A longer shelf life

Written by Rajat Guha | Rajat Guha | Shubham Batra | Updated: Jun 30 2010, 03:17am hrs
Its a fresh lease of life for bankrupt retailer Vishal Retail. Last week, Vishals board agreed to the terms put down by private equity firm TPG , which is understood to have indicated to the firms lenders that it would take over a part of Vishal operations and restructure the business. Since TPG is foreign-funded and FDI in multi-brand retail is restricted, the business would be reorganised such that TPG will run it as a cash & carry operation. The frontend of the business, to be housed in another entity, will remain with the current promoters.

Says Pinaki Ranjan Mishra, head, retail practice, Ernst & Young: That sounds like a good idea. A focused private equity player will be able to run the back-end operations and bring in efficiencies. Adds Saurine Doshi, MD, AT Kearney, The new investors will rope in the expertise of an experienced retail player to help run the business.

Saddled with a debt of over Rs 700 crore, Vishal has been pleading with its bankers to bail it out, seeking a corporate debt restructuring (CDR) package in late 2009. However, the lenders, comprising nearly a dozen banks, including State Bank of India, hasnt been willing to throw good money after bad. Says a senior executive from Uco Bank, a lender, We will not be increasing our exposure to the company. We are hoping to recover the principle but we will lose the entire interest of about Rs 5-6 crore. TPG would settle issues for six of the retailers 13 lenders who agreed to the CDR; it is not clear what arrangements have been made with others.

The chain, founded by Ram Chandra Agarwal in 2001, had a turnover of barely Rs 150 crore in 2005. But by March 2007, sales had grown four-fold to Rs 606 crore, and by March 2009, revenues had crossed Rs 1,300 crore. It had a fairly simple business model, with the hypermarkets earning nearly half their revenues from apparel, about 20-23% from FMCG and the rest from general merchandise. The stores covered roughly 18,000 sq ft and in all the company had built up around 2.3 million sq ft of space. Most stores were in the north, and some in the east and north-east; the chain had very little presence in the west and hardly any in the south. In the smaller cities, the company opted for good locations in upmarket areas, while in the larger cities, it opted for less-expensive locations.

While the model was fairly robust, the company couldnt manage the growth. Once you achieve a certain scale and have a presence across several cities, it is difficult to manage the business. The company didnt have the necessary processes in place to keep a check on costs and inventories, says a consultant.

Clearly, there were management issues. Observes Arvind Singhal, head, Technopak, The problems at Vishal have surfaced because of internal issues and cannot be blamed on the slowdown in the retail sector. Its possible Vishal had borrowed too much, and couldnt service it because the revenues werent large enough.

In many ways, the Vishal story seems startlingly similar to that of Subhiksha, which too grew at a rapid pace, setting up some 800 stores in a span of three years. Ultimately, it ran out of resources and management bandwidth and had to be shut down. Vishals losses , by March this year, had risen to Rs 414 crore. It had to write off inventories worth Rs 342 crore.

TPG has thrown Vishal a lifeline, though a lender, DBS, is battling for its money in the court.