The Burden Of Debt


April 20, 2009


Businessworld Issue Dated 14-20 April 2009

Kishore Biyani took on a huge debt to expand Pantaloon Retail very quickly. Now the slowdown has made his life difficult

Rapid rollout of new stores has been Future Group founder and CEO Kishore Biyani’s major focus area. In the past two years, the country’s largest retailer has thrown open 7 million sq. ft of new shopping space across 24 formats in over 63 Indian cities, often at the rate of one store a day. The day BW met Biyani, 26 March, was another of those days. He was preparing to inaugurate three stores of flagship firm Pantaloon Retail India (PRIL) in Mumbai, the next day. Such frenzied expansion has kept PRIL, with 12 million sq. ft of retail space, well ahead of rivals Reliance Retail, Spencer’s Retail and Aditya Birla Retail. In fact, the three of them put together have less sq. ft of shop area than PRIL. But it has also taken a toll on PRIL’s balance sheet. A Rs 2,300-crore debt burden is the price Biyani paid for that expansion spree.

And now Biyani needs to cope with a slowdown. Coupled with PRIL’s debt burden is a 30 per cent drop in footfalls experienced by retailers across the country. While Biyani insists his stores have not seen any drop in footfalls, he admits that customer conversion has taken a hit — that basically means that the number of customers has not decreased, but the sales have.

Consulting firm KPMG says that for the first time in six years the same store sales of retailers is in the negative. At least 70 per cent of respondents surveyed by it reported a drop in footfalls. “People are downtrading, but they have not stopped buying,” insists Biyani. “The consumption story is not over in India, as portrayed by the media. Retail is a $350-billion market here, and it is a large canvas to capture for organised retailers.” What he doesn’t say is that when people downtrade, it also means lower margins for the retailer. So though Biyani has managed to increase some revenues, the margins have actually worsened.

In response to the slowdown, PRIL — which already owns 48 Pantaloon mid-market apparel stores , 110 Big Bazaars hypermarkets and 148 Food Bazaar supermarkets, besides 160 KB’s Fair Price Shops (the neighbourhood store format) — has decided to scale down its ambitions. It is going slow on setting up 30 Big Bazaars or adding another 1.5 million sq. ft that it had planned by June 2009. Predictably, the target of expanding even more aggressively to 30 million sq. ft has been pushed back from 2011 to 2013, denting the revenue target of Rs 20,000 crore by 2013. Plans to enter the cash-and-carry business have also been shelved.

Food Bazaar and KB’s Fair Price Shops have been the biggest casualty as organised retail struggles to cope with higher rentals, power and staff costs, which constitute 18-25 per cent of the revenues. Biyani’s bets have come down to managing these stores, which are constantly threatened by kirana stores. He confesses that it is the end of an era for the neighbourhood supermarkets. “This year, we will add only 2.5 million sq. ft and will not expand in suburbs of cities any more,” he says. A report by CLSA Asia Pacific Markets lays out the mistakes in the Indian market and states that small-sized food and grocery or supermarket format is unviable.

Earlier, in 2006, Biyani decided to exit the home furnishing format ‘Mela’ within a month of its launch. Fashion Station, a discounted private-label fashion merchandise, was converted to Fashion@Big Bazaar. Such slam-bang experimentation is common in all high-growth sectors, but Biyani has also had to look over the shoulder at the competition closing in on him.

Leader’s Resolve

In 2006, a host of existing and wannabe retailers were snapping at Biyani’s heels. While some such as RPG group-owned Spencer’s Retail were still some steps behind Biyani’s PRIL, others such as Raheja group’s Shoppers Stop were neck and neck in sales. But what threatened Biyani’s numero uno status the most was Reliance Industries’ announcement of a Rs 25,000-crore plan to enter the retail sector and dominate it with 10 million sq. ft of space and 1,000 stores by 2010.

As the leader in organised retail, Biyani had to act to keep ahead. And he did. PRIL grew 2.5 times from 5 million sq. ft to 12 million sq. ft in a span of two years until March 2009. It came at a steep price. The expansion raised his interest outgo by five times, from Rs 43 crore to Rs 200 crore in fiscal 2009. PRIL’s interest coverage ratio (which shows how easily a firm can pay interest on outstanding debt) has fallen to 2.20 times — it was 5.17 in 2006 and 2.69 in 2007. This means making interest payments are becoming more difficult than it used to be.

Here’s the nub of the problem. While PRIL’s revenues seem to be growing nicely, its other financials are actually deteriorating. The company recored a profit of Rs 102 crore in the first nine months FY09, a 27 per cent rise compared to FY08. But on consolidated basis PRIL reported net loss of Rs 61.55 crore in FY08 because of high depreciation, rentals and wages.

The company also seems to be running out of cash. “They have not generated any cash from operations (in the past five years). The downtrading of domestic consumption is affecting retailers. Apart from such shrinkages, higher debt costs are also pinching them,” says Indrajeet Kelkar, retail analyst at Dolat Capital in Mumbai. And its return on investments are not all that hot either.

With Rs 362 crore payable every year to meet long-term debt obligations for the next six years, PRIL’s 3 per cent return on capital employed may not be enough. On capital employed of Rs 5,342 crore, PRIL delivered a turnover of Rs 5,295 crore in 2007-08, representing a cash churn of only 0.98 times of capital employed. Internationally, Wal-Mart generates 2.29 times, but then the firm is a global behemoth. PRIL also has Rs 250 crore worth of inventory on its books and many believe the group’s extended discount sales are testimony to this. But Biyani rubbishes such statements and remains rooted to the Indian retail story.

Investor confidence in PRIL has hit a low too. As against a 63.7 per cent drop in the Sensex from its peak, PRIL’s stock has fallen 80 per cent from a high of Rs 876 on 2 January 2008 to 169 on 6 April 2009. Its market cap has dipped from a peak of Rs 12,913 crore in January 2008 to Rs 2,961 crore on 6 April 2009 (See‘Market Captalisation’). And with 21 million warrants worth Rs 1,050 crore coming up for conversion in three months, Biyani is a burdened man. He refuses to discuss the details of how he would arrange the finances for this but he is believed to have committed shares worth $85 million as a secondary pledge. This is a collateral to a primary pledge, which he would not disclose.

It is a tight-rope walk for Biyani, a man who has his moorings in western and oriental philosophies. He candidly admits that the supermarket format is challenged. “Businessmen make mistakes and only one Indian retailer has lost out so far. That man too can return if he raises money. The Indian retail business is alive,” insists Biyani, convinced that he can fight the slowdown. Only the short-term forecast is not very encouraging. According to Mumbai-based Cartesian Consulting, 53 per cent of retailers’ confidence in the market is shaken as they believe that the current uncertainty is likely to continue for at least 18 months.

All figures in Rs and for financial year 2008; EBITDA: earnings before interest, taxes, depreciation and amortisation
Source: CLSA

Biyani’s book It Happened In India swears by his ability to defy the conventional wisdom. Only this time, his wisdom will be tested in the kind of market that no one has faced before. According to Crisil Research, the retail sector had grown at a CAGR (compound annual growth rate) of 10-14 per cent in the past three years driven by favourable demographics, rising disposable income and increasing urbanisation. During this period, organised retail grew at a higher rate of 28 per cent. With the slowdown, Crisil expects organised retail to grow 13 per cent per annum from Rs 85,000 crore in 2007-08 to Rs 1,10,970 crore in 2009-10.


Retail Rout: All In The Same Boat

The drop in customer footfalls and conversion ratios have been a double whammy for the retail business, resulting in low-er inventory turnover and higher working capital requirements. “Retailers overestimated the growth potential in India,” says Devangshu Datta, CEO of Third Eyesight, a retail consultancy firm in Delhi. Datta says retailers projected that organised retail will grab 20 per cent of the total retail market by 2012, while it still languishes at 5 per cent. Now that those projections seem unreal, large groups such as Aditya Birla Retail and Reliance Retail have slowed their business plans too.

Over the past two years, Spencer’s opened over 300 stores, Reliance opened 900 stores in three years and Aditya Birla 600 stores in two years. Today, some of these stores are shuttered and others may be closed down as well. The most disappointing has been the supermarkets format, which accounted for about 75 per cent of all new stores. “Although many achieved scale in terms of the number of stores, they did not build the supply chain,” says Ajay D’Souza, head of Crisil Research in Mumbai. He adds that competing with kirana stores, which have a 95 per cent market share, became difficult in this period. This, combined with low same-store sales in certain geographies, higher debt and negative cash flows, have caused several stores to shut down. “Your sales have to be very high if you are a retail store in the food category,” he says.

“It is regular customer traffic that drives volumes and retailers have not been able to keep loyal customers to generate profitability,” says Hemant Kalbag, principal consultant at A.T. Kearney in Mumbai. He cites the example of Wal-Mart, whose net sales in the fourth quarter of fiscal 2008 were $106.26 billion, a growth of 8.3 per cent compared to fourth quarter of 2007. Kalbag adds that the business model has to be right, which means the retail store needs to be supported by its assortment of value items in a store, which will generate high store sales. This, analysts say, should also be supported by a strong supply chain. But the slowdown has not helped in this quest.