Subhiksha on expansion spree, may raise money through IPO

Indian Economy is growing at a healthy 9%, and with this grows the propensity to consume. The Indian consuming class is expected to reach 69 crores by 2010 and the retail market to reach $350 billion by 2010 making it the fifth largest retail space in the world. India’s organized retail sector is currently just 3% of India’s $300 billion annual retail business but growing annually by 35%.

Subhiksha, Rs. 340 crore retail chain, promoted by Chennai based R. Subramaniam, an IIT, IIM alumnus, has been the pioneer in the organized discount retail model in India. It operates in four verticals – fruits and vegetables, pharmaceuticals, FMCG and telecom, and offers no frill stores in the neighborhood area offering 8-10% discount on MRP on all products sold throughout the year, which is primarily attained by direct supply arrangements with manufactures which reduce the supply-chain costs. Each store occupies 1,500-2,000 sq. ft., has simple interiors and no air-conditioning. To save on capital costs, many stores are even located on upper-ground or first floors.

Subhiksha completed the Phase I of its expansion by investing Rs. 300 crores on 60 stores in 5 states in south and west India. The company is currently under Phase II expansion by opening stores in 5 states in north and east of India with Rs. 200 crore budget. The company has revenues of Rs. 803 crore in 2006-07 and is targeting Rs 2,200 crore sales in 2007-08. Subhiksha expects to roll out 1,000 stores by the end of 2007 and 2,000 stores in the next two years.

Subhiksha plans to offload a 10% stake in an IPO later this year. The promoters, will reduce their stake from 65% to 58%; while investment firm ICICI Venture will reduce its by 29% from 32%; and the employees’ share will come down to 2.5% from 3%. The need for IPO stems from the fact that the company needs money to fund its expansion plans and increase scale to prevent competition from hypermarkets who may offer higher discounts.
 
Subhiksha with its rapid expansion becomes the prime contender for takeover by a big retailer, which its promoter has been denying for a while. Other local supermarket chains, Trinethra and Adani were recently bought over by Aditya Birla Group and Reliance Retail respectively.

Subhiksha is planning a hybrid model where it is setting up display counters for self-service, apart from its existing service where customers feed in orders into a computer and products are supplied from a warehouse. With foreign retail chains and top Indian groups spending large on retail, Subhiksha could still make its presence felt owing to the first mover advantage, lower infrastructure cost and better acquaintance of the local geography and customer.