subhiksha crisis

After months of denial, discount retailer Subhiksha Trading Services Ltd has admitted it is in trouble.

“It is sudden collapse,” R. Subramanian, Subhiksha’s founder and managing director, said in a nine-page note sent to the media on the company’s health, amid allegations of it not paying vendors and staff salaries, and shuttering several stores.

Cash crunch: A file photo of managing director R. Subramanian. He says Rs300 crore would bring Subhiksha back into financial health. Harikrishna Katragadda / Mint

Subramanian attributed the “collapse” to a strategy of debt-led rapid expansion on a small equity base. He said the growth to 1,600 stores and nearly a Rs4,000 crore annual revenue rate was achieved through a high level of debt. “...we had expanded rapidly... Most of the growth was debt-led... We had built on a tiny equity base of just Rs32 crore, and even including share premiums, etc., the company had raised only a total of Rs180 crore as shareholder funds...”

He said the firm’s inability to raise cash in a difficult economic environment led to the current crisis. The company said it planned to raise cash through placement of equity on a preferential allotment basis and was close to doing so in September but was unable to proceed due to tough economic conditions.

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Lack of funds led the company’s trading cycle to “collapse” as the company ran out of cash in October, bringing its operations to a “standstill”, Subramanian said in the note.

Subhiksha has been in the news since September when vendors in New Delhi’s Azadpur wholesale fruits and vegetables market accused the company of not paying their dues that ran into crores of rupees. It was followed by staff allegations that they hadn’t been paid salaries for months. “Honestly yes, there are arrears on these,” Subramanian said.

So far, Subhiksha has denied that it had problems even as it grappled with several lawsuits from landlords for not paying rent for months.

According to a senior executive from Tata Teleservices Ltd, the company recently cut all fixed line and mobile phone corporate connections to Subhiksha offices and employees due to unpaid bills.

Since August, the retailer said, it tried to juggle between repaying debts to banks and keep its stores operational, that prompted it to delay rentals and staff salaries. “In a business like ours, where stock and cash are like blood, we seized up pretty fast when the blood supply got choked,” Subramanian said.

In spite of this, Subramanian is confident that the company could be nursed back to financial health but would need fresh capital of Rs300 crore that could either come through debt or equity.

Analysts, however, feel Subhiksha will find it challenging to raise funds. “It’s fairly tough raising capital for a business that is clearly not stabilized, is going to be a tough challenge, especially...(since) FDI (foreign direct investment) constraints are there,” said Nikhil Vora, managing director of Mumbai-based IDFC SSKI Securities Ltd.

The restart plans include closing about 10%, or 160 stores, and relocating many others, negotiating lower rentals and shelving plans to roll out a consumer electronics chain. “We are now engaging in getting the restart plan approved by the financial stakeholders and then get the liquidity so that we can continue from where we left,” Subramanian said.

The Chennai-based company, which runs India’s largest chain of discount supermarkets, had been one of the most aggressive organized retail players in recent years. Around 59% of the company is owned by promoters, 23% owned by ICICI Securities Ltd and 10% by software billionaire Azim Premji of Wipro Ltd, which he had bought last year from ICICI Securities for Rs230 crore.

Prakash Parthasarathy, chief investment officer of PremjiInvest, the personal investment arm of Premji, declined to comment. Renuka Ramnath, chief executive and managing director of ICICI Venture, did not return a phone call seeking comments.

Subhiksha was banking on debt and equity sale to fund the expansion to 2,300 stores and Rs4,300 crore revenue for the current fiscal ending.

“Our overconfidence that because we ran a good business, equity would always be there, proved our undoing,” Subramanian said. “We did not budget for a time when there would be no money