Place an apparel retailer on a rating grid using debt to EBITDA and FFO to debt, first as reported and then with store leases treated as debt.

As reported Paridhan sits in the A band: net debt is 2.0x EBITDA and FFO is 37.5% of net debt. Treat Rs 900 crore of leases as debt and add Rs 150 crore of rent back to EBITDA, and leverage rises to 2.8x and FFO to debt falls to 25.1%, both BBB. For a retailer, leases are the adjustment that decides the rating.

Net debt is Rs 1,500 crore less Rs 300 crore of cash, Rs 1,200 crore. Net debt to EBITDA is 2.0x and FFO to net debt is 37.5%, both inside the A band. On gross debt the picture is tighter: 2.5x and 30%, exactly on the boundary between A and BBB. Agencies differ on how much cash they net, so say which basis you used. Interest cover, EBITDA over interest, is a comfortable 5.0x.

A retailer that signs a ten-year lease has promised fixed payments it cannot walk away from, just as if it had borrowed to buy the shop. A family renting a flat on a long contract is committed to the rent much as a family with a home loan is committed to the EMI. Rating analysts therefore add the present value of lease payments to debt, here Rs 900 crore, and treat the rent as debt service rather than an operating cost. Accounting standards now put most leases on the balance sheet, but how EBITDA treats rent still varies, so check the basis before comparing companies.

Adjust both sides consistently. Debt becomes Rs 1,200 crore plus Rs 900 crore, Rs 2,100 crore. EBITDA before rent becomes Rs 750 crore. Leverage is 2.8x and FFO, adding back the Rs 78 crore of rent that repays lease principal, is Rs 528 crore, 25.1% of adjusted debt: both in the BBB band. Rent-adjusted cover, EBITDA before rent over interest plus rent, falls from 5.0x to 2.78x.

Two cautions finish the answer. First, consistency: adding leases to debt without adding rent back to EBITDA gives 3.5x, a double count that overstates risk. Second, a grid is a starting point: agencies also weigh business risk, such as brand strength, store productivity and how quickly unprofitable stores can be closed, and can rate above or below where the ratios point. The grid here is illustrative; each agency publishes its own thresholds, which change, so confirm the current ones.