Mumbai: After rapidly expanding in recent years, many Indian apparel retailers are struggling with heavy debt and inventory mismanagement among other issues, the latest being kidswear retailer Gini and Jony Ltd.

On 13 July, the Bombay high court adjourned hearing in a winding-up petition against the company to 20 July after the retailer sought more time to come up with a repayment proposal for its creditors.

Staying away: A file photo of a Lilliput store in Bangalore. Experts say private equity firms which until a few years ago were queuing up to invest in apparel retailers, are now turning wary of these companies. Hemant Mishra/Mint

“As on October 2010, the outstanding principal amount under the loan was 10.49 crore and the interest that accrued thereon was 7.54 crore," HSBC said in the petition, a copy of which Mint has reviewed.

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The company owes around 10 crore each to Barclays Bank and Canbank Factors.

Devanshu Desai, senior counsel for Gini & Jony, declined to comment on the issue as the matter is in the court.

Gini & Jony and other troubled apparel retailers such as Lilliput Kidswear Ltd, Spykar Lifestyles Pvt. Ltd and Koutons Retail India Ltd are all backed by private equity investors.

For instance, Reliance Capital Ltd holds a 22% stake in Gini & Jony, and Singapore-based fund Arisaig Partners owns 9%.

Experts say private equity or PE firms, which until a few years ago were queuing up to invest in apparel retailers, are now turning wary of these companies, although the investors might have stoked some of the misfortune.

India’s apparel market was estimated at $35 billion (around 2 trillion) in 2011 and expected to grow to $50 billion by 2016, according to management consultancy Technopak Advisors Pvt. Ltd. The organized apparel retail market in India was pegged at $5.5 billion in 2011 and expected to touch $8 billion by 2016.

Globally, PE funds have backed brands such as J. Crew and Gap and these retailers have done very well, said Raj P. Kondur, director at PE firm Ascent Capital. But in India structural issues such as high retail costs make it hard for these companies, he added.

Ascent Capital was a principal investor in Koutons but in end-2010 it decided to exit the cloth seller even if it meant selling its investment in the company at a loss.

Koutons was facing at least four lawsuits, of which two were winding-up petitions filed in the Delhi high court by its suppliers to recover dues.

“In retrospect, the challenges of the sector seem obvious, but some PE funds were probably swayed a step too far by their global experience that they might have hoped to replicate in India," said Kondur.

The trouble for apparel retailers began when they started expanding indiscriminately but without focusing much on the profitability of each store.

“The basic rule in retail is that every location, store has to be profitable," said Saloni Nangia, president at Technopak.

Private equity cash may have triggered some of the expansions.

“A lot of retail apparel companies have made mistakes in choosing locations while trying to quickly add to their store count in order to service the interest of PE investors," said Siddharth Bafna, partner and head of the corporate finance and transaction services practice at Lodha & Co., a financial consultant.

The softening economy has little to do with the woes of apparel companies, he said. “Overall softening of demand may be a factor but I suspect that the pressure that comes with PE money has had a bigger role to play. PE players need that the investee scales quickly during their typical five-year investment horizon. It’s an exit game."

Also, only a few apparel retailers had the necessary supply chain and inventory management experience to manage such rapid growth in an industry where ever-changing fashion can create a huge problem requiring deeply discounted sales or resulting in dead stock, affecting margins.

PE investors said the difficulties of apparel retailers is not a reflection on the due diligence they carried out before investing in these companies.

“This is a failure of a short-term strategy. There was too much stress on building up stores and no micro study was conducted to assess profitability of each store," said Mahendra Swarup, managing director, Avigo Capital Partners. “People borrowed heavily even as their debts were not supported by the balance sheets and they started defaulting."

Avigo had invested in Spykar Lifestyle, which faced financial troubles due to mounting debt and dampened sales. Avigo took over the reins of the company from the promoter last year after roping in its global investor Metmin Investments.

Swarup, however, agreed that PE firms were also swayed by the estimates and projections of these companies.

“Most companies had exaggerated their business plans. They were not real. To that extent, it’s a failure of PE firms to not pay much attention to estimates."

Entrepreneurs, on their part, say expansion is essential for capturing the market share as competition is increasing.

“People start taking debts for expansion thinking they will get multiple PE funding rounds or go public on the back of higher revenues. Many times, this does not happen," said Sanjeev Narula, managing director and founder Lilliput, adding that expansion is key to retail business.

Nevertheless, fund raising will not be easy for apparel retailers now.

“At Motilal Oswal, we will only look at investing in strong brands, even if they are regional. Profitable growth is important before expansion," said Rakesh Sony, director, Motilal Oswal Private Equity Advisors Pvt. Ltd, concluding that investors can no longer go by estimates and prospects. “We need to sit back and see how money is really being made."

deepti.c@livemint.com

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