Most people find it difficult to walk away from what they have created. They often hold on tenaciously, unwilling to let go of their brainchild. In that sense, Kishore Biyani is an outlier. India’s retail tycoon has often taken pride in referring to himself as a “creator” as well as a “destroyer”. It’s perhaps this detachment from his businesses that has always helped Biyani move on—whether it was from his denim manufacturing outfit, his readymade garment brand, Bare, or more recently, Pantaloon Retail (where he had a controlling stake) as well as Future Capital.
This ability is helping him rejig his business model, while disposing of some of the businesses and formats he created over the years. His peripatetic nature may have fostered an avalanche of brands, but having burnt his fingers, he is now working fast to overhaul his existing business model so that his core retail operations become viable. Until last year, his critics didn't quite believe that he would actually go out and sell assets. Now, he's proved them wrong.
The one area where his critics have been proved right is his aggressive expansion. Prior to 2008, India was awash with easy money, with investors frantic to pump funds into businesses that leveraged India’s ‘growth story.’ Biyani, with his grand vision for a retail empire, was a natural target. He welcomed them with open arms.
In those good ol’ days, Biyani’s Future Group looked like it was in a blazing hurry, opening a store a week, raising capital at will and hiring high-profile managers who were offered eye-popping salaries. As a result, the company managed to expand its footprint to over 15 million square feet of retail space in less than a decade. The company serves customers in 85 cities and 60 rural locations across the country and employs 35,000 people directly.
Rather than consolidate, Biyani continued to expand. In these good times, the markets loved Biyani’s speed and proliferation of stores, but as demand started slackening last year, Pantaloon Retail's core retail operations came under pressure. High interest costs and negative cash flows ate into profitability.
The problem was, Biyani had simply spread himself too thin, perhaps carried away by the hype that surrounded his empire. He had borrowed at high interest rates to grow and the 2008 global economic slowdown began to precipitate what eventually became a full-blown crisis for him.
Over the years, all key financial ratios have steadily deteriorated. Sales growth has plummeted from 25 per cent in FY09 to single digits in FY12. Operating profit margins have also been coming down consistently. The ‘Sabse Sasta’ strategy has come with a price. Analysts blame it on mindless expansion and lack of focus.
When all was well with the economy before the 2008 meltdown, the market even paid over Rs 700 per share for his financial services arm, Future Capital, in 2008. No prizes for guessing that those who invested in Future Capital’s IPO at Rs 765 a share have lost their money, as Biyani has now sold a stake in the same company to Warburg Pincus at Rs 162 per share. The market’s mood changed noticeably sometime last year, when store sales started slackening. This was visible in the market’s tepid response to Biyani’s Future Ventures, which had its IPO last May.
Now, with the core retail business coming under pressure, Biyani’s excesses have come back to haunt him. He has to grapple with a core retail debt of Rs 5,200 crore, which comes with high interest costs. Hence, the spate of deals that Biyani stitched up this year—most importantly, a stake sale in Pantaloon to Aditya Birla Nuvo, and Future Capital to Warburg Pincus—which are expected to give his group a fresh lease of life by reducing the core retail debt by Rs 2,200 crore. Expect Biyani to spend more time with investment bankers till he manages to wipe that debt off his company's books.
What’s next on the block? Difficult to say, but it very likely could include some of his non-core businesses which run the gamut of a joint venture with Staples to an insurance outfit. What analysts are concerned about is the fact that he de-merged Pantaloon retail—a core business—from the Group company and flogged it. Clearly, all bets are off as to what could go next if pressure to generate cash becomes an urgent requirement.
Is Biyani a legend in the guise of Sam Walton of Walmart? It’s too early to say, but so far, none of his core retail operations has generated positive cash flow and he still has a large amount of debt to clear. Perhaps, if the world economy hadn’t gone to the dogs and FDI retail become a reality, Biyani could have sold out to a retailer, like Walmart, eager for an India presence. May be this is what he had anticipated all along in the back of his mind.
Nevertheless, Biyani is far from down and out. What the market likes is that the man is committed to cleaning up his balance sheet and is willing to part with non-core businesses—may be even some core ones—to achieve this goal. By his own admission, Biyani, the “eternal optimist”, has finally become a “realist.”