Mumbai: Private equity, or PE, investment in retailers is set to increase after rising almost sixfold last year as the funds bet that growing consumption in the world’s second-fastest growing economy will boost revenue at chain stores.
Investments in the retail sector by PE firms in 2010 jumped to $372 million (Rs 1,674 crore today), the highest in the past four years. The funds invested around $63 million in the previous year $282 million in 2008, according to VCCEdge, a financial research platform.
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In 2007, which had the highest PE investment in India, around $136 million went to the sector.
The surge in investment has happened despite the fact that retailers such as Subhiksha Trading Services Ltd had to shut after they failed to repay debt. During 2005-2007, retailers such as Subhiksha Trading Services and Vishal Trading Ltd borrowed heavily to fund aggressive expansion plans. Subhiksha is now defunct and Vishal, which had debt of Rs 730 crore, got sold for Rs 70 crore to TPG Capital and the Shriram Group in a distress sale.
When Vibhor Mehra, principal at PE firm SAIF Partners Ltd, first looked at kidswear retailer Catmoss Retail Pvt. Ltd three years ago, it was less than $10 million in size.
After tracking the company for three years, SAIF invested Rs 100 crore in Catmoss in August last year, valuing the company at Rs 500 crore.
“Three years ago there were so many companies that were just $10-20 million in size and today they have doubled and tripled in growth,” said Mehra who has looked at a half a dozen retail companies over the past month. SAIF, which has $4 billion under management, is bullish on the retail sector and is targeting at least three-four more investments in the sector. According to Mehra, the pool of high-growth companies today is much bigger than three-four years ago.
The retail sector is expected to increase to $475 billion by 2012, growing at a compound annual growth rate of 9-10%, according to a report released last year by audit and consulting firm Ernst and Young Pvt. Ltd (E&Y).
SAIF is not the only PE firm actively looking to invest in the retail sector.
Avigo Capital Partners, a Delhi-based PE firm that has invested in denim maker Spykar Lifestyles Pvt. Ltd, is looking to strike at least two more deals in the retail sector in the next two-three years. “Retail companies will give better returns than the Sensex, which typically gives 10-15% return,” said Vivek Subramanian, partner at Avigo Capital Partners, who has looked at two-three proposals in the last month. Avigo has around $400 million under management.
To be sure, the retail business is capital-intensive. Growth comes from opening new outlets and from an increase in same-store sales. In 2010, India added approximately 5 million sq. ft of organized retail mall space, according to an Indian retail view report published in February by CB Richard Ellis South Asia Pvt. Ltd, a real estate consultant.
Some of the deals last year in this sector include—$200 million invested in Coffee Day Resorts and Hotels Ltd, which runs a chain of coffee shops, by Kohlberg Kravis Roberts and Co., New Silk Route Partners Llc and Standard Chartered Pvt. Equity Ltd; $86 million in Lilliput Kidswear Ltd by Bain Capital Llc and TPG Growth; $7.8 million invested in eYantra Apparels Ltd by Argonaut Partners Llc and Ventureast Proactive Fund.
According to PE investors within retail, sub-sectors such as food and beverage, wellness chains, fashion and footwear and home furnishings are attractive.
The food and grocery category has the highest share of the overall Indian retail market, approximately 62% of total revenue, followed by clothing, textiles and fashion accessories with 9.5%, according to the E&Y report.
“Food and beverage accounts for nearly 60% of the consumer spend,” said Mayank Rastogi, partner, private equity, E&Y. “Today, every fund wants a branded food and beverage company in their portfolio,” he added.
Also, investors feel that they can make returns in these sectors in four-five years, after which PE firms look to exit.
However, general retail, where there is a need for large-scale operational expertise, has ceased to attract investors.
“We are not very focused on general and big box retail,” said Sameer Sain, managing director and chief executive, Everstone Capital Partners. “For Everstone, interesting areas of investment within the broad-based retail space would include any kind of specialty single-brand retail which deals with apparel, fashion, beauty and wellness.”
One of the key growth deterrents is the lack of foreign direct investment (FDI) in the sector. Currently, 51% FDI is allowed in single-brand retail and 100% in wholesale cash-and-carry. Industry has been lobbying for a relaxation of the rules to allow FDI in other retail sectors.
“Given the Indian economic growth rate, there is a great opportunity for consumption to grow. However, to grow consumption, significant investments are required in retail,” said B. Anand, chief finance officer, Future Group. “Currently, with no FDI, the retail market lacks depth and sustainable funding options. The lack of funding has its own ramifications of a slower growth rate. Companies will find it difficult to grow.”
According to Subramanian of Avigo, the availability of bank funding is the biggest challenge that retail companies face.
India’s largest retailer by market capitalization, Pantaloon Retail India Ltd (PRIL), had total debt of Rs 1,386.22 crore as of June 2010, which represents a debt-equity ratio of 0.84%. In the last fiscal, the company has increased its equity from 380.6 million to 412.3 millionshares by way of qualified institutional buyers, in effect a market capitalization increase of Rs 2,712.85 crore.
After the fate of Subhiksha and Vishal, retailers are reducing debt even as they look at different ways to raise money. Over the past year, PRIL has reduced its debt by 51%, according to Capitaline data, published by Capital Markets Publishers India Pvt. Ltd.
Following the slowdown, retailers have consciously improved profitability. “The focus is on store-level profitability as they shut down unviable locations,” said Saloni Nangia, vice-president (retail) at consultancy Technopak Advisors Pvt. Ltd.
Some PE investments in the sector have been written off as well. Three months after a spate of lawsuits were filed in the Delhi high court by suppliers to recover dues from apparel retailer Koutons Retail India Ltd, Ascent Capital, one of the principal investors in the company, exited the firm at a loss. Last month, Koutons announced that it has appointed SBI Capital Markets Ltd to draft a debt recast scheme as it was unable to repay short-term debt.
Everstone on the other hand made threefold returns when it sold its stake in Lilliput Kidswear to TPG and Bain Capital. When Everstone wanted to exit, bids came from 11 investors.
“When we looked at Lilliput, four years ago we didn’t see it as a retail business, but as a children’s fashion and apparel brand,” Sain said. “This allowed us to focus on the consumer and become channel agnostic—we sold through other departmental stores as well as through company run stores.”