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By Kala Vijayraghavan

 

It took 25 phone calls, 50 text messages, a couple of emails and plenty of persuasion over three weeks before Mr Kishore Biyani, 49, India’s largest retailer finally agreed to meet. Two reasons, both related, could explain his uncharacteristic reluctance.

 

The interview was on an uncomfortable subject, Mr Biyani’s battle with debt, Rs 4,352 crore to be precise. But then, Mr Biyani was never the one to duck tough questions. The second reason therefore is more plausible. Mr Biyani was busy; he was negotiating deals to carve out his empire, meeting global retailers, talking to investment bankers, planning foreign direct investment (FDI) compliance with corporate lawyers…the works.

 

In short, he was doing what every other retail CEO perplexed by the current environment is now doing. He was also nursing a fever. Finally, meet he did…not during the week at his office in Vikhroli, an eastern suburb of Mumbai, but on a Saturday morning at his home in south Mumbai and rather reluctantly.

 

Mr Biyani was to have boarded a flight to Paris on Tuesday night, but the fever kept him back. Had he gone, he might well have signed a unique deal with French retailer Carrefour. Mr Biyani is non-committal, but sources say that 17-18 cash-guzzling Big Bazaar outlets may be converted into a Carrefour franchise. There won’t be any equity infusion, so FDI norms are complied with. Big Bazaar is a hypermarket chain, the group’s flagship format and also one of his pet projects. And Mr Biyani is willing to give away parts of it…in return for some cash.

 

Mr Biyani has changed. Some of his trademark chutzpah has given way to wisdom and caution. But his resolve to build a sprawling consumption business hasn’t weakened. Earlier he wanted to do this alone; now, he is open to multiple partners. “The business environment is challenging and different. And I have to take a more mature approach to business,” he says. “When we started the retail business, the environment was different. And I was younger to take those risks.”

 

King-size Risks

 

Mr Biyani wouldn’t be what he is today, the maharaja of Indian retail, if he hadn’t taken those risks. But at the same time, he also wouldn’t have the problems he is facing today if he hadn’t taken those very risks. That’s not the only irony Biyani is living today. In the past, he raised funds aggressively to grow his empire. Now, his biggest challenge is to raise money: to save his empire. Consolidate is the word he prefers to use, not save.

 

Says Mr Thomas Varghese, CEO, Aditya Birla Retail: “Retail is cash-guzzling and it needs deep pockets to scale up. That’s the nature of the beast. Also, funding of the business can only be viable though equity and not debt.” Sources add that Mr Biyani opened too many fronts, book retailing, electronics, sports, salons, apparel. Debt was unavoidable because he was constantly experimenting with new formats that would make money.

 

Top executives who work closely with Mr Biyani every day say he has decided to take the debt bull by it horns. He wants to raise Rs 5,000 crore in the next 12-18 months to make Pantaloon Retail, the flagship company that owns most of his retail business, debt free. Can he?

 

Not so long ago, Mr Biyani was a rockstar in the stock markets. Pantaloon Retail went public in 1992, one year before Infosys. In the past 19 years, it has delivered an annual return of 25%. Investors cheered his rapid growth.

 

Pantaloon Retail now occupies over 15.2 million sq ft space in multiple retail businesses. It runs 59 Pantaloon department stores, 42 Ezone electronics stores, over 200 hypermarkets under Big Bazaar and Food Bazaar and over 214 KB’s FairPrice stores.

 

It operates 10 formats including Central (seamless malls), Brand Factory (discount fashion) and Ethnicity (ethnic wear). Mr Biyani also got into the financial services business to fund the purchases happening at his stores; he set up a foods business to help stockpile the shelves in his stores; set up venture funds to invest in his suppliers and even floated media companies.

 

Notes Mr Biyani: “In most countries, retailers can focus on retailing alone. But when we started to grow, we realised the lack of an industry ecosystem around retail and realised the need to create one. That meant setting up the entire logistics and supply chain networks.

 

That meant training thousands of people. That meant setting up technology and back-end processes to handle millions of transactions. And it also meant building enablers, stronger brands, consumer finance, media etc, that could spur consumption.”

 

In short, he bet big… real big, on India’s consumption story.

 

 

No Choice, But to Grow

 

And, why not? The economy was booming, salaries were rising and consumers wanted to spend, investors were willing to give him great valuations, banks were lending cheap and real estate was easy to come by. It was rock ‘n’ roll. “In this journey, since we were often the first, we made the maximum number of mistakes; we also learnt the most,” says Mr Biyani. “And today, we know each business threadbare.”

 

Sure, the feisty, home-grown entrepreneur was hungry for growth. But it is also equally true that he had no choice but to grow. Ever so often, there would be a buzz on retail FDI. Mr Biyani had to prepare for it. Retail is all about size; the bigger the better. Mr Biyani had to become a Godzilla if had to have any chance of fighting the likes of Walmart who would come in some day. Even if he didn’t want the fight, he still needed scale to position himself for a sweet buyout.

 

And so Pantaloon Retail grew spectacularly fast. But debt fuelled it. It now clocks Rs 12,366 crore in revenues, about Rs 10,000 crore more than what it made five years ago. Its borrowings have also increased from Rs 700 crore to Rs 4,350 crore.

 

Here is a good way to look at Pantaloon’s growth, in the past five years, the company had to borrow Rs 1 to generate every Rs 3 of annual revenues. This was okay when the economy was growing and debt was cheap. But the economy slowed down and inflation went up, forcing the Reserve Bank of India to raise policy rates 12 times since March 2010.

 

“The retail business is modular and its expansion can be halted or grown depending on the environment, cash flows, and interest rates. We will grow accordingly and take decisions which are conducive in the given environment,” says Mr Biyani, his new found caution very much in evidence. Pantaloon Retail earns Rs 1,203 crore as operating profit, but more than half of it goes towards paying interest charges, leaving it with only Rs 142 crore in net profit after accounting for depreciation and taxes.

 

Dash Bigger Than Cash

 

Industry sources say Mr Biyani was reckless in expanding faster than what the cash flows supported, and not slowing down enough even when he had the chance to do so. “All big players including Reliance focused on restructuring and improving operating efficiencies during the slowdown but Biyani was chasing valuations and growth,” says the CEO of a rival company who did not want to be identified.

 

“Pantaloon’s debt level is uncomfortable,” says Mr Arun Kejriwal, director, Kejriwal Research and Investment Services. “Also, the management has not shown any concrete plan to reduce debts.” Mr Kejriwal says same-store sales have not grown exceptionally, suggesting that the issue with debt, if not resolved, may create problems in future. “It’s imperative for Pantaloon to retire debt,” says Mr Gautam Duggad, a research analyst with Prabhudas Liladhar, a Mumbai-based brokerage. “Although Pantaloon’s gearing is not alarming, its absolute debt is quite sizeable.”

 

All this has made investors jittery. Since April this year, the stock has lost 30% in value, while the BSE Sensex has dropped only 14%. “We are conscious of what the world is thinking about us and we are always discussing ways of cutting  debt,” says Mr Shailesh Haribhakti, independent director at Pantaloon Retail. “We are very responsive to the concerns raised.”

 

At Home With Less Control

 

At his tastefully done-up residence, Mr Biyani is clear about what he needs to do. There is no emotion, regret or hesitation as he spells out his next steps. He is preparing to take some tough calls, including giving up control of some of his prized possessions.

 

Mr Biyani is willing to share ownership in Big Bazaar, Ezone, KB’s Fairprice, and Home Town, all successful formats he has pioneered. “All these years, we have grown the business by ourselves. Now the time has come to get partners. It’s now time to consolidate and let somebody else run the business [shared ownership],” he says. That’s what has brought Mr Biyani to where he is now, in the middle of stitching together half a dozen deals with financial ingenuity to ensure all FDI norms are complied with.

 

He has just signed a deal to give 49% stake in the Future Group’s foods sourcing and manufacturing entity to Lawson Inc, Japan’s second-largest convenience store chain. The move will relieve Pantaloon Retail of the burden of funding the aggressive growth plans of the food business. He is in talks with an Indian company to sell equity in Ezone. And then, there is the likely deal with Carrefour.

 

Mr Biyani also has plenty of non-core businesses: consumer finance, insurance, textile mills, logistics and JVs in mobile retailing and office supplies, Future Capital Holdings (FCH), life and non-life insurance businesses under a partnership with Generali. The Future Group hopes to raise Rs 2,500-4,000 crore by selling equity in these.

 

An Edelweiss report values FCH, and its e-commerce, supply chain, real estate and insurance ventures around Rs 3,000-4,000 crore. “Any such tie-up would bring funds in the company and would help deleverage its balance sheet,” says Ms Sangeeta Tripathi, senior analyst at Sharekhan.

 

‘Picked My Horses Now’

 

Industry sources say exiting many of these businesses is a good idea. “Walmart is known for its austerity and Gucci for its lavish luxury,” says a senior industry CEO pointing out that the Future group wanted to be both. It can’t.

 

“If I were Kishore Biyani, I would totally back the top two horses and ensure that I become so powerful that I would create far more value,” says Mr BS Nagesh, founder, Trust for Retailers and Retail Associates of India, a not-for-profit organisation that trains front-end staff in retail. Nagesh is also the vice-chairman of Shoppers Stop, but these are his personal views.

 

Biyani is thinking along similar lines. He now plans to concentrate on just four large formats, Pantaloons, Central, Big Bazaar and Food Bazaar, limiting itself mostly to food, fashion, home and general merchandise. “In rich countries, retailers are among the largest businesses, wealth creators and employers. We’ll expand prudently and wait patiently for our turn,” he says. “People are right that we should back a few big businesses and scale it up big time. We have picked our horses now.”

 

 

(Additional reporting by Kausik Datta)

 

 

Source:The Economic Times

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