Reverses On Revival Path


October 30, 2010

BusinessWorld, 30 October 2010

Vishal Krishna

Debt-laden Subhiksha’s 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 Subhiksha’s 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 company’s 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 Chennai’s 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 company’s 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 retailer’s 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 retail’s 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)