DSIJ Mindshare

Partake Now In The Future Of Retail

PARTAKE NOW IN THE FUTURE OF RETAIL

Future Retail Limited is an India-based retail FMCG major. The Kishore Biyani-led company, which is primarily engaged in the multi-brand retail trade, provides a wide range of household and consumer products through departmental store facilities under several formats. Its retail formats mainly comprises of value business and home business. The company has access to about 20 compact hypermarket Easyday stores and over 210 supermarket Easyday stores. Its value business format includes Big Bazaar in hypermarket format; Food Bazaar, a supermarket; fbb, a fashion store; Foodhall, a supermarket; and Easyday convenient stores. In its home business format, the company operates Home Town, a store for all home improvement products; and eZone, the chain stores offering consumer durables and electronics. 

The company has aggressively expanded its reach over time with lucrative mergers and acquisitions. The company has acquired Bharti Retail, South India-based convenience store chain Nilgiris and retail business of Heritage Food in the recent past. Post penetration into newer markets of over 240 cities in FY16, the company recorded further growth in FY17 through small format business through merger of retail business of Heritage Foods Limited through its subsidiary Heritage Foods Retail Limited. Heritage Foods, a leading brand in the southern India markets, has helped the company add over 136 stores and strengthen its presence in the small format business in the southern regions of India. The company also revamped its small format business in the northern region of India by renovating and increasing the efficiency of its Easyday stores and conversion of other smaller stores into Easyday stores.

Further, in FY17, the company took over operations of over 29 small stores operating under the brand ‘Sabka Bazaar' in Delhi and Bengaluru, pulling them under the Easyday umbrella. The consolidation has largely equipped the company to make the most of economies of scale. The consolidation of businesses also enabled the company to cash in on the mutual strengths, rationalisation of back-end costs and a greater creation of value for both the business as well as the stakeholders in the long term. 

 The company has imparted immense focus on strengthening Big Bazaar's national presence and has also increased its investment in fashion brand fbb to make it a sustainable brand across the country. The company has plans to add more standalone fbb stores and also strengthen its supply chain and technological prowess to increase the efficiency and speed of delivery of products across the stores. In the home business segment, eZone has become a leading business with focus on small appliances, gadgets and electronics. The company is further integrating eZone with Big Bazaar network to simultaneously widen the range and increase the products offered through the company's brand Koryo. The new brand will be built around a promise of 72 hour repair or replacement guarantee in case of any malfunctioning. The brand Koryo is expected to touch a size of Rs.200 crore in the coming years. 

Developing in accordance with the consumer trends in the economy, the company's seven store Foodhall brand is expanding in niche as well as premium markets. The brand is also engaged in the creation of in-house brands to cater to the newer demands of the market that is accompanied by rapid urbanisation and growth in lifestyle expenditure in India. The company's bakery products and bakeware brand, WhisQ has also sprung out of Foodhall. WhisQ is catering to demands created by the growing home baking trend among customers through Big Bazaar. The company is further building newer and its own authentic brands revolving around tea, accessories, super-premium staples, dry fruits, spices and gifting. The company is growing its existing network through Big Bazaar, while the company is also structuring strategic plans to expand through neighbourhood stores. The company is largely focusing on integrating its northern India based Easyday network and the Hyderabad-based Heritage network in the southern India region to penetrate more widely into the markets. The company's small store network has expanded to 538 stores and is expected to expand ten times over in the coming five years.

FINANCIAL PERFORMANCE On the financial front, Future Retail Limited posted a 7.51 per cent growth on a year-on-year basis in its net sales to Rs.4506.30 crore in the second quarter of FY18. The company's profit before depreciation and tax stood at Rs.211.13 crore for the second quarter of FY18, higher by 64.71 per cent on a yearly basis from Rs.128.18 crore in the same quarter of the previous fiscal. The company's profit after tax grew 108 per cent on a yearly basis to Rs.153.16 crore in the second quarter of FY18, as against Rs.73.63 crore in the same quarter of the previous fiscal. 

On the annual front, the company posted an exceptional increase of 148.45 per cent on a year-on-year basis in its net sales to Rs.16,686.38 crore in the FY17. The company's PBIDT grew tremendously by 597.16 per cent to Rs.581.29 crore in FY17 on a yearly basis, as against Rs.83.38 crore in the previous financial year. The profit after tax of the company witnessed a remarkable growth of 2340.56 per cent to Rs.368.28 crore in FY17 as compared to Rs.15.09 crore in the previous fiscal, despite tepid market conditions during the financial year. The company's cash profit grew to Rs.400.86 crore in FY17, compared with Rs.51.85 crore in the previous financial year, registering a growth of a whopping 673.12 per cent

VALUATION On the valuation front, the company maintained a TTM PE (x) of 44.41x, while its peer Avenue Supermarts commanded a TTM PE of 149.77x. The industry PE stood at 83.42x, keeping Future Retail undervalued. The company's pany's price-to-book value stood at 7.74x. 

The company's return on capital employed was 17.69 per cent, whereas its return on investment stood at 17.02 per cent. The capital employed by the company in the business stood at Rs3,797.79 crore as on March 31, 2017. 

Further, the company's earnings per share grew from Rs0.69 in the previous fiscal to Rs7.81 per share for FY17. The cash earnings per share increased to Rs8.50 in FY17, as against Rs2.35 in the previous financial year. The net debt-toequity ratio of the company also decreased from 0.43 in the previous fiscal to 0.34 as on March 31, 2017, on the back of increased net worth and repayment of borrowings. 

The company has recorded a substantial reduction in its debt and improvement in its net worth in the FY17. The company has been assigned a CARE A1+ (CARE A One Plus) rating for the company's short term borrowings, whereas its long term borrowing are assigned CARE AA- (CARE Double A Minus) as on March 31, 2017. The excellent credit rating is likely to enable the company to obtain funding at a reasonable cost and more conveniently. 

CONCLUSION The retail industry in India is on a growth trajectory and is expected to continue to grow steadily in the coming period on the back of the per capita GDP tipping towards USD 2,000-mark. The growth in per capita GDP will most likely push the market to grow 2-3 times in the next decade as had happened in several emerging markets around the world. This is because of India's growing youth population, rising middle class population with a rising share of discretionary expenditure, rise in shopping area and e-commerce platforms. Moreover, the implementation of GST is expected to spur the organised retail business and drive the shift from unorganised to organised businesses. 

Further, the technological usage in supply chain, distribution network and other operations of the business that will be brought about by the implementation of GST will benefit the sector in the form of reduction in costs and increased efficiency. In addition to benefiting from the scale of operations, strong distribution network and experienced and skilled workforce and multitude of formats in the sector, Future Retail is expected to reap good benefits from the surging consumption drive and, in general, a growth conducive environment. The aggressive inorganic growth undertaken by the company is also expected to drive business synergies in the near term. We recommend investors to HOLD Future Retail.

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