What Happened to Subhiksha?

 Once a favorite model of retail success, now a study of financial failure

It was in 1996 that the idea of Subhiksha (prosperity in Sanskrit), organized retail services came to the mind of Subramanian, and IIT Madras and IIM Ahmedabad alumnus. He opened the first shop in Chennai in March 1997. By March 1999 there were 10 Subhiksha shops in Chennai. Its unique discounting model enraged the retail trade in Chennai

By 2000 Subhiksha grew to nearly 50 shops in Chennai retailing groceries and medicines. ICICI Venture's decision then to pick up a 10 per cent stake in Subhiksha for Rs 15 crore gave the retailer enhanced credibility in the market. This money was used to expand outside Chennai, into the rest of Tamil Nadu. By 2002-03, Subhiksha had 140 stores across 30 towns in Tamil Nadu. Sales grew steadily. Cash flows were reasonable and debt, at Rs 15 crore against the net worth of Rs 23 crore, was comfortable.

Tamil Nadu was not enough for the growth of Subhiksha. Subramanian wanted to expand it all over the nation. There was two choices- expand Subhiksha in one state by one and expand many states at a time. The subhiksha model proved to be successful. He choosed second option. Between late 2004 and early 2007, Rs 160 crore worth of equity was raised. That apart, a debt of Rs 220 crore and a bridge loan of Rs 125 crore (for pending raising of equity from capital markets) was arranged to fund the national rollout.

On an average, 60 to 70 stores were added in a month. The pace of rollout is evident from the fact that till September 2006, Subhiksha had a store count of just 160, but by March 2007 it had shot up to 670 and by March 2008 to 1,320. By September 2008, it was 1,650-in all 1,500 stores were added ih just 24 months. 2006-07 and 2007-08 Subhiksha doubled the stores, tripled revenues and almost quadrupled profits

At the time of tough retail competition with the entry of Reliance, Tata and Aditya Birla group into the field Subhiksha had become the country's largest mobile phone retailer with an annual turnover of Rs 1,000 crore. The performance of Subhiksha attracted the investors. Wipro Chairman Azim Premji, in March 2008, picked up the 10 per cent stake in Subhiksha that was offloaded by ICICI Venture for Rs 230 crore, pegging the company's valuation at Rs 2,300 crore.

That was the time for Subhiksha to capitalize Premji’s interest in the company. Company kept postponing the IPO. It did not want to dilute the shareholders interest. So it continued to raise money through debts. During September 2008, people lost their interest in share markets. There was a complete collapse of equity market. At the time when liquidity was tight, Subhiksha needed Rs 125 crore in cash to repay the loan.  It was due for Subhiksha to repay the bridge loan. The working capitals were diverted to rescue and expand Subhiksha with the hope of IPO in the confidence of success of the model. Working capital eroded. Many shops were closed as a rescue measure. Suppliers stopped supplying. Shops’ stands became empty. The security guards did not turned to the work. These all happened in less than 3 months. And finally in February 2009 there were not a single Subhiksha faced even cheque bounce case. Ajim Premji accused him for financial fraud. ICICI asked for detailed investigation of financial mismanagement. And he and his company became defaulter for over Rs 750 crore to 13 banks.

Probably, if IPO was done instead of postponement, equity could have been used to reduce the debt and Subhiksha would have survived.

Adopted from a case study in IGNOU MBA question paper.