Rising from the ashes – Zorba Wealth

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Heydays

  • Founder : Mr. Ram Chandra Agarwal started his retail journey in early 1994 by setting a garment store in Kolkata, India
  • In 2001, he incorporated Vishal Mega-mart Ltd and was a pioneer in introducing the concept of value retailing.

  • In 2007, Co. came up with its IPO @270/- raising 110 crores. IPO was oversubscribed whopping 81 times! Stock later hit ATH of Rs.1020
  • IPO funds got deployed instantly to fund the aggressive growth plans by opening newer stores in uncharted geographies and few stores were opened in existing geography.
  • The growth was at such a scorching pace, that the topline increased from Rs.14 Crores in 2002 to Rs.1005 Crores in 2008. Such growth demanded much more capital than the internal accruals can fund, so the balance sheet kept on getting leveraged
  • The supply chain back then was not efficiently managed and at one point the co. had 26 warehouses to cater 2.6 Mn Sq. Ft. In order to increase share of private labels, they also ventured into manufacturing their own apparels- starting 4 manufacturing units, which was again capital intensive venture.

CDR Saga

  • Due to global financial crisis in 2008, and sudden evaporation of liquidity from the economy, Co. was not able to raise any funds in 2009 to expand and it had already placed massive orders to its suppliers.
  • In FY09, co. had 171 stores but there was enormous inventory pile up and it had to write down inventory by 100 Crores, it lead to breaking even at operating levels.
    Leverage went off the roof, standing at 750 Crores, including 460 Crores of short term debt which was used for inventory and capex!
  • In FY10, co. took extreme steps to reduce cost structure like reducing warehouses from 26 to 4! And closing down all the manufacturing units. Employee strength was also reduced from 17,000 to 10,000. Inventory write off for Rs.400 Crores was also done. This inventory write off was also questioned by the auditor due to lack of evidence of the same
  • Co. also approached the CDR cell with SBI as lead lender and proposed restructuring of its debt.
  • Slump Sale: On 14/03/11 co. sold its Wholesale Trading, Institutional Sales and Franchise Operations business to PE firm- TPG Limited . Trading Business of the company was sold to Shriram Group (Chennai). Co. fetched Rs.70 Crores from combined slump sale wherein liabilities of Rs.823 Crores and assets of Rs.394 Crores were absorbed
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Revival Phase

After selling off the entire business, Mr. Agarwal was still very persistent and dreamt to rebuild all that was lost. The name of the company was changed to V2 retail and it started setting up new retail stores from scratch. In FY11 the co. started with only 3 stores and currently having 77 stores focused in UP, Bihar, Jharkhand, Odisha, Karnataka.

Evolution from Vishal retail to V2 retail as follows:

  1. Profitable growth with debt free balance sheet unlike in Vishal wherein at its peak co. had debt of Rs.750 Crores!
  2. Leaner business model wherein co. has only one central warehouse unlike 26 warehouses earlier. Also, Vishal retail had 4 manufacturing unit whereas V2 retail is having none at the moment (plans to open 1 soon at 15 Cr capex)
  3. Until 2011, Co. was also into multi-products like FMCG as well whereas currently it is only focusing on high margin apparel segment which is the core of business
  4. Co. earlier suffered from high inventory, leading to high working capital and associated debt. Currently, co. is actively using SAP HANA to monitor inventory levels and keep inventory days to much lower levels
  5. Vishal retail’s average store size was 19,373 Sq. Ft. & Revenue/Sq. Ft. was Rs.5,412 whereas in V2 retail, average store size is 11,348 Sq. Ft. & Revenue/Sq. Ft. is Rs.11,304 which is double of the earlier
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Operations

  • Sales/sq ft is falling because co. doubled store count in past two years.
  • SSSG is negative and management doesn’t expect it to go up substantially

Peer Comparison

  • V-Mart is direct peer as it has the same business of value retailing and is present in similar geographies. While the P&L and efficiency ratios of V2 Retail is similar to V-Mart, the cashflows of both companies shows stark difference.
  • V-mart is able to operate at much lower working capital in proportion to sales and this ensures EBITDA post taxes converting into CFO. While Conversion ratio of V-mart is very healthy at 84%, V2 retail’s conversion is negative! This reflects more and more cash is deployed in operating the business and no free cash flows are generated from the business.
  • Over past 5 years period, V2 raised total Rs.132 Crores via Equity and major chunk of it i.e Rs.100 Crores was used CAPEX. This indicates that the capex was majorly funded via inflows from CFF and CFO didn’t generate any material amount over 5 years.
  • V-mart had 108 stores in FY15 and in 214 stores in FY19 (Almost double)
    Whereas, V2 retail had 16 stores in FY15 and 77 Stores in FY19 (Almost 5x)
  • This fact, to a certain point explains why Cashflows of V2 Retail are lagging, mostly because they are growing at much faster rate (on smaller base). V-mart has model of growing only from internal accruals and thus, it has never diluted equity except IPO or raise debt, whereas V2 retail has diluted equity on multiple occasions.
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Valuations: Maruti vs Ferrari

  • V2 retail trades at Market-cap of 200 Crores and EV of 230 Crores
    P/E of 7.8x
    EV/EBITDA of 3x
    Market-cap/Sales of 0.25x
  • V-mart trades at Enterprise Value of 3,100 Crores
    P/E of 55x
    EV/EBITDA of 15x
    Market-cap/Sales of 1.8x



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Aashav Patel
Aashav is an Equity market enthusiast who strives to learn daily.
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