Mumbai: Shareholders of Reliance Fresh Ltd, a Reliance Industries Ltd (RIL) subsidiary that runs a chain of supermarkets and hypermarkets, have passed a resolution authorizing the company to raise its borrowing limit by half to Rs.15,000 crore with immediate effect to fund future expansion, according to the company’s filing with the Registrar of Companies (RoC).
Reliance Fresh, the largest format in RIL’s retail business, has expanded its presence across India at a rapid pace and wants to keep up the momentum which, analysts say, could be a strategy to counter increased competition after the opening of doors to foreign direct investment (FDI) in multi-brand retail.
At an extraordinary general meeting on 31 October, Reliance Fresh shareholders passed the resolution allowing the company to have, at any time, debt that is Rs.15,000 crore in excess of its combined paid-up capital and free reserves, according to the company filing, which was uploaded on the RoC website on 30 November.
Since the company has paid-up capital of only Rs.1.05 crore (according to its 2012 annual return filed with RoC) and no free reserves (it’s still running at a loss), the current borrowing limit will be Rs.15,001.05 crore.
As and when the company’s paid-up capital increases and it accumulates free reserves, its debt exposure will automatically rise in the same proportion.
A Reliance Retail executive, speaking on condition of anonymity, described the proposal as an enabling resolution that will help create a buffer for the company to fund future growth.
A Reliance Retail spokesman declined to comment.
The shareholder approval to raise the borrowing limit comes after the government in September paved the way for the entry of overseas retailers such as Wal-Mart Stores Inc., Carrefour SA and Tesco Plc to enter India by allowing 51% FDI in supermarket chains. This month, Parliament approved the move by rejecting opposition-sponsored motions against it.
According to the Reliance Fresh 2010-11 balance sheet, the latest available on the RoC website, the subsidiary of India’s most valuable company had debt of Rs.5,217.71 crore. Most of this debt is owed to its parent company.
The increase in the borrowing limit may indicate that the Mukesh Ambani-led conglomerate is getting ready to pump more money into its retail operations in the coming fiscal.
The hypermarket and supermarket models offer lucrative business opportunities in the organized retail market in India. Hypermarkets are a combination of department stores and supermarkets, selling everything from groceries, vegetables, fruit, and personal and home care products to consumer durables and clothing.
A week after FDI in multi-brand retail was allowed, Scott Price, chief executive and president of Walmart Asia that has a joint venture with Bharti Enterprises Ltd called Bharti Walmart Pvt. Ltd, told The Wall Street Journal about the company’s intentions to set up its own stores in India in the next 12-18 months.
Reliance Retail launched operations in 2006 and in the past six years has gained the experience and expertise to be able to take on foreign retailers that are drawing up plans to tap the Indian market, experts said.
Reliance Retail already has around 1,450 stores in the country, according to the Reliance Retail executive cited above. In 2012 alone, the company added around 250 stores with over 1 million sq. ft of retail space. It grew 20% in the last calendar year and is seeking to maintain the pace of growth this year.
“Reliance is a very quick learner. The past six years would have taught the company what is working and now it is looking at a more informed and confident growth,” said Arvind Singhal, chairman of Technopak Advisors Pvt. Ltd, a retail consulting company. “Reliance will be on a very strong footing by the time global retailers start ramping up in India.”
The Reliance Retail executive said the company wasn’t unmindful of the prospect of increased competition, but the growth plans were more connected with chairman Ambani’s vision of increasing retail revenue five-fold to around Rs.50,000 crore over the next three-four years.
Reliance is seeking to expand its retail operations at a time when competitors such as Pantaloon Retail (India) Ltd, which runs the Big Bazaar and Food Bazaar chains, have been rationalizing space and focusing more on improving their efficiency.
Pantaloon Retail, India’s largest listed retail company, reduced its retail space to 16.36 million sq. ft at the end of the September quarter from 16.71 million sq. ft in June.
To be sure, getting the supermarket and hypermarket formats right hasn’t been easy for Reliance Retail. In the past six years, the business has undergone several management changes.
In 2010, the company brought in a team of expatriates, led by Gwyn Sundhagul, from Tesco, Thailand. Sundhagul resigned in October after having been moved to a marketing role in the parent company in 2011 following the induction of a new team led by senior Wal-Mart executives from China, Rob Cissell and Shawn Gray, at Reliance Retail.
In fiscal 2012, Reliance Fresh incurred a loss of Rs.273.76 crore on revenue of Rs.3,860.37 crore, according to RIL’s latest annual report. The combined loss of the firm’s 34 retail entities was around Rs.434 crore in fiscal 2012.
The losses have not been a deterrent for RIL. In fact, it stepped up investments in the retail subsidiaries. In fiscal 2012, RIL invested Rs.5,027 crore of fresh capital in Reliance Retail. The last time RIL infused capital into Reliance Retail was in 2009-10—around Rs.1,220 crore.