Shopper’s Stop, a departmental retail chain, said it was deferring a plan to raise stake in Hypercity to 51 per cent by about 19 months because of cash crunch and slowing sales.
Shopper’s Stop had an option till December 31 to buy an additional 32 per cent stake in Hypercity, a part of the K Raheja Corp Group.
The retailer’s board at its meeting held on December 18 decided to defer the stake increase plan, Shopper’s Stop said in a statement to the Bombay Stock Exchange.
The retail chain’s debt has risen to three-times its equity as on September 30 compared to two-and-a-half times as of March 31, 2008, straining its financial risk profile, Crisil said in a report on December 12 while downgrading the company’s Rs 50 crore worth non-convertible debenture rating to A- from A+.
Shopper’s Stop has been relying on short-term and long-term debt to finance its expansion plan. A company with a higher ratio is vulnerable to downturns in the business cycle because it has to continue to service its debt regardless of how slow the revenue growth is.
Crisil in its report expressed concern over the company’s ability to service its debt as the retailer was was forced to defer a Rs 500 crore rights issue to 2009 after pruning its size to Rs 300 crore owing to a slump in the stock market.
“Pending the equity infusion, Shopper’s Stop will continue its capex using additional debt, which will affect its financial risk profile. Further, Hypercity’s expansion plan, which requires additional investment of around Rs 300 crore, is expected to be funded using a debt-to-equity ratio of 2:1. Hence, timely infusion of equity is critical of funding the capital commitment, and is a key rating sensitivity factor,’’ Crisil said in the report prior to the retailers decision to defer its investment plan.
What has further turned Crisil negative is that the operating profit margins according to them have fallen by 150 basis points in the first half of 2008-09, while the retail slowdown has hurt the profitability of the firm. The company is in the red with losses after tax amounting to about Rs 47 crore in the six months to September 2008.
Things are not expected to be any better as customers are not flocking to stores with industry analysts believing that a drop in footfalls could continue for a bit longer. Clearly in such an environment, there is not much of a pricing power for the firm and lower prices and discounts to bring in sales would further mean shrinking growth and if lease rentals and employee costs are not controlled could mean further losses for the firm.
