Even as India?s nascent retail sector struggles to emerge from the wrenching economic slowdown that hit the country in late 2008, signs of another meltdown that could spell doom have started emerging.
This time, too, the first to get hit are the smaller chains. Much like and Vishal, which bore the brunt then, this time it is the turn of the chemical-to-textile GHCL, which bought the struggling UK-based retailer Rosebys in 2006 and brought the brand to India with plans to open hundreds of outlets. Recently, it quietly halted operations of the home furnishing business.
Rosebys? closure follows that of Spinach supermarkets, owned by Mumbai-based Wadhawan Retail.
However, analysts maintain that a slowdown this time round could impact not only the smaller firms, but also bigger retailers like Pantaloon Retail, Reliance Retail and the retail ventures of the Aditya Birla Group and Bharti Enterprises.
?Breaking even or coming to profits takes longer than expected,? says Bharat Chhoda, retail analyst at ICICI Securities. Also, many of them have taken debt and servicing debt becomes difficult as their revenues will be squeezed in a downturn, he says. Chhoda says in a downturn, consumers reduce discretionary spending and retailers resort to woo consumers with heavier discounts on their merchandise, leading to even lower margins and declining revenues.
Thomas Varghese, chief executive of Aditya Birla Retail and head of CII’s retail committee agrees, saying the impact of the slowdown is already visible in the slack month before the festive season. ?Sales are generally down between August 15 and September 15 but this year, the decline was more pronounced than the last two years,? Varghese says without citing any number. However, he adds that retailers are ?better prepared? for a slowdown this time.
What worries retail giants is the possible impact of sovereign debt crisis in the eurozone, which could test the very strong players saddled with high debt and looking for ways to raise funds. For instance, the country’s largest listed retailer Pantaloon Retail is saddled with Rs 4,200 crore of debt on a standalone basis and its debt-equity ratio has already reached the previous slowdown level of 1.33 debt for every equity. As a group, Future Group ? which also runs financial services to logistics units ? is sitting on more than Rs 7,000-crore debt.
A Mumbai brokerage analyst tracking Pantaloon says the company will be ?hard hit? due to its high debt and the ongoing rising interest rates. Future Group is planning to raise capital by selling assets in non-core businesses like Future Capital Holdings where the company holds 55%. Analysts say it would be difficult for Future to get a decent valuation for the sell-off especially in the current economic situation. A further dip in sentiments means its plans to raise money becomes even more difficult.
Investors are already wary of retail stocks. Pantaloon’s share closed Wednesday on the Bombay Stock Exchange at Rs 180, close to its 52-week low of Rs 173 and almost 66% down from its 52-week high of Rs 527 a year ago. Similarly, the scrip of Koutons Retail ? which is also staring at a corporate debt restructuring ? is trading at Rs 25, one-seventh of its 52-week high of 170 a year ago. Apparel retailer Cantabill Retail that was listed a year ago has seen its share price erode by a fourth to close at Rs 25, a shade up from its all time low.