Mumbai: Retailer Kishore Biyani has consolidated his family investments in group companies into a single holding firm, Future Corporate Resources Ltd, in a move expected to help him create a more transparent ownership structure and facilitate succession planning. It could also help him raise money to fund an aggressive expansion plan, by offering lenders shares in the new holding firm as collateral, even though his flagship retailing company has higher debt levels than its peers.
The new holding company now owns a 39.13% stake in Pantaloon Retail (India) Ltd, India’s largest retailer by sales.
This stake was earlier held by several investment firms.
The consolidation process began in December 2009, with Future Corporate Resource’s purchase of the 23.6% stake in Pantaloon Retail held by PFH Entertainment Ltd. The holding company later increased its stake in the listed retailer by purchasing shares held by three smaller investment companies—Erudite Trading Pvt. Ltd, Varnish Trading Pvt. Ltd and Manz Retail Pvt. Ltd.
“The (Biyani) family plans to raise its stake by 3%, to 47% from the present 44%, by converting its preferential shares into equity shares in the next one year,” said Anand B., Future Group’s finance director. The Biyanis had earlier invested Rs100 crore to convert a part of their holding of preferential shares into equity shares, to raise their stake in Pantaloon Retail to 44%.
“Consolidation of family holdings into one company gives the promoters lots of options and flexibility to divide the ownership of the companies without disturbing the management of these companies,” said a Mumbai-based lawyer, who requested anonymity because his firm does business with the Future Group. He added that the current restructuring will help avoid cross-holdings between group companies and thus help divide the firms among the next generation later.
Such cross-holdings between group firms have often been the bane of succession planning in many Indian business groups and led to family disputes.
In another corporate rejig, Biyani recently created a group executive board (GEB) of 16 top executives who report to him. “The GEB is similar to the Aditya Birla Group’s Aditya Birla Management Corporation, the group’s strategy and management cell, which reports to (Kumar Mangalam Birla),” said Anand, a member of the executive board.
The restructuring of promoter holdings will facilitate India’s largest retailer, with sales of Rs9,786.94 crore for the year ended June, to raise money to fund its aggressive expansion plans.
Biyani wants Pantaloon Retail to be a $20 billion (around Rs90,000 crore) company in the next six-seven years.
“We have pledged nearly 7% of the 44% held by promoters as guarantee to lenders,” Anand said.
Analysts and rating agencies have raised concerns on Pantaloon Retail’s strategy of using debt to fund its expansion.
Pantaloon’s debt level averaged 44% of sales for the past four years compared with Shoppers Stop Ltd’s average debt of 16% and Trent Ltd’s debt of 28% of sales, Jaishankar Krishnamurthy, an analyst at Mumbai-based brokerage Brics Securities Ltd, noted in a report released on 29 September.
Anand dismissed the debt concerns. He said aggressive expansion to build scale will provide Pantaloon Retail with the cash flows required to service its debt.
“Unless cash generation from operations (before capital expenditure and interest payment), which was quite low during the last two years, improves, the company would need to borrow additional debt or raise equity to meets its interest and loan repayment obligations,” Brics Securities said in the same report.
The Future Group already has 13.37 million sq. ft of retail space and plans to add 3 million sq. ft every year, to double space in the next four years.
“The Indian retail market is estimated to be a $500 billion market. A simple growth rate of 8% per annum would mean a net addition of $120 billion to $150 billion in three years,” explained Arvind Singhal, chairman of retail consulting firm Technopak Advisors Pvt. Ltd.
“There is no reason to disbelieve Biyani and he would have done the math on making it possible,” said Singhal.
With inputs from Ashwin Ramarathinam.