Rudra Shares' dark horse recommendation: Buy Future Retail for long term bet

Rudra Shares And Stock Brokers | Jan. 23, 2017, midnight

The Composite Scheme of Arrangement between Future Enterprises Limited (formerly known as ‘Future Retail Limited’) and Future Retail Limited (formerly known as – ‘Bharti Retail Limited’) and their respective shareholders and creditors (“the scheme”) under the provisions of the Companies Act, 1956.

The Scheme, provides for demerger of Retail Business. Undertaking of Future Enterprises Limited (‘‘FEL’’) and vesting into the Company and demerger of Retail Infrastructure Business Undertaking of the Company and vesting into FEL with effect from Appointed Date of October 31, 2015, as defined in the Scheme, has been given effect on May 1, 2016. Pursuant to the Scheme, all the assets and liabilities pertaining to the Retail Business Undertaking of FEL has been demerged and vested into the Company and all the assets and liabilities pertaining to Retail Infrastructure Business Undertaking of the Company has been demerged and vested into FEL.

During the year, Future Retail Limited announced the partnership with Bharti Retail Limited to combine the businesses of the companies bringing together winning retail brands such as Big Bazaar, easy day, fbb, Food Bazaar, Home Town, eZone and Foodhall. The scheme has been brought into effect on May 1. As part of the Scheme of Arrangement, the front end operations of these retail chains were consolidated within Bharti Retail Limited. Subsequently, name of the Company has been changed to Future Retail Limited. Accordingly, the Boards of the two companies have been reconstituted to ensure proper representation of promoters and the professional Board.

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. Company has seen excellent traction in the initial period post launch & becomes the 3rd largest FMCG seller at Future Retail. Company 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 companies offerings to existing customers.

Future Retail has approved of acquisition of online home furnishings and décor business, FabFurnish , from Bluerock eServices for ` 4.86 per share. FabFurnish is a high margin and profitable business, currently operating at 40-41 % margins. Company plans to operate in 100 cities eventually, is aiming to enter into more cities via this Brand & to bring in significant capabilities of building a digital business. With this acquisition company expects be the first company to get into the ` 1,000 crore space in this business & expecting EBITDA of close to ` 40-50 crore this year.

Partnership with Bajaj Finance Ltd.

Bajaj Finance Limited, 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 ` 5,000 stretching up to a maximum of ` 3 lacs, and the tenure of loan would be three months to 2 years.

With this tie-up, easy EMI finance would cover the complete spectrum of 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 To enable this smarter purchasing option, both companies have also unveiled a cobranded EMI Network card.

Business Outlook

As per BCG Retail 2020 report, Indian retail market is projected to double from $600 billion in 2015 to $1 trillion by 2020. The report further attributes rapid growth in retail to income growth, urbanization, nuclearisation of families and attitudinal shifts towards higher consumption levels. During this period, modern trade is expected to grow from $60 billion at present to $180 billion by 2020 growing at twicethe pace of the overall retail market.

With a geographically balanced retail store portfolio of 738 stores, spread across various formats, FRL is poised to benefit immensely from this retail growth wave. Further, the Company would be in better position to get maximum benefit by the increased consumer spending, due to its presence in areas of high consumption cities and strategic locations of its various formats.

Valuation Conclusion

Company's efforts to optimize productivity per store basis, providing better productivity in terms of increased customer foot fall which would translates into higher velocity of sales, higher ticket size and improved profitability, by reducing overall costs as well as increasing margins earned from upgraded products offering to customers, creation of a consolidated retail entity across food, fashion and home will reap benefits from increased scale and optimization of cost structure going forward.

Focus of the company is now on strengthening its food division after Fashion business became reasonably big. Recently, Future Group is 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 group’s over 700 stores spread across 13 million square feet space in across 25 cities & is 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 ` 1 lakh crore turnover by 2021 from its recent business and acquisitions in the long-run.

Moreover, 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 2016-17, 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.

Overall, Future retail is a concept based company, therefore the estimates of the company have not been done & we recommend to buy this script for Long term Bet.

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