Mumbai: The retailing arm of Reliance Industries Ltd (RIL) continued to get capital from the Mukesh Ambani-led parent company in a year that saw a management shake-out and strategy rethink at the subsidiary.
RIL invested another Rs1,220 crore in Reliance Retail Ltd (RRL) in FY10, taking its total investment to Rs5,220 crore, according to RIL’s annual accounts that were sent to shareholders this week.
The latest capital infusion came from subscription to partially paid-up shares, which analysts say allows RRL to raise capital of up to another Rs4,270 crore without seeking board permission.
The 2009-10 annual report of India’s most valuable company shows that it has invested in 6,100 million shares of RRL, the country’s second largest retailer by revenue, but has paid up only Rs3 of the face value of Rs10 per share. RIL paid Re1 per share in FY09, or a total of Rs610 crore. It paid another Rs2 per share in FY10, or Rs1,120 crore. The other Rs7 per share has still to be paid up and could potentially increase the retailing arm’s paid-up capital by another Rs4,270 crore.
Analysts believe that RIL could pay rest of the money as and when the board of RRL asks for it.
An email sent to RIL for comments remained unanswered.
“By issuing partly paid-up shares Reliance Retail Ltd has ensured that it doesn’t have to seek board approval each time for raising capital by way of issuance of fresh shares. Rather, it can call on RIL to pay the balance money as and when it requires it, which would save time,” said Jagannadham Thunuguntla, head of equities at SMC Capitals Ltd.
“Investors have been wary of the retail space since some retailers such as Vishal and Subhiksha ran into trouble, so the most convenient source of capital to support Reliance’s retail ventures is from its own coffers,” he added.
Graphic: Yogesh Kumar / Mint
The total investment by RIL in its retail operations is at least Rs5,220 crore, including an earlier investment of Rs3,390 crore in the fully paid-up equity shares of the company. As on 31 March, RIL had cash and cash equivalent assets to the tune of Rs13,462.64 crore.
However, Thunuguntla added that there was no regulatory requirement for RIL to make the investment in any specified time frame.
Reliance Retail’s new chief executive of value formats, Gwyn Sundhagul, a Thai expat manager, had told Mint in a 19 May story that “the business model needs to be profitable. We need to grow in a calibrated manner”. Sundhagul had also mentioned that Reliance Retail’s next phase of growth would be driven by the hypermarket format that would have a floor space of at least 80,000 sq. ft.
RIL’s retail arms, that were in the red in fiscal 2009, have managed to cut down their losses by almost half in FY10.
The combined losses of 17 RRL subsidiaries that have a turnover of Rs40 crore and above have come down by around 43% year-on-year in FY10, to little under Rs244 crore. The turnover for the same set of companies inched up 7% in the same period, to around Rs5,310 crore.
Reliance Retail, which had a loss of around Rs20 crore in FY09, reported a net profit of Rs18.22 crore in the last fiscal, largely due to a write-back of tax provision of Rs25.22 crore. Some other retail arms such as Reliance Fresh Ltd and Reliance Food Processing Solutions Ltd have also seen similar write-backs of Rs81.93 crore and Rs20.80 crore, respectively, that have helped them reduce net losses.
“Retail is a very difficult business and the last two-three years have been even more difficult. Reliance Retail too has undergone its learning curve and the infrastructure build-up, growing at a much faster pace in earlier years, could have eased up now,” said Pankaj Jaju, executive director, investment banking at Enam Securities Pvt. Ltd, commenting on the firm’s declining losses in the last fiscal.
On the possible Rs4,270 crore infusion by RIL in its retail venture, Jaju, who heads the retail practice at Enam, said that the quantum of investment might help RRL create around 15 million sq. ft of retail space, excluding real estate costs. “It is not too large a sum, given their overall growth plans.”
One of the expansion strategies being adopted by Reliance Retail is to forge partnerships with international brands.
“RRL rapidly expanded the stores network it operates through strategic partnerships with world-class companies such as Marks and Spencer and Pearl Europe... RRL has recently opened its flagship store under its franchise agreement with Hamleys and plans to expand the store network in the coming year,” the annual report stated.