Debt load, soaring losses slow down India's retail juggernaut

Written by Rasul Bailay | Rishi Raj | New Delhi | Updated: Dec 2 2011, 10:00am hrs
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Contrary to the general perception that organised retail has the potential to capture dominant market share by wiping out kirana stores and generate huge profits, a closer look at the balance sheets of Indias seven listed retailers in the last five years suggests a long haul.

While these firms posted cumulative losses or somewhat modest profits in the last five years, one indicator is common: Their debts have galloped as the firms have ratcheted up scale. As a result, the debt-equity ratio of these companies has become quite steep.

For instance, the countrys largest department store operator Shoppers Stop posted an overall loss of R4 crore in the last five years, while its debt soared to R390 crore. Similarly, Vishal Retail posted cumulative losses of R550 crore, while it borrowed R64 crore during the period. The number is even starker for the countrys largest listed retailer Pantaloon Retail: It reported a cumulative profit of R173 crore in five years, borrowing a whopping R7,848 crore from the market during the same period. Pantaloons profits between 2007 and 2011 was dragged down as the company posted R68 crore losses in 2008 and 2009.

By March 2009, Shoppers Stop had a debt-equity ratio of 1.15:1 and Pantaloon 1.3:1, while Vishal Retail was treading in dangerous territory with 2.65 debt for every equity. The company had to be rescued through a corporate debt restructuring with R630 crore debt and was finally acquired earlier this year by an alliance of US-based private equity TPG Capital and Chennai-based Shriram Group.

Because these companies had small equity bases to start with, the massive retail expansion came through heavy debt. For, example, Chennai-based Subhiksha Trading Services expanded to 1,600 stores on its small equity base of R32 crore while its debt mounted to R750 crore. Eventually, the financial mismatch led to its bust in early 2009 as the discount retailer was unable to raise working capital from banks or the market.

The wrenching economic slowdown which started in late 2008 dealt crippling blows to domestic organised retailers as sales shrank and inventory piled up, leading to soaring debt. While Shoppers Stop was able to bring its debt to equity level at more comfortable levels since, Pantaloon's worsened as its debt-equity ratio breached 1.31: 1, a level seen in the slowdown era.

This is a sign and symbol of the retailers getting carried away by the India growth story and the rise of the middle class, said Jagannadham Thunuguntla, head of SMC Global.

Thunuguntla added that retailers have run up huge debts because the country's back-end is not developed and huge investments go into developing it.

His views were echoed by a retail analyst who said Indian retailers have suffered as they don't possess the vital supply chain for their networks, ultimately creating inventory problems for them.

Our supply chain is not efficient and holding up of inventory is cost and the cost ultimately affects profitability, said an analyst.

Mitesh Shah, a retail analyst at brokerage Sharekhan says operating margins and same-store-sales have been dropping for retailers in India over the last five years. For example, Pantaloon enjoyed about 15% same-store-sales five years ago which has now come down to about 6.5%. similarly, the company's operating profits has dropped considerably from 15% four-five years ago to about 8.5% at present.

Inventory costs have been going up and sales pace could not keep pace, says Shah.

Meanwhile, analysts say the decision allowing foreign companies to hold 51% will help companies like Pantaloon reduce debt as they might be able to offload stakes.