Stock Review: Vishal Retail

Vishal Retail, which has been reporting operating loss for the past six quarters following the poor show by its retail venture, on Monday proposed to sell its core retail business to the Shriram Group and the wholesale business to TPG, a global PE investor, including all the underlying assets and certain liabilities pertaining to the businesses.

    The latest move by the Delhi-based company is not surprising given its struggle to stay afloat for the past two years. However, it's difficult to determine the exact benefit to the shareholders since Vishal Retail is tight-lipped about the deal structures under the two transactions.

    Vishal Retail had expanded its business using debtheavy capital structure. The domestic retail sector faced a tough time owing to the economic slowdown in 2008-09. The consumer spending drastically deviated from expectations. Consequently, Vishal's earnings dwindled in subsequent quarters. The company now faces liquidity issues. In the past, the company had tried to implement several corrective measures such as closing down lossmaking stores, warehouses and manufacturing facilities. It had also reduced manpower over the past few quarters. So the latest deal serves as the last resort for the company. According to media reports, the company has been trying hard to find a strategic buyer for past couple of months.

    According to the management, the proposed sale transaction would reduce a part of debt from the balance sheet. It would receive an upfront payment of 75 crore and another 25 crore in the form of bonds with yield to maturity of 7.5%, redeemable in five years.

    The cash will allow the company to clear debts from certain creditors, who have filed winding-up petitions against the company. The company's stock rose by 7% on Monday following the announcement. The sharp jump in the stock prices may be surprising given the fact that not enough details about the transaction are available.

    One reason for the renewed investor interest in the stock could be the possibility of a reduction in the company's debt burden. But a bigger question that demands an answer is what business Vishal Retail will be left with. The retail business was its core competence and after the deal the company would not be able to continue with the similar business due to the non-compete agreement with the two buyers. This means Vishal would have to look out for other avenues for business opportunities. Given this, its future looks uncertain.

    Also, it needs to be seen whether the company has been able to derive a fair value from sale of its two businesses under desperate condition. After disposing of the two core operations, Vishal is left with four properties in Kolkata, Dehradun, Hubli and Jabalpur. It is not certain in what way the company would use its properties. Investors need to wait for more clarity from the management.