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
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.
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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. Thus, we expect RoCE to improve to 23.0% in FY19 (17.7% in FY17) and RoE to improve to 25.8% in FY19 (16.6% in FY17).
Key risks Overall growth and margins could get impacted by the slowdown in overall macro‐ economic environment, increased competition from other physical and online players and increase in rentals. Also, growth and margins may be marred by failure of management to turnaround Easy Day – a small box format which is a new area of operation for the company owing to which chances of failure are higher. Here we would also highlight that there are some related party transactions done with the group companies. The key transaction being the one with the back end infrastructure company – FEL regarding the fit out being rented by the company from FEL for which FRL pays lease rental to FEL (~47% of total lease rental and INR5bn loans & advances). However, these transactions are at arm’s length and doesn’t hinder normal course of business.
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Investment Rationale
SSSG witnessing structural shift Structural changes in consumer spending habits, the company’s intent to enhance consumer experience, strong brand building, and sharp pricing (with various consumer events and occasions for sale) are driving FRL’s SSSG. Moreover, in our view, fbb which operates in fast fashion segment coupled with increased share gains helped by GST will help FRL to sustain double digit SSSG – expect ~12% average SSSG over FY17‐19E
Business restructuring (undertaken in FY16 in May 2015) involved creation of 2 separate companies from erstwhile Future Retail. The asset‐light arm, Future Retail Limited (FRL) came into being along asset heavy infrastructure entity, Future Enterprise Limited (FEL). Post capitalisation of erstwhile debt‐heavy Future Retail’s business (~INR69bn debt on books in FY12), FRL’s management got a breather from the heavy interest costs that earlier marred its EBITDA as ~75‐80% of its debt was transferred to FEL post realignment. Management was also better placed to focus on improving FRL’s operational performance.
Fig.1: Creation of asset‐light FRL led to increased focus on operational performance
Source: Company, Edelweiss research
SSSG improving ‐ secular rise to sustain FRL has been witnessing improvement in same store sales growth (SSSG), a phenomenon that is not limited only to the past 4 quarters. The company has been recording strong SSG in its value retail format, Big Bazaar, since Q1FY15 which instills confidence in us that Big Bazaar is witnessing secular improvement and which is sustainable. In past 4 quarters, FRL has been consistently recording strong SSG in overall business in general and Big Bazaar in particular in the range of high single to mid teens. The company’s initiatives such as improvement in product assortment, best price to consumers, use of data analytics, etc have been propelling its SSSG. Demonetisation has also seen a change in buying behaviour of consumers. We expect FRL to maintain strong SSSG ‐ 13% in FY18E and 11.5% in FY19E, respectively, at overall company level.
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Chart 1: SSSG strong for Big Bazaar and overall company 19.0
16.6
14.2 (%) 11.8
9.4
7.0 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Big Bazaar Overall
Chart 2: Big Bazaar’s SSSG on uptrend since Q1FY15 22.0 Big Bazaar SSG (%)
17.8
13.6 (%) 9.4
5.2
1.0 Q5FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16
Source: Company, Edelweiss research *Q4FY16 data not available
We are confident that strong SSSG will sustain led by factors enumerated below.
Changing consumer habits favour modern trade Demonetisation changed dynamics of consumer spends Modern trade was one of the few sectors that gained from the government’s recent demonetisation drive. The sudden spurt in non‐cash sales saw physical retailers, such as, Future Retail, Reliance Retail, etc., witnessing a surge in SSSG in the demonetisation quarter (Q3FY17). For most physical retailers, card sales increased from 30% of overall business to ~70% during demonetisation (though it has come off partially now).
However, the same did not sustained as liquidity improved. But, consumers were exposed to shopping in modern trade ‐ cash crunch saw rising number of consumers being forced to shop in modern trade, which facilitates use of cards. We believe, over longer term, as more cashless transactions are promoted, consumers will increasingly shift to modern trade. This will in turn see the Future Group, market leader in value
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retail format, emerge as one of the largest beneficiaries of same. Future Group was prompt to ride the DeMon wave – made it easy for customers to withdraw cash (up to INR2,000) at all its stores by using debit cards during demonetisation. Higher credit card spends at Big Bazaar and Easy Day stores catapulted 86% YoY during November 2016 to March 2017. Consequently, Future Group forged better connect with customers.
We believe consumers’ buying habit is seeing a structural change which instills confidence in us that strong SSSG trend in organised trade will sustain – demonetisation saw sharp money inflow into bank accounts of consumers, which is also one of the reasons why consumers are shifting to non‐cash mode of transactions, which favours the organised retailers. Q1FY18 also witnessed good growth for most of the retailers – Jubilant Foodworks saw 6.5% YoY SSSG in Q1FY18.
Chart 3: Non‐cash transactions via debit, credit cards spurted during DeMon 500
410
320
(mn) 230
140
50 16 16 17 16 16 16 16 16 16 16 16 16 17 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Jul Jan Jun Oct Apr Sep Feb Feb Dec Aug Nov Mar May Debit card (in mn) Credit card (in mn)
Source: Industry, Edelweiss research
Post demonetisation, consumer goods companies have been focusing on increasing direct distribution. We estimate contribution of modern trade to overall FMCG business (currently contributes 8‐10%), can jump to ~20% over long term (salience of modern trade in metros is already 20‐40%, much higher than overall average).
The trend of increasing share in modern trade is already visible—recently P&G entered into a strategic tie up with the Future Group wherein it will work closely with the retailer in turn bolstering its market share, better manage its supply chain, data analytics, manage shelf space, etc. In fact, sales officials of both companies will work in close cohesion to draw up plans, forecast sales, launch new products, etc. Globally, P&G already has such a tie up with Walmart. HUL has also entered into a tie up with Reliance Hypermarket to set up a chain of beauty and wellness formats in Reliance Retail stores. Similarly, Patanjali has tied up with the Future Group to sell its products. These exclusive tie‐ups bode well for modern trade as it gives the players the niche and helps in sustaining SSSG.
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Table 1: Salience of modern trade of consumer goods companies – to increase further Modern trade contribution (%) HUL 10.0 GCPL 8.0 Dabur 10.0 Emami 7.0 Marico 9.0 Britannia 10.0 Colgate 8.0 GSK Consumer 9.0 Source: Company, Edelweiss research
Improving consumer experience and brand image Increasing the frequency of customer visits and therefore SSSG will be FRL’s focus area over next 3 years as it will lead to better turn and higher return ratios. To attract higher number of consumers, the company has been working towards improving consumer experience in terms of look and feel and layout of stores. For instance, Big Bazaar GenNxt, launched at DLF Mall of India in Noida and Infinity Mall, Malad, in Mumbai have been designed to enhance customer experience with interactive, digital displays featuring product information, multi‐sensory environments and live kitchens, sit‐down checkouts, superior customer service and many more features.
Fig. 2: Big Bazaar GenNxt stores creating premium experience
Source: Company, Edelweiss research
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In fbb, FRL is looking at improving overall brand image ‐ has Bollywood actors Katrina Kaif and Varun Dhawan as its brand ambassadors. fbb has also tied up with properties, such as, IPL, Sunburn Music Festival and Miss India to connect with its younger customers.
Fig. 3: FBB associating itself with events and properties catering to younger audience
Source: Company, Edelweiss research
Exploring newer avenues for consumer visits and focus on pricing FRL organises occasions to increase consumer footfalls by way of sale seasons and signature events, such as, Sabse Saste Din and Mahabachat during the national holidays of January 26 and August 15, among others. The company’s public holiday sales are held thrice a year around May 1, October 2 and December 25. These sale seasons are margin dilutive, but it helps create a buzz that drives footfalls, especially when it is a signature event.
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Pricing and general demand for a particular product are other important factors, apart from brand awareness, that help drive SSSG. However, FRL would ideally refrain from operating as a discounting brand, and look at offering value while simultaneously encouraging customers to premiumise. In pricing, instead of focusing on lower income bracket consumers by playing the discounts model, the company is focusing on the younger middle class consumers, which helps in better up‐trading of consumers (e.g., Dove, a premium soap, is one of the highest selling soaps at Big Bazaar versus Lifebuoy versus Lux and hence results in better overall growth). FRL focuses on the India 2 – serving class (shown in image below) where the scope of growth and premiumisation is significant – 500mn consumers with strong aspirations are set to upgrade.
Fig. 4: FRL focused on middle class
Source: Company, Edelweiss research
Fig. 5: Big Bazaar signature sale season
Source: Company, Edelweiss research
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Fig. 6 Big Bazaar promoting shoppers to shop via cash backs
Source: Company, Edelweiss research
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Fashion at Big Bazaar focusing on faster growing segments FRL is focusing on volume in the fashion business and has one of the most competitive pricing for its fashion. The target is to lower price points by 3‐5% every year helped by economies of scale. Better/same quality fashion products, at competitive pricing, have not only been attracting new consumers but have also seen higher repeat purchase. The company plans to continue fbb’s strong run aided by focus on women’s ethnic wear and men’s and women’s casual wear, which is amongst the fastest growing categories in apparel segment.
The Future Group is the largest fashion retailer of India, while FRL is the second largest domestic fashion retailer.
Table 2: Men’s casual, women’s ethnic & casual wear ‐ fast growing segments Size (USD bn) 2014 2020E 2025E CAGR 2014‐25E Men's Formal 3.6 5.0 9.0 ~10% Men's casual 1.4 5.0 12.5 ~20% Total Men's wear market 5.0 10.0 21.5 ~15%
Size (USD bn) 2014 2020E 2025E CAGR 2014‐25E Women's western wear 0.7 2.5 7.5 ~20% Women's ethnic 1.7 2.7 5.2 ~15% Total women's wear 2.4 5.2 12.7 ~16.5% Kids 2.7 4.7 7.0 ~15%
To a certain extent, fbb’s model is akin to ABFRL’s Pantaloons in its current avatar and Max Fashion. Pantaloons also cut its product prices by ~20% which in turn saw 40% jump in volumes. The company also sharpened focus on increasing share of faster growing women ethnic and casual wear segment, which helped improve overall inventory turn. Hence, drawing parallels from success of Pantaloons, fbb is expected to do well with its current strategy of being focus on pricing—fbb has already clocked double digit SSSG.
Chart 4: Pantaloons’ SSSG improved post rejig shows affordable pricing works Pantaloon SSG (%) 23.0
17.8
12.6 (%) 7.4
2.2
(3.0) Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17
Source: Company, Edelweiss research
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Customer loyalty programmes, price matching to catapult spends per head FRL’s different loyalty programmes provide it: 1) strong data base of consumers; 2) will bolster overall spends per consumer; and 3) enhance overall visits per head in a year of loyalty consumers—loyalty programme customers, on an average, spend ~3x more than non‐members, while annual spends of loyalty customers over the year are almost 10x a non‐member; also, loyalty programme members visit 3.8x every year on an average. FRL loyalty programmes have attracted strong membership of 28.5mn with estimated 20mn unique customers.
FRL’s loyalty programmes • Big Bazaar Profit Club offers additional free shopping value to customers who pay INR10,000 upfront and visit stores at least 12 times in a year.
• The Payback loyalty programme in partnership with American Express allows consumers to earn and utilise loyalty points earned from shopping.
• In the Easy Day format, FRL offers a loyalty programme Easy Day Savings Club wherein consumers can avail 10% discount on all bills up to a limit of INR50,000 per annum by paying one‐time annual fee of INR999. The scheme pilot project has been successful ‐ during the pilot phase (3 months), average spends per member stood at INR12,424. Members can also avail other benefits, such as, free vouchers, free home delivery, etc.
Fig. 7: Loyalty programmes run by the company
Source: Company, Edelweiss research
FRL has started the Future Pay wallet concept to ensure that it does not lose customers to competition. Future Pay is a digital loyalty wallet that helps in shopping across Future Group outlets and that too cashless. The wallet has a price match feature which compares the price of the product on the customer’s bill with the competitor’s advertised prices. And, if it finds a lower price, it credits the difference to the customers’ Future Pay Wallet. Future Pay currently has ~1.2mn users.
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Fig. 8: Future Pay: Price match feature
Source: Company, Edelweiss research
GST ushers in level playing field GST implementation will result in a level playing field. The organised players are geared for GST not only in terms of front end (billing, integration of software, etc), but also back‐end ready as they procure directly from companies. The unorganised players, especially the wholesalers, are witnessing tough times ‐ demonetisation has derailed their business model and now the GST compliance costs will exert further pressure on non compliant players. FRL will be a beneficiary of GST as it will get credit of the service tax paid on rentals amounting to ~INR1.5‐1.8bn.
Chart 5: SSSG assumption in Big Bazaar 17.0 Big Bazaar
15.4
13.8 (%) 12.2
10.6
9.0 FY17 FY18E FY19E Big Bazaar
Source: Company, Edelweiss research
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Chart 6: SSSG assumption in fbb
24.0 FBB
21.8
19.6 (%) 17.4
15.2
13.0 FY17 FY18E FY19E FBB
Source: Company, Edelweiss research
Chart 7: SSSG assumption in Easy Day Easyday 11.0
10.0
9.0 (%) 8.0
7.0
6.0 FY17 FY18E FY19E Easyday Source: Company, Edelweiss research
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Healthy store expansion with improvement in throughput/store
FRL has the largest store network in India with ~13.8mn sq ft of area spread across 240 cities. The company has aggressive plans chalked out for store expansion of Easy Day and fbb, while Big Bazaar will witness steady expansion. The company is targeting addition of 15‐20 Big Bazaar stores per annum with Easy Day helping to expand in the cities where Big Bazaar is not feasible (11 consumption clusters identified). Here it may be noted that despite such expansion, overall throughput/outlet will continue to improve – set to improve from INR12,118 in FY17 to INR14,634 in FY19E.
FRL has total retail space of 13.8mn sq ft with presence in 26 states and 240 cities, which in our view is one of its biggest advantages. Considering the company’s deep reach, focus is on increasing overall throughput per outlet, for which ensuring healthy SSSG is a key criteria (already discussed). Besides, the store expansion strategy should also ensure that the company does not cannibalise its own stores.
Table 3: Footprint across stores Store format Total Stores Sq ft area (mn) States Cities Big Bazaar 235 10.2 26 124 FBB 54 0.6 17 32 Easy Day 538 1.4 12 11 clusters Foodhall 7 0.1 4 4 ezone 30 0.3 8 11 Home Town 37 1.3 12 22 Total 901 13.8 26 240 Source: Company, Edelweiss research
On the anvil are aggressive long term plans for most of FRL’s formats. Separate strategies have been etched out for each of the formats.
Chart 8: Big Bazaar expansion steady, fbb expansion aggressive (as per company) 600
480
360
(nos.) 240
120
0 FY16 FY17 FY20‐22 Big Bazaar Stores fbb stores
Source: Company, Edelweiss research
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Chart 9: Easy Day expansion –aggressive on cluster model (as per company) Easyday stores 5,000
4,000
3,000
(nos.) 2,000
1,000
0 FY16 FY17 H1FY19 FY21‐22 Easyday stores Source: Company, Edelweiss research
Big Bazaar: Steady store additions FRL does not plan to be aggressive in store openings of its hyper‐market format, Big Bazaar. Hence, store roll outs will happen only after ensuring that it does not cannibalise the super market format, which in our view is the right strategy. Having already achieved significant scale in the hyper‐market format with an area of 10.2mn sq ft, the company’s focus is on increasing overall throughput/sq ft—throughput/outlet has been improving with the target to add 15‐20 Big Bazaar stores per annum.
To ensure that overall throughput of Big Bazaar stores increases, per store area size has been reduced without impacting productivity — area/store has been cut from 50,000sq ft to 43,000sq ft. New store addition will also have smaller size in the 35,000‐45,000sq ft range. The company is targeting 350 Big Bazaar stores by 2021. Throughput for Big Bazaar has improved from INR9,000 in FY12 to ~INR12,300 in FY17 – this improvement will continue helped by increasing footfalls, better inventory management and some store rationalisation.
Chart 10: Store additions slower in past few quarters 250 Big Bazaar stores
220
190
(nos.) 160
130
100
Q3FY14 Q4FY14 Q5FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Source: Company, Edelweiss research
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Chart 11: Sales/sq ft jumps Big Bazaar sales per outlet (INR) 13,000
11,600
10,200 (INR) 8,800
7,400
6,000 FY10 FY11 FY12 FY14 FY17
Source: Company, Edelweiss research *FY15 and FY16 numbers not available
Chart 12: Average store size Average size per store (sq ft) 50,000
47,000
44,000 ft)
(sq 41,000
38,000
35,000
Q3FY14 Q4FY14 Q5FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Source: Company, Edelweiss research
fbb: The fbb stores have been gaining traction and clocking SSSG of ~20%, albeit on low base. fbb was earlier part of Big Bazaar, but now the focus is more on expanding standalone stores as the potential of value fashion business is humungous. Fashion accounts for ~35% of FRL’s total revenues and on an all‐India level it is the second largest fashion retailer. Even taking into account Future Lifestyle Fashion, Future Group is the largest fashion player in the country with combined sales of ~INR97bn in FY17 – this results in a lot of sourcing benefits for the company.
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Chart 13: FRL ‐ Second largest domestic fashion retailer; Future Group the largest Revenues (INR bn) 75.0
63.0
51.0 bn)
(INR 39.0
27.0
15.0 ABFRL Future Shoppers Future Arvind Page Trent Retail Stop Lifestyle Industries Fashions Revenues (INR bn)
Source: Company, Edelweiss research
FRL is targeting aggressive roll out of fbb stores – targets to take the total count to 500 plus stores in next 3‐5 years from 54 stores in FY17. Since this brand operates in value fashion retail, fbb stores operate in areas where it can garner better footfall (mix of malls and high street) — volume focus will result in better inventory turns. However, to leverage on value proposition the company proposes to increase overall size of stores in the 12,000‐15,000 sq ft range (currently ~10,000 sq ft in size), similar to Pantaloons, as a larger store allows better display of assortments with larger variety of inventory, resulting in higher bill amount per customer. The company is cautious while expanding fbb (number of stores in Q1FY16 was 51, which at Q4FY17 end stood at 54) as it has been trying to crack the right model, right assortment, team, etc., which is now complete. The focus is now on expanding the brand.
Table 4: FBB stores and average size FBB Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Total Stores 30.0 38.0 38.0 52.0 51.0 50.0 51.0 50.0 50.0 54.0 54.0 Store Size (mn sq ft) 0.4 0.4 0.4 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.6 Average size per store (sq ft) 12,000 11,316 11,316 10,192 10,196 10,400 10,196 10,000 10,000 10,000 10,185 Source: Company, Edelweiss research
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Fig. 9: Loyalty programmes run by the company
Source: Company, Edelweiss research
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Easy Day: Post acquiring Easy Day, FRL’s focus was on cost reduction, closure of loss‐making stores (now largely done), changing store layout, shelf arrangement, etc. FRL has figured out the hyper market model with Big Bazaar, while the convenience store is a relatively new territory for it. It has been trying to crack the model and took some notes from the Walmart team. Now, Easy Day is focused on wide scale expansion — it has adopted the cluster approach and identified 11 consumption micro markets (11 clusters) where its expansion will roll out over next 15‐18 months. NCR, Mumbai, Chennai, Hyderabad and Bengaluru are the top‐5 cities of India in terms of GDP per capita, entailing humungous opportunity for organised retail and form part of the cluster defined by the company.
Table 5: Consumptions clusters (11) identified for expansion Population (in mn ‐ Total household in mm(assuming 5 Consumption cluster Easyday stores 2011 Census) member in each house) Households per Easyday NCR (largest cluster) 143 46.1 9.2 64,434 Haryana 30 27.8 5.6 185,333 Mumbai 27 12.5 2.5 92,593 Bengaluru 31 8.5 1.7 54,839 Hyderabad 80 6.8 1.4 17,000 Chennai 36 4.7 0.9 26,111 Jaipur 9 3.1 0.6 68,889 Lucknow 37 2.8 0.6 15,135 Ludhiana 118 1.6 0.3 2,712 Jammu 7 0.5 0.1 14,286 Haridwar 20 0.2 0.0 2,300 Total Stores 538 114.6 22.9 42,602 Source: Company, Edelweiss research
Table 6: Stores and overall size per store Easyday Q1FY17 Q2FY17 Q3FY17 Q4FY17 Total Stores 331.0 338.0 379.0 538.0 Store size (mn sq ft) 0.8 0.8 0.8 1.4 Average size per store (sq ft) 2,266 2,249 2,190 2,509 Source: Company, Edelweiss research
FRL plans to take overall Easy Day store count to 1,000 within next 18 months, while its long‐term plan is to have 4,000 stores by 2022. The focus is on ensuring that the supermarket format of Easy Day meets the daily and weekly requirements of consumers (to make it their neighbourhood store), while the hypermarket format of Big Bazaar caters to the monthly consumption basket of urban India. Considering that, on an average, still ~42,600 households have only one Easy Day store in the clusters identified offers enough scope for further expansion – cluster approach is the right way to go as it helps in fragmenting the market with one brand, thereby making it difficult for another brand to enter that market.
20 Edelweiss Securities Limited Future Retail
Chart 14: Aggressive plans for Easy Day store expansion Easyday stores 4,400
3,600
2,800
(nos.) 2,000
1,200
400 Q4FY17 18 months 3‐5 years
Source: Company, Edelweiss research
To increase its store count and get entry into South India, FRL recently acquired the retail format of Heritage Foods (136 stores) which will be branded under Easy Day. This acquisition has given FRL entry into the South where Easy Day format is not present. Key highlights of the deal include:
• FRL acquired retail business of Heritage Foods with 136 stores in the 3 South cities of Hyderabad, Bengaluru and Chennai.
• This complements Easy Day’s store expansion strategy which is largely concentrated in North India. Heritage Foods gives FRL direct entry in South India. The company has gained market entry into Chennai and Hyderabad markets via this acquisition; Easy Day was not present in these markets.
• Currently, the 136 Heritage stores are operated under the ‘Heritage Fresh’ brand and cover close to 0.48mn sq ft.
• Heritage Foods has spun off its retail, bakery, agri sourcing and veterinary care business into a fully owned subsidiary. Subsequently, all these businesses, except veterinary care, which is merged with FRL.
• Post the deal, Heritage Foods holds 3.65% in FRL via fresh issue of shares.
Heritage outlets acquired by FRL are profitable at store level and the company will now be targeting to spruce up the margin profile of these stores by improving the store mix and cost rationalisation.
Table 7: Heritage retail stores to garner better focus from FRL Heritage stores current position Changes that FRL will incur Targeted results Strong brand Loyalty program Increased margins Store level profitable Adding new branded assortment Better assortment Mix of products skewed to dairy Supply chain efficiency Synergy benefits Cutting staff Source: Company, Edelweiss research
21 Edelweiss Securities Limited Retail
Table 8: Our assumption of store expansion across formats FY17 FY18E FY19E Big Bazaar 235 252 269 Easyday 538 778 1,003 FBB 54 104 154 Source: Company, Edelweiss research
Why is FRL going for cluster approach in Easy Day? The basic idea of an Easy Day store is that it poses to be a neighbourhood store which is closer to the homes of consumers and meets their daily needs. Clustering helps the company in identifying consumption trends in a particular area and enhance focus on catering to consumer demand as per their needs. For instance, consumer demand and consumption in the Jaipur cluster may be different from the Bengaluru cluster. Hence, the company will have a different focus towards assortment and inventory at these 2 clusters. Some other benefits of clustering are:
• Data analytics: It helps in getting data about the consumer behaviour and buying pattern of different areas according to cluster and accordingly the decision on inventory and replenishment can be taken.
• Brand creation: Higher number of stores in one particular cluster leads to increased visibility of the store and hence helps in brand building.
• Differentiated pricing and discounting strategy: FRL can follow different pricing and promotion strategy depending on the cluster and consumer profile of a particular culture. This also helps in pushing a particular brand or product depending on the customer profile in a cluster.
This approach will allow FRL identify clusters and undertake significant expansion there instead of opening retail stores in a staggered manner. Easy Day has identified 11 clusters for expansion.
22 Edelweiss Securities Limited Future Retail
Private labels, convenience stores to ramp up margins
Strong SSSG, improved throughput/outlet and private label mix are the key catalysts driving FRL’s margins considering the high fixed costs per store. Improvement in private label mix (~30% at company level) will aid margin improvement – we estimate margins to rise by ~75bps over FY17‐19E. Similarly, turnaround in Easy Day business (expected to break even in H1FY18) will ensure that margins further ramp up. We believe rising throughput at the convenience store (Easy Day’s savings club ensures customer stickiness) along with better private label mix (~20% in Easy Day) will aid the jump in margins.
After spelling out its strategy for expansion and key assortment, margin improvement is next on management’s agenda. Operating leverage (being addressed by focusing on SSSG improvement) remains one of the key drivers for margins – increasing overall share of private label brands, higher throughput/outlet in Big Bazaar format and turnaround of convenience store, Easy Day. Currently, FRL is operating at consolidated gross and EBITDA margins of 24.8% and 3.4%, respectively, which are set to improve aided by the above factors. We expect EBITDA margins to improve by ~75bps YoY to 4.1% by FY19 (from 3.4% in FY19E).
Chart 15: Overall margins on uptrend Gross margins (%) EBITDA margins (%) 31.0 5.0
28.6 4.4
26.2 3.8 (%) (%) 23.8 3.2
21.4 2.6
19.0 2.0 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Gross margins (%) EBITDA margins (%) Source: Company, Edelweiss research
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Chart 16: Overall revenue mix ‐ Food has the highest share followed by fashion General merchandise 12% Fashion Personal care 35% 15%
Foods 38% Source: Company, Edelweiss research
In case of Big Bazaar, FRL plans to gradually increase throughput/outlet in turn resulting in margin accretion. The company is focused on driving higher value per customer through its loyalty program aided by data analytics. We have enumerated the factors that would drive improvement in SSSG, which along with lower size should help increase throughput/ outlet for Big Bazaar and in turn aid ramp up in overall margins.
Chart 17: Higher sales/outlet on strong SSG in turn improving margins Big Bazaar sales per outlet (INR) 16,000
14,000
12,000
(INR) 10,000
8,000
6,000 FY10 FY11 FY12 FY14 FY17 FY18E FY19E Big Bazaar sales per outlet (INR) Source: Company, Edelweiss research
Big Bazaar’s margins improved led by the various measures the company initiated on store front. Segment margins improved from 7.6% at start of CY14 and hit a high of 11.6% in Q3FY15. However, margin dipped to 9.1% in Q3FY16 just before the company acquired the Easy Day format.
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Chart 18: Overall margins before consolidation Future Retail EBITDA margins (%) 14.0
12.4
10.8 (%) 9.2
7.6
6.0 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q5FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Future Retail EBITDA margins (%)
Source: Company, Edelweiss research
Rising contribution of private label brands is another vital factor driving overall margins – private labels fetch higher margins (ranging between 500‐800bps) and we believe Big Bazaar’s foods business has adequate room to increase the contribution of private labels. Already ~95% of Big Bazaar’s total fashion (fbb) comprises private labels, with food accounting for ~15‐17%, home ~20% and general merchandise ~5%. Overall, with private label accounting for 30%, there’s enough scope to increase proportion of private label brands in overall business, especially in foods and personal care.
Table 9: Proportion of private label brands –huge scope in food Segment Private label (%) Fashion (including fbb) 95.0 Food 15.0 Home 20.0 General Merchandise 5.0 Company level 30.0 Source: Company, Edelweiss research
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Fig. 10: Some of the private label brands of Future group
Source: Company, Edelweiss research
Fig. 11: Strategy for driving penetration of private brands in business
Source: Company, Edelweiss research
Easy Day, the delta to margins The convenience store, Easy Day, is the other kicker for margin improvement. As per management, Easy Day is expected to achieve breakeven in H1FY18 from EBITDA loss in FY17. Post acquisition of Easy Day, the primary focus was on cutting costs, shutting down loss‐making stores, changing store layout, shelf arrangement, etc. Post closure of loss‐ making stores, FRL revamped the assortment strategy to drive better throughput (assortment with better shopping experience at attractive pricing and loyalty benefits). Going forward, the company plans to train focus on private label brands in Easy Day stores. The target is to take overall private label brands at Easy Day stores to 60% from current 20% levels. Though Easy Day is a new area of operation for the company, it has already built backend capacity to handle 5,000 stores, has identified 3,000 SKUs for each store for
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assortment, a cost control drive is ongoing to achieve EBITDA improvement and the cluster approach with the Easy Day savings club will ensure that throughput/outlet is healthy. Easy Day savings club entails payment of INR999 per consumer and offers savings of 10% on all consumer bills up to a maximum of INR50,000. This ensures consumer stickiness with Easy Day (currently 0.18mn members – which is ~335 members per store).
Table 10: Initiatives driving Easy Day turnaround Backend Store level Consumer Built capacity to handle 5000 stores Identified ~3000 SKUs for each store Easyday saving club: Ensure customer stickiness Have set up centralised procurement Operate in 11 clusters with better Home delivery in select locations mechanism customer understanding Entered into strategic tie ups with Running cost control to turn EBITDA Neighbourhood store FMCG companies break even Each store decide mix of local Assortment of essential and aspirational products products ‐ considering local and national needs Inhouse training of managers Accepting payments in all modes
Cost in Easy Day is lower owing to lower employee cost, rentals, operating and A&P spends. Over next 2‐3 years, convenience stores could attain EBITDA margins of ~3.5‐4%, while steady state EBITDA margin could be ~5.5% levels.
Table 11: Easy Day versus other retailers Retail chain Sales per sq ft (INR) Average store size (sq ft) Stores Total area (mn sq ft) Easy Day 17000‐18000 2,509 538 1.4 D‐Mart 32000‐33000 31,298 131 4.1 HyperCity 8000‐8500 69,474 19 1.3 More Megastore 8500‐9500 40000‐45000 20 0.9 More supermarket 8000‐9000 2000‐5000 494 1.5 Star Bazaar 11000‐13000 45000‐50000 24 1.1 Spencer Hypermarket 16000‐17000 22000‐25000 37 0.9 Spencer supermarket 17500‐18500 2750‐3000 83 0.2 Reliance Fresh 17500‐18500 3000‐4000 NA NA
Chart 19: Margin improvement imminent Future retail overall margins 5.0
4.4
3.8 (%) 3.2
2.6
2.0 FY17E FY18E FY19E Future retail overall margins Source: Company, Edelweiss research
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Case study: Can Easy Day become 7 Eleven of India 7‐Eleven is one of the largest convenience stores’ chains in the world that has been in operation at more than 56,600 stores globally across 18 countries. Here we try to draw some parallels for Easy Day with 7‐Eleven wherein we try to gauge likely improvement in overall financials and other areas of learning and relevance in India. We look at the operations of 7‐Eleven Malaysia Holdings Berhad which owns, operates, and franchises convenience stores under the 7‐Eleven brand in Malaysia (enjoys 82% market share).
Huge scope in India and cluster approach the right way to go: Started in 1984, this company operates 2,100 plus stores in Malaysia (serves ~0.9mn customers per day). To achieve success in its convenience store format, 7‐Eleven in Malaysia too followed the cluster approach. Considering that Malaysia on land area basis is the 66th largest country and already has 2,100 plus 7‐Eleven outlets suggests that cluster approach works in convenience store format.
Can Easy Day consider franchising after achieving certain threshold: 7‐Eleven Malaysia on reaching the 1,000 stores mark started franchising the stores and invited bids for same. We would not deny the possibility of FRL also opting for the franchise model once it achieves certain threshold number of Easy Day stores.
Differentiated offerings: 7‐Eleven stores carry more than 2,200 Stock Keeping Units (“SKUs”), including its proprietary brands, such as, Slurpee frozen beverages and Big Gulp fountain soft drinks. It also offers variety of services, such as, the bill payment service, sale of mobile phone reload cards, IDD/STD, Touch ‘n Go reload, internet games starter packs, photocopying, fax, automated teller machine (ATM), etc. Over a period of time it also introduced fresh brewed coffee and other hot beverages together with packaged fresh food and bakery for the convenience of customers looking for ready‐to‐eat hot food. Easy Day can also increase its offerings by entering the RTD packaging foods and hot beverage segments. Additional services (rentals, etc) can be additional source of income.
Table 12: Financial snapshot of 7‐Eleven – margins at ~6% (including royalty) 2012 2013 2014 2015 2016 Total stores 1,407 1,557 1,745 1,944 2,122 Revenues (RM mn) 1,579 1,673 1,893 2,006 2,103 EBITDA (RM mn) 99.9 104.2 130.9 127.4 126.5 EBITDA margins (%) 6.3 6.2 6.9 6.3 6.0 PAT (RM mn) 40.5 44.1 63.1 55.8 52.2 PAT margins (%) 2.6 2.6 3.3 2.8 2.5 ROCE (%) 34.0 42.8 41.7 27.5 27.0 Source: Company, Edelweiss research
28 Edelweiss Securities Limited Future Retail
Realigned balance sheet and better turns, impelled return ratios
Business structure realignment has resulted in asset light RoE generating company. Management bandwidth has shifted from a top‐line focused company to improving overall balance sheet of business – as visible in overall improvement in inventory days and return ratios of the company. Inventory days have improved from 175 in FY12 to 106 in FY17. Similarly, RoE stood at ~17% in FY17 which we expect will jump to 25.8% in FY19.
In the past, FRL was unable to generate strong return ratios, which is now changing. With management increasingly focusing on sprucing up balance sheet, the results are there to see. First, the rights issue was a step in the right direction which helped FRL prune debt (in turn allowing better focus on business, instead of just servicing debt). Second, overall realignment of business to front‐end and back‐end entities helped create an asset‐light and pure play retail business.
Fig. 12: Business realigned into 2 separate entities leading to a pure play asset‐light retail model
Source: Company, Edelweiss research
Headed in right direction to lower inventory days FRL’s various measures to reduce inventory days are showing results ‐ inventory days declined to 106 in FY17 (108 in H1FY17 from ~175 in FY12). We expect further drop to 95 days by FY19. Key steps that will lead to further dip in inventory include:
Better supply chain management and lower SKUs for faster inventory turns In past couple of years FRL has been working on improving inventory management. The company has been focusing on assortment and vendor management. Consequently, it has significantly improved the turns in fashion segment where there is larger risk of
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fashion – the company cut down the number of SKUs of its products, and slow moving SKUs were eliminated from the system. For instance, in Chino’s, FRL earlier had 12‐15 varieties across price points which has been reduced – now it sells Chino’s at only 3 price points and has also reduced the variety of Chino’s without reducing the depth. This has helped in reducing retail shelf space. Such inventory management has been done across its product range. The strategy has helped the company in building better relationships with its suppliers. With the products segments now narrowed down, FRL is now able to work deeper with limited vendors and hence the lead time has declined. For instance, in garments, FRL’s relation with Shahi Exports (one of the largest suppliers) has improved which has helped latter to reduce its working capital and hence lower cost. The company has also done away with slow moving inventory as also exited several low‐value categories. For any low‐value category to find shelf space in the store it better be fastest moving.
Data analytics to better understand consumer behaviour In past couple years, FRL has been investing on building its data analytics capabilities which has helped it in having better understanding of consumer behaviour, buying patterns, slow and fast moving products, etc., on real time basis. The company has set up a dedicated data war‐room to constantly monitor and take real‐time action on the shop floor – has partnered with the world’s leading consumer analytics firm, Dunnhumby and the Bangalore‐based Manthan Systems for better data analytics. Data has enabled the company to track on real‐time basis store level buying and selling patterns, understand what is selling more and what is less, compare prices to neighbourhood stores, etc. The company also has an auto replenishment system which prevents loss of sale due to faster replenishment of inventory. It is also now equipping the store manager with hand‐held devices, which helps in quick decision making as the level manager can directly punch in orders, replenish stock, etc.
Chart 20: Inventory days decline, to reach to 95 days by FY19E Inventory days 250
210
170
(days) 130
90
50 FY14 FY15 FY17 FY18E FY19E
Source: Company, Edelweiss research
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Management keen to cut costs and improve return ratios FRL made changes to its team and management – hired new professional members and fired underperforming members. As a result, it now has a lean team which is more focused and will bring the company back to profitability path. The company adheres to a business planning performance measurement wherein Mr Biyani reviews the key business metrics every month. Performance of the bottom‐5 stores are discussed at length. Cost cutting another focus area where the discussion is done at minute level wherein FRL engages with each store manager about store level cost management, doing away with additional costs and having savings costs at store level. Already we are witnessing improvement in the Balance Sheet items – loans and advances have come down.
Chart 21: Loans and advances on a decline Loans and advances 25,500
23,000
20,500 mn)
(INR 18,000
15,500
13,000 FY14 FY15 FY17 Loans and advances
Source: Company, Edelweiss research
Chart 22: From negative to strong return ratios – improvement to sustain
30.5
27.0
23.5 (%) 20.0
16.5
13.0 FY17 FY18E FY19E ROE (%)
Source: Company, Edelweiss research
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Pure retail at forefront with demerger of home retail
FRL has demerged its high inventory and low‐margin home town business ‐ 170‐180 inventory days with low single‐digit margins. The company is defocusing on e‐zone and hence will not be doing expansion in that format. It also plans to shut down some of its e‐zone stores which are not doing well. Consequently, return ratios will improve following decline in inventory days and margin improvement.
In another step towards becoming a pure play retail play, FRL has approved demerger of its home retail business – Home Town, which will be spun off as a separate entity and get listed separately. This is a prudent step as Home Town is a high inventory (~170 days inventory), lower margin (~3%) business with low synergies (has a separate sourcing line and team). Hence, going ahead, though it will impact overall sales (Home Town had ~INR6bn sales), the demerger will be accretive for overall margins and return ratios.
Similarly, FRL decided against further expansion of E‐Zone. In fact, it shut down loss‐making stores. The company will be operating at current levels where it is witnessing good traction. This business has 0 to ‐2% EBITDA margin. Hence, lower expansion and store closure will support the company’s profitability trajectory. As of FY17, the company had ~87 E‐Zone stores whose numbers are unlikely to increase.
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Financial Outlook
We estimate FRL to clock revenue CAGR of ~18.9% over FY17‐19, riding strong SSSG and robust store expansion led by Easy Day and fbb. EBITDA is expected to grow at ~31.3% CAGR, led by ~75bps margin expansion over FY17‐19E. We expect margin to expand driven by improvement in private label mix, Easy Day turnaround and improved throughput. Consequently, return rations are expected to surge – RoE set to touch 25.8% levels by FY19E from 17% in FY17.
Revenue on robust trajectory We forecast FRL to post revenue CAGR of 18.9% over FY17‐19E. The major growth triggers include: 1) overall double‐digit SSSG of ~12% (~13% in Big Bazaar, ~18% in fbb and ~9% in Easy Day); and 2) robust store expansion led by Easy Day and fbb with steady expansion in Big Bazaar (we expect Big Bazaar to add 17 stores each in FY18 and FY19, respectively, fbb to add 50 stores each in FY18 and FY19, respectively, and Easy Day to add 240 and 225 stores each in FY18 and FY19, respectively).
Chart 23: FRL’s Revenue trajectory Revenues (INR mn) 265,000
240,000
215,000 mn)
(INR 190,000
165,000
140,000 FY17 FY18E FY19E
Source: Company, Edelweiss research
EBITDA and EBTIDA margins on gradual uptrend We estimate strong EBITDA CAGR of ~31.3% over FY17‐19, driven by gradual margin expansion fuelled by increasing througput per outlet (overall throughput to improve from INR12,118 in FY17 to INR14,634 in FY19E), turnaround in Easy Day business (has achieved EBITDA break even) and increase in overall private label mix (driven by foods and personal care). With this coupled with operating leverage benefits, we conservatively estimate EBITDA margin to increase from 3.4% to 4.1% over FY17‐19.
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Chart 24: Robust EBITDA growth and improving EBITDA margins EBITDA margins (%) EBITDA (INR mn) 5.0 10,500
4.4 9,300
3.8 8,100 mn)
(%)
3.2 (INR 6,900
2.6 5,700
2.0 4,500 FY17 FY18E FY19E FY17 FY18E FY19E Source: Company, Edelweiss research
Return ratios to improve with free cash flow generation Enhanced focus on reducing overall inventory days has started to show results – inventory days have declined to 106 days in FY17 (108 in H1FY17), while return ratios stood at ~17% in FY17. We expect 915bps YoY improvement in RoE over FY17‐19 and 532bps YoY improvement in RoCE over the period. The company saw free cash to firm of ~INR511mn in FY17, which is expected to improve to INR7,952mn in FY19. The company had accumulated losses of INR18bn and hence tax rate will be nil till FY19E.
Chart 25: Robust EBITDA growth and improving EBITDA margins Free cash flow to firm (INR mn) 30.5 11,000
27.0 9,700
23.5 8,400 (%) mn) 20.0
(INR 7,100 16.5 5,800 13.0 4,500 FY17 FY18E FY19E FY17 FY18E FY19E RoCE (%) RoE (%) Source: Company, Edelweiss research
34 Edelweiss Securities Limited Future Retail
Valuations
FRL has been witnessing strong SSSG and turnaround in business as apparent from the improvement in working capital days. We expect the strong momentum in SSSG to sustain, which aided by gradual margin improvement and increased throughput/outlet will drive improvement in return ratios. We initiate coverage on FRL with ‘BUY/ Sector Outperformer’, recommendation/rating and target price of INR516, assigning 25x EV/EBITDA multiple.
FRL, India’s largest grocery retailer and the number 2 fashion retailer, has been witnessing robust SSSG in past 4 quarters which is expected to continue going forward too led by changing consumer habits (thanks to demonetisation), consolidation in distribution network (wholesale getting consolidated), and various initiatives to reduce inventory and assortment, etc. The company is expected to record gradual improvement in margins led by better mix and turnaround in Easy Day business. Balance sheet improvement will be led by further improvement in inventory days.
Improvement in financial metrics apart, FRL has successfully realigned to have in place an asset‐light model with better return ratios. Notably, FRL is one of the few players to have successfully cracked this model along with being profitable (D‐Mart being the bellwether) and with reach across the country (901 stores present in 240 cities of India). We value the stock at 25x EV/EBIDTA (~30% discount to Avenue Supermarkets – D‐Mart) to arrive at a target price of INR516. We initiate coverage with ‘BUY/ Sector Outperformer’ recommendation/rating. This is despite the fact that EPS CAGR for FRL over FY17‐19E at 57.4% is higher than Avenue Supermarket with RoE profile at 17% (slightly lower than Avenue Supermarket).
Table 13: FRL’s valuation metrics versus peers EV/ Sales(x) EV/EBITDA (x) EV/EBIT (x) EPS Company FY18E FY19E FY18E FY19E FY18E FY19E ROE % (FY17) (CAGR17‐19E) Future Retail 1.0 0.8 26.6 19.1 28.4 20.1 16.6 57.4 Indian Peers mean 2.2 1.7 27.9 20.4 44.1 27.9 Avenue Supermarkets 3.7 2.9 43.7 33.6 48.9 37.3 17.8 38.3 Shoppers Stop 0.7 0.6 14.4 9.7 38.5 18.5 (13.0) 106.8 ABFRL 2.1 1.7 25.5 17.9 45.0 27.8 5.4 147.8 Global Peers mean 0.9 0.8 9.2 8.7 15.7 14.7 Marks & Spencer (UK) 0.7 0.7 5.8 5.8 10.8 10.7 4.0 (2.5) Whole Foods Market (US) 0.9 0.8 10.7 10.3 19.1 18.5 12.3 7.5 JC Penney (US) 0.4 0.5 5.3 5.3 13.1 12.3 4.0 132.9 7Eleven Malaysia Holdings 0.7 0.6 11.2 10.1 19.7 17.8 30.0 12.0 Big C Supercenter (Thailand) 1.7 1.5 12.9 12.3 18.5 17.1 13.8 9.8 Loblaw Cos (Canada) 0.8 0.8 9.3 8.7 13.4 11.8 7.1 12.2 Source: Company, Bloomberg, Edelweiss research
Case study: Amazon ‐ Whole Foods Market’s acquisition Recently, in the US, Amazon acquired the physical supermarket chain, Whole Foods Market (WFM). A premium grocery chain, WFM operates in the organic food segment and has food products that are without artificial preservatives, colours, flavours, sweeteners and hydrogenated fats. Founded in 1978, WFM is positioned as USA’s healthiest grocery store. It has a total of 464 stores across 3 countries, with majority located in US (~98%) with average
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size per store in the range of 38,000‐42,000 sq ft. Amazon has announced acquisition of this physical retailer in an all‐cash deal for USD13.7bn at USD42/share which was at 27% premium to the price it was trading at the time of this announcement. At USD42/share, Amazon acquired the company at valuations of ~32x FY17 EPS and 0.85x FY17 sales.
Table 14: Whole Foods Market key financial metrics Whole Foods Market (USD mn)FY11FY12FY13FY14FY15FY16FY17E Revenues 10,108 11,699 12,917 14,194 15,389 15,724 15,906 Revenue growth (%) 12.2 15.7 10.4 9.9 8.4 2.2 1.2 Gross margins (%) 35.0 35.5 35.8 35.5 35.2 34.4 33.8 EBITDA 836 1,058 1,225 1,311 1,380 1,391 1,265 EBITDA margins (%) 8.3 9.0 9.5 9.2 9.0 8.8 8.0 PAT 344 467 553 579 587 530 411 PAT growth (%) 42.3 36.0 18.3 4.7 1.3 (9.6) (22.5) PAT margins (%) 3.4 4.0 4.3 4.1 3.8 3.4 2.6 ROE (%) 12.7 13.7 14.4 15.1 14.1 14.5 14.1 Source: Company, Edelweiss research
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Key Risks
Economic slowdown: A slowdown in economy and GDP growth rate can have significant impact on company’s overall footfalls and SSSG. During slowdown, pace of premiumisation is also impacted which limits the scope of margin improvement.
Increase in inventory levels: Rise in inventory has been a concern for Future group investors. Though various measures have been taken to reduce inventory days and the same are bearing results, the risk of increase in inventory always lingers due to slowdown in SSSG. Apart from this, due to aggressive expansion and widespread footprint it becomes difficult in terms of order processing and inventory management. Hence, the risk of increase in inventory levels remains as the company expands aggressively, especially in the supermarket format.
Reckless diversification and expansion: This remains a key risk though the company has hived off non‐retail portion of business. Diversification in non‐related areas and aggressive acquisitions not only result in business risks, but can also increase debt that has been taken for any acquisition. Aggressive expansion has its disadvantages in terms of supply chain management and also increases the risk of cannibalisation from the same stores.
Failure of supermarket model: Future Group has a long experience in running the hypermarket format. However, they are new to super markets which has not been a successful format for most players in India. Hence, the risk of failure in this format (Easy Day) remains. Also, currently this is a loss‐making model fraught with the risk of slower turnaround in business due to lower SSSG.
Intensifying competition: Heightened competition from both brick and mortar and online players could impact overall SSSG of FRL. Competition from online delivery players, such as, bigbasket.com. grofers.com, etc., remains a key threat. Also, change in FDI norms can lead to further competition. Currently, the government has allowed FDI in food processing sector. Apart from this, the government is also contemplating liberalising rules relating to multi‐brand retail. This will open up foreign investments in a big way which may pose a threat to existing retail players like FRL, etc.
Inter‐group transactions: FRL does some inter‐group transaction, largest one being the leasing of fitouts from FEL for which FRL pays lease rentals. However, these transactions are at arm’s length and in normal course of business. The company as loans and advances of ~INR5bn given to FEL and the same is expected to remain flat/reduce over the years. It has paid ~INR6.5bn lease rentals to FEL, which was ~47% of total lease rental expense of the company in FY17.
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Industry Outlook
Organised players well placed to capitalise on favourable macros
India’s organised retail industry, at relatively nascent stage with per capita consumption and penetration at extremely low levels, portends humungous growth opportunities.
Favourable domestic levers include: (i) rising disposable incomes with per capita poised to cross USD2,000; (ii) attractive demographics – median age of 27 with ~50% of population in the working age bracket and per capita consumption 1/5th China’s; (iii) urbanisation – urban population increased to 31.2%, as per 2011 census, from 28.5% in 2001; and (iv) low penetration of organised retail — 8% versus 85% in the US.
Penetration levels of categories such as food & grocery (~3%), apparel (~22%), home and living (~10%) is very low, which indicates strong growth opportunity going forward in organised modern trade.
India – attractive opportunity India’s organised retail industry is at a nascent stage with per capita consumption and penetration at extremely low levels, entailing humungous opportunities for growth. The country’s demographics—world’s youngest nation with ~50% population below 25 years—is an added advantage for organised retail and apparel sectors. Other growth drivers include rising urbanisation and an expanding overall job market.
Rising disposable income levels: Discretionary spending has high correlation with disposable incomes. Pertinently, disposable income is a function of economic growth, a lynchpin for new jobs creation. Recovery in discretionary spending will help revive growth of India’s organised retail market.
Attractive demographics: With a median age of 27, India’s demographics are currently one of the most enviable in the world. Further, 50% of the population is in the working age bracket (20‐60 years) and discretionary consumption is poised to grow rapidly.
Urbanisation: Consistent urbanisation, as a trend, has been picking up in India. Urbanisation happens not only in the need of jobs, but also to improve the standard of living. As per the 2011 census, share of urban population to total residents stood higher at 31.2% (from 28.5% in 2001). According to a UN report on world population, 40.8% of India's population is expected to reside in urban areas by 2030.
Lower penetration, per capita consumption indicate strong opportunity: Penetration of organised retail in India stands at a low 8% versus other developed markets where it is as high as 85% (US), indicating high growth potential.
38 Edelweiss Securities Limited Future Retail
Chart 26: Favourable demographics; per capita consumption still 1/5thof China’s 50 750
44 600
38 450 32 (Years) (USD) 300 26 150 20 UK USA UAE Italy
India 0 Brazil China Africa
France FY05 FY10 FY15 Median age US EU China India South
Chart 27: Proportion of population by different age groups 65 years and above 6% 45‐64 years 15%
0‐24 years 50%
25‐44 years 29%
Chart 28: Proportion of urban income to increase as urbanisation rises 100.0
80.0
60.0 (%) 40.0
20.0
0.0 1990 2001 2008 2030E Urbal Income Rural Income
Source: Industry, Edelweiss research
39 Edelweiss Securities Limited Retail
Chart 29: Rate of urbanisation set to increase… 45.0
40.0
35.0 (%) 30.0
25.0
20.0 1990 1991 2001 2005 2008 2011 2025E 2030E Urbanisation Rate
Chart 30: ... in turn bolstering growth of branded apparels 1,750
1,400
1,050
(mn) 700
350
0 1990 1991 2001 2005 2008 2011 2025E 2030E Total Population(MN) Urban Population
Chart 31: Penetration of organised retail at ~8%, one of the lowest globally 100.0
80.0
60.0 (%) 40.0
20.0
0.0 US Taiwan Malaysia Thailand Indonesia China India
Source: Industry, Edelweiss research
40 Edelweiss Securities Limited Future Retail
Chart 32: Industry in charts
India’s private consumption at ~60% of GDP Size of organised retail in India 17.0 1,152
13.6 926
10.2 tn)
700 bn)
6.8 (USD
(USD 473 3.4 247 0.0 US UK
Italy 21 India Brazil China
France FY12 FY16 FY20E Germany 2015 2020E Overall Retail Organised brick & mortar retail
Penetration level of various categories in modern trade Segment‐wise contribution 51.0 Segmentwise contribution (%) 40.8 Others CDIT 4% 30.6 16% Food &
(%) grocery 20.4 Footwear 5% 24% 10.2 Home & 0.0
living & &
& 5% living
Others
& Pharma & Jewellery
Grocery
wellness Footwear watches Pharma &
Consumer wellness & watches
Apparel electronics accessories Jewellery Apparel & 3% 23% Home accessories Food 2016 2020E 20%
41 Edelweiss Securities Limited Retail
Share of unorganised segment in apparel Share of different formats in retail Organised 64.0 15% 52.2
40.4 (%) 28.6
16.8
5.0 Unorganise Hypermarkets Supermarkets Modern d convenience 85% stores 2016 2020E
Source: Industry, Edelweiss research
Table 15: Gross margin of various categories in retail Categories Industry GM average (%) Food & Grocery 12‐25 Apparel 30‐50 Non food FMCG 12‐25 General merchandise 25‐30 Accessories 20‐45 Furniture & furnishing 30‐40 Footwear 30‐55 Smart electronics 7‐16 Others 23‐27
Table 16: Category mix of various retailers Food & grocery Non Food HPC Others D Mart 52 21 27 Reliance Fresh 58 39 3 More 66 28 6 Easy Day 72 26 2 Nilgiri's 70 26 4 KB's 63 34 3 Spencer Supermarket 59 38 3 Food bazaar 61 32 7 Star Market 64 32 4 Key regional players 58 40 2 Source: Industry, Edelweiss research
42 Edelweiss Securities Limited Future Retail
Company Description
Future Retail (FRL) is a pioneer of retail market in India with market leadership in the food and grocery retail market (market share of 13% in 2016). The company, which is the largest organised retailer in India, has total retail space of 13.8mn sq ft with presence in 26 states and 240 cities with a total store count of 901 stores. A major realignment and consolidation exercise was undertaken to make FRL a pure play retail company with strong presence in multiple formats – hypermarket and supermarket. In May 2015, the company acquired the supermarket format, Easy Day, from Bharti Group and enhanced its overall presence across the country.
Consolidation/ realignment of business: Key features • FRL acquired Bharti Retail’s retail business, Easy Day, in an all‐stock deal.
• To create a pure play retail operation the company segregated front end (retail) and backend infra operations (assets, investments, etc) into separate entities. • Accordingly, front end business of FRL was merged with the Bharti Retail business and named as Future Retail (the current company). Similarly, retail infrastructure of Bharti Retail was merged with erstwhile Future Retail to form the company, Future Enterprises Limited (combined retail infrastructure and non‐core assets).
• Shareholding pattern is in the ratio of 1:1 between the shareholders of BRL and FRL – BRL’s shareholders hold ~9% stake in each of the retail and infrastructure companies. • Apart from this, BRL will have to share the upside on sale of holding in each of the company (this can be sold post 3 years of share allotment in May 2015) with the respective companies (depending on sale proceeds – 50% of amount above INR9.5bn, 60% of amount above INR14.5bn and 75% of amount above INR19.5bn).
Fig. 13: Deal structure for FRL
Source: Company, Edelweiss research
43 Edelweiss Securities Limited Retail
Different retail formats operated by the company Big Bazaar: Big Bazaar is FRL’s hypermarket format with average size in the range of 35,000‐ 40,000 sq ft. The company has a network of 235 stores encompassing total area of 10.18mn sq ft with presence in 26 states and 124 cities. Big Bazaar offers variety of categories to consumers raging from personal care, foods, general merchandise, fashion, electronics, etc.
Easy Day: Easy Day is the supermarket format of FRL with average size of 2,000‐2,500 sq ft. The company targets to make this neighbourhood store to cater to the daily needs of consumers. Easy Day has a network of 538 stores with total area of 1.35mn sq ft with presence in 8 states through 11 clusters.
Fashion at Big Bazaar (fbb): fbb is FRL’s value fashion format with both standalone and Big Bazaar stores (going forward the company will be opening standalone stores in this format). The company has a network of 54 stores with total area of 0.55mn sq ft and presence in 17 states and 32 cities. Store size is typically in the range of 8000‐10000sq ft.
Foodhall: Foodhall is the company’s premium food retail chain which was launched in 2011. The company has a total of 7 Foodhall stores and is present in 4 cities across 4 states.
Hometown: Hometown is the home and furnishing retail store of the company. Offerings at the store include slew of living room furniture, dining, bedroom furniture and furniture essentials, mattresses, modular kitchens, home furnishing, décor, households and bath luxury. The company has a total of 37 stores with presence in 12 states across 22 cities comprising total area of 1.29mn sq ft. However, the company recently demerged this division from FRL into a different company, which will be separately listed.
E‐Zone: Founded in 2002, E‐Zone is present across India in the form of stand‐alone stores as well as at Group format stores, such as, Big Bazaar, Home Town and Central. It offers a range of products such as Audio, Accessories, Communications, Computing, Home Entertainment, Home and Kitchen Appliances, Imaging, Personal Entertainment & Gaming. E‐Zone has a total of 30 stores with presence in 8 states across 11 cities with total area of 0.30mn sq ft.
Future Group FLF is part of >INR320bn Future Group, focusing not only on fashion but also on food and home. Apart from FLF, other Future Group entities include Future Retail, Future Consumer, Future Enterprises and Future Supply Chains.
Future Retail: FRL is the flagship company of Future Group. Through multiple retail formats, such as, Big Bazaar, Easyday, fbb, Foodhall, Home Town and E‐Zone, Future Retail is the big daddy of India’s modern trade story.
Future Consumer: It is India’s first sourcing‐to‐supermarket food company. Under Future Consumer, the company sources best quality commodities from the world over, comprising extensive portfolio of established brands in food and HPC space, builds urban convenience stores for key metros and cash‐n‐carry rural distribution models for other cities across India. Future Enterprises: While FRL caters to front end with its multiple retail formats, Future Enterprises (FEL) forms the backbone and links the retail arm with its infrastructure. FEL develops, owns and leases retail infrastructure for the group. FEL also holds the froup’s
44 Edelweiss Securities Limited Future Retail
investments in subsidiaries and joint ventures including insurance, textile manufacturing, supply chain and logistics.
Future Supply Chains:This company manages the logistics ‐ from warehousing, storage to distribution of raw materials and products. Future Supply Chains (FSC) is India's first fully integrated and IT enabled end‐to‐end supply chain and logistics company with capabilities of handling modern warehousing, express logistics, cold chain and e‐ commerce logistics. FSC caters to corporates in food & beverages, lifestyle, consumer electronics & high tech, automotive &engineering, home & furniture, healthcare, general merchandise and e‐commerce. Each category has a distinct supply chain with its own distinct requirements that needs customised solutions.FSC has been a pioneer and leader in modernising logistics and supply chain in India having implemented cutting edge and contemporary supply chain management practises in India through implementation of global best practises, indigenised and best adapted for Indian conditions.
45 Edelweiss Securities Limited Retail
Management Overview
Board of Directors
Mr Kishore Biyani, Chairman and Managing Director: Mr Kishore Biyani is the Founder and Group Chief Executive Officer (CEO) of Future Group. In 2001, he led the creation of Big Bazaar and since then a number of retail chains have become part of the Future Group. Some of these include Central, Brand Factory, EasyDay, Nilgiris, Aadhaar, HomeTown, eZoneonline.in and fabfurnish.com. Collectively, these are spread across more than 18.5mn sq ft of retail space through over 240 cities and towns in India and on various digital platforms. Future Group stores attracted over 400mn customer visits. Mr. Biyani has also led the Future Group in investing and mentoring a number of supply partners and entrepreneurs as well as joint ventures with British footwear market, Clarks and Europe’s leading insurer, Generali Group.
Mr Rakesh Biyani, Joint Managing Director: Mr. Rakesh Biyani is Joint Managing Director of FRL. He has been associated with the company for over 20 years. In his executive role as the Joint Managing Director, he leads the management and expansion of the company’s flagship formats, Central, Big Bazaar and Food Bazaar. He is actively involved in Category Management, Retail stores operations and Information Technology.
Mr Rajan Bharti Mittal, Non Executive Director: Mr. Rajan Mittal is a Non‐Executive Director. He was appointed as a Non‐Executive Director of the company with effect from April 30, 2016. He is the Vice Chairman of Bharti Enterprises with interests in retail, telecom, financial services, manufacturing, realty and agri‐business.
Ms Gagan Singh, Independent Director: Ms. Gagan Singh is the Independent Director. She was appointed as an Independent Director of the company with effect from April 30, 2016. She is a Chartered Accountant from The Institute of Chartered Accountants of India and Cost Accountant from The Institute of Works Accountants of India. Ms. Gagan Singh is CEO ‐ Business (India) and Chairperson Sri Lanka Operations of Jones Lang LaSalle.
Mr Ravindra Dhariwal, Independent Director: Mr Ravindra Dhariwal was appointed as an Independent Director of the company with effect from April 30, 2016. He is an MBA from IIM‐Calcutta and a B.E. from IIT Kanpur. Mr. Dhariwal is a Senior Advisor to TPG India and brings with him the experience of 39 years of building consumer business all over the World.
Mr. Shailendra Bhandari, Independent Director: Mr. Shailendra Bhandari was appointed as an Independent Director of the company with effect from April 30, 2016. He holds a Masters degree (MBA) in Management from IIM, Ahmedabad. He is also Bachelor of Arts (Honours) in Economics from St. Stephen's College, Delhi University. He is a seasoned finance professional with 34 years of experience and an impressive track record of accomplishments.
Ms. Sridevi Badiga, Independent Director: Ms. Sridevi Badiga was appointed as an Independent Director of the company with effect from April 20, 2017. She currently runs a cross‐border advisory practice, working closely with a network of family offices and Institutional Investors in the Middle East. In the past, she worked in Kuwait, Bahrain, Qatar and Dubai primarily in Investment Banking.
46 Edelweiss Securities Limited Future Retail
Annexure I
SWOT Analysis Strengths: Future Group has a strong history of operating organsied retail formats in India – started operation in 2001. Due to long history of operations, the company has significant learnings of operating a retail store in India. Also, with the acquisition of Easy Day the company has substantially widened its overall retail presence in India – operates 901 stores in India comprising an area of ~13.8mn sq ft and hence has set up high entry barrier for other players in terms of store expansion.
Weaknesses: The company has not know for generating better return ratios over the years – retail is a tough business, especially to generate return ratios on consistent basis. Management has widespread operations in retail, food, supply chain, insurance, etc., which could dilute focus.
Opportunities: Organised retail in India remains a very big opportunity considering mere ~10% penetration of total retail in India, demographics, ease to customer, etc. Future Group enjoys highest market share in food and grocery retail in India and has the largest number of stores. It is therefore the key beneficiary of the burgeoning opportunity in organised retail business. Also, more and more companies are now opting for direct distribution and hence modern trade, such as, Future Retail remains the key beneficiary. Also if the government allows 100% FDI in multi brand retal it can also lead to potential trigger for the company as the company.
Threats: Increased competition from physical and online players remains a key threat. Also, sharp jump in rentals and lower availability of good retail space present potential threat to overall growth.
47 Edelweiss Securities Limited Retail
Annexure II
Table 1: FRL versus D‐Mart Future Retail D‐Mart Total revenues in FY17 (INR mn) 166,863.8 118,580.0 Gross margins (%) 24.8 15.3 EBITDA margins (%) 3.4 8.2 RoE (%) 16.6 17.9 Number of stores 901.0 131.0 SSSG (%) 12.0 21.2 Total retail area (mn sq ft) 13.8 4.1 Average store size (sq ft) 15,316 31,298 Sales per sq ft (INR) 12,118.0 32,000.0 Mix (%) Foods 38.0 53.7 Non foods (FMCG) 15.0 20.0 General merchandise and apparel 47.0 26.4 Inventory days 106.0 30.0 Source: Company, Edelweiss research
48 Edelweiss Securities Limited Future Retail
Annexure III
Future Enterprises Limited Future Enterprises Limited (FEL) is the infrastructure arm of Future group, which houses backend assets of the retail business and investments that are held for sale. The company garners revenues from lease rentals that it receives (mainly from FRL) for the fit outs it gives on rent and from sale from manufacturing in its textile mills. Around 75‐80% of debt was transferred to this company at the time of realignment and debt stood at ~INR48bn at FY17 end for this company. It holds stakes in Future Supply Chain, Future Generali Life Insurance, Future Generali General, Staples, Future Consumer Enterprises (~9%), Future Lifestyle Fashions (~16% stake) and Goldmohur & Apollo mills – offloading of stakes in these businesses can easily help reduce the company’s debt. Total capital employed in the business at the end of FY17 was ~INR91.1bn.
Table 1: FRL’s FY17 P&L snapshot (INR mn) FY17 Net sales 37,821 Cost of goods sold 26,754 Employee cost 600 Other Expenditure 934 Total expenses 28,288 EBITDA 9,533 Depreciation 6,332 EBIT 3,201 Other inc 2,311 Interest net 5,076 PBT 436 Tax ‐ PAT 436
As % of net sales COGS 70.7 Employee 1.6 Other expenditure 2.5 Depreciation 16.7 Interest 13.4 EBITDA 25.2 PAT 1.2 Source: Company, Edelweiss research
49 Edelweiss Securities Limited Retail
Annexure IV
Table 1: Comparison of various retailers on different metrics Per sq ft (INR) Future Retail D ‐ Mart Spencer's Hypercity Shoppers Stop ABFRL FLF Size (in mn sq ft) 13.8 4.1 1.2 1.3 5.8 6.2 5.4 Sales 12,373 29,019 17,112 8,723 8,437 10,649 7,180 COGS 9,300 24,588 13,590 6,381 5,480 4,852 4,528 Staff costs 582 470 1,235 766 668 1,138 379 Rental 985 52 904 492 736 1,754 770 Other expenses 1,084 1,516 1,605 1,222 1,254 2,200 839 EBITDA 421 2,393 (221) (137) 299 705 663 Depreciation 24 312 282 244 259 391 346 Combined depreciation and rental 1,009 364 1,186 736 996 2,145 1,116
As a percentage of sales (%) Future Retail D ‐ Mart Spencer's Hypercity Shoppers Stop ABFRL FLF Gross margins 24.8 15.3 20.6 26.9 35.0 54.4 36.9 Staff costs 4.7 1.6 7.2 8.8 7.9 10.7 5.3 Rental 8.0 0.2 5.3 5.6 8.7 16.5 10.7 Other expenses 8.8 5.2 9.4 14.0 14.9 20.7 11.7 EBITDA 3.4 8.2 (1.3) (1.6) 3.5 6.6 9.2 Depreciation 0.2 1.1 1.6 2.8 3.1 3.7 4.8 Combined depreciation and rental 8.2 1.3 6.9 8.4 11.8 20.1 15.5 Source: Company, Edelweiss research
50 Edelweiss Securities Limited Future Retail
Financial Statements
Key assumptions Income statement (INR mn) Year to March FY16 FY17 FY18 FY19 Year to March FY16 FY17 FY18E FY19E GDP(Y‐o‐Y %) 7.2 6.5 7.1 7.7 Net revenues 68,451 170,751 200,335 241,525 Inflation (Avg) 4.9 4.5 4.0 4.5 Cost of materials 50,651 128,344 150,270 180,940 Repo rate (exit rate) 6.8 6.3 5.8 5.8 Gross profit 17,800 42,407 50,065 60,585 USD/INR (Avg) 65.0 67.5 66.0 66.0 Employee costs 3,285 8,034 9,275 10,972 Company FY16 FY17 FY18 FY19 Rent and lease expenses 6,043 13,595 15,787 18,843 Revenue growth (Y‐o‐Y %) Others 7,638 14,965 17,563 20,752 No. of stores ‐ Big Bazaar 228.0 235.0 252.0 269.0 EBITDA 834 5,813 7,441 10,018 No. of stores ‐ FBB 51.0 54.0 104.0 154.0 Depreciation 368 326 476 499 No. of stores ‐ Easyday 320.0 538.0 778.0 1,003.0 EBIT 466 5,487 6,964 9,519 No. of stores ‐ Others 139.0 74.0 22.0 22.0 Interest Expense 498 2,042 1,402 1,200 Retail Space (mn sq. ft) ‐ BB 9.8 10.2 10.9 11.6 Other income 182 238 390 805 Retail Space (mn sq. ft) ‐ fbb 0.5 0.6 1.1 1.7 Profit before tax 151 3,683 5,953 9,124 Retail Space (mn sq. ft) ‐ Easy Day 0.7 1.4 2.0 2.5 Reported Profit 151 3,683 5,953 9,124 SSSG ‐ Big Bazaar NA 14.0 14.0 12.0 Adjusted Profit 151 3,683 5,953 9,124 SSSG‐ Fbb NA 20.0 20.0 17.0 No. of Shares outstanding 44 472 490 490 SSSG ‐ Easyday NA 8.0 9.0 9.0 Adjusted Basic EPS 3.5 7.8 12.2 18.6 EBITDA margin assumptions No. of Diluted shares outstand 44 472 490 490 COGS as % of sales 74.0 75.2 75.0 74.9 Adjusted Diluted EPS 3.5 7.8 12.2 18.6 Staff costs as % of sales 4.8 4.7 4.6 4.5 Adjusted Cash EPS 11.9 8.5 13.1 19.7 Rent exp. as % of sales 8.8 8.0 7.9 7.8 Dividend per share (DPS) ‐ ‐ 0.7 0.9 Other general exp. as % of sales 11.2 8.8 8.8 8.6 Dividend Payout Ratio (%) ‐ ‐ 7.2 6.0 Financial assumptions Tax rate (%) ‐ ‐ ‐ ‐ Common size metrics (%) Dividend as % of net profit ‐ ‐ 7.2 6.0 Year to March FY16 FY17 FY18E FY19E Depreciation as % of gross block NM 7.2 7.5 7.5 Cost of materials 74.0 75.2 75.0 74.9 Int. rate on o/standing debt (%) 5.1 18.9 13.0 12.0 Employee costs 4.8 4.7 4.6 4.5 Debtor days 6.1 4.9 5.0 5.0 Rent and lease expenses 8.8 8.0 7.9 7.8 Inventory days 237.6 106.2 100.0 95.0 Other general expenditure 11.2 8.8 8.8 8.6 Payable days 159.1 79.1 80.0 80.0 EBITDA margin 1.2 3.4 3.7 4.1 Cash conversion cycle (days) 84.6 32.0 25.0 20.0 EBIT margin 0.7 3.2 3.5 3.9 Capex (INR mn) NM 1,115.3 300.0 300.0 Net profit margin 0.2 2.2 3.0 3.8
Growth metrics (%) Year to March FY16 FY17 FY18E FY19E Revenues NA 149.4 17.3 20.6 EBITDA NA 597.2 28.0 34.6 PBT NA 2,340.6 61.6 53.3 Adjusted Profit NA 2,340.6 61.6 53.3 EPS NA 125.0 55.7 53.3
51 Edelweiss Securities Limited Retail
Balance sheet (INR mn) Cash flow metric As on 31st March FY16 FY17 FY18E FY19E Year to March FY16 FY17 FY18E FY19E Share capital 87 944 979 979 Operating cash flow (26,298) 1,626 6,295 8,252 Reserves & Surplus 18,653 24,593 30,117 38,693 Financing cash flow 8,703 (84) (2,579) (2,747) Shareholders' funds 18,740 25,537 31,096 39,673 Investing cash flow (1,195) (877) 90 505 Short term borrowings 9,682 10,776 10,000 9,000 Change in cash (18,790) 665 3,806 6,009 Total Borrowings 9,682 10,784 10,000 9,000 Capex (2,178) 1,115 300 300 Long Term Liab. & Provisions 1,661 1,896 1,896 1,896 Dividends paid ‐ ‐ 429 547 Sources of funds 30,083 38,217 42,993 50,569 Gross Block 2,829 6,202 6,502 6,802 Ratios Net Block 2,609 5,656 5,480 5,281 Year to March FY16 FY17 FY18E FY19E Total Fixed Assets 2,609 5,656 5,480 5,281 ROAE (%) 1.6 16.6 21.0 25.8 Cash and cash equivalents 895 1,560 5,366 11,376 Pre‐tax ROCE (%) 4.6 17.7 19.0 23.0 Inventories 32,972 37,352 41,170 47,094 Debtors Days 6555 Sundry Debtors 1,149 2,281 2,744 3,309 Inventory Days 238 106 100 95 Loans & Advances 12,448 17,074 19,074 21,074 Payble Days 159798080 Other Current Assets 5,781 5,452 5,452 5,452 Cash Conversion Cycle85322520 Total Current Assets (ex cash) 52,350 62,159 68,440 76,929 Current Ratio 2.1 2.0 2.0 2.1 Trade payable 22,085 27,800 32,936 39,658 Gross Debt/EBITDA 11.6 1.9 1.3 0.9 Other Current Liab. & ST Prov. 3,686 3,358 3,358 3,358 Gross Debt/Equity 0.5 0.4 0.3 0.2 Total current liab. & prov. 25,771 31,158 36,294 43,016 Adjusted Debt/Equity 0.5 0.4 0.3 0.2 Net current assets (ex cash) 26,579 31,000 32,146 33,912 Net Debt/Equity 0.5 0.4 0.1 (0.1) Uses of funds 30,083 38,217 42,993 50,569 Interest Coverage Ratio 0.9 2.7 5.0 7.9 Book Value per share (INR) 430.8 54.1 63.5 81.0 Operating ratios Free cash flow (INR mn) Year to March FY16 FY17 FY18E FY19E Year to March FY16 FY17 FY18E FY19E Total asset turnover 2.3 5.0 4.9 5.2 Reported profit 151 3,683 5,953 9,124 Fixed asset turnover 52.5 41.3 36.0 44.9 Add: Depreciation 368 326 476 499 Equity turnover 7.3 7.7 7.1 6.8 Interest (Net of Tax) 498 2,042 1,402 1,200 Others ‐ (238) (390) (805) Valuation parameters Less: Changes in WC 27,314 4,186 1,146 1,766 Year to March FY16 FY17 FY18E FY19E Cash from operations (26,298) 1,626 6,295 8,252 Adjusted Diluted EPS (INR) 3.5 7.8 12.2 18.6 Less: Capex (2,178) 1,115 300 300 Y‐o‐Y growth (%) NM 125.0 55.7 53.3 Free cash flow (24,120) 511 5,995 7,952 Adjusted Cash EPS (INR) 11.9 8.5 13.1 19.7 Diluted P/E Ratio (x) 113.9 50.6 32.5 21.2 Price to Book Ratio (P/B) (x) 0.9 7.3 6.2 4.9 Enterprise Value / Sales (x) 0.4 1.1 1.0 0.8 Enterprise Value / EBITDA (x) 31.2 33.7 26.6 19.1
Dividend Yield (%) ‐ ‐ 0.2 0.2
Peer comparison valuation Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%) Name (USD mn) FY18E FY19E FY18E FY19E FY18E FY19E Future Retail 3,139 32.5 21.2 26.6 19.1 21.0 25.8 Future Lifestyle Fashions 926 47.3 28.5 14.7 11.4 7.3 11.0 Aditya Birla Fashion and Retail 2,054 78.7 37.6 24.9 17.5 14.6 24.8 Shoppers Stop 449 85.8 28.2 14.3 9.6 (2.6) 13.3 Wonderla Holidays 315 35.8 24.5 18.0 12.4 12.6 16.5 Source: Edelweiss research
52 Edelweiss Securities Limited Future Retail
Additional data
Directors data Mr. Kishore Biyani Chairman and Managing Director Mr. Shailendra Bhandari Independent Director Mr. Rakesh Biyani Joint Managing Director Ms. Sridevi Badiga Independent Director Mr. Rajan Bharti Mittal Non Executive Director Ms Gagan Singh Independent Director Mr. Ravindra Dhariwal Independent Director
Auditor ‐ M/s NGS & Co., LLP * as per last annual report
Top 10 holdings Perc. Holding Perc. Holding Cedar Support Services Ltd 9.22 Arisaig Partners Asia Pte Ltd 6.71 Brand Equity Treaties Ltd 5.30 Bennett Coleman & Co Ltd 5.19 Verlinvest Sa 2.27 Wgi Em Smaller Co Fund Llc 2.09 Government Pension Fund ‐ Global 1.97 HSBC Holdings Plc 1.58 Counseled Merchantile Ltd 1.26 IDFC Mutual Fund 0.89 *as per last available data
Bulk Deals Date Acquired / Seller B/S Qty Trades Price 31‐Mar‐17 Bennett Coleman & Co Ltd Buy 4100000 256 *in last one year
Insider Trades Reporting Date Acquirer / Seller B/S Qty Traded 3‐Apr‐17 Future Corporate Resources Limited Buy 1750000 5‐Apr‐17 Gargi Business Ventures Private Limited Buy 531375 5‐Apr‐17 Future Corporate Resources Limited Buy 1875000 5‐Apr‐17 Gargi Business Ventures Private Limited Buy 1684663 5‐Apr‐17 Future Capital Investment Private Limited Sell 531375 5‐Apr‐17 Ryka Commerical Ventures Private Limited Sell 1684663 6‐Apr‐17 Gargi Business Ventures Private Limited Buy 531375 6‐Apr‐17 Future Corporate Resources Limited Buy 1875000 6‐Apr‐17 Gargi Business Ventures Private Limited Buy 1684663 6‐Apr‐17 Future Capital Investment Private Limited Sell 531375 6‐Apr‐17 Ryka Commerical Ventures Private Limited Sell 1684663 *in last one year
53 Edelweiss Securities Limited Retail
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91‐22) 4009 4400, Email: [email protected]
Aditya Narain Head of Research [email protected]
Coverage group(s) of stocks by primary analyst(s): Retail
Aditya Birla Fashion and Retail Ltd, Future Lifestyle Fashions, Future Retail, Jubilant Foodworks, Shoppers Stop, Titan Company, Wonderla Holidays
Recent Research
Date Company Title Price (INR) Recos
18‐Jul‐17 Dollar The right fit; 2,230 Not Industries Visit Note Rated
17‐Jul‐17 Jubilant New CEO begins with a bang; 1,273 Hold
FoodWorks Result Update
07‐Jul‐17 Future Two to tango; 310 Buy Lifestyle Initiating Coverage Fashions
Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation
Buy Hold Reduce Total Rating Expected to
Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12‐month period * 1stocks under review Hold appreciate up to 15% over a 12‐month period > 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12‐month period Market Cap (INR) 156 62 11
One year price chart 500
400
300
(INR) 200
100
0 17 16 17 16 17 17 16 17 16 16 17 17
Jul Jan Jun Oct Apr Sep Feb Sep Dec Nov Mar May Future Retail
54 Edelweiss Securities Limited Future Retail
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56 Edelweiss Securities Limited Future Retail
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