Mervaka Retail, a footwear and apparel chain, reports EBITDA of Rs 500 crore and debt of Rs 600 crore, but pays Rs 200 crore a year of rent on long store leases. Which credit metrics would you look at, and what is leverage on a lease-adjusted basis?

Lease-adjusted leverage is about 3.1x, not 1.2x, and rent plus interest is covered only 2.8x. Capitalising Rs 200 crore of rent at 8x adds Rs 1,600 crore of debt-like obligations, and EBITDAR of Rs 700 crore is the matching earnings figure. For a store-based retailer the metrics that matter are lease-adjusted leverage, fixed charge cover, free cash flow after capex, inventory turns and same-store sales, because rent does not fall when sales do.

A family that owns its house with a small mortgage and a family that rents with a nine-year lock-in both owe a fixed sum every month; only one of them shows it as a loan. For a store-based retailer, long leases are debt in all but name: fixed, contractual, and senior in practice, because a store cannot trade without its lease. Mervaka's Rs 200 crore of rent is four times its interest bill. Ignoring it compares Mervaka with a retailer that owns its stores, which it is not.

Adjust both halves of the ratio. Capitalise rent at a multiple, 8x being a long-standing convention, adding Rs 1,600 crore to debt, and add rent back to EBITDA to get EBITDAREarnings before interest, tax, depreciation, amortisation and rent: the earnings available to pay both lenders and landlords.. Rs 2,200 crore over Rs 700 crore is 3.14x, and fixed charge cover, EBITDAR over interest plus rent, is 2.76x against a reported interest cover of 9.3x. Under Ind AS 116 and IFRS 16 most leases already sit on the balance sheet as lease liabilities; agencies now generally use that figure rather than a multiple, so confirm the current methodology.

Rent does not fall with sales, so the leases amplify the downturn. A 10% sales fall at a 40% contribution margin takes Rs 160 crore off EBITDA, to Rs 340 crore; reported leverage rises to only 1.76x, but lease-adjusted leverage reaches 4.07x and fixed charge cover falls to 2.13x. The reported metrics would still pass most covenants while the business was under real strain. That is exactly the gap a lender to retailers is paid to see.

Four more, each for a reason. Same-store sales growth, because total sales can grow from new stores while existing ones decline; inventory days and markdowns, because fashion stock loses value by the season; free cash flow after capex and new store openings; and liquidity, meaning cash plus undrawn lines against seasonal peaks. Lease terms matter too: how many stores can be exited, and at what cost, decides how quickly rent can be cut. The view: underwrite Mervaka as a 3x credit and size the new loan and covenants on lease-adjusted numbers.