Debt likely to reduce but at cost of dilution
• Future Retail (FRL) reported revenues of | 2,317.2 crore, marginally
lower than our expectation of | 2,480.0 crore. The total operational
space stands at 10.4 million square feet (mn sq ft) (I-direct estimate:
10.5 mn sq ft)
• The company reported a gross margin of 28.2% (up 92 bps YoY) as
against our estimate of 26.5%. The operating margin at 10.5% (up
195 bps YoY) was also ahead of our estimate of 8.3%
• High interest costs continue to dent the profitability. FRL reported a
PAT of | 66.5 crore owing to profit on sale of stake in Capital First.
Space addition to remain muted
FRL has taken a step back and consciously decided to go slow on the
space addition plan. The company has decided to consolidate its current
position with a clear focus on debt reduction. Over the next two years, we
expect space addition of ~1.0 mn sq ft taking the total operational space
to 11.3 mn sq ft by FY16E.
Debt reduction plans
FRL has announced multiple stake sales in order to reduce the mammoth
debt burden. It sold stake in its flagship Pantaloon’ format and divested
stake in the insurance ventures for want of funds. While other formats are
far more comfortably leveraged (Future Lifestyle & Future Consumer
Enterprises), Future Retail still sits on a debt of ~| 5,500 crore. In June
2014, the FRL has now announced fund raising plans to the tune of |
2,000 crore and it intends to utilise ~75% of the proceeds there from
towards reduction of debt. Apart from this, better working capital
management could boost cashflows thereby aiding faster debt reduction.
Revival in same store sales growth to aid growth and improve profitability
Considering the slowdown in the economy and the consciously lower
space addition, the company will be able to achieve revenue growth only
through healthy same store sales growth (SSSG). In Q1FY15, the
company reported an SSSG of 9.2% and 5.5% in the value and home
segment, respectively. A revival in SSSG will not only help the company
achieve revenue growth but also help it enhance profitability and,
thereby, in bringing down debt. We expect SSSG to hover in the 5-8%
range for FY15E and FY16E.
Rightsizing of stores and product mix to aid in protecting margin
Considering that the high margin fashion business has moved out, FRL
has been prompt in closing down unviable stores and is also rightsizing
its stores to enhance operational efficiency. It is commendable that FRL
has been able to report operating margin in the range of 8-10.5%.
Debt reduction holds key; downgrade to SELL
FRL is one the largest retail players. However, in the quest to achieve this,
the company has had to suffer on the balance sheet front. Mounting debt
and inventory levels have impacted the profitability of the company.
While the recent restructuring has aligned the balance sheet of the other
business, FRL still remains under the burden of heavy debt. It has recently
announced fund raising plans which would lead to dilution. Like the many
attempts made in the past, we hope this too does not go in vain and the
company is actually able to lower the debt levels. We have a cautious
outlook and thereby downgrade Future Retail to SELL considering the
recent rally in the stock. We revise our target price to | 90 (0.6x FY16E
EV/Sales, 25% discount to Shoppers Stop).
• Future Retail (FRL) reported revenues of | 2,317.2 crore, marginally
lower than our expectation of | 2,480.0 crore. The total operational
space stands at 10.4 million square feet (mn sq ft) (I-direct estimate:
10.5 mn sq ft)
• The company reported a gross margin of 28.2% (up 92 bps YoY) as
against our estimate of 26.5%. The operating margin at 10.5% (up
195 bps YoY) was also ahead of our estimate of 8.3%
• High interest costs continue to dent the profitability. FRL reported a
PAT of | 66.5 crore owing to profit on sale of stake in Capital First.
Space addition to remain muted
FRL has taken a step back and consciously decided to go slow on the
space addition plan. The company has decided to consolidate its current
position with a clear focus on debt reduction. Over the next two years, we
expect space addition of ~1.0 mn sq ft taking the total operational space
to 11.3 mn sq ft by FY16E.
Debt reduction plans
FRL has announced multiple stake sales in order to reduce the mammoth
debt burden. It sold stake in its flagship Pantaloon’ format and divested
stake in the insurance ventures for want of funds. While other formats are
far more comfortably leveraged (Future Lifestyle & Future Consumer
Enterprises), Future Retail still sits on a debt of ~| 5,500 crore. In June
2014, the FRL has now announced fund raising plans to the tune of |
2,000 crore and it intends to utilise ~75% of the proceeds there from
towards reduction of debt. Apart from this, better working capital
management could boost cashflows thereby aiding faster debt reduction.
Revival in same store sales growth to aid growth and improve profitability
Considering the slowdown in the economy and the consciously lower
space addition, the company will be able to achieve revenue growth only
through healthy same store sales growth (SSSG). In Q1FY15, the
company reported an SSSG of 9.2% and 5.5% in the value and home
segment, respectively. A revival in SSSG will not only help the company
achieve revenue growth but also help it enhance profitability and,
thereby, in bringing down debt. We expect SSSG to hover in the 5-8%
range for FY15E and FY16E.
Rightsizing of stores and product mix to aid in protecting margin
Considering that the high margin fashion business has moved out, FRL
has been prompt in closing down unviable stores and is also rightsizing
its stores to enhance operational efficiency. It is commendable that FRL
has been able to report operating margin in the range of 8-10.5%.
Debt reduction holds key; downgrade to SELL
FRL is one the largest retail players. However, in the quest to achieve this,
the company has had to suffer on the balance sheet front. Mounting debt
and inventory levels have impacted the profitability of the company.
While the recent restructuring has aligned the balance sheet of the other
business, FRL still remains under the burden of heavy debt. It has recently
announced fund raising plans which would lead to dilution. Like the many
attempts made in the past, we hope this too does not go in vain and the
company is actually able to lower the debt levels. We have a cautious
outlook and thereby downgrade Future Retail to SELL considering the
recent rally in the stock. We revise our target price to | 90 (0.6x FY16E
EV/Sales, 25% discount to Shoppers Stop).
