Let me tell you a story – An ambitious physically challenged, young guy who lives in a chawl like building, in a 600sqft rented flat along with his 20-22 family members decides to live his dream. He tries his hand in various businesses. He rents a small shop – first starts with xerox (Doesnt work), then starts selling cold drinks (again, doesn’t work) and finally retails ready-made garments (which becomes a big hit). Despite of great challenges (economically and physically challenged), with his hard work and desire to succeed he starts climbing the ladder of success. Soon that small shop becomes a huge shop and that one huge shop, in-turn becomes multiple shops. Then comes a huge crisis in form of union problems. The entire business has to be closed down, and debtors also start demanding their money. Inspite of all this, he does not lose hope or courage. He moves to another city. He starts with the same business, and makes money. Slowly but surely he returns all the money to his previous debtors and then starts growing again. This time the growth is ever more superlative. The man grows so big that he becomes the challenger to the biggest retail company in the country – and also become a little too ambitious in the process. In order to grow fast he tries taking expensive short term debts. But then 2008 happen and his entire empire comes crashing down (on the back of huge debts and declining demand). He has to sell out his entire business. He is down, but not out.
Now, he has started a new innings – again…..Do you think this man has the capability of building an empire again (given the past history), if yes, then read on…..
In entrepreneurship (Myself included), starting a venture, making losses and selling the business should not come as an uncommon story. But, after all this, re-starting a similar business is surely unusual. Surely, it needs a lot of guts, confidence and honesty, of having learned from past mistakes. And Mr. Aggarwal is one such gutsy and retail pioneer.
Background: Back in the early 1980s, when Agarwal was still an assistant manager in a rolling-shutter company, he noticed the rising demand for readymade garments. He started with a store for readymade clothes at Kolkata’s Lal Bazaar in 1986. After a few years, he moved to Delhi and set up Vishal Retail in 2001. Vishal Retail at one point in time was being touted as the next big thing in retail after Kishore Biyani’s Pantaloon Retail. Both grew at a frantic pace, but while Biyani prospered, growth became a liability for Agarwal. To become the biggest, Vishal decided grow the business through short-term debt. The thinking was that once Vishal expand, have the topline, they could hit capital markets again to fund expansion and retire short-term debt or convert into long-term debt. Before it could do so, (industry sources say Vishal was talking to some private equity investors, who withdrew at the last moment), the Lehman Brothers collapse happened.
Anticipating its expansion, Vishal had placed orders with suppliers (in apparels, Vishal had to place orders six months in advance) When the stores did not happen, deliveries piled up and consumption slowed.
There were many other mistakes too: When it was ramping up, it spread itself too thin, opening stores across the country. Given that it was selling over 20,000 items in its stores, this made its supply chain complex. They needed to expand, stabilize and then expand. But they wanted to be first off-the-block in every town.
Its distribution, center-led model failed as it could not build an IT network. Which meant that buying at the warehouses was not aligned to customer needs, and it ended with dead inventory. Also, Vishal tried to develop private labels in every single category, but did not have the competence (had limited scale) to support these.
As a result of all this and with a debt of Rs 750 crore, falling sales and rising costs, Agarwal sold the business to Airplaza Retail Holdings, a Shriram Group company, and private equity firm TPG Wholesale for Rs 70 crore in March 2011.
Shattered and Battered was he and his fiscal health, but, he was not done with his staunch belief in the India retail story. With funding from family and friends, Agarwal was back within a few months with V2 Retail Ltd. (Full name: Value and Variety Retail Ltd.).
What is Different This Time?
A key strategy this time around is to go slow and open smaller shops in tier 2,3 and tier 4 towns mainly(rentals are less) and with go mostly with apparels. Food and grocery are totally out as margins are very thin and shelf life is extremely low.
After burning his fingers with debt, V2 is now cautious. V2 also has reduced its turnover ratio. This means more efficient turning of inventory into sales.
Earlier they were targeting people at the bottom of the pyramid, but this time they are targeting only middle-class people, so their merchandize is more upscale this time around. They pay the vendors in cash in a week. So, vendors deliver to V2 in the shortest possible time.
Agarwal has now hired TCS as IT consultant. Though he doesn’t have such high-end vendors servicing V2’s IT needs as yet, he is clear that once he reaches the Rs 1,500 per sq.ft. per month of sale milestone, he would require an outsourced IT vendor to run his retail 2.0.
One of the biggest lessons of the Vishal Retail debacle was to avoid manufacturing. Things will be done differently at V2, which currently buys merchandise. V2 will outsource manufacturing and control quality.
Depth in professional Management:V2 Retail has hired a Chief Executive Officer, who oversees day-to-day operations – Dinesh Malpani, former CEO at Jubilant Retail. Agarwal is also putting information technology, systems and processes in place, which he sees as crucial to efficiency and transparency.
V2 is preparing to launch an e-commerce platform to boost sales and awareness in the next 6 months. More about this here -> http://retail.economictimes.indiatimes.com/news/apparel-fashion/apparel/former-vishal-retail-becomes-ebidta-positive-plans-to-enter-ecommerce-in-next-six-months/36355987
‘We’ll do it right this time’ – Ram Chandra Agarwal (as quoted)
1 No enormous investments or debts in the beginning
2 The total initial investment so far is only Rs 15 crore
3 Slower expansion to keep debt in check
4 Increase management bandwidth before expansion
5 High degree of automation to reduce leakages
6 Online presence and plan to start e-commerce soon, i.e. in in next 6 months (http://retail.economictimes.indiatimes.com/news/apparel-fashion/apparel/former-vishal-retail-becomes-ebidta-positive-plans-to-enter-ecommerce-in-next-six-months/36355987). The company has recently started selling their merchandise on sites like ebay etc.
Revenues have grown by more than 100% CAGR during the period FY12-14, i.e. from 40cr in FY12 to 228cr in FY14. The losses have reduced substantially from more than 34cr loss in FY12 to around 4.5cr in FY14 but more importantly there has been a couple of quarters with net profits too. V2 retails ended the FY14 being EBITA positive after quite a few years. They are targeting sales of around 550-700cr by FY16.
Yes, there are issues with the company (high promoter pledge, huge accumulated losses etc) but at the CMP of rs 14.9 and Market Cap of just 33cr, there’s very good value on the stock. The downside looks protected whereas upside could be humongous.
Technicals: Whenever the stock breaks 18rs and closes above it, that will take the stock to next territory. The stock has been consolidating between 14-17rs for quite some time now. The results could be game changer. For people with lesser risk appetite (but still, risk appetite is required to buy this stock) safe buying, buy above 18rs.
One should also watch this -> https://www.youtube.com/watch?v=QMCfwxT_qD0