Future Retail Ltd - Research Report

 

Private Client Research

Rating

Buy

Sector

Retailing

Company

Future Retail Ltd

Reco Price
Rs. 147.00
Price Target (1.5 - 2 Years)
Rs. 295.00
Upside
100.68%

Date

April 21, 2016
Sensex
25880.38
CNX Nifty
7912.05

Exchange

Code

NSE
FRL
BSE
523574

Demerger story will unlock value for shareholders.

Retail Business:
Existing businesses of Future Retail Ltd. inlcude Retail operations as well as an Retail Infrastructure and an Investments; whereas existing businesses of Bharti Retail Ltd. are Retail operations and Retail Infrastrucutre only. The retail businesses of both the above mentioned entities will be merged into a Bharti Retail Ltd which will be renamed as Future Retail Ltd. (FRL) and Retail Infrastructure and Investments will be combined in erstwhile FRL which will be renamed Future Enterprises Ltd. (FEL). FRL has stores like Big Bazaar, Food Bazaar, FBB, Home Town and E-Zone under its brand name and will also operate front end retail business. It will also include leasing of store properties, product sourcing, visual merchandising, marketing, sales and store operations. Bharti retail will transfer its retail infrastructure arm into FEL. Infrastructure arm involves setting up in store furniture, fixtures, fittings, electrical, IT infrastructure, private label apparel manufacturing and various investments whereas, the investments includes Future Generali Life, Future Generali General insurance, Future Supply Chain Solutions, Future Consumer Enterprises, FLFL, Apollo and Goldmohur Mills.

Asset Light Model:
FRL will have an asset light model as all the backend and store infrastructure will be a part of FEL. FRL will take the stores on lease, run them, keep the inventory, hire and pay the staff, and FEL will create the infrastructure and fixtures for an annual lease charge. FRL is expected to pay operating lease charges of around Rs. 500-550 Crores p.a for its existing stores. However, the future store capex will be undertaken at an arm’s length basis by FEL and would be at commercial rates. So for every new store addition, FRL’s balance sheet will show lease deposits, whereas P&L statement will show higher store rentals and lease charge for furniture and fixtures.

Extending reach:
Retail business will have more than 200 Hypermarts (Including 15 EasyDay Markets) apart from 185 EasyDay convenience stores. The move will considerably bolster the presence of FRL in north India. FRL will retain EasyDay brand for convenience stores, while Easyday markets will be rebranded as Big Bazaar. BRL has 4 EasyDay markets at same locations as Big Bazaar; these will be converted into other formats of Future Group.

BRL will hold 9% stake in FRL & FEL:
Shareholders of FRL, for every one share held in the company, will get 1 share of BRL each. BRL will then be renamed as Future Retail Ltd. (FRL). The shareholders of FRL will have 42.8 crores shares in new entity that will be formed including a share capital of is 4.34 Crores shares of Face Value of Rs. 2 each of BRL. The Bharti Group (BRL) will have 9.2% stake in new entity. BRL does not have any debt, so the deal values the Bharti Retail business at Rs 500 crores plus the optionally convertible debTs of Rs 250 crores. DVR holders will get one share each in both FRL and FEL after restructuring. Bharti Group will have a three-year lock in for selling its stake get in FRL and FEL. They can sell stake after three years with the, consent of FRL. However, after a period of five years, they would be free to sell their stake in the company. Bharti Group will have to share a part of those proceeds between FRL and FEL, if the sales proceeds are above the minimum threshold of Rs. 950 Crores The sharing would be 50% of the incremental if the sales proceeds are more than between Rs. 950 Crores - Rs 1450 crores, 60% of incremental if the proceeds are between Rs. 1450 Crores and Rs 1950 crores and 75% if the proceeds are above Rs 1950 crores.

Stock Data

CMP (Rs)
149.35
Face value (Rs)
2
52 Week Range (Rs)
172.95 - 93.80
Market cap (Rs Crores)
6900.00
Price To Book Value (x)
1.09
P/E Ratio (x)
37.84
EV/EBIDTA (x)
8.64

One Year indexed Stock Performance

Future Retail LtdSensex
Future Retail Ltd
Return (%)
1m
6m
12m
36m
Absolute
13.61
17.83
37.58
1.06
Sensex
2.35
-5.16
-6.49
35.01

Shareholders

(in %)
31-Dec
Promoter
51.92
Public
48.08
Others
0.00
Total
100

+91 22 6639 3000
research@stockaxis.com

 

Industry

The Indian retail industry has emerged as one of the most dynamic and fast-paced industries due to the entry of several new players. It accounts for over 10% of the country’s Gross Domestic Product (GDP) and around 8% of the employment. India is the world’s fifth-largest global destination in the retail space. The Indian retail industry in the single-brand segment has received Foreign Direct Investment (FDI) equity inflows totalling $344.9 Million during April 2000–September 2015, according to the Department of Industrial Policies and Promotion (DIPP).

India is expected to become the world’s fastest growing e-commerce market, driven by robust investment in the sector and rapid increase in the number of internet users. Various agencies have high expectations about growth of Indian e-commerce markets. Indian e-commerce sales are expected to reach $55 Billion by FY2018 from $14 Billion in FY2015. Further, India's e-commerce market is expected to reach $220 Billion in terms of gross merchandise value (GMV) and 530 million shoppers by 2025, led by faster speeds on reliable telecom networks, faster adoption of online services and better variety as well as convenience.

Profile

Future Retail Limited is an India-based company, which is engaged in multi brand retail trade. The Company's store networks include around 401 stores in around 122 cities, which are operated under various names, including Big Bazaar, fbb, eZone, HomeTown and Foodhall. The Company is engaged in retail trade in various areas, such as fashion, food, homeware and electronics, and technology. Big Bazaar's fashion section, branded fbb, provides a number of brands, such as DJ&C, Knighthood, Shristi, Lee Cooper Originals and Chalk, and a number of foreign brands, such as Converse and Champion. The Company offers food products through the Big Bazaar hypermarkets and Foodhall gourmet store. The Company's homeware and electronics retailing business is operated through Big Bazaar and specialty retail chains, such as Home Town and eZone. It operates a technology-enabled, assisted commerce initiative, Big Bazaar Online, which is built around a franchise network.

Profit & Loss Statement:- (Standalone)
(Rs Crores)
Particulars
Mar-13
Mar-14
Mar-15
Mar-16E
Mar-17E
Mar-18E
Income:-
  • Operating Income (Net)
  • Growth (%)
  • Total Expenditure
  • EBITDA
  • Margin (%)
  • Other Income
  • Operating Profit
  • Interest
  • PBDT
  • Depreciation
  • Profit Before Taxation & Exceptional Items
  • Exceptional Income / Expenses
  • Profit Before Tax
  • Provision for Tax
  • Tax Rate (%)
  • Profit After Tax
  • Minority Interest
  • Share of Associate
  • Consolidated Net Profit
  • Margin (%)
  • Adjusted EPS
  • 21301.97
  • -
  • 19059.28
  • 2242.69
  • 10.53
  • 130.01
  • 2372.70
  • 1647.12
  • 725.58
  • 632.26
  • 93.32
  • 379.32
  • 472.64
  • 130.90
  • 27.70
  • 341.74
  • -62.45
  • -3.62
  • 275.67
  • 1.29
  • 11.81
  • 14612.79
  • -31.40
  • 13669.15
  • 943.64
  • 6.46
  • 307.76
  • 1251.40
  • 725.95
  • 525.45
  • 451.88
  • 73.57
  • 25.83
  • 99.40
  • 4.41
  • 4.44
  • 94.99
  • -14.69
  • -
  • 80.30
  • 0.55
  • 3.44
  • 11709.62
  • -19.87
  • 10584.98
  • 1124.64
  • 9.60
  • 94.60
  • 1219.24
  • 679.18
  • 540.06
  • 541.69
  • -1.63
  • 164.00
  • 162.37
  • 2.11
  • 1.30
  • 160.26
  • -7.38
  • 0.10
  • 152.98
  • 1.31
  • 3.69
  • 13400.00
  • 14.44
  • 12850.00
  • 550.00
  • 4.10
  • 0.00
  • 550.00
  • 132.00
  • 418.00
  • 50.00
  • 368.00
  • 0.00
  • 368.00
  • 80.00
  • 21.74
  • 288.00
  • -
  • -
  • 288.00
  • 2.15
  • 6.70
  • 15410.00
  • 15.00
  • 14730.00
  • 680.00
  • 4.41
  • 0.00
  • 680.00
  • 70.00
  • 610.00
  • 50.00
  • 560.00
  • 0.00
  • 560.00
  • 122.00
  • 21.79
  • 438.00
  • -
  • -
  • 438.00
  • 2.84
  • 10.14
  • 17722.00
  • 15.00
  • 16880.00
  • 842.00
  • 4.75
  • 0
  • 842.00
  • 70.00
  • 772.00
  • 50.00
  • 722.00
  • 0
  • 722.00
  • 80.00
  • 11.08
  • 642.00
  • -
  • -
  • 642.00
  • 3.62
  • 14.86
Source: Stockaxis Research, Company Data
Notes: The above financial estimates indicates numbers of merged retail entity i.e. of Future Retail & Bharti Retail

Valuation

We expect a turnaround in Bharti Retail in next 2-3 years, as the EBITDA loss has already decreased from 300 Crores to 100 Crores in first 5 months of operations. This is expected to become nill during FY17. Also Depreciation and Interest cost are expected to go down while lease rentals (pertaining to instore infra, IT infra etc.) will be directed to P&L of FRL – thereby improving PBT (largely similar at EBIT level).

Hence we are banking on demerger story where shareholders will be benefited from value unlocking. We assign target price of Rs 295 where stock trades at P/E of 19.85x FY 2017E which will be justified when separate entities will be listed.

 

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