Reasons for Vishal Retail's big fall

Three years before Kishore Biyani set up his first Pantaloon store on Kolkata's high-street, Gariahat, in 1997, Ram Chandra Agarwal had set up a large garment store, Vishal Garments, at Kolkata's Tiger Cinema, which was converted into a sprawling store.

But Agarwal's first-mover advantage didn't last long. While Biyani's store is still there, Agarwal's has long closed, after he moved to Delhi in 2001 and founded Vishal Retail. Both grew at a frantic pace after that, but while Biyani prospered, growth became a liability for Agarwal.

Today, the chairman of Vishal Retail is eagerly waiting his date with the Corporate Debt Restructuring cell of lenders in the third week of November. With unpaid debt of Rs 730 crore (Rs 7.3 billion), Agarwal is hoping his lenders would give him a new lease of life.

The lenders, led by State Bank of India, have to take a call on restructuring Vishal's Rs 730-crore debt: reduce interest rates, prolong its repayment of the principal and offer some sort of moratorium on repayment of interest and principal.

The lenders are even seeking a change in management, though executives and people close to the company feel there's no need for it. "Agarwal is open to change, but what will the lenders do by taking over a company? They can't run a retail company,'' says a former Vishal executive. Agarwal is travelling and could not be reached for comments.

Vishal's Group President Ambeek Khemka says bankers have validated its business model, which is value-retailing and catering to masses in tier-II and tier-III cities. ''The only mistake we made was to grow our business through short-term debt,'' says Khemka.

The 'only mistake', however, proved too costly. In June 2007, Vishal raised Rs 110 crore (Rs 1.1 billion) through an IPO but this was not enough to meet its scorching growth. It had 50 stores by then and was looking to add 130 more in a year. It tapped the short-term debt market, as it could not bring in a follow-on offer before a year after the IPO.

''The thinking was that once we expand, have the topline, we could hit capital markets again to fund expansion and retire short-term debt or convert into long-term debt,'' says Khemka. Before it could do so, (industry sources say Vishal was talking to some private equity investors, who withdrew at the last moment), the Lehman Brothers collapse happened.

Anticipating its expansion, Vishal had placed orders with suppliers (in apparels, Vishal had to place orders six months in advance) When the stores did not happen, deliveries piled up and consumption slowed. "The supply chain got choked, not just for Vishal but many retailers globally,'' says Manmohan Agarwal, a former CEO at Vishal.

Vishal is saddled with huge stocks, valued at Rs 550 crore (Rs 5.5 billion), that it is trying to liquidate. This is its second big problem and responsible for back-to-back quarterly losses in the last two quarters. It is yet to announce results for the quarter ended September 2009, but Khemka says that losses are likely to continue till the quarter ended June 2010.

Vishal made many other mistakes. When it was ramping up, it spread itself too thin, opening stores across the country. Given that it was selling over 20,000 items in its stores, this made its supply chain complex. ''They needed to expand, stabilise and then expand. But they wanted to be first off-the-block in every town. Your supply chain has to be robust. Even a Wal-Mart is moving step-by-step,'' says a supplier with Vishal.

Similarly, suppliers say its distribution centre-led model failed as it could not build an IT network. Which meant that buying at the warehouses was not aligned to customer needs, and it ended with dead inventory. ''It seems the sourcing managers had a brief to buy at the best cost. But there was a mismatch,'' says the sales head with an FMCG major. Also, Vishal tried to develop private labels in every single category, but did not have the competence (had limited scale) to support these.

Though the impact has still been minimal so far, Vishal has been trying to get back on track. Khemka is working on a turnaround to reduce its debt burden, get rid of inventory and infuse liquidity.

Vishal has brought down monthly expenses from Rs 46 crore (Rs 460 million) to Rs 36 crore (Rs 360 million), which includes an interest burden of Rs 8.5 crore. It has reduced interest costs by Rs 2.5 crore (Rs 25 million) a month, which will come down further if the CDR agrees to a moratorium on interest payment for two years. It could use this for replenishing stocks, upgrading stores.

Vishal's capital structure remains a problem. One good thing working for it is that it has brought rentals on its properties down to Rs 23-24 per sq ft from Rs 50-60 per sq ft.

It has also closed two dozen stores and warehouses. At one point, Vishal had a warehouse space of 1.1 million sq ft (26 warehouses) to service a retail space of 2.6 million sq ft.

Today, it is servicing 2.5 million sq ft of retail space through one central warehouse of 350,000 sq ft. It plans to close another 12 stores in the next three months, which will bring the number from 150 to about 135. Vishal's stores used to sell over 40,000 SKUs (stock keeping units); Khemka has brought it down to 15,000 SKUs.

Vishal says it has seen an increase in footfalls -nearly 150,000 customers visit its 150 outlets every day, some 55 per cent of whom buy - which has helped it increase the average ticket size to Rs 475, after it had plummeted to Rs 400 last year. Its ticket size has also come down, as it is doing a lot of deep-discounting to get rid of inventory.

''If I replenish my stock with fresh assortments in the right quantity and at the right time, in tune with local preferences, my ticket size would go back to Rs 500,'' says Khemka.

Vishal doesn't like to be compared with Subhiksha, unable to pay and having suspended operations, as it is meeting its obligations. Unlike Subhiksha, lenders are willing to consider its debt recast. ''It's a running company. There's no reason to stop supporting it...Lenders made money on Vishal for seven years. They can now support it for two-three years,'' says Manmohan Agarwal.

Even if the CDR admits and approves its proposal, Vishal would need an infusion of Rs 50 crore (Rs 50 million) to buy merchandise (today, it is buying less), refurbish stores. This can come by way of a QIP issue, from a strategic investor, or a bank loan at really low rate.

Over to the lenders.