North Block: Capital issues

Can a government diktat overrule a statute? That's what the guidelines on foreign investment in preference shares, announced by the government late last month, seems to have done. Non-convertible, optionally-convertible or partially-convertible preference shares, the guidelines say, will be considered as debt. Foreign investments coming in as fully convertible preference shares will, however, be treated as a part of company's share capital. The Companies Act, 1956, allows Indian companies to raise two classes of capital-equity and preference.

This has sparked off a debate. "Preference shares should be treated as capital and cannot be treated as debt," says Ajay Bahl, Managing Partner at law firm AZB & Partners. He argues that debt servicing is not possible since dividends, unlike interest, can be paid only out of profits or reserves. In other words, dividends are an apportionment of profits and unlike interest, not a charge against them. "Therefore, dividends cannot be declared unless there are profits or reserves," he points out. The new guidelines will also create an anomaly between preference shares issued to Indian shareholders and those issued to foreign shareholders.

The issue is contentious and legally in a grey zone. It is quite likely that the judiciary will be called upon to take the final call in the matter.

-Krishna Gopalan

Mallya Says Cheers to W&M
The UB Group is set to gain more global market share.

UB's Mallya: Flying high

The move has been reported (and prematurely closed) for months, but it appears that liquor baron Vijay Mallya will finally seal the deal for the 163-year-old Whyte & Mackay (W&M) for around £500-700 million (Rs 4,100-5,740 crore), and add the Isle of Jura and Dalmore single malt whiskies, Vladivar vodka and Glayva liqueur to his bag of brands. Result: UB will get around a tenth of the global market for Scotch whiskies and also be in a position to blend Whyte & Mackay's huge stock-reportedly valued at £200 million (Rs 1,640 crore)-of aged single malt Scotches with its Indian whiskies for sale in the growing domestic market. Commenting on the deal second week of May, Mallya told BT: "Don't worry, it's on." UB had announced its intention of acquiring W&M in March, but rumours had been swirling for months before that. The talks, however, had got stuck over differences on valuation. UB had initially made a £550-million (Rs 4,510-crore) offer. It will be a leveraged buyout-that means UB will finance the deal by using W&M's assets. It may also list the company (possibly on the London Stock Exchange). According to estimates, the takeover of W&M will pitchfork United Spirits (Mallya's flagship spirits company) into the #2 position in the global market, since it will add around 10 million cases to its sales of 80 million cases a year. It is currently the world's third largest spirits maker, behind Diageo (95 million cases) and Pernod Ricard (85 million cases).

The deal will also work out well for W&M Chairman Vivian Immerman and his brother-in-law Robert Tchenguiz, who had bought the company in 2001, and turned it around. Mallya is expected to depute senior managers from his Indian operations to run W&M, though he may retain some existing managers of the company.

-Rahul Sachitanand

It's Beginning to Hurt
Shoppers' Stop reports Q4 loss. Blame competition.

India's retail battles are far from begun-Reliance Retail and Bharti-Wal-Mart, for example, haven't even got their act together yet-but incumbents are beginning to feel the heat. A case in point: Shoppers' Stop, which reported a surprise fourth quarter (Q4) loss of Rs 2.2 crore, although revenue jumped 37 per cent. If the giant retailer wannabes haven't yet taken Shoppers' head on and there is no price war that has broken out, why is the retail pioneer (it opened shop in 1991) hurting? According to analysts, there are two reasons: One, Shoppers' staffing and operating costs have shot up. In Q4 2006-07, employee cost soared to more than Rs 16 crore from Rs 11.65 crore in the same period the previous year, while operating and admin costs jumped 37 per cent to Rs 38 crore. Two, depreciation more than tripled to Rs 14.2 crore.

But things aren't as bad as they seem. For starters, Shoppers' did turn in Rs 26 crore in net profit for 2006-07 on revenues of Rs 800 crore. Besides, other listed retailers such as Kishore Biyani's Pantaloon Retail are facing the heat, too. While Pantaloon's topline surged 89 per cent to Rs 861 crore, thanks to Big Bazaar and Food Bazaar, net profits grew only 15 per cent to Rs 18.7 crore in the fourth quarter. Tellingly, though, its net margin declined to 2.2 per cent from 3.6 per cent. The third listed retailer, the Tata-owned Trent, which owns lifestyle store Westside, book retailer Landmark and hypermarket Star India, was yet to announce its Jan.-March results when BT went to press. Arvind Singhal, Chairman, Technopak, believes that pressure on retailers will only increase in the quarters ahead. "With Reliance and Bharti firming up their plans, there will be employee poaching and you will see advertising and promotional costs skyrocket."

Shoppers' Managing Director and CEO, B.S. Nagesh, could not be reached for comment, but it's unlikely that he's too worried. Notwithstanding the Q4 surprise, the retailer, which also has a 19 per cent stake in new-age hypermarket HyperCity, is on a strong footing. Sales per square foot are up 16 per cent to Rs 2,120 and same-store sales (that is, not including the new ones that haven't done one full year) is up 18 per cent, and the average transaction size is also up 15 per cent. Sure, some analysts such as Citigroup's Princy Singh and Pragati Khadse have made a sell recommendation to their clients, but most investors are still keen on staying invested in the sector. Perhaps the fancy multiples that stocks in the sector enjoy (50 times 2007-08 earnings in the case of Shoppers' and 27 times for Pantaloon) won't be there forever. But in a country where just 3 per cent of retail is in the organised sector, there's no doubt which way the market is headed.

-Kushan Mitra