Fitch Ratings has upgraded InRetail Pharma S.A.'s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) and its senior unsecured bonds to 'BBB-' from 'BB+'.
Fitch has also upgraded InRetail Real Estate Corp.'s IDRs and InRetail Shopping Malls' senior unsecured bonds to 'BBB-' from 'BB+'. The Rating Outlook is Stable.
The upgrades reflect improved cash flow generation from the food and pharma segments during 2021 boosted by the Makro acquisition and the reopening of shopping malls. Together this translates into a robust capital structure aligned with an investment grade credit.
InRetail's ratings consider the strong market position of the retail business in Peru supported by its material scale and diversified business profile in resilient sectors. Fitch expects InRetail to maintain strong cash flow generation supportive of an adequate capital structure and financial flexibility.
Key Rating Drivers
Strong Consolidated Profile: Fitch views the credit profiles of InRetail Pharma and InRetail Real Estate on a consolidated basis and in alignment with that of their parent company, InRetail Peru, due to its 100% ownership of both subsidiaries and no legal ringfencing of their activities. Intercorp Retail acts as an intermediate holding company between Intercorp and InRetail Peru. Intercorp owns 71.5% of InRetail Peru.
Robust Retail Profile: The group's strong cash flow generation is supported by its operations in the less discretionary food and pharma retail segments with limited impact from weak macro-economic fundamentals as demonstrated during the last couple of years. The food segment reported Same Store Sales (SSS) of 7.8% in 2021 after posting 17.7% in 2020 when social restrictions were imposed. The pharma segment also posted strong SSS of 10.6% in 2021 after 4.5% increase in 2020. The retail segment represented around 90% of the group's consolidated EBITDA in 2021.
Leading Position in Shopping Malls: InRetail Real Estate is the leading mall owner and operator in Peru, operating 21 malls. These malls were negatively impacted during the pandemic when only supermarkets, pharmacies and bank branches were allowed to operate.
At year-end 2021, 90% of its GLA was opened compared to 80% at the end of 2020. During this critical period, the company opted to waive rents to accommodate the financial needs of its client base and maintain healthy occupancy levels. To preserve liquidity, the group cut operational costs to minimal levels and pushed back expansionary capex. Occupancy levels remain healthy at 93% as of Dec. 31, 2021.
Adequate Capital Structure: Fitch expects the group's capital structure measured as net adjusted debt over EBITDAR to remain adequate and below 4.0x during the next three years as expansionary capex and dividend outflow is funded with internal cash flow generation. Net leverage was 4.3x in 2021. The company's retail-only net adjusted leverage is expected to remain 4.0x, while the net adjusted leverage ratio for its real estate business should fall to 6.5x.
Increasing Capex Levels: InRetail Peru expects to resume an aggressive capex strategy in the retail segment that was put on hold (land acquisitions) during the pandemic to maintain its financial flexibility. Annual capex is expected to average PEN825 million during the next four years as it expands its food stores by around 115 and pharma stores by around 80 per year. The pace of its growing portfolio paired with high levels of dividends expected at around PEN356 million per year will dictate the company's ability to deleverage. This expansionary capex is flexible and could be delayed in line with economic recovery. Maintenance capex was PEN239 million in 2021 and PEN210 million during 2022-2024.
Economic Deceleration in Peru: The Peruvian economy grew 13.3% in 2021, beating Fitch's expectation of 11.9% growth. This result was pushed by higher private investment and public consumption. These factors contributed to GDP reaching pre-pandemic levels, before the coronavirus pandemic caused an 11.0% decline in 2020. Fitch projects economic growth of around 2.5% in 2022, largely affected by the political climate and industry-level policy uncertainties, stimulus withdrawal and a lower base effect. Inflation is also expected to remain at 3.8% in 2022, similar to levels seen in 2021.
Parent Supports Ratings: Fitch rates the retail subsidiaries on a standalone basis at 'BBB-'/Stable, the same ratings of the consolidated profile at Intercorp Peru. If the Standalone Credit Profile (SCP) of InRetail Pharma and InRetail Real Estate were lowered to 'BB+'/Stable while Intercorp's ratings remain unchanged, Fitch would then apply its Parent and Subsidiary Rating Criteria and would follow the Strong Parent Path. It would then consider factors such as legal, operational and strategic incentives for Intercorp to support these two entities when determining whether or not to downgrade them or rate them on a consolidated basis at 'BBB-'.
Derivation Summary
InRetail Peru's consolidated financial profile is a key credit driver for InRetail Pharma's and InRetail Real Estate's ratings, due to the strong parent-subsidiary linkage. The group credit profile is weaker than other regional peers such as El Puerto de Liverpool, S.A.B. de C.V. (BBB+/Stable), Falabella S.A. (BBB/Stable) and Cencosud S.A. (BBB-/Positive). All of these entities operate multiple retail business segments and have a strong brand presence which supports a solid competitive position in the countries they operate. However, InRetail Peru's scale and geographic diversification are considered weaker than regional peers.
The group is rated one notch below Cencosud. Cencosud is a larger player benefiting from large scale in the more resilient retail food segment in Chile, Argentina, Peru, Brazil and Colombia. Cencosud's capital structure is expected to remain strong during the rating horizon. As of Dec. 31, 2021, net debt to EBITDA was 1.2x while that for InRetail group was at 3.6x.
The group is rated two notches below Falabella. Falabella's market position is supported by its large and diversified integrated operations in department stores, shopping malls and financial services in Chile and Peru. Historically, both entities have reported similar capital structure. As of Dec. 31, 2021, Falabella's net leverage was 2.5x.
The group is rated three notches below El Puerto de Liverpool. Liverpool's business concentration in Mexico is offset by its diversified format and solid financial profile. Additionally, its financial discipline is robust demonstrated by its historical negative net leverage.
Key Assumptions
Opening 115 food stores on average every year until 2025;
Opening 80 pharma stores on average every year until 2025;
EBITDA margins stable at around 10.8% in the medium term;
Average annual capex of PEN825 million;
Average annual dividend payment of PEN356 million
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of Intercorp combined with continuous linkage perception between parent and subsidiaries;
Net adjusted leverage, measured as total adjusted net debt/EBITDAR, consistently below 3.0x at InRetail Peru would be viewed as positive;
Improved portfolio and geographic diversification;
Larger scale at sustainable profitable margins.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of Intercorp combined with a perception of a weaker linkage between the parent and the subsidiaries;
Net adjusted leverage, measured as total adjusted net debt/EBITDAR, consistently above 4.0x at InRetail Peru;
Weak same-store sales and business trends;
Increasing vacancy rates in real estate segment.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Adequate Financial Flexibility: InRetail Peru's liquidity is adequate and supported by strong cash flow generation, adequate cash on hands and flexible amortization profile. As of Dec. 31, 2021, InRetail Peru consolidated cash position was PEN1.0 billion while short-term debt was PEN640 million.
In 2021, InRetail Peru improved its financial flexibility through a liability management initiative. The company issued two senior secured notes (USD and local currency) for USD735 million. The proceeds from the transactions were used to repay the Makro acquisition bridge loan (USD375 million) and refinance Pharma's subsidiary international notes (USD400 million) due in 2023.
Dividend distribution is expected to average PEN356 million in the next four years.
Issuer Profile
InRetail is a Peruvian multi-format retailer with food retail, pharma and shopping mall operations. It also has pharmaceutical operations in Ecuador and Bolivia. InRetail is controlled by Intercorp Peru, one of Peru's largest business groups.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
INRETAIL PERÚ CORP. 
