"Things are alarming for Vishal," said Ankur Periwal, an analyst with Mumbai-based brokerage Religare Securities Ltd.

Manmohan Agarwal, CEO, corporate affairs, Vishal, agreed that the company's debt was at the level indicated by analysts. "We are in talks with the lenders to recast the debt from short term to long term, as this is the need of the hour. We are also in talks with Deutsche (Deutsche Mutual Fund) to recast the debt." Agarwal also said that a 2:1 debt to equity ratio was "considered reasonable in the retail context". "We are doing around 2.65:1. Therefore, to that extent interest is also marginally higher than what we would like to have. However, we are in talks with the lenders to relook at the interest rates." Agarwal said the amount of inventory on a retailer's books was a function of the retail space occupied by the chain.

"When your retail space increases the inventory levels go up as well. Vishal has also added about 900,000 sq. ft of retail space and about 87 stores in this fiscal." Like many other retail chains, Vishal expanded in the first six months of 2008-09. It has since closed some stores.

However, the total retail space occupied by its stores has gone up from 2.1 million sq. ft in March 2008 to 3 million sq. ft now. The number of stores has increased from 100 to 183 in the same period, despite some closures.

Religare's Periwal said that slowing sales in recent quarters have dented Vishal's cash flow, preventing it from fulfilling its debt obligations. "The company has already deferred payments and may look for a further debt extension." "Right now they are trying to push their inventories and trying to increase sales to get some cash and repay the debt," said Sehgal of Angel Broking.

India's largest publicly traded retailer, Pantaloon, too, has seen its interest payout rise.

According to Ritesh Doshi, retail analyst with Mumbaibased brokerage First Global Securities Ltd, the company's interest payout, expressed as a proportion of total sales is like ly to rise to 4.7% in the fiscal year ending June 2009 against 3.7% in the previous year.

Doshi, however, added that Pantaloon's debt level is "manageable" because the company has seen a steady growth in profits and sales.

Pantaloon ended the year to June with revenue of at least Rs5,000 crore and a net profit of Rs125 crore. In the first six months of 2008-09 it turned a net profit of Rs70 crore on revenue of Rs3,037 crore.

Pantaloon's spokesperson Atul Takle said Pantaloon's debt to equity ratio was at 1.19:1 in the year ended June 2008 but declined comment on whether the ratio had gone up this year. "Since the current fiscal year (that ends June 2009) is not over yet and interest rates are falling, we cannot comment on this." The debt issue hasn't spared Shoppers Stop either, although the company has a debt to equity ratio of 1:1. Still, analysts say that the company's slowing sales have prevented it from repaying some of its debt and this could lead to the same problems that the other retailers are facing. "In the short term, concerns (about Shoppers Stop's debt obligation) remain," said Periwal of Religare Securities.

Shoppers Stop ended the year to March 2008 with revenue of Rs1,093 crore and a net profit of Rs7 crore.

It ended the first nine months of this fiscal year with a revenue of Rs950 crore and a net loss of Rs47 crore.

Downplaying concerns over the ability of his firm to repay debt, C.B. Navalkar, chief financial officer of Shoppers Stop, said Shoppers Stop was in a comfortable position, and had a surplus of Rs100 crore lying in the banks. He added that the company's debt-equity ratio would remain at the current level or go to a maximum of 1.15:1.

The challenges faced by India's top publicly traded retailers are the same that smaller firms face. Many of the companies, big and small, expanded aggressively in the past four to five years, funding these efforts largely through borrowings. A strong economy kept the cash till ringing, and helped them meet their debt payments in time but as sales have slowed, they have found it increasingly difficult to meet their debt obligations. Meanwhile, lenders have become conservative in the wake of a global credit crunch.

"Their (the retailers') ability to repay debt is now limited...because of this, roll-overs (of loans) are inevitable," said Pooja Shiraangi, retail analyst, with Mumbai-based brokerage firm Brics Securities Ltd.

"...Lenders will now seriously reassess the business risk for each retailer. In this regard, a large retailer (such as Pantaloon) may have borrowing rates leaning in his favour, than a smaller player (such as Vishal)." According to the research arm of credit rating agency Crisil Ltd, the capital expenditure of retailers in 2004-05 was funded through debt (47%), equity (22%), and internal accruals or surplus money generated by the business (31%).

This changed to 53% debt, 35% equity and 12% internal accruals in 2007-08.

Crisil Research expects that going ahead retailers will be forced to go slow in rolling out new stores to reduce their dependence on debt and because internal accruals will be insufficient to undertake any massive expansion except in cases where the retail firm is part of a conglomerate which is willing to subsidize and fund its operations.