New Delhi: Even as they wooed customers to shop in their outlets, India’s retail chains shopped for debt to keep growing—and this is coming back to hurt them.
As sales slow, three of India’s biggest listed retail chains, Vishal Retail Ltd, Pantaloon Retail (India) Ltd, and Shoppers Stop Ltd are struggling with rising debt and interest costs. Their problems are likely to mirror those of several other companies in the business.
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Earlier this year, Subhiksha Trading Services Ltd, which ran India’s largest chain of supermarkets, halted its operations saying it had run out of cash as it could not raise money either from the equity markets or from banks due to tough economic conditions. Subhiksha has blamed a high level of debt for its downfall.
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Analysts say retailers are having to borrow money from banks for short-term needs to sustain their operations, resulting in a higher level of debt—and higher interest payouts.
According to analysts, Vishal Retail, the New Delhi-based discount retailer with around 180 stores across the country, for instance, has seen its debt to equity ratio rise to 2.65:1, Pantaloon will see its interest payout, as a proportion of sales rising this year, and Shoppers Stop could find it difficult to meet all its debt obligations.
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The total debt on Vishal’s books is around Rs750 crore. Raghav Sehgal, a retail analyst with Mumbai-based brokerage firm Angel Broking Ltd said that of this Rs750 crore, Rs140 crore is high-cost short-term debt which the firm has raised at 16%—a relatively high rate of interest, but around the same rate at which most companies raise money. Although the prime lending rate, or the rate at which a bank is expected to lend to its best and most credit worthy corporate customers, is about an average 12% for public sector banks, even these companies don’t get to borrow at this rate.
Vishal is also saddled with heavy inventory, and, according to Sehgal, will have unsold goods worth Rs740 crore in its books on 31 March 2009, as compared to goods worth Rs557 crore on 31 March 2008. The company ended the year to March 2008 with revenue of Rs1,010 crore and a net profit of Rs41 crore. In the first nine months of 2008-09, it turned a profit of Rs22 crore on revenue of Rs1,100 crore.
“Things are alarming for Vishal,” said Ankur Periwal, an analyst with Mumbai-based brokerage Religare Securities Ltd.
Manmohan Agarwal, CEO, corporate affairs, Vishal, agreed that the company’s debt was at the level indicated by analysts. “We are in talks with the lenders to recast the debt from short term to long term, as this is the need of the hour. We are also in talks with Deutsche (Deutsche Mutual Fund) to recast the debt.”