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Ascent Capital exits from Koutons Retail at a loss

Three months after a spate of lawsuits were filed in the Delhi high court by suppliers to recover their dues from Koutons Retail India Ltd, Ascent Capital, one of the principal investors in the cloth seller, has exited the firm at a loss and considers the investment a “write-off”, said two executives at the private equity (PE) firm briefed on the development.

“We have completely exited Koutons. It’s at a loss…it’s as good as a write-off. We haven’t made any money in it,” one of them, a top executive at Ascent Capital, said on condition of anonymity. He declined to give more details.

Ascent Capital, formerly known as UTI Ventures, invested about Rs.54.6 crore in Koutons through two rounds in 2006, a year ahead of the company going public. The PE firm held an 8.3% stake.

In December, VC Circle reported that Ascent Capital part-exited from its investment by selling 2.8% stake at a 58% loss. It sold the balance stake in the market late December.

Repeated emails, text messages and calls to Koutons’ chairman D.P.S. Kohli and the company’s external public relations firm did not elicit any response.

Trouble for Koutons started with inventory misestimates, which had debts, taken to buy the merchandise, shooting up, said the second Ascent Capital executive mentioned earlier.

“More inventory was bought than could be sold over the years. The leftover was then sold for much lesser prices and debts kept piling up,” he said. “The latest we know is that some funds are in talks with them (Koutons) for taking over.”

In August, three directors exited Koutons, including Rajiv Grover, an independent director, Anil Khatod, who represented the $2 billion (Rs.9,360 crore) fund Argonaut Private Equity, and Ajay Mittal, an appointee of Ascent Capital.

Koutons, established in 1991, sells clothing for men, women and children through more than 1,300 company-owned and franchisee outlets across India.

It moved up the value chain from a garment manufacturer to a retailer by opening its own stores in 2002.

It went public in 2007, listing at Rs.510. The company’s stock has been falling over the past year and ended Thursday at Rs.42.50 on the Bombay Stock Exchange. Its 52-week low on the exchange is Rs.39.35.

Other investors in Koutons include Argonaut, Fid Funds (Mauritius) Ltd, ING Vysya Life Insurance Co. Ltd and Lloyd George Investment Management (Bermuda) Ltd.

ING Vysya said in an email reply that as a policy, it does not comment on individual investments. The other firms did not reply to emails sent on Wednesday enquiring about their investments in Koutons.

Koutons is the latest in the line of modern Indian retailers, including discount store operators such as Subhiksha Trading Services Ltd, Vishal Retail Ltd and the India franchisee of US-based My Dollar Store Inc., to be facing cash problems.

Defunct Subhiksha is facing several winding-up petitions in the Madras high court after a financial crunch stalled operations of the once aggressive supermarket chain.

In September, debt-ridden Vishal Retail sold its retail trading business to Shriram Group and its wholesale division to PE investor TPG Capital for a combined value of Rs.100 crore.

Fabric vendors Berry Cotts Pvt. Ltd and RC Velvet have filed winding-up petitions against Koutons in the Delhi high court.

Still, analysts aren’t brushing off the retail sector.

“Deals go wrong in all sectors. There is a flip side to investment business. In every space, be it auto components or IT (information technology), there have been deals that have done exceedingly well, while some have gone nowhere. We can’t broad-brush a sector on the basis of one or two deals,” said Avinash Gupta, leader-financial advisory, Deloitte Touche Tohmatsu India Pvt. Ltd.

Some PE-backed retailers are doing well and the sector is still attractive, given overall macroeconomic considerations, said Gupta.

Experts say some retail firms expanded too aggressively and built capacities for fast growth but at high rentals and at the expense of profitability.

“One needs to be conservative in this business. It is not about the number of stores or revenues from new stores, it’s about sales from the same stores,” said Vikram Utamsingh, executive director, KPMG India Pvt. Ltd, a consulting firm. “If the same stores have consistent sales, you can be sure that your product category is in demand.”

It is key to have a good management team that can control costs, leverages carefully and ensures that operational processes are robust, said Amit Jain, partner, BMR Advisors.

“To be successful, one needs to ensure that the outlet selection is appropriate, pricing policy is strong, inventory is rotated fast and the supply chain is good,” he said.

“Control over the processes needs to be very strong. There has to be a separate profit-loss management for each store.”

Source: Livemint

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