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Fitch upgrades X5's issuer default rating to BB+

Fitch Ratings on June 8 upgraded X5 Retail Group NV's long-term foreign and local currency issuer default ratings to BB+ from BB, with a stable outlook.

The upgrade reflects the Russian food retailer's improved position as the largest food retailer in Russia, as well as the solid execution of its growth strategy over the past four years, Fitch said.

The agency also cited X5's tightened financial leverage target following its adoption of a dividend policy last year, which sets a target payout ratio of at least 25% of the retailer's net profit, provided that its net debt-to-EBITDA ratio is below 2.0x.

"The company's increased focus on digitalization and innovation and continuous improvements in customer value proposition and logistics should enable X5 to withstand growing competition from other large retail chains and specialized stores," Fitch said.

Fitch forecasts X5's revenue to continue growing in double digits over the next three years. However, it expects the growth in revenue to decelerate in pace, resulting to a high base effect, while EBITDA margin is expected to gradually drop to below 7% due to potential gross margin sacrifices to fend off competition and protect footfall rates.

The agency noted that the retailer's ratings are moderately impacted by the operating environment in Russia.