First, Vishal Mega Mart and now More. Private equity (PE) entities have invested in two retail chains over recent months. In May, L Catterton Asia, the Singapore-based PE company (backed by LVMH Moët Hennessy Louis Vuitton) bought 10 per cent stake in Future Lifestyle Fashions, partially buying out an earlier investor, Pi Opportunities Fund.
What explains the interest spurt of PE in retailing? Two triggers. The Initial Public Offer of equity (IPO) from supermarket chain D-Mart, which saw good interest from small investors — the valuation was Rs 950 billion at its peak, maybe for its small float — and WalMart's $20-bn bet on Flipkart. TCNS Clothing, a women's garment retailer, had an impressive listing and was valued at Rs 45 bn.
‘‘These have convinced investors that retail can deliver this kind of value in India,'' says Arvind Singhal, chairman at management consultants Technopak. They have also seen how to get exits through an IPO or strategic sale. ‘‘Hence, there's renewed interest from PEs. The consumption story remains strong and there's evidence that value can be created,'' adds Singhal.
‘‘There's a structural driver working in favour of organised retailers. With demonetisation and GST (the national goods and services tax), smaller retailers are finding it difficult. During demonetisation, consumers also got a taste of organised retail and found it better in experience, quality and pricing. The same-store sales growth of several retailers is growing in double-digits (annually) against single digit earlier. These are secular trends,'' says a senior executive with a PE firm involved in a recent deal.
In May, the Manish Kejriwal-led Kedaara Partners and Partners Group bought value retailer Vishal Mega Mart from TPG Capital and Shriram Group for an undisclosed sum; news
reports pegged the deal at Rs 50-55 billion. It owns the franchise to the Vishal Mega Mart brand and is a wholesale supplier to a little more than 230 hypermarket stores, which target value-focused customers. TPG Capital and Shriram had turned around Vishal's operations.
Last week, Samara Capital and Amazon agreed to buy the More supermarket chain run by Aditya Birla Retail for an undisclosed value. News
reports peg the value at Rs 42 billion. More operates 523 supermarkets and 20 hypermarkets. The business had piled up debt of Rs 40 billion but had narrowed the losses to Rs 4.9 billion in FY18, from Rs 6.4 billion in FY17; revenue was Rs 44 billion. Amazon is keen to use More to strengthen its grocery business and use it for its offline/online strategy.
‘‘Certain businesses are good at a certain price. More hasn't been making money and the Birlas might have lost interest in trying to fix it. Sometimes, a deal is driven by the price you are getting for it and you take a chance of fixing it. PEs don't shy away from betting on businesses which are not making money,'' adds a PE executive. Samara Capital had invested in the franchisees of Pizza Hut in India. It was loss-making when Samara invested but they revamped the management team and a few other things, turning it around. ICICI Venture earlier had a bad experience in investing at retail firms Subhiksha and Lilliput. These had management issues. These companies
were under pressure to grow and provide exits to investors.
Devangshu Dutta, managing partner at retail consultancy Third Eyesight, feels the demographic profile of rising income, migration and new households is driving retail demand. ‘‘Since then, the business has acquired a certain amount of critical mass and matured, and so has the investor eco-system. Retail is a 20-25 years game, while PEs have a fund life of 8-10 years. We now see both primary and secondary deals. Investors can exit through IPOs (TNS), strategic sale (Flipkart) or secondary deals (NEA portfolio),” says Dutta.