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". 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 meager 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.
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 diversification lead to di-worsifications.
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 reported a net loss for FY2008-09 for the reasons explained above, but the quantum of losses for 9 months ending Dec'09 have been quite high. Earlier there was a fire that broke out at the company's warehouse resulting in a 50 crore loss, and there also has been huge inventory write down by the company.
Outlook
Vishal retail is a lot matured company in terms of its presence across India, its revenues and also management. The company is involved in the CDR (Corporate Debt Restructuring) mechanism, and as per the leading financial daily recently the Private equity fund Texas Pacific Group submitted its intent under which TPG will form a new cash-and-carry (wholesale) company with a capital infusion of Rs 200 crore.
Vishal will carry out a slump sale to this newly formed company, transferring all its assets and most of its liabilities. TPG’s operation will also have a sister company that will carry out the retail operations. An Indian associate company of TPG will own this firm. Foreign direct investment in retail companies is restricted, while such restrictions don’t apply in the case of cash-and-carry stores.
Lease agreements of some 140 stores owned by Vishal Retail will be transferred to the retail company, while the inventory, other assets and all liabilities will be transferred to the cash-and-carry company. A working capital infusion of about Rs 50 crore will be made to the retail company as well.
If the deal fructifies, TPG might end up with a very good deal considering the fact that Vishal Retail already has all the Infrastructure in place in terms of stores, warehouses, supply chain. Vishal Retail was a profit making entity and to bring it back on the same path all one needs to do is infuse funds and retire debt. As far as Investors and traders are concerned, the proposal by TPG shall have a positive impact for many days to come, and you never know there might be other Investors coming in for a bargain deal on hand.
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.
- Ekansh Mittal, Lead Associate - HBJ Capital Services Pvt. Ltd
Email: Ekansh@hbjcapital.com
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