Can S Kumars weather the financial storm?

About a decade ago, film star Amitabh Bachchan signed an agreement with textile and apparel company S Kumars Nationwide (SKNL) to become the brand ambassador for Reid & Taylor suitings.

The success that followed the high-voltage campaign made the home-grown textile company go in for aggressive expansion into global markets through a series of buyouts.

SKNL retails international luxury brands such as Alfred Dunhill and Escada in India, and owns Stephens Brothers, Carmichael House and Belmonte.

In 2006, the company bought US-based home furnishing firm American Pacific for Rs 480 crore (Rs 4.8 billion). In 2009, it acquired Hartmarx, known best for dressing US President Barack Obama.

Those were heady days of success. The Kasliwal family-owned textiles major clearly has not been able to maintain the momentum. The signs of the changing tide are evident in the company's share price.

SKNL's market capitalisation has fallen 73 per cent to Rs 255 crore (Rs 2.55 billion) as on March 25 from Rs 942 crore (Rs 9.42 billion) a year ago.

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In comparison, the market capitalisation of its peers, Raymond and Arvind, has fallen 32 per cent to Rs 1,655 crore (Rs 16.55 billion) and 10 per cent to Rs 1,955 crore (Rs 19.55 billion), respectively.

The making of the crisis

Experts attribute the steep fall in SKNL's share price to a range of reasons, including the pledging of shares to financial institutions by its promoters.

According to BSE data, the promoter group, including the Kasliwal family and entities, such as Anjaneya Holdings Pvt Ltd, Nessece Holdings Ltd and Sansar Exim Pvt Ltd, have pledged about 69 million shares, or 88.65 per cent of the overall promoter holding (26.28 per cent or 78 million shares).

Things went from bad to worse when the financial institutions started invoking the pledged shares or selling them off in the market.

In December, IDBI Bank invoked 14.57 per cent of the stake and sold 3.66 per cent in the market. Currently, IDBI Bank is the largest shareholder in the company with a stake of 10.91 per cent.

Other major shareholders include Copthall, a unit of JPMorgan Chase & Company (8.18 per cent), and Artha Emerging Markets Fund (3.52 per cent).

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"The fall in promoters' stakeholding created a scare among investors," says SP Tulsian, an independent market analyst.

"The company, with an earning per share of Rs 12-13 has not even given Rs 1 dividend," points out Tulsian.

Nitin Kasliwal, vice-chairman and managing director, SKNL, did not respond to queries.

What went wrong? SKNL's peers and consultants say the company did not have a clear focus on operations and management.

"They did not manage the company well and operations have not been robust," says the head of a New Delhi-based consultancy firm.

"Though it had plans for an initial public offering (IPO) for Reid & Taylor, it could not come out with the issue, as markets were bad," he adds.

Poor management

Another former executive, asking not to be named, says, "The company drew up plans thinking funds will come but that has not happened. When you are highly leveraged, interest burden will suffocate you."

Apart from the IPO, which was to come out in 2011, many of the company's other plans got stalled as well. Its plans to open 15 flagship stores and 160 exclusive stores for Reid & Taylor did not materialise, say sources in the know.

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Now, according to recent reports, SKNL plans to raise about Rs 600 crore (Rs 6 billion) by selling shares of its Reid & Taylor arm through a qualified institutional placement.

Last year also saw a series of other setbacks for the company. In September 2012, the registrar of companies in the ministry of corporate affairs started an enquiry against the company for alleged violation of corporate governance and other norms.

In the aftermath of the enquiry, SKNL's share prices fell to Rs 19.7 from Rs 26.8 in the previous month.

As another blow, SKNL's US unit, HMX Acquisition Corp, has filed a voluntary application for capital restructuring under the US Bankruptcy Code.

Hartmarx, which owns several brands, including Hart Schaffner Marx and Hickey Freeman, was acquired by SKNL from the US Bankruptcy Court in 2009 to expand its presence in north America.

Making safe exits

Meanwhile, the company is struggling to retain its staff. In the past two years, several senior-level people have quit.

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Among those who have left include chief executive Aloke Banerjee, managing director (brand retails) Tarun Joshi, director (retail and apparel) Ashesh Amin, chief operating officer (Reid & Taylor) Janak Dave and vice-president (corporate communications) Manish Mallick.

In last three years, SKNL's debts have more than doubled. The outstanding debt on the company's books as on September 2012 was about Rs 3,858 crore (Rs 38.58 billion).

The company posted a 67 per cent fall in net profit in the first nine months of financial year 2013 at Rs 86 crore (Rs 860 million) as compared to Rs 264 crore (Rs 2.64 billion) in the preceding nine months.

Not a bright picture

However, the financial performance of Raymond and Arvind wasn't any better.

Raymond's net profit fell 82 per cent to Rs 28 crore (Rs 280 million) in the nine months ended December 2012 from Rs 152 crore (Rs 1.52 billion) in the same period last financial year.

Arvind saw a fall of 53 per cent in profit after tax at Rs 172 crore (Rs 1.72 billion) from Rs 369 crore (Rs 3.69 billion) for the same period.

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Total debt for Arvind rose to Rs 2,128 crore (Rs 21.28 billion) from Rs 2,099 crore (Rs 20.99 billion) in the last five years, while Raymond's debts reached Rs 1,747 crore (Rs 17.47 billion) from Rs 1,320 crore (Rs 13.2 billion) in the same period.

Analysts, however, say despite problems both Arvind and Raymond have successfully managed to strengthen their brands over the years.

Arvind has four brands which have crossed the Rs 100-crore (Rs 1-billion) mark: The Rs 550-crore (Rs 5.5 billion) value brand Megamart, Rs 400-crore-plus (Rs 4 billion-plus) formal wear brand Arrow, the Rs 250-crore (Rs 2.5 billion) casual wear brand USPA and the Rs 100-crore (Rs 1 billion) western wear brand Flying Machine.

It also acquired British fashion retailers Debenhams and Next and American sportswear lifestyle brand Nautica last year.

The chief executive of a Mumbai-based textile company says SKNL paid high rentals while opening its stores of brands such as Reid & Taylor and Belmonte in a bid to build valuations, which ate into its operating profits.

"They followed a strong brand ambassador-led strategy but did not deliver on the operations front. I feel somewhere they lost the customer connect due to lack of innovation in merchandise and marketing," says the former CEO, who doesn't want to be named.