30 October 2010
Debt-laden Subhikshas hopes of resurrection seems to have
reached a dead end. The retailer received a serious blow this
week with the Madurai bench of the Madras High Court rejecting
its merger proposition with Blue Green Constructions and Investment
(BGCIL), a Madras Stock Exchange-listed company. A merger would
have helped the combined entity list on the Bombay Stock Exchange
and the National Stock Exchange and raise fresh capital. Subhiksha
owes at least Rs 800 crore to its creditors, which include Kotak
Mahindra Bank, ICICI Venture and ICICI Bank. The court squashed
Subhikshas appeal stating that any more money being raised
would jeopardise the interest of the investors.
The last time BW spoke to R. Subramanian, CEO of Subhiksha, about
a year ago, he said, There is no better time for value retailing.
We kick ourselves for having to sit out injured at this time.
We have only retired hurt and will be back to bat soon.
One year since, the retailer is still retired hurt with many claiming
that the companys innings are over. Subramanian also said
the merger meant quick access to the consumer durable retailing
business where BGCIL had done a lot of spadework, and that BGCIL
would give Subhiksha access to more equity.
The retailer has not been a bad venture for all its investors,
though. For instance, ICICI Venture, which invested four times
in Subhiksha in eight years, has taken out Rs 270 crore on total
investment of Rs 90 crore, claims Subramanian.
Subhiksha is not the only one stumbling. Vishal Retail
currently sitting on a debt of over Rs 700 crore is negotiating
with US-based TPG Capital and Chennais Shriram Group to
sell its assets. The company reported a net loss of Rs 19 crore
in the quarter ended 30 June and a loss of Rs 414 crore in 2009-10.
Apparel seller Koutons Retail is also facing cash problems. Its
suppliers filed winding-up petitions in the Delhi High Court this
week, after they failed to recover their dues. The companys
current debt stands at Rs 660 crore. Koutons net profit
fell 49.9 per cent to Rs 5.51 crore in the quarter ended June
2010. The retailers stock has also tumbled over 60 per cent
in the past one month on worries that the promoters have pledged
more shares. The retailer has close to 1,400 stores across India.
Managing rents, servicing a large number of stores and inventory
build-ups have virtually stalled retails growth in India.
But, analysts say, many are beginning to think practically. Retailers
have realised that they have to build the current set of stores
and lead them to profitability and expand when the first task
is achieved, says Abhishek Malhotra, partner at consulting
firm Booz & Company.
But core challenges will be there. Undercapitalisation
is the bane of any business, but particularly for retail,
says Devangshu Dutta, CEO of Third Eyesight. He says retail is
lighter on fixed assets than businesses such as manufacturing
and infrastructure. This makes raising secured debt difficult.
Others think organised retail is a playable game for cash-rich
conglomerates only. The retail business still needs deep
pockets and it is the larger firms with other large business
interests that are surviving, says Pinakiranjan Mishra,
national leader of consumer practice at Ernst & Young. This
trend is clearly noticed with Reliance Retail, Aditya Birla Retail
and Pantaloon Retail consolidating their respective businesses
for better capital efficiency.
As far as Subhiksha is concerned, it is fast becoming a good case
study for what not to do in retail business. Or, in other words,
biting off more than one can chew.
(This story was published in Businessworld
Issue Dated 08-11-2010)