The Road To No Where


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Encouraged by the response to the first presentation, i am putting in my thoughts on the developments and probable future of Subhiksha as they happen. Essentially a sequel to my first presentation. Please feel free to share your comments and views with me

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The Road To No Where

  1. 1. The road to no where: Subhiksha Retail 13 th February 2009
  2. 2. Views expressed hereby are mine . I formed these views initially through interactions with Subhiksha on business levels and later through follow ups of the newspaper reports and conversations with sources from the industry and employees at Subhiksha. This is a follow up on my earlier presentation “The Anatomy of a Bust: Subhiksha Retail”
  3. 3. Carte Blanche <ul><li>Please note that in absence of independent audits and unavailability of financial statements, a lot being reported and concluded is guesswork and conjecture. </li></ul><ul><li>However, facts such as salary and rental defaults, store lock downs and absence of ancillary services is a good indication of the finances and management at Subhiksha </li></ul>
  4. 4. The Bust! <ul><li>Subhiksha financial woes were painfully evident thru the later half of 2008… </li></ul><ul><li> </li></ul><ul><li>… even though R Subramanian (RS) has denied it for long! </li></ul><ul><li> </li></ul><ul><li>Before throwing in the towel and calling for help! </li></ul><ul><li> </li></ul>
  5. 5. Timelines: 30 th Jan – 13 th Feb A Degenerating situation <ul><li>On 30 th January 2009, RS indicated a requirement of Rs.300 crores to resume operations </li></ul><ul><li>9 th February: RS declared NO BANKRUPTCY / Hinted at selling stake in Subhiksha/ Restructure Rs.750 crore of debt in its books before looking for equity financiers/ Denied any fund diversions and discrepancies! </li></ul>
  6. 6. Inconvenient Truth <ul><li>Subhiksha made $474 million (Rs. 2303 crore) revenues from operations in FY’08 </li></ul><ul><li>There is Rs.750 crores of debts in Subhiksha books </li></ul><ul><li>The debt is secured from 13 banks </li></ul><ul><li>It also issued 40 million warrants of face value Rs.10 to 6 fund houses! </li></ul>
  7. 7. Inconvenient Truth <ul><li>Rs.620 crore debts (working capital loans and term loans ) had been issued to Subhiksha by 10 banks on May 2 nd , 2008 </li></ul><ul><li>HSBC (Rs85 crore), ABN AMRO (Rs50 crore), Centurion Bank of Punjab (Rs40 crore), Yes Bank (Rs50 crore), Standard Chartered Bank (Rs25 crore), HDFC Bank (Rs65 crore), Development Credit Bank (Rs25 crore), Federal Bank (Rs50 crore), Bank of Baroda (Rs75 crore), ICICI Bank (Rs155 crore). </li></ul><ul><li>Security for these loans vary from movable assets, immovable assets, charge of current assets/book debts of the company, pledge of promoters’ shares, stock and book debts, inventories, “first and exclusive charge on credit card receivables from PoS (point-of-sale) installed by ICICI Bank in Subhiksha stores” </li></ul>
  8. 8. Inconvenient Truth <ul><li>Rs. 40 crore worth in warrants were issued to 6 fund houses </li></ul><ul><li>4,07,08,236 warrants, with each warrant carrying right to subscribe one equity share of Rs10 at par on a future date </li></ul><ul><ul><li>India Advantage Fund 1,55,79,066 warrants </li></ul></ul><ul><ul><li>Emerging Sector Fund, 76,73,271 warrants </li></ul></ul><ul><ul><li>ICICI Fusion Fund, 16,60,947 warrants </li></ul></ul><ul><ul><li>ICICI Fusion Fund II, 33,72,227 warrants </li></ul></ul><ul><ul><li>Zash Investment and Trading Co. Pvt. Ltd, 1,00,66,346 warrants </li></ul></ul><ul><ul><li>ESOS Trust, 23,56,379 warrants </li></ul></ul>
  9. 9. Inconvenient Truth <ul><li>Subhiksha had not paid (many of) its vendors dues in July/August/September 2008 quarter </li></ul><ul><li>It started defaulting on employee salaries from September 2008 onwards </li></ul><ul><li>It started defaulting on rentals October/ November 2008 onwards! </li></ul>
  10. 10. Food for thought <ul><li>For a business which was Rs. 200 crores in Revenue per month… </li></ul><ul><li>(Rs.2303 crores annually) </li></ul><ul><li>Where did the Rs.660 crore debt finance (in May 2008) disappear in 2/3 months (by July/August 2008)? </li></ul>
  11. 11. How did Subhiksha spend Rs.660 crores? <ul><li>Option 1: Finance expansion? </li></ul><ul><li>Option 2: Finance existing store operations? </li></ul><ul><li>Option 3: Was the money siphoned off? </li></ul><ul><li>Option 4: Option 1 + Option 2 </li></ul><ul><li>Option 5: Debt servicing of earlier loans </li></ul>
  12. 12. Option 1: Funding Expansion! <ul><li>Open more stores </li></ul><ul><li>More people taken on board </li></ul><ul><li>More categories </li></ul><ul><li>More Investments! </li></ul>Difficult to imagine such a FURIOUS level of expansion! Subhiksha had announced Consumer Durable stores and Private Mandis during this period! However non of that saw the light of the day RS was risking Debtors money on very risky expansion plans In Other words “WHAT WERE YOU THINKING?”
  13. 13. Option 2: Financing Existing store Operations <ul><li>For a revenue model of Rs. 200 crore per month </li></ul><ul><li>RS used up Rs.660 crore in 3-4 months </li></ul>Subhiksha’s USP was discounts! It certainly looks like RS discounted his merchandise by 75% or more to eat up all the Rs.620 in operations! Conversely, this means that a majority of stores were not making Money! Or so it would seem! In Other words, “That’s not BUSINESS! Where are the returns?”
  14. 14. Option 4: Option 1 + Option 2 <ul><li>Eating up all debt finance without an eye on returns! </li></ul><ul><li>The existing stores were not making money, and yet more stores were being opened </li></ul>In Other words “ More investments in a business, which was already struggling and not performing” “ HARDLY GOOD BUSINESS SENSE”
  15. 15. Option3: Was the money siphoned off? ???
  16. 16. Option 5: Debt servicing of earlier loans <ul><li>Debt renewed to square earlier debt </li></ul><ul><li>This would mean very low operating income/profit for the first 1000 stores </li></ul><ul><li>The strategy in that case ought to have been consolidation rather than expansion </li></ul>An aggressive expansion strategy based upon high leverage debt, without Consolidation and nurturing profits could be a double jeopardy which it Eventually turned out to be
  17. 17. <ul><li>From 660 crores, 8 months back … </li></ul><ul><li>.. to a cash strapped business gasping for more money! </li></ul><ul><li>Which ever of the 5 ways the money was spent, it shows serious incompetence in the management to handle Business and Money! </li></ul>
  18. 18. Subramanian and his baby!
  19. 19. Fact of the matter <ul><li>Subhiksha Corporate Debt Restructuring (CDR) process is going to take 30 – 40 days (Mid – End March 2009) before any direction is clear </li></ul><ul><li>Meanwhile employees clamor for 4 month arrears, even as many are pressing punitive charges against Subhiksha! </li></ul><ul><li>Several top managers have quit their jobs at Subhiksha </li></ul>
  20. 20. Fact of the Matter <ul><li>With no money to pay to security agencies, 600 stores have been vandalized by irate employees, suppliers and other parties whom Subhiksha owes money </li></ul><ul><li>Tata Teleservices has filed a case in Chennai high court regarding its pending dues of 10 crore on account of 10000 corporate connections </li></ul>
  21. 21. Fact of the matter <ul><li>Employees Provident Fund Organization - which manages the compulsory retirement savings accounts of employees—has begun an inquiry into why Subhiksha has not paid the money that it has to mandatorily move into the provident fund (PF) accounts of its employees. The first hearing was held on 3 February and the next hearing is scheduled for 19 February. The company has clarified that in view of non-payment of salaries, there is corresponding non-payment of PF and as such that there is no default!! </li></ul><ul><li>The Amount in question is Rs.5 crore! </li></ul>
  22. 22. Resignation of Board members: Whats cooking? <ul><li>5 external directors of the board have resigned </li></ul><ul><ul><li>Rama Bijapurkar: 9 th January 2009 </li></ul></ul><ul><ul><li>ICICI Venture’s chief executive and MD Renuka Ramnath and joint MD Rajeev Bakshi quit the board in early February </li></ul></ul><ul><ul><li>Kannan Srinivasan resigned on 26 December 08 </li></ul></ul><ul><ul><li>S.B. Mathur stepped down on 1 September 08 </li></ul></ul>
  23. 23. Resignation of Board members: What's cooking? <ul><li>The existing members of the board are 4 nameless individuals (3 of them from Blue Green Constructions and Investments, a listed company acquired by Subhiksha) </li></ul><ul><li>The fourth presumably is a Azim Premji representative! </li></ul><ul><li>The Fifth member is R Subramanian himself </li></ul>
  24. 24. End Lines <ul><li>With a record of being cash rich, with good retail operations (of his own statement, in September)… </li></ul><ul><li>… to a cash strapped struggling organization fighting to stay alive! </li></ul><ul><li>There are many questions, one may ask RS and Subhiksha </li></ul><ul><li>The foremost: How do you account for Rs. 660 crores </li></ul>
  25. 25. End Lines <ul><li>RS may have to sell off Subhiksha </li></ul><ul><li>Will he (RS) have buyers? </li></ul><ul><li>What kind of an equity investor will invest in Subhiksha? </li></ul><ul><li>Perhaps for the assets! (yes)… but again… who would spend that kind of money in these recessionary times </li></ul>
  26. 26. Thanks
  27. 27. References <ul><li>3 Subhiksha directors quit company as woes mount </li></ul><ul><li> </li></ul><ul><li>ICICI Venture execs resign from Subhiksha board </li></ul><ul><li>Subhiksha denies any fund diversion, discrepancy </li></ul><ul><li> </li></ul><ul><li>Subhiksha in talks with lenders to restructure debt </li></ul><ul><li> </li></ul><ul><li>May sell stake but no declaration of bankruptcy: Subhiksha </li></ul><ul><li> </li></ul><ul><li>Around 600 Subhiksha stores vandalized across country </li></ul><ul><li> </li></ul><ul><li>Subhiksha employees protest over non payment of dues </li></ul><ul><li> </li></ul>
  28. 28. References <ul><li>Subhiksha founder admits chain is in deep financial trouble : </li></ul><ul><li>Subhiksha seeks renegotiation with property owners </li></ul><ul><li>Subhiksha says it’s not facing financial crisis : </li></ul><ul><li>Subhiksha to invest Rs1,200 crore for expansion by 2010 </li></ul><ul><li>Subhiksha not paying some bills </li></ul><ul><li>Wipro buys 10% stake in Subhiksha </li></ul><ul><li>Denying stake sale, Subhiksha to foray into durables </li></ul><ul><li>Subhiksha plans to set up private mandis http :// </li></ul><ul><li>Subhiksha enters Kolkata, Kerala telecom retail markets </li></ul><ul><li>Subhiksha defers IPO indefinitely, looks at banks </li></ul><ul><li>Rs350 crore IPO to fund Subhiksha expansion </li></ul>