The credit rating of LLC «SOLNECHNYY SVET» (hereinafter, SUNLIGHT, or the Company) is based on its strong business profile assessment, which, on the one hand, is constrained by the high cyclicality of demand on the jewelry retail market, and, on the other hand, is supported by the high awareness of the SUNLIGHT brand and a wide diversification of trading formats. The Company is characterized by the wide geography of operations and the medium level of corporate governance. ACRA assesses SUNLIGHT’s market position as high.
The overall assessment of the operational risk profile is medium. The leverage is medium and the interest coverage is moderately high. ACRA assesses the Company’s profitability as high and its business size as medium. The Agency notes the high liquidity assessment of the Company, while its cash flow, according to ACRA’s calculations, is low.
LLC «SOLNECHNYY SVET» is the Russia’s largest jewelry retail chain (in terms of revenue) focusing on the mass market. As of September 22, 2023, the Company’s chain included 609 stores in 238 cities across Russia.
Key assessment factors
High assessments of market position and business profile; wide geography of operations. ACRA highly assesses the Company's market position: it is the largest player in the Russian jewelry retail market with a share of about 17% (2022). The strong market position is determined by the extensive countrywide retail chain. Sales are quite well diversified by region, the largest of them (Moscow and the Moscow Region) accounted for 36% in 2022. The high recognition of the SUNLIGHT brand also has a positive impact on the rating. The trade format diversification is assessed by the Agency at a high level: the SUNLIGHT chain includes stores of three formats (standard stores, hypermarkets, and mall kiosks), the share of online sales in the revenue is high (35% by the end of 2022). SUNLIGHT operates mainly in the mass segment, although 6% of revenue by the end of 2022 accounted for the premium segment. A high cyclical demand in the jewelry market has a negative impact on the factor assessment.
Medium assessment of corporate governance. ACRA positively assesses SUNLIGHT’s new development strategy and the results achieved by the Company over the past strategic cycle. The Company does not have a board of directors, but at the level of the holding company of the group, which includes SUNLIGHT, a supervisory board has been established, which includes shareholders and management representatives. ACRA assesses the Company's management structure at a medium level. The Agency draws attention to a significant decrease in the volume of SUNLIGHT’s related-party transactions. The Company’s purchases were generally carried out through an associated company, but in 2022 purchases were transferred to the Company, which led to a noticeable change in the size of inventories on its balance sheet. In the future, ACRA expects the dynamics of the size of inventories at a level comparable to the dynamics of revenue.
In 2023, the Company applied IFRS for the first time when preparing the 2020–2022 financial statements; the statements were audited by Kept JSC. ACRA notes that the auditor expressed the qualified opinion, since the auditor did not observe stocktaking for RUB 5.4 bln as of January 1, 2020. Taking into account the significant time between this date and the date of the rating analysis, ACRA does not consider the presence of this qualification to be an evidence of increased risks associated with an area of uncertainty in the Company's financial statements.
Medium assessment for business size and high profitability. In 2022, SUNLIGHT's revenue amounted to RUB 42 bln, or 10% higher than in 2021. According to the Company’s forecast regarding new stores, LFL sales, number of purchases, and average check, the Company’s revenue may increase by more than 50% in 2023. In 2024–2025, ACRA expects a gradual decrease in the Company's revenue growth rate to 15–30% per year. According to the Agency's calculations, FFO before fixed charges and taxes amounted to RUB 6 bln in 2022, while this indicator grew faster than revenue (+26%). The revenue and FFO before fixed charges and taxes correspond to the medium score for business size as per ACRA’s methodology.
In 2022, the FFO before fixed charges and taxes margin reached 14%, which is estimated by the Agency as high. ACRA believes that in 2023–2025, the profitability will range within 13–15%. A high EBITDA per 1 sq. m is positive for the profitability assessment.
Medium leverage and moderately high coverage of interest and rental payments. As of June 30, 2023, SUNLIGHT's total debt was RUB 4 bln and was represented mainly by ruble loans granted by the owner and a related party. In addition, 21% of the debt portfolio was formed by ruble loans from Sberbank (ACRA’s rating: AAA(RU), outlook Stable) and PJSC Sovcombank (ACRA’s rating: AA-(RU), outlook Stable). The main portion of the portfolio (77%) is formed by fixed-rate liabilities.
According to ACRA’s calculations, by the end of 2022, the ratio of total debt to FFO before net interest was 0.8x, which is positively assessed by the Agency. At the same time, the ratio of rent-adjusted total debt to FFO before fixed charges was 3.4x, which corresponds to the medium leverage according to ACRA’s methodology. To finance the growth of the chain (investments in capex and working capital), SUNLIGHT plans to attract additional debt obligations, which may lead to some increase in these indicators. The Agency expects that in 2023–2025, the ratio of total debt to FFO before net interest will be in the range of 1.1–1.3x, and the ratio of rent-adjusted total debt to FFO before fixed charges will be in the range of 3.7–3.9x.
In 2022, the ratio of FFO before net interest to interest was 20.0x, which corresponds to the very high coverage, and the ratio of FFO before fixed charges to fixed (interest and rental) charges was 2.2x, which is estimated by ACRA at a medium level. In 2023–2025, the Agency forecasts the values of these indicators in the ranges of 7.2–7.9x and 1.9–2.0x, respectively, which, taken together, is estimated by ACRA at a moderately high level.
High liquidity assessment and weak cash flow. According to ACRA’s calculations, SUNLIGHT's free cash flow (FCF) in 2020–2022 was in the negative area due to, among other things, the implementation of the strategy for opening new stores. In 2023, the Company plans significant investments required to open new stores, which will cause the FCF to remain negative. Resulting from high investments, negative FCF can put pressure on liquidity, but these investments will be financed by new borrowings, which minimizes the negative impact on the factor assessment.
The current loan portfolio demonstrates a fairly comfortable repayment schedule: bank loans are due in 2023–2024, while shareholder loans fall due in 2030. In addition, the Company benefits from a significant volume of committed but undrawn credit lines. Regardless that the due date on shareholder loans is in 2030, the Company may prepay them.
Key assumptions
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Annual revenue growth by 30–35% in 2023–2025.
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The FFO before fixed charges and taxes margin at 13–15%.
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No annual dividend payouts until late 2025.
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Access to external sources of liquidity.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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The weighted average ratio of total debt to FFO before net interest declining below 1.0x and the weighted average ratio of rent-adjusted total debt to FFO before net fixed charges declining below 2.0x;
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The weighted average ratio of FFO before fixed charges to fixed charges exceeding 5.0x and the weighted average ratio of FFO before net interest to interest remaining above 10.0x;
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The weighted average FFO before fixed charges and taxes margin exceeding 15%, the weighted average FFO before fixed charges and taxes exceeding RUB 30 bln, and the weighted average revenue exceeding RUB 100 bln;
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The weighted average FCF margin exceeding 2%.
A negative rating action may be prompted by:
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The weighted average ratio of total debt to FFO before net interest exceeding 2.0x or the weighted average ratio of adjusted total debt to FFO before fixed charges exceeding 3.5x;
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The weighted average ratio of FFO before fixed charges to fixed charges declining below 1.5x or the weighted average ratio of FFO before net interest to interest declining below 10.0x;
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The FFO before fixed charges and taxes margin declining below 10%;
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Worse access to external sources of liquidity.
Rating components
Standalone Creditworthiness Assessment (SCA): a-.
Support: none.
Issue ratings
No outstanding issues have been rated.
Regulatory disclosure
The credit rating of LLC «SOLNECHNYY SVET» has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit rating has been assigned to LLC «SOLNECHNYY SVET» for the first time. The credit rating of LLC «SOLNECHNYY SVET» is expected to be revised within one year following the publication date of this press release.
Disclosure of deviations from the approved methodologies: the Cyclicality of Demand for Products sub-factor was assessed with a deviation from the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation, since the assessment criteria for this sub-factor do not describe the cyclicality of demand on the jewelry retail market.
The credit rating was assigned based on data provided by LLC «SOLNECHNYY SVET», information from publicly available sources, and ACRA’s own databases. The credit rating is solicited, and LLC «SOLNECHNYY SVET» participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no ancillary services to LLC «SOLNECHNYY SVET». No conflicts of interest were identified in the course of credit rating assignment.
