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From Near Shutdown To Retail: Is SpiceJet Taking A Flight Of Fancy?

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From Near Shutdown To Retail: Is SpiceJet Taking A Flight Of Fancy?

The positive trend of long term debt coming down could be adversely hit if the company has to make investments for its retail business

A SpiceJet passenger aircraft takes off from Sardar Vallabhbhai Patel international airport in Ahmedabad

 

If this report by moneycontrol is to be believed, low cost airline SpiceJet is looking for a retail foray where it will focus on an offline and online business model. According to the report, it does not want to take on the likes of Amazon, Flipkart and Snapdeal but wants to drive the business only on the strength of its private labels.

 

Private labels under the brand ‘Spice’ across product categories will be launched. The physical stores will come up at the airports while the online store will be available for everyone. The retail business will be a subsidiary of the airline venture, for which a separate team is being put together.

 

When BOOM reached out to SpiceJet for a comment on the issue, a spokesperson for the company said they had no comments to offer.

 

For an airline which nearly went belly up in 2015, this could be a high risk strategy for expansion.

 

While the airline has turned around, its market share is a distant fourth in the pecking order. Its passenger load factor was 93.6 per cent during January 2017, according to data from the Directorate General of Civil Aviation (DGCA). But while Indigo’s market share stood at 39.8 per cent, SpiceJet was fourth at 12.8 per cent, trailing Jet Airways’ 15.5 per cent and Air India’s 14.1 per cent.

 

Passenger growth has been healthy for the financial year ending March 2017. According to a report by rating agency ICRA, the financial year could see a 22-23 per cent growth in passenger traffic. This compares very well with the figures over the preceding five years at 12.9, 5.3, 4.6, 15.5 and 22.1 per cent.  But with ticket prices slipping and the looming threat of rising aviation turbine fuel prices, which accounts for nearly 50 per cent of operating expenses, there are significant headwinds ahead.

 

LARGE RETAILERS SLUG IT OUT

 

Regulation plays a big role in the high investment airlines business. India’s fast rising retail business has a different flavor altogether, with even the likes of Reliance and Aditya Birla group having faced a rough time. The bigger challenge, though, could be building and driving the private labels business. All large format retail companies rely on private labels to drive margins and profitability for their business.

 

Future Group’s food business, Future Consumer Enterprise, for example has invested Rs. 85 crore in a joint venture for manufacturing oats in Sri Lanka, hoping for the brand ‘Kosh’ to clock Rs. 1000 crore in revenue by fiscal 2021. It is planning to enter the confectionary segment too with its own label. For the entire group, it hopes to have 70 per cent sales from private labels against 35-40 per cent at present.

 

India’s largest departmental store chain Shoppers Stop, though, is struggling to push its private labels business. With just 11 per cent of its topline from private labels, it needs to push the business aggressively. Several new brands are likely to make it to its 81 stores across 27 cities during March and April.

 

Shoppers Stop’s profitability appears to be melting. It reported Rs. 64.3 crore profit in March 2012 on a topline of Rs. 1929.7 crore. The bottomline has been consistently slipping and for March 2016 it was at Rs. 25.2 crore on a topline of Rs. 3413.2 crore. Clearly, a strategy driven by large format stores is not working well enough.

 

According to a report by retail advisory firm, Technopak, there are big opportunities to create private labels in some food categories, both online and offline. With government focus and infrastructure support for food processing and investments in food parks, the move, sourcing of private labels could get a big boost.

 

PRIVATE LABELS: FLIPKART, AMAZON STRUGGLE

 

Developing a private label business that can compete with the likes of Flipkart and Amazon may be easier said than done. These well-funded online stores have the patience to bleed and battle competition for a long time.

 

Flipkart is looking to raise $300 million or Rs. 2000 crore in debt from Indian banks, according to a report  byVCCircle. Founded in 2007, its marketplace entity reported a loss of Rs. 1096 crore in 2014-15 while the losses of its operations are estimated at Rs. 2000 crore. As it is squeezed for cash, India’s biggest online retailer is having to secure debt to fund its operating expenses. The online venture is still to return cash to its shareholders despite its dizzying valuations.

 

Both the online only and offline only models are not working. That is the opportunity that SpiceJet promoters seem to be sensing. Since it wants the retail stores at the airports only, it may be able to get shoppers who are willing to loosen their purse that extra bit.

 

WHAT ABOUT SPICEJET’S DEBT?

 

The flavour of its hybrid retail business will take time to take shape but investors are sensing that the aviation business for SpiceJet is on a roll. After closing at Rs 56.60 at the end of last year, it has seen very healthy gains over the first 11 weeks of 2017. Investors who saw the stock at Rs. 9 sometime in 2008, when Nymex crude oil prices hit a record high of $147.27, may just have begun to breathe easy. The stock closed at Rs 82.85 on Wednesday.

 

The worry for the company could be the long term borrowings mentioned in its balance sheet. Servicing the debt for its Rs. 923.7 crore long term debt will not be easy. However, the number has come down from Rs. 1119.9 crore in 2014-15, Rs. 1236.3 crore in 2013-14 and Rs. 1430 crore in 2012-13. The positive trend of long term debt coming down could be adversely hit if the company has to make investments for its retail business.

 

For the financial year ending March 2016, SpiceJet reported a profit of Rs. 407 crore against a loss of Rs. 687 crore a year earlier.

 

The investors may just be wondering if SpiceJet promoter Ajay Singh’s flight of fancy has enough tailwinds.

 

 

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