‘We will continue to focus on improving our cash margin’

Shopper’s Stop reported a significantly higher profit in Q2. Govind Shrikhande, president and CEO, explains to Pallabika Ganguly how he did it. Here is the second part of the three-part interview.

ML: What is the future of organised retail in India? Do big brands see value in this segment?
Organised retail has only grown to 4% of the market and our main challenge would be to take it to higher levels. Despite huge investments by retailers, organised retail is not going to grow to 15% of the total market over the next five years. At best, it can reach 10%. Over a period of time, big brands have to understand that they have to protect and support the large-scale organised retail sector in a different manner. They will have to help organised retail to drive their top-line so that they make sufficient margins to survive. According to me, it is going to be a battle of wits (between organised retail and big brands) and over a period of time, when both understand each other, things will settle down. In this business, size does matter. When you are dealing with a big company like, say, Hindustan Unilever Ltd (HUL), we may not have leverage. But when an organised retailer of the size of Wal-Mart deals with any company, they naturally have a lot of clout. Secondly, product prices in India are comparatively lower than in international markets. That is the reason why manufacturers want to control pricing. A manufacturer like HUL does everything to promote its products and it enjoys a high operating profit margin (OPM) on the strength of its distribution network. But manufacturers do not want to pass on even a small portion of their OPM to retailers.

On the other hand, we have to generate good margins and then increase sales throughput. A retailer has to focus on maximising sales growth, generating maximum cash margin from the occupied space and controlling overall costs.
Many retailers have cut costs and are doing well now. As the economy starts improving, same-store sales will improve, and then we can look at how to drive higher cash margins through better inventory management and trading models.

ML: What kind of trading models are you looking at?
Over the past two quarters, we have changed our trading model. Earlier, we used to invest about 58% of our capital in buying. I brought it down below 50%, so the 8% consignment concession that we managed to get helped us to reduce our working capital, interest and manpower costs. In our Q2 results, as you can see, the percentage (operating profit) margin hasn’t risen, it has actually dropped by 20 basis points—but at the same time, our cash margin has increased significantly. This was possible because we were able to manage the matrix between the models of merchandise versus the margin.

ML: Shopper’s Stop’s same-store sales moved back into positive territory with a growth of 1.8%. Do you think it will continue over the forthcoming quarters as well?
We should report good growth in same-store sales over the next two quarters due to the ongoing marriage and festival season. However, it is difficult to predict numbers. I do not expect high, double-digit numbers which we used to witness earlier, but I think we should see single-digit growth in the coming quarters. We are also expanding rapidly. Last year, we opened our first store in Hyderabad and it was followed by another one in May. Last month, we opened our third store in the city. So, in a way, you can say we are trying to grow 100%, but at the same time you cannot expect the market to grow at the same level.

ML: Your gross margins remained flat on account of a decline in your private-label mix and higher sales of branded products. What is your strategy on private labels?
We have mentioned that during Q3FY10 and Q4FY10, we will continue to focus on cash margin rather than percentage margin because we are still not trying to drive the share of private labels. We will try to push private labels along with exclusive launches only in the next financial year. Unless overall sales rise dramatically, there is no point in increasing stocks at your end. With private labels, you have to pile up stocks. Next year, you will see some focus coming back to private labels. We have plans to reinvest in private labels. Next year should be a great year for private labels. In any case, private labels constitute only 18% of our sales mix right now, which clearly shows that we are not trying to compete with any big brands. We have plans to extend private labels to only 20%-22% (of our total product mix) by the next financial year. For us, private labels are a niche segment which supports existing brands or where no major brand is present—like women’s ethnic wear. In the case of some of our competitors, 80% (of the total brands on offer) are private labels. So, we are not in that category. We are not going to copy & paste somebody else’s design and rename it as our own brand.

ML: Interest cost continues to remain on the higher side in retail. What is your plan to combat this situation?
During the second quarter, our interest cost was flat and we should be able to hold it at that level. We don’t see it going up; if you see our current ratio, we are currently under 1x in terms of debt-to-equity ratio. We should be able to maintain this level.

ML: What are your expansion plans? And how would you manage your expenses while expanding?
When you take a property totally on rent, for the initial 12-14 months you cannot expect robust business. This can be termed as the ‘testing’ period. So, if after some 18 months the business does not ramp up, you end up with huge losses if you are on a high rental base. So, the most important step we took was to take new properties mainly on a revenue-sharing basis (about 5%-7%), with a lower rental component. As the rent is capped, I can save on my expenses. Today, I spend about 35% of my total expenses on rentals. So, if I can bring it down to around 10%, it is a huge saving for me. A business risk also goes away. In some of our existing properties, I was able to get rid of the escalation component in rent. Some of these lease contracts had an escalation component of 10%-12% for every three years. I negotiated with some of our landlords and was successful in waiving the escalation component for this year. So, my occupation cost will remain flat even as my sales go up, and so my occupation cost as a percentage of sales will drop. I think this is the key methodology by which you can work around the escalation component. Our occupation cost in Q1 and Q2 was 11% of sales. Every 100 basis points drop in occupation cost adds directly to the EBITDA.

In the first stage of our expansion plan, Shopper’s Stop will reach 30 additional cities and we will be opening about 60 new stores over the next five-six years. In December 2009, we will open our stores in Ahmedabad and Amritsar. By March next year, there will be another store in Bengaluru. We are also planning to open new stores in Coimbatore, Vijayawada, Visakhapatnam and Durgapur. At Kochi and Vadodara, we are still scouting for good locations. Currently, we are present in 12 cities and we are working towards reaching 14 cities more within the next three years.  

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    SHCIL gives cash dividend of 900%

    SHCIL has declared an unprecedented dividend of 900%. What is the reason behind this lavish payout?

    Stock Holding Corp of India Ltd (SHCIL) has announced a staggering cash dividend of 900%. According to informed sources, this entire dividend is the amount SHCIL earned by selling its 2% stake in the National Stock Exchange (NSE). Officials from SHCIL were not immediately available for comments. SHCIL has appointed MXV Consulting, management consultants to deploy the windfall cash, but in the absence of a firm business plan for profitable deployment, SHCIL decided to pay out the money. SHCIL has realised almost Rs250 crore as staggered divestment of a part of its NSE stake via IDBI Capital Markets.
    This is a bonanza for its shareholders IDBI Bank, ICICI Bank, IFCI, administrator of the specified undertaking of the Unit Trust of India, LIC, GIC and the other four general insurance companies. SHCIL sold its 2% shares in NSE through IDBI Capital Markets for about Rs250 crore, thus reducing its stake to 5%. Earlier, SHCIL had declared an interim dividend of 130%, but soon after the stake sale, it announced a whopping dividend of 900%. Last year, it had declared a dividend of 50%.

    Interestingly, SHCIL's paid-up capital is just Rs21.10 crore. For FY07 and FY08, SHCIL had declared a dividend of 50% and earnings per share of Rs23.17 and Rs32.85, respectively. However, for FY09, its dividend went up to a staggering 165% with EPS of Rs31.52.

    SHCIL achieved a profit before tax (PBT) of over Rs101 crore for the year to end-March 2008 thanks to a massive bull run. Its managing director and chief executive RC Razdan had announced a target to double the PBT for the year ending in March 2009. But, it was able to achieve a PBT of just Rs90.20 crore as against a target of Rs200 crore. This was covered up by paying an interim dividend of 130% and a final dividend of 35%, taking the total dividend for FY09 to 165%.

    SHCIL has been deeply mired in controversy for its e-stamping project planned several years ago. It has been under investigation by the Serious Frauds Office for various shenanigans. Insiders say that this unprecedented dividend payout is given to favour the guilty and secure the protection of its shareholding institutions. After the huge dividend payout, charges against SHCIL will turn stale. If this is true, then shouldn't the Ministry of Corporate Affairs act on the SFIO report, pending since ages?

    The story of SHCIL does not end here. Even market regulator Securities and Exchange Board of India (SEBI) has not renewed SHCIL's custodial license that expired on 31 October 2009, while all other custodians got it renewed for three years.
    —Sucheta Dalal with Yogesh Sapkale [email protected]

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    AK Maheshwari

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