Mumbai: Two decades after he founded what’s now Future Group, one-time garment supplier Kishore Biyani is recasting flagship Pantaloon Retail (India) Ltd, the country’s largest shopping chain by market value, in a move aimed at clarifying the structure, repaying debt and giving investors greater choice.
Biyani, managing director of Pantaloon, will consolidate the 22 companies in the group into three verticals—retail, logistics and financial services—which in turn will be controlled by the promoters through a main holding company.
Strategic move: Kishore Biyani, managing director of Pantaloon. Hemant Mishra/Mint
“This is my dream structure,” Biyani told Mint at his corporate office in south Mumbai where the wall facing him is lined with photographs of his icons such as Sam Walton, Mother Teresa, Rahul Bajaj and N.R. Narayana Murthy. One of the frames holds a mirror, in which Biyani can see himself reflected back.
Biyani’s move is expected to unlock the value of the various units and potentially lead to the induction of a strategic partner in some of the verticals, helping him raise funds needed for expansion. Investors can pick the vertical of their liking and the businesses will have to support themselves, rather than be funded by Pantaloon Retail.
“This will create a transparent structure,” Biyani said. “Lawyers and chartered accountants are working on” the process so that there will be “no tax implications”.
Biyani, who runs the firm with his brother and cousins, is also working on two proposals to sell shares in the company.
One involves a strategic initiative with French retail giant Carrefour Group for back-end operations similar to what Wal-Mart Stores Inc. has with Sunil Mittal’s Bharti Group and the second is a financial proposal from Bain Capital Llc, one of the world’s largest private equity funds, to put in more cash.
The move comes amid analyst calls for greater transparency. Pantaloon needs to enhance its disclosure levels with respect to consolidated financials, funding plans and investments in subsidiaries, Jamshed Dadabhoy and Aditya Mathur, analysts with Citigroup Global Markets India Pvt. Ltd, wrote in an 18 August report.
Growth channels: A Big Bazaar store in Noida, Uttar Pradesh. Pantaloon, which owns the brand, plans to add 5 million sq. ft of retail space over two years to the 9.7 million sq. ft it already has across the country. Harikrishna Katragadda/Mint
“All the three companies will be listed,” Biyani said. The listing of “the main holding company will be decided later”.
The new structure will also improve operational efficiency, he said.
The Pantaloon management knows that it needs to improve inventory management by reducing stock, Dadabhoy and Mathur had written in the same report.
The process of creating the main holding company is already under way. On 18 September, eight members of the Biyani family, which owns 48.79% of Pantaloon, traded shares in a so-called inter se transfer. Inter se transfers involve stock changing hands among co-promoters.
The company is also looking to raise $210 million (Rs976.50 crore) through the fresh issue of shares to domestic investors to help fund its plan to boost retail space by 5 million sq. ft over the next two years and repay some debt. Pantaloon, whose key brands are Big Bazaar, Home Solutions, Food Bazaar and Central, currently has 9.7 million sq. ft of retail space.
In the 2009 fiscal year, the company invested Rs370 crore in its subsidiaries out of a total capital expenditure of Rs1,300 crore.
Key concerns about Pantaloon include the high leverage and the risk associated with the funding of expansion plans, Latika Chopra, an analyst with JPMorgan Asia Pacific Equity Research, wrote in a report released on 4 August.
Pantaloon raised Rs300 crore in the last fiscal year through an issue of preferential warrants to promoters and Dharmyug Investments, owned by Bennett, Coleman & Co. Ltd, which publishes The Times of India and The Economic Times. Pantaloon, which said net profit grew 12% to Rs140 crore and sales rose 26% to Rs6,345 crore in the last fiscal year, had debt of Rs3,100 crore as of 30 June.
Asked specifically about plans to raise cash for expansion, Biyani says this is an ongoing process.
The challenge for promoters in a growing market is to raise cheap and riskless capital in such a way that it does not affect the weaker parts of the business, says Sachin Sondhi, senior director, Deloitte, a global consultant. But the challenge companies face is the need to preserve cash to fund different growth channels and retain an ownership structure that creates value for shareholders.
Biyani is also taking a cue from infrastructure player Infrastructure Leasing and Financial Services Ltd or IL&FS that runs toll roads, funds various infrastructure projects and is engaged in financial services. IL&FS, which also recently took over Maytas Infrastructure Ltd, is involved in financial services linked to infrastructure and Biyani similarly wants to create what he calls “consumption intermediation” —being present in any business linked to consumption.
“Nearly 40% of our trillion- dollar economy is in the consumption business and our companies will be present in this area linked to consumption,” he said.
Biyani’s plans for the financial services business include the general insurance venture with Generali Group and the private equity fund.
He wants to build a non-banking financial services company that would provide supplier and retailer credit besides debt syndication for firms linked to his business. This would allow Future Group to partially own and fund these companies, he says. The non-banking arm will also help his companies raise debt to grow their business.
Future Ventures, the private equity fund that will be insulated from the current restructuring, has invested in Sula Wines, the second largest wine maker, Biba, a garment maker, Mother Earth, a retail chain that supplies organic food and Aadhaar, a joint venture with Godrej.
Biyani says his challenge is to streamline the current business, manage the value chain and move ahead to achieve a target of Rs25,000 crore revenue by 2012 with an 8-10% profit margin.
Future Learning and Development, which teaches skills to nearly 25,000 people annually primarily to absorb them into the retail chain, will offer such services to rivals as well. Similarly, Biyani plans to lease his warehouses, distribution network and inventory accounting services.