The economic slowdown in recent years has derailed the plans of many Indian companies. Large debts taken to expand capacity to meet the expected increase in demand have weighed heavily on company cash-flows. But there are some companies, such as Future Retail, that have employed bold moves to meet this challenge.

Falling sales growth Future Retail’s debt-equity ratio has never been very high – in the past 10 years, the ratio has usually been below 2 times.

But quick addition to store count, debt amassed to fund this expansion, consumers averse to spending and an army of mostly loss-making subsidiaries made a heady recipe for trouble for Kishore Biyani-led Future Retail, earlier Pantaloon Retail. Troubles came to a head in 2012, when the company began restructuring to battle debt woes.

Consumer spending began slowing from late 2008 as higher living costs and a slowing economy led to consumers curbing discretionary spending. For Future Retail, sales growth in stores open a year or more (same-store-sales) slowed from March 2011 onwards.

Sales growth in the main value-retail format went from 10.3 per cent in that quarter to a fall of 0.2 per cent by September 2012. Same-store-sales growth in home furnishing, too, continued to decline. This apart, consolidated EBITDA margins for the company dropped below 10 per cent from 2010, down from around 12 per cent in earlier quarters.

Piling up debt The company, in order to cement its leadership position, remained focused on its expansion strategy. Retail footprint went from 11 million square feet at end-June 2009 to 15.23 million sq ft by the end of June 2011.

Future Retail’s consolidated debt ballooned to ₹7,846 crore by June 2011 from ₹3,858 crore in June 2009.

By the March 2012 quarter, after which restructuring began, the interest outgo accounted for more than 8 per cent of sales, and interest cover was around just 1.2 times.

“We have learnt it the hard way. When the cost of capital is high and growth is low, business becomes risky. We have to work on lowering our debt,” Biyani, Chairman of the Future Group, said recently.

“The cost of capital is nearly 13 per cent in India compared with 1 to 1.5 per cent elsewhere in the world, which was a distinct disadvantage to Indian retailers,” he said.

Selling off In April 2012, Future Retail sold the Pantaloon chain to Aditya Birla Nuvo.

The move took ₹1,600 crore in debt off Future Retail’s books. But Pantaloons was also the jewel in Future Retail’s crown, offering good margins and brand recall. The sale necessitated change of the company’s name to Future Retail from Pantaloon Retail.

Future Retail then merged the value formats, earlier under wholly-owned subsidiary Future Value Retail, with itself. That brought in formats Big Bazaar, Food Bazaar, e-Zone, HomeTown, and fbb, making the company a play on value and home retail.

Future Retail is now dependent mostly on Big Bazaar to push sales growth with the loss of Pantaloon.

Next, it created a separate company, Future Lifestyle Fashions, to house its fashion product lines.

Formats such as Central and Brand Factory, and brands such as Indigo Nation, AND, Biba, Bare, and RIG went into this venture in which Future Retail holds 19.8 per cent.

Third, owned-food brands such as Tasty Treat and Fresh & Pure, and chains like KB Fair Price went into Future Ventures, another group company, renamed as Future Consumer Enterprises. Future Retail has a 9.5 per cent stake in this company.

Fourth, it sold a 22.5 per cent stake in subsidiary Future Generali Life, and its entire stake in Future Capital, raising over ₹546 crore. Fifth, it made a preferential share issue amounting to ₹200 crore.

Meanwhile, the accounting year-end was first extended from June 2012 to December 2012, and again from December 2013 to March 2014. This and the restructuring render the company's financials incomparable.

Still debt-heavy But Future Retail’s mountain of debt hasn’t reduced much. To fund working capital and increase store count, it still piled on debt.

As of end-March 2014, standalone debt is ₹6,268 crore. Interest outgo in the past three quarters still accounts for more than 6 per cent of the sales.

To tackle the debt mountain, it has filed for a rights issue for ₹1,600 crore, though raising the whole amount is a challenge. This apart, a preferential allotment, made in June to a promoter group, will bring in ₹200 crore. It also issued warrants worth another ₹200 crore, which will trickle in over the next year and a half.

At least 75 per cent of the fund-raising will go towards debt reduction, while the balance will be used for expansion, says a company official.

If the rights issue is successful, it should shave about ₹187 crore off the annual interest outgo.

Abhishek Ranganathan, Vice-President, Phillip Capital, points out that the company can additionally cash in on the stake held in the fashion retail and insurance business.

The company also said it can further monetise assets such as stakes in subsidiaries involved in supply chain and warehousing, two textile mills in a joint venture with National Textile Corporation, should the need arise.

Better prospects

But Future Retail has, at the same time, received shareholder approval to raise the debt limit up to ₹8,500 crore. It expects to add 20 Big Bazaar stores and 10 fbb stores in this year.

Signs of better prospects are showing up, with EBITDA margins above the 10 per cent mark by the March 2014 quarter, and a return to net profit by the December 2013 quarter.

A higher share of fashion in the product mix in the Big Bazaar chain helped.

Food and groceries carry margins of 10-15 per cent compared with at least double that for apparel.

(With inputs from Purvita Chatterjee and Bindu Menon)

This is part of a series on how companies are managing debt to gear up for better times.

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