Will money-losing Spencer's get right valuation post listing?

Buoyed by developments in retail FDI, RPG-Sanjeev Goenka Group is planning to list its retail arm Spencer’s after demerging it from the group’s flagship CESC.

The company has been weighing options to induct a strategic investor for the retail format and a consultant will soon be appointed to look into the intricacies of listing.

“Spencer’s retail is moving towards a positive EBIDTA (earnings before interest, taxes, depreciation and amortisation)” Sanjeev Goenka said.

[caption id=“attachment_512174” align=“alignleft” width=“380”]  Sanjiv Goenka said several options, including mirror level demerger from the parent company, initial public offering, and induction of a strategic investor, were being looked at for listing of Spencer’s Retail.[/caption]

Goenka is hoping Spencer’s will break even (the point of balance between making either profit or a loss) by the second quarter of 2013-14, but the task is not easy as Spencer’s suffered an operating loss of Rs 140 crore on a gross revenue of Rs 1,210 crore in financial year 2012.

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Given that Spencer is still a money-losing businesses, it might be difficult to find the right valuation once the company is listed. Retail is a long-haul business which needs time and investment, where the rates of return are slow.

However, Goenka claims that Spencer’s is currently making “store-level profits” for the first six months of the year, which meaning that the stores were able to recover operating costs. Also important to his plans is a potential tie-up with a foreign partner, which will help with a capital influx needed for expansion.

The group intends to focus more on hyper-market format. “To achieve economies of scale as well as stimulate growth, we will implement a new apparel & home merchandise acceleration plan, the replenishment system to improve stock by about 8% on an average on the shelf, accelerate acquisition of new properties and exit small stores selectively,” Goenka said.

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Over the next five months, the company proposes to launch seven stores across India , in Dhanbad, Lucknow, Raipur, Kolkata, Meerut, Aligarh, and NCR-Delhi. Almost all are going to be large ones with a floor area of 9,000-30,000 sq. ft. With the addition of new stores, the retailer’s total trading area will go up to 1.11 million sq. ft from around 950,000 sq. ft currently.

There would be consolidation at the back-end as well, in Pune, Bangalore and Kerala. At another level, with foreign direct investment in the retail sector becoming a reality, there could be consolidation of the back-end with different retailers too.