The Hindu Business Line : Subhiksha revival hinges on speedy debt restructuring

Discount retailer Subhiksha’s revival hinges on the speedy completion of the corporate debt restructuring, perhaps the first for a non-manufacturing entity, initiated by the consortium of 13 banks, which have collectively lent a sum of Rs 750 crore.

Mr R. Subramanian, Managing Director, said the company has sought a two-year moratorium on interest and principal payable by the company and halving of interest rates to around 6 per cent.

He said that the retailer, whose interest burden is in the range of Rs 14.5 crore a month, was servicing its loans till December before a credit squeeze hit it. If banks which have lent 75 per cent of the total loans to the retailer arrive at a consensus to restructure its debts all the lender banks have to fall in line, according to the CDR programme. The major lenders are ICICI Bank and HDFC Bank.

He said that the retailer has also submitted a revival plan to be vetted by the banks which will knock off its fledgling Rs 350 crore fruit and vegetable mandis and focus only on mobiles and pharma, apart from its mainstay groceries business. It is in the process of renegotiating on property rentals with landlords and will close stores in tough markets that are unviable. Not more than 10 per cent of stores will be whittled down as the company had invested in back-end infrastructure for the 1,600 stores it had before the chain shut down all its stores. Even now, there are “credible investors” who are willing to put in money into the company and are awaiting the outcome of the CDR package, he added. A few India-based PE funds have expressed interest.

Mr Subramanian said that they saw the liquidity crunch coming in September itself and had asked its banks for Rs 155 crore to tide over the deficit. But with the meltdown happening at that time banks were chary of lending. Now, its immediate requirement has gone up to Rs 300 crore which will go towards salary dues, paying off vendors, rentals and restocking stores.

He said the crux of the credit squeeze Subhiksha found itself in had to do with the fact that it did not increase its small capital base of Rs 32 crore substantially and grew mostly on debt, despite banks’ insistence on bringing in more equity.

According to reports, in March last year Mr Azim Premji’s investment arm offered to inject Rs 300 crore as capital in the company. However, since he ended up buying a 10 per cent stake from existing investor ICICI Venture for Rs 230 crore the money could not be infused as capital. Later while the retailer waited for better valuations for an equity infusion it was much too late. In December, Mr Premji lent Rs 40 crore to the retailer to meet some bank obligations.

Admitting that these blunders cost the company dear, and there is “a lot of pain all around” he said that of the company’s 4,800 employees on its rolls, 4,500 are now on leave without pay while the rest are firefighting.

Asked how the retailer, which had a turnover of Rs 1,955 crore in the first half of FY 2008-09 and profits of Rs 53 crore, ran out of cash, Mr Subramanian said, “The nub is that we were making Rs 12-13 crore of pre-tax profit and investing Rs 50 crore per month on expansion – we were to raise equity and then debt we did neither — that is the pain.”

However, saying that his life is an “open blog” now, he emphasised, “I am not running away from the problems; I owe it to all my stakeholders and employees to revive the company.”