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Future Retail INITIATING COVERAGE FUTURE RETAIL In pole position India Equity Research| Retail Future Retail (FRL), India’s numero uno grocery and second largest EDELWEISS 4D RATINGS fashion retailer with an asset‐light model, recorded impressive double‐ Absolute Rating BUY digit same stores sales growth (SSSG), pruned inventory (down 5 days in Rating Relative to Sector Outperform FY17) and improved RoE to ~17% in FY17. Still a lot of steam is left– Risk Rating Relative to Sector Low inventory days improvement (decline to 95 in FY19 from 106 in FY17) and Sector Relative to Market Underweight ~12% SSSG over FY17‐19E. Margins will uptrend gradually steered by private labels and Easy Day turnaround. We estimate FRL to post sales, EBITDA and PAT CAGR of 18.9%, 31.3% and 57.4%, over FY17‐19. We MARKET DATA (R: NA, B: FRETAIL IN) assign 25x EV/EBITDA multiple and initiate with 'BUY' and TP of INR516. CMP : INR 394 Target Price : INR 516 52‐week range (INR) : 411 / 116 Structural shifts to sustain SSSG, organised retailers gainers Share in issue (mn) : 471.8 Structural catalysts of: 1) high inflow to banks driving spike in non‐cash spends; and 2) M cap (INR bn/USD mn) : 186 / 2,886 GST leading to consolidation, have catapulted organised retailers to pole position. Avg. Daily Vol.BSE/NSE(‘000) : 585.8 Retail bellwether, FRL, with its strong reach (901 stores covering 240 cities), consumption events (public holiday sales etc), brand investments (fbb sponsoring IPL, SHARE HOLDING PATTERN (%) Femina, Big Bazaar GenNxt stores), loyalty programs (members spend 3x that of non Current Q4FY17 Q3FY17 members) and big data analytics (28.5mn members) is fast emerging the consumers’ Promoters * 49.5 49.5 48.9 delight. Strong SSSG of Big Bazaar, fbb and Easy Day, which would grow 14%/20%/9% MF's, FI's & BK’s 4.9 4.7 4.1 in FY18 and 12%/17%/9% in FY19, respectively, will bear testimony of same. FII's 17.4 17.3 17.5 Others 28.1 28.5 29.5 Rising throughput/store amid widening network * Promoters pledged shares : 25.9 (% of share in issue) Despite robust store expansion plans in Easy Day and fbb, we believe margins are on gradual uptrend aided by rising throughput/store. Realisation improvement is led by PRICE PERFORMANCE (%) store rationalisation (size of Big Bazaar down ~14%), higher private label mix (~30% of Stock over Sensex Stock total), enhanced fashion focus (sharp pricing in fbb) and Easy Day turnaround (supply Sensex chain has stabilised, cost rationalisation). 1 month 2.0 1.6 (0.4) 3 months 8.6 26.3 17.7 Outlook and Valuations: On strong course; initiate with ‘BUY’ 12 months 15.1 145.3 130.2 On sustained strong SSG, improving margins and better inventory turns, we expect ~915bps jump in RoE to 25.8% over FY17‐19. We initiate coverage with ‘BUY/SO’ and TP of INR516 (25x FY19E EV/EBIDTA). Likely 100% FDI in multi‐brand retail is a potential trigger. Key risks include inter‐group transactions and slowdown. Tanmay Sharma, CFA Financials +91 22 4040 7586 [email protected] Year to March FY16 FY17 FY18E FY19E Revenues (INR mn) 68,451 170,751 200,335 241,525 Abneesh Roy EBITDA (INR mn) 834 5,813 7,441 10,018 +91 22 6620 3141 [email protected] Adjusted Profit (INR mn) 151 3,683 5,953 9,124 Shares outstanding (mn) 44 472 490 490 Click on image to view video Diluted EPS (INR) 3.5 7.8 12.2 18.6 Alok Shah EPS growth (%) NA125.055.753.3+91 22 6620 3040 Diluted P/E (x) 113.9 50.6 32.5 21.2 [email protected] Enterprise Value / EBITDA (x) 31.2 33.7 26.6 19.1 ROAE (%) 1.6 16.6 21.0 25.8 July 21, 2017 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited Retail Executive Summary Future Retail’s (FRL – houses retail operation of Big Bazaar, Easy Day, fbb, Foodhall and e‐zone) business restructuring has lent better management focus to the company and gives the investors opportunity to play an asset‐ light pure retail model. Amidst consolidation (FRL has acquired retail business of Bharti, Heritage Foods) and few retailers with a profitable business model (D‐Mart and Reliance Retail apart from FRL), we believe FRL is in a sweet spot. We expect FRL to sustain double‐digit SSSG momentum (~12% YoY average over FY18 and FY19) led by competitive pricing, data analytics, better store layout and customer offers. The company is geared for gradual margin improvement (~75bps improvement over FY17‐19E) led by increase in private label mix (fashion is ~95% private label, overall 30% is private label mix) and turnaround in Easy Day, which along with better operating leverage and improvement in inventory days (to improve further from 106 days in FY17 to 95 in FY19E) will result in improving cash flows and return ratios (~915bps jump in RoE over FY17‐19E). We assign a target EV/EBIDTA multiple of 25x and initiate coverage with ‘BUY/Sector Outperformer’ recommendation/rating with a target price of INR516. SSSG to sustain double digit run FRL’s SSSG has been going strong post the realignment – recorded 12% YoY SSSG in FY17 with 14% YoY SSSG in Big Bazaar. In our view, this strong run will sustain led by better assortment and smart inventory management (slow moving inventory replaced with fast selling products), improving its brand appeal (for instance, fbb is on instant recall when it associates with popular events, such as, IPL, Femina Miss India, Big Bazaar’s signature sale days, among others), competitive pricing (matches lowest price points) and prudent use of data analytics (mines its huge database of 28.5mn loyalty programme members to attract specific customers and cash in on conducive consumer behaviour). Overall, we expect Big Bazaar, fbb and Easy Day to clock SSSG of 14%/20%/9% in FY18E and 12%/17%/9% in FY19E, respectively. Margin expansion to be gradual Margin expansion for FRL will be gradual and the key levers, apart from operating leverage, will be increase in overall private label mix (private labels fetch ~500bps higher gross margins) and business turnaround in Easy Day. Margin improvement will also be helped by faster growth in fbb, which is ~95% private label. Overall, private label contribution is ~30% which gives enough scope for expansion and private label FMCG brands of Future Group will also help. Apart from this, on Easy Day front, the company has initiated several cost saving measures, sorted supply chain logistics, assortment, and introduced savings club which are targeted to increase overall throughput/outlet and ramp up overall margins. We expect FRL to improve margins by ~75bps over FY17‐19, led by change in mix and cost efficiencies. We expect throughput/store to increase from INR12,118 in FY17 to INR14,634 in FY19. 2 Edelweiss Securities Limited Future Retail Unmatched stores network FRL has total retail space of 13.8mn sq ft with presence in 26 states and 240 cities with a total network of 901 stores, which is one of its biggest advantages. The company operates in both hypermarket (big box with Big Bazaar) and supermarket (small box with Easy Day) formats, which lends it ease of expansion – cities where the company believes catchment doesn’t need the bigger Big Bazaar format and it can go with Easy Day and where it believes that even after Big Bazaar more is required it can fill in with Easy Day. fbb is also scalable beyond the metros and top‐10 cities (currently 54 stores) considering that it operates in the fast fashion value segment and offers products at reasonable prices. We expect FRL to add 17 stores each of Big Bazaar in FY18 and FY19 respectively. However, the company will be more aggressive in expansion of Easy Day and fbb outlets – we expect it to add 50 stores each of fbb in FY18 and FY19, respectively, and 240 and 225 stores of Easy Day in FY18 and FY19, respectively. FRL not a mere grocery retailer FRL is not a mere grocery retailer. Rather, the company is also one of the largest fashion retailers in India. It ranks second in terms of fashion sales in India after ABFRL with close to 35% of revenues coming from this business. If we see overall fashion sales of the entire Future Group (with Future Lifestyle Fashions), the group is the largest player in fashion in India with close to INR97bn of sales in FY17. With such a large scale, FRL enjoys economies of scale in terms of sourcing benefits, designs, raw material, job work, etc. Structure realignment, better inventory turns to shore balance sheet Business realignment of erstwhile Future Retail resulted in creation of 2 companies – an asset‐light front‐end retail arm, Future Retail (holds front‐end retail business of Future and Bharti Retail) and the other being the asset‐heavy infrastructure arm, Future Enterprises (holds all the investments and infrastructure in terms of fit outs etc which goes into the retail stores of FRL). With this realignment, majority of debt relating to assets moved to FEL while FRL was left only with the working capital debt needed to run the business. Apart from this, management exerted strong focus on increasing overall inventory turns which cut inventory days from 180 three years back to 106 in FY17. We expect inventory days to further decline to 95 by FY19.
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