ICRA Nepal Reaffirms Ratings for Bhat-Bhateni Supermarket; Operating Income Shows Consistent Growth

The recent rating action by ICRA Nepal reaffirmed Bhat-Bhateni Supermarket and Departmental Store Private Limited's long-term and short-term ratings at [ICRANP] LBB and [ICRANP] A4, respectively. The company remains the largest supermarket/department store chain in Nepal, boasting a strong market presence, experienced management, and consistent revenue growth. Over the last five years, the company has achieved around a 14% Compound Annual Growth Rate (CAGR) in revenue, indicating a solid performance and benefiting from economies of scale.

Despite these strengths, the company faces challenges primarily related to its short-term liquidity. The continuous expansion and investment in new outlets have strained its liquidity position, leading to an asset-liability maturity mismatch. The supermarket's utilization of short-term working capital debt for expansion, combined with increased interest obligations in a high-interest rate environment, raises concerns about its short-term liquidity and debt coverage for the fiscal year 2024.

Key points to note:

Credit Strengths:

• Established track record, experienced management team, and promoters.
• The dominant player in the retail segment, enjoying economies of scale and strategic locations.
• Consistent revenue growth and improving profit margins due to the expansion and network enhancement.

Credit Challenges:

• Asset-liability maturity mismatch due to continuous capital expenditure for expansion.
• High principal repayment obligations and increased debt in a high-interest rate environment.
• Exposure to competition and unproven success in underdeveloped areas within Nepal.

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The company's financial indicators show positive trends in operating income and profit margins, yet demonstrate concerns regarding debt ratios and short-term liquidity. The total debt to tangible net worth ratio has slightly decreased over the years, but the debt to OPBDITA (Operating Profit Before Depreciation, Interest, and Tax) ratio has shown improvement. The Interest Coverage ratio has declined, raising concerns, while the Debt Service Coverage Ratio (DSCR) improved from FY2022 but remains below comfort levels.

Operating Income (OI) has shown a consistent growth from NPR 17,996 million in FY2019 to NPR 29,700 million in FY2023, reflecting a robust increase in transactional activity and revenue generation over the years. The operating profit before depreciation, interest, taxes, and amortization (OPBDITA) margin improved from 10.30% in FY2019 to 12.53% in FY2023, indicating a positive trend in profitability.

The company's challenges with respect to liquidity and debt coverage metrics for the upcoming fiscal year and the ability to handle short-term financial stress remain crucial rating considerations. The supermarket's continued growth, the effectiveness of its liquidity management, and the sustenance of revenue and profitability will be critical factors to monitor for future rating assessments.

In summary, despite its robust market position and consistent revenue growth, the company faces challenges regarding liquidity management and debt coverage. The successful management of these challenges will play a pivotal role in determining the company's creditworthiness and ratings going forward.