Vishal Retail was once the fastest growing retailing groups in India. It had been very aggressive in opening its outlets across various parts of the country under the brand name "Vishal Mega Mart", but now it has pruned that expansion plan a bit. Vishal Retail came quite late with its IPO in year 2007, which was hugely subscribed. Such was the euphoria at that time, that people were willing to pay just about any price for the IPO. How can one forget the IPO of Reliance Power, where Mr. Anil Ambani was asking people to pay a price of Rs 450 per share for a company which had no operations, and where he himself had just paid Rs 10 for the same share.
It's really amazing, since Indians are known to be good at bargaining, but in the case of stocks, they just forget the whole idea of ownership in the business, and look at stocks as a piece of paper. When the price falls, they term the whole process of investing in stocks as risky, and ultimately make a promise of never investing in it again, thus losing out on an opportunity to make huge gains.
Coming back to Vishal retail, where a similar fall from a high of Rs 1000 to a low of Rs 25, must have scared another set of people. Actually it is scary, to see your Rs 1,00,000 turn into a meagre Rs 2500, but in the first place, people should not have actually put in money into it with a view of investment, as it was already trading at a P/E of 50 and above. Also, from a look at volumes when it started its downfall, its quite evident that many people may still be holding their investment in Vishal Retail, as the volume was not very high during those days.
Let's now go through the present situation
Business
Vishal Retail sells ready-made apparels (including its own brands) and a wide range of household merchandise and other consumer goods such as footwear, toys, watches, toiletries, grocery items, sports items, crockery, gift and novelties. The company has around 180 stores spread across more than 100 cities.
Vishal Retail's half of revenues come from apparel sales in North India. The company basically caters to the needs of middle and lower class through its apparel division and has therefore established its stores in tier-III cities pre-dominantly, apart from the Metros and high end cities.
Financials
All was well with Vishal Retail, until recession gripped the whole world, and the large amount of debt in its books started haunting it in the form of large interest outgo. Recession led to the sluggishness in the sales, and interest payments, dampened the already less margins. Also, the company had started diverting from its core competencies, and was planning to enter restaurant business. Personally I maintain the view, that in most of the cases diversificaions lead to di-worsefications.
In the recent times, company had to shut down many stores, lay-off many people, and has now started outsourcing its manufacturing operations, which until now it had been doing on its own. The basic reason, for closing down stores is that company has not been able to rotate its inventory at a comfortable pace, and there has been a sizable build up of it. For a company in retail, its very important to sell its products at a rapid pace, as only then cash can be generated, otherwise huge inventory build up can take place, leading to blockage of liquidity.
The company has not come up with its annual results, although they should have been out by now. In the nine months ending Dec'08, it has been able to register sales of just a tad above Rs 1000 Cr, with a net profit of Rs 20 Cr. The last two quarters have been dismal as it could only clock in profit of Rs 6 Cr from the two, whereas interest payment has already crossed a mark of Rs 70 Cr, and is expected to touch 100 Cr.
Outlook
The very important question that comes up is, will Vishal Retail go the Subhiksha way ? According to me, the answer to it is definitely no. Vishal retail is a lot matured company in terms of its presence across India, its revenues and also management. The management of the company was quick to assess the situation and has rightly taken steps of consolidating its stores in the same city. Similarly to bring the cost down, it has started outsourcing some of its activities.
The company got a breather from its lenders in the form of approval to roll over about a third of its near-term debt, which was maturing this fiscal. So, the situation is certainly not that grim as was with Subhiksha, and the current stock price has almost factored in all negatives about the company.
But, if I talk in terms of growth, then in the medium term that will be certainly muted for about year or so, as the company has slowed down on its expansion plans in the wake of dwindling footfalls, and also the debt burden will certainly weigh over its earnings for the time being. Long term prospects, as a whole are good for organized retail, and Vishal being an early entrant into it, will certainly have an advantage over others.
It's really amazing, since Indians are known to be good at bargaining, but in the case of stocks, they just forget the whole idea of ownership in the business, and look at stocks as a piece of paper. When the price falls, they term the whole process of investing in stocks as risky, and ultimately make a promise of never investing in it again, thus losing out on an opportunity to make huge gains.
Coming back to Vishal retail, where a similar fall from a high of Rs 1000 to a low of Rs 25, must have scared another set of people. Actually it is scary, to see your Rs 1,00,000 turn into a meagre Rs 2500, but in the first place, people should not have actually put in money into it with a view of investment, as it was already trading at a P/E of 50 and above. Also, from a look at volumes when it started its downfall, its quite evident that many people may still be holding their investment in Vishal Retail, as the volume was not very high during those days.
Let's now go through the present situation
Business
Vishal Retail sells ready-made apparels (including its own brands) and a wide range of household merchandise and other consumer goods such as footwear, toys, watches, toiletries, grocery items, sports items, crockery, gift and novelties. The company has around 180 stores spread across more than 100 cities.
Vishal Retail's half of revenues come from apparel sales in North India. The company basically caters to the needs of middle and lower class through its apparel division and has therefore established its stores in tier-III cities pre-dominantly, apart from the Metros and high end cities.
Financials
All was well with Vishal Retail, until recession gripped the whole world, and the large amount of debt in its books started haunting it in the form of large interest outgo. Recession led to the sluggishness in the sales, and interest payments, dampened the already less margins. Also, the company had started diverting from its core competencies, and was planning to enter restaurant business. Personally I maintain the view, that in most of the cases diversificaions lead to di-worsefications.
In the recent times, company had to shut down many stores, lay-off many people, and has now started outsourcing its manufacturing operations, which until now it had been doing on its own. The basic reason, for closing down stores is that company has not been able to rotate its inventory at a comfortable pace, and there has been a sizable build up of it. For a company in retail, its very important to sell its products at a rapid pace, as only then cash can be generated, otherwise huge inventory build up can take place, leading to blockage of liquidity.
The company has not come up with its annual results, although they should have been out by now. In the nine months ending Dec'08, it has been able to register sales of just a tad above Rs 1000 Cr, with a net profit of Rs 20 Cr. The last two quarters have been dismal as it could only clock in profit of Rs 6 Cr from the two, whereas interest payment has already crossed a mark of Rs 70 Cr, and is expected to touch 100 Cr.
Outlook
The very important question that comes up is, will Vishal Retail go the Subhiksha way ? According to me, the answer to it is definitely no. Vishal retail is a lot matured company in terms of its presence across India, its revenues and also management. The management of the company was quick to assess the situation and has rightly taken steps of consolidating its stores in the same city. Similarly to bring the cost down, it has started outsourcing some of its activities.
The company got a breather from its lenders in the form of approval to roll over about a third of its near-term debt, which was maturing this fiscal. So, the situation is certainly not that grim as was with Subhiksha, and the current stock price has almost factored in all negatives about the company.
But, if I talk in terms of growth, then in the medium term that will be certainly muted for about year or so, as the company has slowed down on its expansion plans in the wake of dwindling footfalls, and also the debt burden will certainly weigh over its earnings for the time being. Long term prospects, as a whole are good for organized retail, and Vishal being an early entrant into it, will certainly have an advantage over others.
Note: The stocks discussed at MPS thru blog postings are neither a part of “Business Insights” issue nor a “Penny Stocks” which we reco/publish for paid subscribers. These are just stock specific views by MPS team; one MUST do the due diligence before doing any investment based on our reco.
To contact the equity analyst on this story: Ekansh Mittal in Noida (New Delhi) at Ekansh@hbjcapital.com
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