May give up control; feelers sent to Biyani and Bain Capital
After offering great steals on multi-branded apparel to Indian consumers in his deep discount store chain, The Loot, Jay Gupta, the chain’s 35-year-old founder and managing director, wants to get a deal for himself.
According to three independent sources, Gupta is looking to rope in a strategic partner in the company he founded seven years ago. He is even open to divesting a majority control in the company or may even exit entirely, they said.
In the recent past, the retail sector has faced severe challenges after expanding rapidly. High debts, shrinking margins, drop in sales and rise in costs not only dented the top line, the company's bottom lines, too, got hit. Many retailers went into the red, and some like Subhiksha and Vishal went belly up.
However, for The Loot, the financials are not so severely stretched as Vishal Retail and most analysts believe under a bigger player, a turnaround and growth is very much possible.
While accepting that he was open to a strategic stake sale, Gupta told Business Standard that he would like to continue in the company. “If we get an opportunity to induct a strategic partner, we will look at it. The decision to give up majority control depends on the offers that will come on the table. But as far as the thought is concerned we are open to strategic alliances,” he said.
Though an exclusive mandate has not been given to any investment bank, sources in the know said bankers have sent initial feelers to retailers like Kishore Biyani’s Future Group and Bharti Retail.
Private equity players, too, have been sounded out and players like Bain Capital have sent positive feedback, though getting a foreign fund to invest in a multi-brand retail company would mean unique structuring to circumvent the Foreign Direct Investment (FDI) regulations.
When contacted, Future Group and Bharti Retail spokespersons refused to comment on “speculation”. Bain Capital India MD Amit Chandra said, “We don’t comment on any deals, whether interested or not.”
While Biyani has an existing deep discount format Brand Factory, Bharti does not have any. A Bharti Retail executive on condition of anonymity said, it’s unlikely they would be keen on a format like The Loot.
Bain, said sources, has sought legal opinion to examine if they can buy out an entity that will own The Loot brand along with the back-end distribution piece.
Gupta, however, said he has not spoken to any retailer or PE player himself. “We have spoken to certain consultants to source equity and debt. If they have spoken to them that is a different thing,” he said.
Funds to expand the business are hard to come by, admitted Gupta. “It is difficult to get funds, as FDI is restricted. Bank lending, too, has become tight. Retail, real estate is not getting funds. Our cost of funds is around 14 per cent. Even the IPO markets are not encouraging. We had planned to raise Rs 100 for expansion capital but it is difficult to come out with a small sized IPO.”
Gupta said, in the last financial year, the chain posted revenues of Rs 117 crore and its profit after tax (PAT) was three per cent of its sales. But analysts who have been tracking the company said the business has been bleeding and after an earnings before interest, taxes, depreciation and amortization of seven to eight per cent of sales two years back, in 2010-11 it has actually came down to a negative three per cent on an unaudited basis.
Sources said, Gupta is looking at one-and-a-half times the current sales as valuation for the chain.
Gupta himself predicts that after closing 15 loss-making stores in the last one year, he expects to clock Rs 150 crore in sales in this year. "In the last two months, we have opened 15 stores and are going aggressive on store openings. We plan to open 30 stores in the next six months mainly through internal accruals and bank funds," he said.
