Alok Industries to shut 45 retail stores

An edited version of this story first appeared in DNA Money edition on Thursday, August 16, 2012.

Integrated textiles company Alok Industries Ltd is planning to cut down its retail store footprint in India as part of its business rationalisation exercise. According to company top management, the plan is to shut down some of its non-profitable stores and review profitability of the retail division for the balance part of the financial year. The company’s retail operations carried out under its wholly owned subsidiary Alok H&A Ltd, currently operates 290-odd stores (as of June 30, 2012) across the country under the H&A brand.

“We will shut down 45-odd stores that are not generating profits by September this year. If this rationalisation exercise doesn’t work out well, as in make the retail vertical profitable, we will start folding the retail division,” said Dilip Jiwrajka, managing director, Alok Industries during an analyst call discussing the company’s first quarter performance for the fiscal 2012-13.

According to Crisil Research, Alok’s domestic retail business contributes less than 1% to the company’s consolidated top line and hence no major impact is expected in the company’s operations due to rationalisation of the retail division.

 

“The retail business was less than 10% of Alok’s revenues in FY 2012. At the profit after tax (PAT) level, it incurred losses. In such a scenario, shutting down the business would reduce the top-line but would improve the bottom-line,” said Crisil Research.

This apart, intensified competition in the domestic retail industry in recent years has resulted in major retail players booking thin margins. “PAT margin for typical value retailers ranges between 1% and 3%. Taking the competitive scenario and thin margins into consideration, we do not see material impact of closing 45 stores on its overall bottom-line,” said the research firm.

Alok H&A launched retail operations in FY’07 to push the sale of its own products in the domestic market and to take advantage of the growing organised retail sector. Of the 290-odd stores the company operates 137 stores as exclusive branded outlets (EBOs) and the balance (154) are in the form of shop-in-shops (SISs) on a franchise basis.

On the performance of the retail division, the company management is of the opinion that while SIS stores breakeven faster and are profitable, it is the EBOs that are under significant pressure. “The rental component associated with EBOs is making a big dent in its profitability,” said Jiwrajka.

 

As a result, all stores that will down shutters in the next 45 days will be the EBOs. As for SISs are concerned, the company is likely to continue with that model as those are profitable. According to Crisil Research, after the non-profitable EBOs are closed, the management will not make any further investments in retail.

Spread across 800 square feet area, the H&A exclusive branded outlets sell products in home textiles, men's wear, women's wear, kids wear and accessories like ties, handkerchiefs, cuff lings etc. The company’s overall retail operations currently occupy approximately 230,000 square feet of space across the country.

The company had earlier planned to reach 500 stores by FY’14. However, the expansion plans had to be put on hold on account of a challenging macro-economic situation in the domestic market and the company will focus on its core manufacturing business going forward.

Focusing primarily on return on capital employed (ROCE) the company management had earlier initiated exiting its non-core business, primarily real estate assets. With a debt of Rs 12,900 crore sitting on the company’s books, the management is planning to raise Rs 2,500 crore over two year horizon of which a significant portion will be raised through real estate divestment in this financial year.

“Approximately Rs 1,500 crore will be raised in this fiscal. We have negotiated transactions worth Rs 600 core and received Rs 150 crore in advance payments. The balance money will be paid soon. The funds thus raised will be used to reduce the debt burden on the company,” said Jiwrajka.

During 2012, Alok Industries sold eight floors (out of 20 floors) from its largest real estate venture, Peninsula Business Park project (estimated deal size of Rs 400-450 crore and three floors (out of the eight floors) of the Ashford Centre and received a token sum of approximately Rs 50 crore.

The company is keen on selling the remaining nine floors of the PBP project (three floors will be used for own use) during FY’13 and appears positive about the same. Also, it intends to sell other real estate properties and land by FY’14. One of these is Ashford center in Lower Parel, where three out of eight floors have been sold.