Future Retail Ltd - Research Report

 

Private Client Research

Rating

Buy

Sector

Retailing

Company

Future Retail Ltd

Reco Price
Rs. 126.30
Price Target (6 - 9 Month)
Rs. 190.00
Upside
50.44%

Date

December 15, 2016
Sensex
26519.07
CNX Nifty
8153.60

Exchange

Code

NSE
FRETAIL
BSE
540064

Lean balance sheet with enchanced distribution network and increase in effeciency will lead to future growth of the company.

Asset light Model:
Future Retail Ltd. (FRL) has an asset light model as all the backend and store infrastructure is a part of Future Enterprises Ltd. (FEL). FRL is expected to pay operating lease charges of around Rs. 600-650 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.

Focus to strengthen Food Division:
FRL is focusing on strengthening its food division after its fashion business became reasonably large. Recently, Future Group was in buyout talks with Heritage Foods (a company which is backed Andhra Pradesh Chief Minister Chandrababu Naidu’s family) & with Aditya Birla Retail (ABRL) to buy or merge ABRL’s supermarket business. In the last four to five years, the group has acquired companies like Nilgiri, Big Apple and Bharti Retail & has contributed to the groups’ over 700 stores spread across 13 million square feet space in across 25 cities. It is also aiming to reach across India through Mergers & Acquisitions. Apart from plans to expand its acquired business, the group is also focusing on developing its own food brands like Golden Harvest, Sunkist and Tasty Treats. The Group is targeting a Rs. 1 lakh crore turnover by 2021 from its recent business and acquisitions in the long-run.

Acquisition of online home furnishing & Décor business:
Future Retail has approved of the acquisition of an online home furnishings and décor business, FabFurnish.com, from Bluerock eServices for Rs. 4.86 per share. FabFurnish is a high margin and profitable business, currently operating at 40-41 % margins. FRL plans to operate in 100 cities eventually via FabFurnish, which will bring in significant capabilities of building a digital business.

With this acquisition, the company expects be the first one to get into the Rs. 1,000 crores league in this business & is expecting an EBITDA of close to Rs. 40-50 crores this year.

Partnership with brands to attract new customers:
Future Retail Ltd., the Big Bazaar brand took a leadership position by being among the first to form a partnership with Patanjali Ayurved and offer its entire range of health-positive, ayurvedic FMCG products in categories like food, staples, nutrition, hair care, skin care, dental care and toiletries etc. The company has seen excellent traction in the initial period post launch & has become the 3rd largest FMCG seller at Future Retail. It is also in process of launching some products of Sri Sri Ravi Shankar. Such alliances would help to attract new customers to the stores & at the same time enhancing the company’s offerings to existing customers.

Partnership with Bajaj Finance Ltd:
Bajaj Finance Ltd., the diversified retail lending arm of Bajaj Finserv, announced its unique partnership with Future Group, to enable and empower customers to convert all their purchases from any of the Future Group brands into easy EMIs, thus ushering in a digital era of smart purchase.

The credit facility available to customers on a minimum invoice amount is Rs. 5,000 stretching up to a maximum of Rs. 3 lakhs, with the tenure of loan being 3 months to 2 years.

With this tie-up, easy EMI finance would cover the complete spectrum of the customers’ lives – from grocery and household essentials to fashion and accessories, from small appliances to consumer durables, and from furniture to furnishing. This facility is available across all the stores of Big Bazaar, FBB, Central, Home Town and Ezone & soon, will also be available in Foodhall, Easy day and online platform FabFurnish.com. To enable this smarter purchasing option, both companies have also unveiled a cobranded EMI Network card.

Stock Data

CMP (Rs)
127.30
Face value (Rs)
2
52 Week Range (Rs)
179.70 - 115.45
Market cap (Rs Crores)
6016.64
Price To Book Value (x)
2.97
P/E Ratio (x)
404.93
EV/EBIDTA (x)
69.74

One Year indexed Stock Performance

Future Retail LtdSensex
Future Retail Ltd
Return (%)
1m
6m
12m
36m
Absolute
0.16
-
-
-
Sensex
0.82
-0.78
4.73
28.36

Shareholders

(in %)
30-Sept
Promoter
48.82
Public
51.18
Others
0.00
Total
100

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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

As India’s leading retailer, Future Retail inspires trust through innovative offerings, quality products and affordable prices that help customers achieve a better quality of life every day, serve customers in more than 240 cities across the country through over 11 million square feet of retail space.

Future Retail is the flagship company of Future Group, India’s retail pioneer catering to the entire Indian consumption space. Through multiple retail formats, it connects a diverse and passionate community of Indian buyers, sellers and businesses. The collective impact on business is staggering: Over 330 million customers walk into stores each year and choose products and services supplied by over 30,000 small, medium and large entrepreneurs and manufacturers from across India.

This number is set to grow. The company operates multiple retail formats in both the hypermarket, supermarket and home segments of the Indian consumer market including Big Bazaar, Easy day, KB's, fbb, Food Bazaar, Foodhall, Home Town, e Zone.

Profit & Loss Statement:- (Standalone)
(Rs Crores)
Particulars
Mar-14
Mar-15
Mar-16
Mar-17E
Mar-18E
Income:-
  • Net Sales
  • Growth (%)
  • Total Expenditure
  • EBITDA
  • % Margin
  • Other Income
  • Operating Profit
  • Interest
  • PBDT
  • Depreciation
  • Profit Before Taxation & Exceptional Items
  • Exceptional Income / Expenses
  • Tax
  • Profit After Tax
  • Adjusted EPS
  • 2343.12
  • -
  • 2921.13
  • -578.01
  • -24.67
  • 11.39
  • -566.62
  • 83.13
  • -649.75
  • 60.71
  • -710.45
  • 395.84
  • -
  • -314.61
  • -2.25
  • 1890.38
  • -19.32
  • 2275.29
  • -384.91
  • -20.36
  • 70.03
  • -314.88
  • 20.23
  • -335.11
  • 44.10
  • -379.21
  • -
  • -
  • -379.21
  • -2.71
  • 7267.58
  • 284.45
  • 7182.03
  • 85.55
  • 1.18
  • 15.51
  • 101.06
  • 49.75
  • 51.31
  • 36.76
  • 14.55
  • -
  • -
  • 14.55
  • 3.34
  • 17078.81
  • 135.00
  • 16421.28
  • 657.53
  • 3.85
  • 0.00
  • 657.53
  • 150.00
  • 507.53
  • 50.00
  • 457.53
  • -
  • 80.51
  • 377.02
  • 7.99
  • 19640.00
  • 15.00
  • 18658.00
  • 982.00
  • 5.00
  • 0.00
  • 982.00
  • 150.00
  • 832.00
  • 50.00
  • 782.00
  • -
  • 137.62
  • 644.38
  • 13.66
Source: Stockaxis Research, Company Data

Valuation

Company's Plan to operate with a much leaner balance sheet resulting into higher ROCE and expected to be a free cash flow company from its first full year of operation, In FY 17 & 18, FRL will emerge as a core retail front end company with an enhanced distribution network. Also, company can also look forward to borrow at lower interest rates & reducing overall borrowing costs and all these factors put together are expected to result in margin tailwinds in the years ahead.

At CMP of Rs 126.30, the stock is trading at 9.25x to FY 2018E which is very low valuation for such growth oriented stock. We assign Buy rating on stock with target price of Rs 190 where it trades at 13.90x which is fair valuation for stock in long term.

 

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