08 AUG 2017 Company Report BUY Target Price:Rs 560
CMP : Rs 404 Potential Upside : 39%
MARKET DATA
No. of Shares : 472 mn Market Cap : Rs 191 bn Free Float : 50% Avg. daily vol (6mth) : 841,562 shares Future Retail 52-w High / Low : Rs 448 / Rs 116 Bloomberg : FRETAIL IB Equity RETAIL Promoter holding : 50% FII / DII : 17% /5% Rising like a phoenix Price performance 300 Sensex Future Retail
200
100
0 Aug-16 Nov-16 Feb-17 May-17
Financial summary (standalone) Key drivers Y/E Sales Adj PAT Con. EPS* Change RoCE EV/E (%) FY18E FY19E FY20E Mar (Rs mn) (Rs mn) (Rs) EPS (Rs) YOY (%) P/E (x) RoE (%) (%) (x) DPS (Rs) FY17 170,751 3,683 - 7.8 - 51.7 16.6 16.8 34.7 - Total store count (Nos.) 1,165 1,417 1,735 FY18E 206,517 6,244 16.1 12.6 62.1 31.9 21.2 19.6 24.4 - Sales growth 20.9 14.2 16.9 FY19E 235,855 9,745 19.3 19.7 56.1 20.5 25.5 24.3 17.9 - EBITDA margin 3.9 4.4 4.8 FY20E 275,656 9,580 - 19.4 (1.7) 20.8 18.9 27.0 13.0 5.0 Net profit margin 3.0 4.1 3.5 Source: Company, Axis Capital 08 AUG 2017 Company Report
Future Retail Contents RETAIL
Page
Investment summary 3 Restructuring 4 Accelerating growth in modern retail 6 Strong tailwinds in value fashion 10 Focus on convenience 13 A different take on value 16 Asset light business 17 Multiple margin levers 19 Lower inventory and return ratios 20 Low debt 21 Reasonable valuations 22
Company financials 23
Key risks 31
Board of Directors 35
Appendix – I: Group and company overview 37
Appendix – II: Industry 43
2 08 AUG 2017 Company Report
Future Retail Investment summary RETAIL
Rising like a phoenix: Rapid expansion and foray into unrelated businesses in the bull market years of 2005-2010 took a toll on the company’s finances, resulting in rising debt and falling market capitalization. The company undertook a massive restructuring exercise in FY12 which included sales of multiple assets including Pantaloons and change of positioning of its flagship Big Bazaar. Today, with a significantly healthy balance sheet, FRL is India’s leading multi-format retailer operating 901 stores spread over 13.8 mn sqft and servicing over 300 mn customers annually across 240 cities. Post EasyDay acquisition and restructuring in FY16, FRL is now well positioned to play the structural growth in modern retail in India. It operates Big Bazaar, Food Hall, Food Bazaar and EasyDay formats (food and grocery), fbb (fashion), Home Town (home & furnishings) and ezone (electronics retail).
Why FRL: The following changes make it an attractive investment i. Restructuring: Successfully undertook business and financial restructuring in FRL ii. Accelerating growth in modern retail: Changes in consumption patterns like up trading driving shift to modern retail iii. Strong tailwinds in value fashion: This will ensure strong growth in fbb which is also benefiting from excellent execution iv. Focus on convenience: FRL is targeting 2,000+ EasyDay stores in five years from 538 in FY17 v. A different take on value: No direct discounts but discounts through loyalty programs (min 10% off for EasyDay members) vi. Asset light business: With shift of assets to FEL and new store capex being funded by FEL, FRL is now asset light vii. Multiple margin levers: OPM to increase to 5.5% by FY22 from 3.4% in FY17. Focus on increasing private label share viii. Inventory coming down: Down to 80 days in FY17 from 85 days in FY16 and expected to be at 70 days by FY22 ix. Healthy return ratios: Pre-tax RoCE healthy at 16.8% in FY17 and improving to a strong 30% by FY22E x. Low debt: Net debt is now at only Rs 11 bn (D/E at 0.4 in FY17); we estimate debt to be completely paid off by FY19 xi. Reasonable valuations: FRL trades at FY20 P/E of 21x vs. 45x for D-Mart
3 08 AUG 2017 Company Report
Future Retail Business restructuring undertaken RETAIL
Repositioning Big Bazaar: FRL started the Big Bazaar format in 2001 offering the best quality at the lowest price, trying to get the Indian middle-class consumer to shift to modern retail. Since then, with rising income and growing consumer aspirations, FRL has repositioned Big Bazaar to a complete assortment, variety departmental store providing a superior shopping experience to consumers, helping them trade up to more premium products. Management believes this is a key differentiator for Big Bazaar given it faces increased competition from D-Mart. Introducing Big Bazaar GEN NXT: Continuing with the focus on helping consumers premiumize, FRL launched the Big Bazaar Gen Nxt store in November 2015. The stores are designed to take customer experience to a new level, with special focus on experiential and smarter shopping via use of technology, innovation in services, layouts and sections and digital interfaces. FRL is already experiencing higher ticket size at the Gen Nxt vs. a regular Big Bazaar store. Energising fbb : FRL has made two key changes to the fbb format, (i) moving away from commodity-oriented clothing to fashion and quality-oriented clothing and (ii) working towards a first price right logic for the business. We believe this will help the company establish a strong presence in the high growth value fashion segment. Betting big on convenience stores: FRL is the only large retailer betting big on convenience stores (Reliance is focused on the Cash & Carry format and D-Mart on mini-hypermarkets). FRL recently acquired EasyDay and Heritage Retail to strengthen its small format store network. Management sees potential for ~4,000 small stores and is targeting reaching 2,000 stores in five years. Although many retailers have burnt their fingers in the past due to low margins in the convenience format, FRL management believes it could crack the code, benefitting from higher throughput due to accelerated shift to modern retail, stronger private label portfolio and supply chain benefits from scale of Big Bazaar. Phasing out the ezone : FRL has been scaling down ezone (electronic retail). It currently operates only 30 standalone ezone stores and intends to reduce the network further. Focus will be on its own label ‘Koryo’ for small appliances. Increasing private label in food and grocery through FCL: FRL is currently targeting increasing the share of private label (through FCL) in food and grocery to 70% in 4-5 years (from 30% currently) as the Group continues to innovate and provide product offerings based on Indian consumers’ requirements.
4 08 AUG 2017 Company Report
Future Retail Financial restructuring undertaken RETAIL
Demerged Pantaloons business: FRL sold majority stake in Pantaloons (flagship apparel format) to the Aditya Birla Group in 2012, as the group was under considerable pressure to deleverage its balance sheet. Through the demerger, FRL transferred Rs 16 bn debt to the Pantaloons business. Divested non-core investments: FRL also started exiting non-core businesses in 2012 as it looked to strengthen its balance sheet. It divested its holding in Capital First (formerly Future Capital Holding) in 2012 to Warburg Pincus, for a total consideration of Rs 5.6 bn. FRL also reduced its shareholding in the two Insurance JVs with Generali, raising Rs 9 bn in 2013-14. Demerged Future Lifestyle Fashion/ raised capital through issue of preference shares: The company also transferred Rs 12.6 bn debt by carving off its remaining fashion portfolio (Central/ Brand Factory stores and apparel brands) into a new entity – Future Lifestyle Fashion. FLF recently raised Rs 7 bn through two separate stake dilutions, issuing compulsorily convertible preference shares (CCPS) at a fixed IRR and convertible into shares in four years. Transferred back-end infrastructure to Future Enterprises: FRL, during the reverse merger with Bharti Retail in 2016, transferred all the back-end infrastructure of its retail stores (primarily furniture and fixtures) and Rs 44 bn debt to FEL’s books. This helped FRL further reduce debt, transform itself into an asset light business, converting into a pure retail company, with improved return ratios. Planned demerger of Home Town: FRL recently announced that it will completely spin off its home retail business, which will help FRL further improve its financial performance. The demerger will help FRL reduce its inventory from 78 days in FY18 to 73 days in FY19 (post- Home Town demerger) as home retailing is a high inventory business. Potential reduction of Group debt : As per media articles, Future Group could further deleverage its balance sheet through probable stake sale in the insurance JVs (FEL holds 27% in Future Generali Life Insurance and 50% in Future Generali General Insurance) and potential listing of Future Supply Chain (FEL owns 57%).
5 08 AUG 2017 Company Report
Future Retail Accelerating growth in modern retail RETAIL Modern retail should grow at 20% over FY16-20 Huge untapped potential in modern F&G retailing. (while Indian retail will post CAGR of 12% in the Modern retail penetration in Indian retail market is at same period), driven by structural drivers like rising 10% vs. 20-40% in developing economies like China, disposable incomes, positive demographics (large Indonesia and Brazil. Even though F&G constitutes 67% youth population, urbanization, nuclearisation of of the USD 616 bn Indian retail market, penetration of families), increasing quality/ brand consciousness modern retail in F&G category at 3% remains well and need for higher category depth/width below other categories
Indian Food & Grocery retail market F&G modern retail penetration well below other categories 60 (USD bn) FY2012 FY2016 FY2020 (%) 40 40 27 GDP 1,318 2,115 3,449 22 25 20 10 10 12 Private 760 1,262 2,000 3
consumption 0
F&G
Others
Footwear
Watches
Consumer
Electronics Wellness
Retail 386 616 960 Apparel &
Jewellery Jewellery &
Accessories Pharmacy Pharmacy &
Source: Industry Living&Home Food & Grocery 261 413 634 (F&G) retail Modern retail share in F&G to increase from 3% in FY16 to 5% in FY20, as traditional retail model Traditional F&G 257 400 603 becomes unsustainable due to rising opportunity cost of real estate and next generation unwilling to take over Modern F&G 4 13 31 the business due to better job prospects. Modern retail 34% 24% CAGR CAGR further benefits from consumers seeking more variety (due to up-trading) as well as greater value even in daily F&G modern retail market to post 24% CAGR over FY16-20 consumption items
Source: Industry 6 08 AUG 2017 Company Report
Future Retail Big Bazaar: Well positioned to benefit from growth in modern retail RETAIL
Big Bazaar is one of the most well know retail brands Double-digit SSSg, premiumization to drive margin improvement in India and has gained substantial scale since its Big Bazaar FY17 FY20E CAGR FY17-20E inception 16 years ago. It currently has a network of Sales/ sqft 13,078 16,625 8.3 235 stores spread across 124 cities. FRL management has planned a modest store expansion for the format GMROF 3,335 4,422 9.9 (adding ~20 stores/ year) as it focuses on further Gross margin (%) 25.5 26.6 improving the operational efficiencies at Big Bazaar Opex/ sqft 2,750 3,513 8.5 FRL has significantly altered Big Bazaar’s positioning, Opex/ sales (%) 21.0 21.1 from the lowest price retailer in 2001 to a complete assortment, variety departmental store that provides a EBITDA 585 910 EBITDA margin (%) 4.5 5.5 superior shopping experience to consumers, helping Source: Axis Capital them trade up to more premium products Big Bazaar gross margin is significantly higher than peers We expect the format to continue to report healthy SSSg (was 14% in FY17), supported by general 30 growth in modern retail and rising average bill value 25.5 25 22.7 on higher share of premium products (Big Bazaar Gen 20.2 19.2 20 Nxt average bill value is Rs 1,400 vs. Rs 1,000 at a 15.1 normal Big Bazaar store) 15 10 FRL also benefits from higher gross margin at Big 5 Bazaar as compared to peers, driven by a high share of fashion (~33%) and higher private label 0 Big Bazaar HyperCity Spencer's ABRL D-Mart contribution in food and grocery (~30%)
Source: Company, Axis Capital
7 08 AUG 2017 Company Report
Future Retail Changing Big Bazaar’s positioning over the years RETAIL
2001 2010 2015
8 08 AUG 2017 Company Report
Future Retail Big Bazaar Gen Nxt: For the premium experience RETAIL
Designed to take customer experience to a new level with sit-down checkouts, smart trial rooms, experience zones with multi-sensorial, interactive displays and shelf talkers. FRL currently operates five Big Bazaar Gen Nxt stores across Delhi, Mumbai and Noida
9 08 AUG 2017 Company Report
Future Retail fbb: Riding the strong tailwinds in the value fashion segment RETAIL
Future Group is a pioneer in apparel retailing, having Focus on expanding fbb standalone store network
started its journey with Pantaloons in 1997. FRL is 200 186 again increasing focus on apparel retail to drive (Nos.) 151 growth. It currently has 54 standalone fbb stores, in 150 addition to a fbb in every Big Bazaar store, with total 121 96 sales of ~Rs 47bn in FY17 (~27% of FRL sales) 100 74 54 The value fashion category in India is poised to 50 outgrow the broader apparel market, with key players experiencing strong sales growth over past five years 0 – V-Mart (29% CAGR), Max (32% CAGR) FY17 FY18E FY19E FY20E FY21E FY22E
Source: Company, Axis Capital Management has made two key changes to the format, which, in our opinion, will help fbb become a Margin to improve with throughput growth ahead of costs
leader in the value fashion category fbb standalone FY17 FY20E CAGR FY17-20E i. Moving away from commodity-oriented to fashion and Sales/ sqft 7,619 9,421 7.3 quality-oriented clothing ii. Working towards a first price right logic for the GMROF 3,048 3,768 7.3 business (thus reducing discounts) Gross margin (%) 40.0 40.0
FRL is also focusing on the high growth categories in Opex/ sqft 3,000 3,473 5.0 apparel, improving the share of sales for women’s Opex/ sales (%) 39.4 36.9 clothing to over 40% and kids’ at ~20%. In the men’s EBITDA 48 296 category, management will continue to focus on EBITDA margin (%) 0.6 3.1 essentials to attract footfalls. Source: Axis Capital
10 08 AUG 2017 Company Report
Future Retail Explosive growth in value fashion category RETAIL
FY17 sales of Rs 10 bn; 29% CAGR Rs 25 bn sales in FY17;15% CAGR over the past five years over the past three years
11 08 AUG 2017 Company Report
Future Retail Contemporary store designs, event sponsorships to appeal to youth RETAIL
12 08 AUG 2017 Company Report
Future Retail EasyDay: Focus on convenience RETAIL
FRL management is betting big on convenience stores. Aggressive EasyDay store network expansion plans
It acquired 200 EasyDay stores from Bharti Retail, and 2,500 has recently acquired 136 Heritage Retail stores. (Nos.) 1,913 Management sees potential for ~4,000 small stores 2,000 1,588 and is targeting reaching 2,000 stores in five years. 1,500 1,288 We estimate contribution of EasyDay to grow from 17% 1,013 in FY18 to 28% in FY22. 1,000 763 538 500 Rationale behind the focus on convenience stores 0 Catchment areas in metros are small due to insufficient FY17 FY18E FY19E FY20E FY21E FY22E infrastructure, low car ownership and slow moving traffic FRL wants to capture the weekly/ bi-weekly shopping Source: Company, Axis Capital demand of consumers EasyDay sales to post 56% CAGR over FY17-22E Overcoming challenge of low margins in grocery 120 Accelerated shift from unorganized to organized will (Rs bn) 104 100 help FRL’s small stores to achieve meaningful throughput 83 80 FRL has a strong private label portfolio in food and 64 grocery which will boost gross margins 60 49 36 Greater share of premium products in customer baskets 40 17 will help the format further improve margins 20
FRL can leverage Big Bazaar’s existing supply chain and 0 sourcing network. Management believes the existing FY17 FY18E FY19E FY20E FY21E FY22E supply chain can provide for 5,000 small stores with only marginal incremental costs Source: Axis Capital
13 08 AUG 2017 Company Report
Future Retail EasyDay: To break even in FY18 RETAIL
Management expects EasyDay format to turn EBITDA EasyDay sales throughput to register 5% CAGR over FY17-22E positive in FY18 as sales throughput increases over 30,000 Rs 21,656/ sqft and gross margin improves from 14% (Rs/ sqft) 27,508 26,198 24,950 We estimate EasyDay EBITDA margin to improve to 25,000 23,762 22,631 1.4% by FY20, driven by steady improvement in sales 21,656 throughput (4.8% CAGR over FY17-20%) and improving gross margin (rising to 15.5% in FY20E) 20,000
Throughput growth will be aided by 15,000 FY17 FY18E FY19E FY20E FY21E FY22E i. Accelerated shift from unorganized to organized Source: Axis Capital ii. FRL’s focus on premiumization through improved product offering Margin to improve with higher gross margin and throughput iii. Loyalty programs offering great value will drive EasyDay FY17 FY20E CAGR FY17-20E footfalls at EasyDay stores Sales/ sqft 21,656 24,950 4.8 Gross margin is likely to improve to 15.5% by FY20E, GMROF 3,032 3,867 8.5 as we see benefits from Gross margin (%) 14.0 15.5 i. Integration of the business with Big Bazaar’s supply chain Opex/ sqft 3,032 3,510 5.0 ii. Better sourcing terms given Big Bazaar’s scale of Opex/ sales (%) 14.0 14.1 operations EBITDA 0 358 iii. Rising share of private labels at EasyDay stores EBITDA margin (%) 0.0 1.4
Source: Axis Capital
14 08 AUG 2017 Company Report
Future Retail Acquisitions helped to scale up the convenience store network RETAIL
EasyDay acquisition from Bharti Retail in FY16 Network of small stores acquired Through the acquisition, FRL acquired 200 EasyDay stores spread over 1.5 mn sqft and predominantly located in North India Management sees benefits from the acquisition on multiple fronts (i) no debt transfer, (ii) reduced competition, (iii) carry forward loss of Rs 18 bn from the EasyDay business and (iv) a stronger play on premiumization given better 193 products and stores at EasyDay At a total consideration of Rs 7.5 bn (stock-based) and
assuming FY17 EasyDay sales of Rs 17 bn, the deal was 1 valued at 0.44x EV/ sales 2
Heritage Retail acquisition in FY17 Heritage business (retail, agri and bakery) has been merged with Future Retail effective Mar’17. It included 4 136 stores (20 in Bangalore, 36 in Chennai and 80 in Hyderabad) covering 0.48 mn sqft of selling space The stores acquired are profitable at store level, and there 136 Bharti Retail was no debt transfer for the acquisition Heritage provides FRL with an entry into the South markets Heritage Retail without cannibalizing the existing EasyDay network At total consideration of Rs 2.95 bn (stock-based) and assumed FY17 Heritage sales of Rs 8 bn (30% YoY
growth), the deal was valued at 0.36x EV/ Sales Source: Company
15 08 AUG 2017 Company Report
Future Retail Loyalty programs: A different take on value RETAIL
Instead of direct discounting to all, FRL is offering EasyDay Savings Club membership program value through loyalty programs whereby members can
effectively get a discount of 8.5% on FMCG products. ♦ Rs 999 membership fee Management believes this is an effective way to entitles for 10% discount on a counter the value proposition offered by D-Mart. purchase of Rs 50,000 or 12 months, whichever is earlier Average ticket size of a loyalty program member is 4 times that of a non-member. The loyalty programs also ♦ Average discount for the company comes to 8.5% as lead to higher frequency of visits. The combined the discount is not applicable impact means that a loyalty program member’s annual on Patanjali products, flour, oil and baby food spend is 10 times that of a non-member.
For the small store format, FRL has launched the Source: Company EasyDay Savings Club membership program and has already registered 130,000 members in six months. Loyalty programs lead to more frequent visits The company intends to increase the penetration of 16 15.0 members from ~400/ store to 1,500/ store. (customer visits/ year) 12 The company generates the highest ticket size through its Big Bazaar Profit Club loyalty program members. 8 5.4 The program also helps increase the throughput by 3.8 4 assuring 12 customer visits in a year (12 monthly 1.5 discounts of Rs 1,000 each for Rs 10,000 upfront fee) 0 Big Bazaar Profit T24 All loyalty Non-member FRL has also launched a Savings Club membership Club programs program for some Big Bazaar stores where there is significant competition Source: Company, Axis Capital *All loyalty programs also includes Payback card and EasyDay and Big Bazaar Savings Club memberships
16 08 AUG 2017 Company Report
Future Retail Asset light: Separated retail from the non-core business in FY16 RETAIL
Future Retail Ltd Future Enterprises Ltd
Pure play retail business
Infra operations supporting the Retail business
Transferred the retail back-end infrastructure to FEL
17 08 AUG 2017 Company Report
Future Retail Asset light business: Back-end infrastructure leased from FEL RETAIL
Through the realignment of business in FY16, FRL Lease payments to FEL/ sales declines on higher sales throughput converted itself into an asset light pure play retail 4 business. Under the arrangement, FRL transferred its 3.4 (%) 3.0 gross block (consisting of furniture and fixtures) of 2.8 3 2.6 Rs 55 bn to Future Enterprise Ltd (FEL) 2.5 2.4
2 FRL also transferred all the long-term debt (Rs 44 bn) to FEL, bringing the debt on FRL’s books to below 1 Rs 10 bn (only working capital debt) as of Mar’16 0 This scheme of transfer of back-end infrastructure into FY17 FY18E FY19E FY20E FY21E FY22E
a separate entity led to the formation of an asset light Source: Company, Axis Capital business, helping the company improve profitability (driven by lower finance cost) and register better Capex to be borne by FEL for setting up FRL stores return metrics (due to an asset light book)
7 6.2 FRL paid Rs 5.75 bn to FEL as lease expenses in (Rs bn) 6 5.2 FY17, at ~9% rental yield on Rs 64 bn gross block 5 4.4 currently – effectively bringing the depreciation 3.6 4 3.3 expense above the EBITDA 3 2 FRL’s net debt was Rs11 bn as of Mar’17 and the management has guided to maintain it below this level 1 (D/E is at 0.4 in FY17) 0 FY18E FY19E FY20E FY21E FY22E
Source: Company, Axis Capital
18 08 AUG 2017 Company Report
Future Retail Multiple margin levers: Rising private label share, operating leverage RETAIL
We estimate EBITDA margin to increase from 3.4% in EBITDA margin to improve to over 5.5% by FY22E FY17 to 4.8% in FY20, driven by multiple margin 6 levers like increasing share of private labels and (%) 5.5 positive operating leverage from higher store 5.1 5 4.8 throughput 4.4 3.9 4 FRL’s private labels currently contribute 30% to its food 3.4
and FMCG sales. Management targets increasing this 3 to 70% in 4-5 years as the company continues to innovate and provide product offerings based on 2 Indian consumers’ requirements FY17 FY18E FY19E FY20E FY21E FY22E
Source: Company, Axis Capital In apparel, FRL primarily follows a private label strategy at fbb with contribution already at 95% Big Bazaar sales throughput to post 8% CAGR over FY17-22E
EBITDA margin will also benefit from a significant 20,000 19,034 (Rs/ sqft) increase in sales throughput for the company driven 17,789 18,000 by a shift of consumers towards modern retail, 16,625 increasing premiumisation and rising contribution of 16,000 15,465 FRL’s strong membership programs at all EasyDay 14,386 stores and some Big Bazaar stores 14,000 13,078 12,000 We estimate sales throughput at Big Bazaar to post 7.8% CAGR over FY17-20E as the format continues to 10,000 FY17 FY18E FY19E FY20E FY21E FY22E register healthy SSSg for the next 3-5 years
Source: Axis Capital
19 08 AUG 2017 Company Report
Future Retail Lower inventory and improving return ratios RETAIL
FRL is using advanced data analysis to optimize its Inventory days product mix and hence reducing inventory 82 80 80 (days) 78 Faster growth of the higher throughput convenience 78 76 store business will also help the company reduce 73 74 72 inventory days. EasyDay business has an inventory 71 72 70 turnover of 10x (vs. 4.6x FRL inventory turns) 70 68 Inventory will further improve due to the demerger of 66 the Home Town business which has higher inventory 64 (home retailing is typically at 2x inventory turnover) FY17 FY18E FY19E FY20E FY21E FY22E
Source: Company, Axis Capital ^Demerger of high inventory Home Town business from FY18-end With the improvement in profitability, higher inventory turns and the fact that FRL will expand its store base RoE through an asset light model (all capex is borne by FEL), company’s return ratios will improve significantly. 30 We estimate RoCE to improve from 17% in FY17 to (%) 25.5 25 21.2 20.7 27% in FY20 and 30% in FY22 18.9 19.2 20 16.6 According to our calculations, FRL will start paying tax 15 at 30% after the Rs 18 bn accrued losses (from the 10 acquisition of EasyDay) are completely offset by FY19. 5 This results in a dip in RoE to 19% in FY20; a steady state RoE for the company in the long-run 0 FY17 FY18E FY19E FY20E FY21E FY22E
Source: Company, Axis Capital ^Starts paying taxes from FY20 as accrued losses from Bharti are completely offset
20 08 AUG 2017 Company Report
Future Retail Low debt: Cash generation + upside sharing makes it debt free by FY19 RETAIL
Healthy FCF generation: FCF will rise from Rs 1.7 bn FRL will receive Rs 12.7 bn through upside sharing clause in FY17 to Rs 11 bn in FY19, driven by improving Payments from upside sharing clause margins, no capex requirement and lower finance Bharti costs due to debt repayment. However, as we estimate Shareholding (in mn) 47.2 FRL to start paying full tax FY20 onwards, FCF Selling price estimate (Rs/ share) 500 declines by 29% YoY to Rs 7.9 bn in FY20 Sale proceeds (Rs mn) 23,614
Upside sharing: FRL has entered into upside sharing 50% of amount between Rs 9.5-14.5 bn 2,500 arrangement in the acquisitions from Bharti and 60% of amount between Rs 14.5-19.5 bn 3,000 Heritage. We estimate the company to get Rs 8.6 bn 75% of amount above Rs 19.5 bn 3,086 Total upside sharing 8,586 and Rs 4.1 bn payments from Bharti and Heritage as they sell off their stakes in FY20/21 Heritage Shareholding (in mn) 17.8 Free cash flow Selling price estimate (Rs/ share) 550 Sale proceeds (Rs mn) 9,816 14 13.0 (Rs bn) 11.2 12 10.3 50% of amount between Rs 4-5 bn 500 10 75% of amount between Rs 5 bn 3,612 7.9 8 Total upside sharing 4 ,112 6.1 6 Source: Company, Axis Capital Note: Shareholding for Bharti includes current shareholding of 43.5mn shares and additional 4 Rs 1.5bn worth shares to be issued by FRL in Oct’17 (assumed at Rs 400/share) 1.7 2 0 FY17 FY18E FY19E FY20E FY21E FY22E
Source: Company, Axis Capital ^Starts paying taxes from FY20 as accrued losses from Bharti are completely offset
21 08 AUG 2017 Company Report
Future Retail Valuations: FRL trades at 21x on FY20E vs. 45x for D-Mart RETAIL
We value FRL based on Sep’19 EPS of Rs 19.6 and a 1-yr forward target multiple of 28x. We also value Home Town separately (as it gets demerged by the end of FY18), assuming 5% sales growth and 1x target EV/sales multiple
Our TP of Rs 560 implies 36% upside from CMP of Rs 404; we initiate coverage with BUY rating on the stock
Mcap EV PE EV/EBITDA ROE Sales growth EBITDA margin Net margin FY17-19 CAGR (USD m) (USD m) FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E Sales Earnings Domestic retailers D-Mart 8,918 8,799 76.0 56.3 42.9 33.0 18.0 20.4 38.4 28.3 8.4 8.5 4.8 5.0 33.3 49.2 Future Retail 2,975 3,118 31.9 20.5 25.5 19.8 21.2 25.5 21.1 14.2 3.9 4.4 3.0 4.1 17.5 59.0 ABFRL 2,075 2,381 103.4 52.7 27.3 20.6 12.1 20.5 22.0 17.3 7.3 8.2 1.6 2.8 19.6 121.5 Trent 1,414 1,439 74.6 50.0 42.7 33.7 8.2 10.4 56.0 20.0 7.9 8.3 4.4 5.5 36.8 49.3 Shoppers Stop 470 566 57.3 36.4 12.7 10.6 10.5 14.8 6.6 10.3 5.2 5.7 1.0 1.4 8.4
Global retailers Wal-Mart 242,094 281,141 18.4 17.4 8.6 8.4 17.1 18.5 1.8 2.4 6.6 6.6 2.7 2.7 2.1 (0.6) Costco 69,350 67,891 27.2 24.6 12.7 11.7 21.5 22.6 7.7 5.4 4.2 4.3 2.0 2.1 6.5 9.5 Target 31,243 41,366 12.9 13.2 6.2 6.4 21.6 20.7 0.8 0.1 9.5 9.2 3.4 3.3 0.4 (8.5) Ahold Delhaize 26,401 27,380 13.7 12.2 5.5 5.2 9.9 10.6 35.9 1.6 6.6 6.9 2.5 2.8 17.5 51.1 Tesco 19,005 25,408 17.7 13.8 6.8 6.2 11.4 13.5 1.7 3.1 4.9 5.3 1.4 1.8 2.4 Carrefour 18,681 25,180 13.4 12.0 5.3 5.0 10.2 10.5 7.4 2.9 5.0 5.2 1.4 1.6 5.2 35.4 Magnit 17,031 18,841 18.5 15.2 10.0 8.4 26.3 26.1 21.6 15.5 9.6 9.9 4.7 4.9 18.5 16.0 Jeronimo Martins 12,504 12,882 24.3 22.2 11.8 10.9 23.9 24.6 15.7 7.0 5.8 5.9 2.7 2.8 11.3 (8.0) X5 Retail 10,594 13,364 18.5 13.8 8.3 6.9 23.8 25.1 37.8 21.9 7.6 7.5 2.8 3.0 29.6 53.3 Sun Art Retail 7,876 6,854 19.2 17.6 6.3 5.9 12.5 13.0 3.8 5.1 6.9 7.1 2.6 2.7 4.5 7.8 Morrisons 7,483 9,018 19.7 18.3 7.8 7.6 6.9 7.0 2.1 1.0 5.2 5.2 1.7 1.8 1.5 (0.8) Casino 6,834 22,548 17.3 14.5 9.8 9.3 4.5 5.2 14.6 4.4 5.0 5.1 0.9 1.1 9.4 (58.7) GPA 6,612 8,306 35.5 22.1 10.0 8.6 4.4 6.0 21.7 12.1 5.7 5.9 1.2 1.7 16.8 BIM 5,980 5,775 27.4 23.5 17.5 14.9 36.9 35.7 (0.4) 16.7 5.0 5.0 3.3 3.3 7.8 7.0 Source: Bloomberg, Axis Capital *Price as of Aug 1, 2017
22 Company financials 08 AUG 2017 Company Report
Future Retail Operational summary RETAIL
FY17 FY18E FY19E FY20E FY21E FY22E Big Bazaar Stores 235 255 273 292 312 333 Stores added 17 20 18 19 20 21 Space (sq ft) 10.2 10.8 11.3 11.9 12.5 13.1 % YoY growth 4.9 5.9 5.0 5.0 5.0 5.0 Revenue (Rs mn) 130,000 150,769 170,891 192,935 216,847 243,733 % YoY growth 16.0 13.3 12.9 12.4 12.4 Revenue per sq ft 13,078 14,386 15,465 16,625 17,789 19,034 % YoY growth 10.0 7.5 7.5 7.0 7.0
EasyDay Stores 538 763 1,013 1,288 1,588 1,913 Stores added 218 225 250 275 300 325 Space (sq ft) 1.35 1.80 2.30 2.85 3.45 4.10 % YoY growth 92.86 33.33 27.78 23.91 21.05 18.84 Revenue (Rs mn) 17,000 35,643 48,712 64,247 82,523 103,841 % YoY growth 109.7 36.7 31.9 28.4 25.8 Revenue per sq ft 21,656 22,631 23,762 24,950 26,198 27,508 % YoY growth 4.5 5.0 5.0 5.0 5.0
fbb Stores 54 74 96 121 151 186 Stores added 3 20 22 25 30 35 Space (sq ft) 0.55 0.71 0.89 1.09 1.33 1.61 % YoY growth 10.00 29.09 24.79 22.57 22.10 21.12 Revenue (Rs mn) 4,000 5,136 6,994 9,289 12,214 15,961 % YoY growth 28.4 36.2 32.8 31.5 30.7 Revenue per sq ft 7,619 8,152 8,764 9,421 10,128 10,887 % YoY growth 7.0 7.5 7.5 7.5 7.5 Source: Company, Axis Capital
24 08 AUG 2017 Company Report
Future Retail Operational summary RETAIL
FY17 FY18E FY19E FY20E FY21E FY22E E- Zone Stores 30 28 26 24 22 20 Stores added -62 -2 -2 -2 -2 -2 Space (sq ft) 0.30 0.28 0.26 0.24 0.22 0.20 % YoY growth -40.00 -6.67 -7.14 -7.69 -8.33 -9.09 Revenue (Rs mn) 13,000 7,766 7,448 7,103 6,731 6,330 % YoY growth -40.3 -4.1 -4.6 -5.2 -6.0 Revenue per sq ft 26,000 26,780 27,583 28,411 29,263 30,141 % YoY growth 3.0 3.0 3.0 3.0 3.0
Foodhall Stores 7 8 9 10 11 12 Stores added 3 1 1 1 1 1 Space (sq ft) 0.09 0.10 0.11 0.12 0.13 0.14 % YoY growth 28.57 11.11 10.00 9.09 8.33 7.69 Revenue (Rs mn) 1,251 1,560 1,810 2,082 2,376 2,694 % YoY growth 24.7 16.1 15.0 14.1 13.4 Revenue per sq ft 15,636 16,418 17,239 18,101 19,006 19,956 % YoY growth 5.0 5.0 5.0 5.0 5.0
Hom e Town Stores 37 37 Stores added -6 0 Space (sq ft) 1.29 1.29 % YoY growth -0.77 0.00 Revenue (Rs mn) 5,500 5,643 % YoY growth 2.6 Revenue per sq ft 4,247 4,375 % YoY growth 3.0
Source: Company, Axis Capital
25 08 AUG 2017 Company Report
Future Retail Operational summary RETAIL
FY17 FY18E FY19E FY20E FY21E FY22E Revenue Big Bazaar 130,000 150,769 170,891 192,935 216,847 243,733 EasyDay 17,000 35,643 48,712 64,247 82,523 103,841 fbb 4,000 5,136 6,994 9,289 12,214 15,961 E-Zone 13,000 7,766 7,448 7,103 6,731 6,330 Foodhall 1,251 1,560 1,810 2,082 2,376 2,694 Home Town 5,500 5,643 0 0 0 0 FRL 170,751 206,517 235,855 275,656 320,690 372,558
Gross profit Big Bazaar 33,150 39,200 44,944 51,321 58,115 65,808 EasyDay 2,380 5,346 7,404 9,958 13,204 17,134 fbb 1,600 2,054 2,797 3,716 4,886 6,384 E-Zone 2,600 1,553 1,490 1,421 1,346 1,266 Foodhall 375 468 543 624 713 808 Home Town 2,200 2,257 FRL 42,305 50,879 57,179 67,040 78,263 91,400
Gross margin Big Bazaar 25.5 26.0 26.3 26.6 26.8 27.0 EasyDay 14.0 15.0 15.2 15.5 16.0 16.5 fbb 40.0 40.0 40.0 40.0 40.0 40.0 E-Zone 20.0 20.0 20.0 20.0 20.0 20.0 Foodhall 30.0 30.0 30.0 30.0 30.0 30.0 Home Town 40.0 40.0 FRL 24.8 24.6 24.2 24.3 24.4 24.5
Source: Company, Axis Capital
26 08 AUG 2017 Company Report
Future Retail Financial summary RETAIL
Store network Sales
3,000 400 373 (Nos.) (Rs bn) 2,464 321 2,500 2,084 300 276 2,000 1,735 236 207 1,417 1,500 1,165 200 171 901 1,000 100 500
0 0 FY17 FY18E FY19E FY20E FY21E FY22E FY17 FY18E FY19E FY20E FY21E FY22E
Source: Company, Axis Capital Source: Company, Axis Capital Sales breakup by formats Gross margin
25.0 (%) Big Bazaar fbb EasyDay Others 24.8 (%) 12 7 4 3 3 2 24.6 100 24.5 17 21 23 26 24.4 80 10 28 24.5 24.3 2 2 3 24.2 3 4 4 60
40 76 24.0 73 72 70 68 65 20
0 23.5 FY17 FY18E FY19E FY20E FY21E FY22E FY17 FY18E FY19E FY20E FY21E FY22E
Source: Company, Axis Capital ^Others includes Home Town before demerger in FY18-end Source: Company, Axis Capital
27 08 AUG 2017 Company Report
Future Retail Financial summary RETAIL
Staff cost/ sales Lease cost (for real estate)/ sales
4.8 4.7 5.0 4.6 4.7 (%) 4.4 (%) 3.9 3.8 4.7 4.0 3.7 3.6 4.6 4.5 4.5 3.0 4.5 4.4 4.4 2.0 4.4
4.3 1.0
4.2 0.0 FY17 FY18E FY19E FY20E FY21E FY22E FY17 FY18E FY19E FY20E FY21E FY22E
Source: Company, Axis Capital Source: Company, Axis Capital Lease cost (to FEL) / sales EBITDA margin
4 6 3.4 (%) (%) 5.5 3.0 5.1 2.8 3 2.6 5 4.8 2.5 2.4 4.4 3.9 2 4 3.4
1 3
0 2 FY17 FY18E FY19E FY20E FY21E FY22E FY17 FY18E FY19E FY20E FY21E FY22E
Source: Company, Axis Capital Source: Company, Axis Capital
28 08 AUG 2017 Company Report
Future Retail Financial summary RETAIL
Total debt Working capital days
14 13 70 (Rs bn) 59 (days) 12 60 52 10 50 45 8 41 38 8 40 36 6 30 4 20 2 10 0 0 0 0 0 0 FY17 FY18E FY19E FY20E FY21E FY22E FY17 FY18E FY19E FY20E FY21E FY22E
Source: Company, Axis Capital Source: Company, Axis Capital Inventory days Payable days
59 82 80 60 80 (days) (days) 78 58 78 58 57 76 56 73 56 55 74 72 72 71 54 70 54 70 68 52 66 64 50 FY17 FY18E FY19E FY20E FY21E FY22E FY17 FY18E FY19E FY20E FY21E FY22E
Source: Company, Axis Capital Source: Company, Axis Capital
29 08 AUG 2017 Company Report
Future Retail Financial summary RETAIL
Net profit margin Inventory turnover
5.5 4.5 4.2 4.1 (x) 5.2 (%) 3.9 5.1 4.0 5.1 3.5 5.0 3.5 5.0 3.0 3.0 4.7 4.6 2.5 2.2 4.5 2.0 1.5 4.0 1.0 FY17 FY18E FY19E FY20E FY21E FY22E FY17 FY18E FY19E FY20E FY21E FY22E Source: Company, Axis Capital ^Starts paying taxes from FY20 as accrued losses from Bharti are completely offset Source: Company, Axis Capital RoE RoCE
30 35 (%) 25.5 (%) 29.5 25 30 27.0 27.5 21.2 20.7 24.3 18.9 19.2 25 20 16.6 19.6 20 16.8 15 15 10 10 5 5 0 0 FY17 FY18E FY19E FY20E FY21E FY22E FY17 FY18E FY19E FY20E FY21E FY22E
Source: Company, Axis Capital ^Starts paying taxes from FY20 as accrued losses from Source: Company, Axis Capital Bharti are completely offset 30 Key risks 08 AUG 2017 Company Report
Future Retail Key risks RETAIL
Medium risk F&G retailing is the most underpenetrated modern retail category in India. Even though FRL has a large store network, we believe Risk to network there is sufficient untapped potential for it to expand further, more so given its focus on EasyDay convenience store and fbb expansion standalone formats. However, it is dependent on FEL for opening of new stores as capex is funded by FEL. If FEL is unable to divest its investments, then it would not have the cash flow for new store capex.
Medium risk Risk from Big Bazaar could come under pressure (although its clientele is different) if D-Mart expands into other regions, especially East where competition Big Bazaar has a strong footprint. In the near term, we see D-Mart entering North but not East.
Low risk and actually a boon Regulatory risk Across developing nations, local players have remained the leader despite the entry of global retailers. However, entry of global (opening up of FDI) retailers can put pressure on costs. On the other hand, FRL can be a good acquisition candidate which will drive value for shareholders.
Medium risk Indian F&G e-commerce players are acquiring customers even as they continue incurring losses. Online retailing in F&G has not Risk of disruption been successful except UK, China and South Korea. We note that there are media articles stating that Amazon is looking to acquire from e-commerce Big Basket (a leading online grocer) even as it is expanding its own grocery business. D-Mart, also in its own unique way has entered the online channel. As in most categories, online retail (read Amazon) can be a serious disruptor; hence, a risk to watch out for.
Medium risk High debt at the Group level: Future Group has a total debt of Rs 67.7 bn across its four listed companies Risks related to Related party transactions: FRL’s business also involves various related party transactions, like leasing store capex from FEL (paid Rs Future Group 5.75 bn lease rentals in FY17), selling group private label products of FCEL (worth Rs 13 bn in FY17), engaging FSC for supply chain services (paid Rs 2.5 bn in FY17) and cross selling apparel from FLFL (FRL and FLFL sold almost Rs 1.25-1.50 bn worth each others apparels). FEL also procures about Rs25-30bn worth of textiles on behalf of FRL and sells the same to job workers who in turn sell finished goods to FRL.
32 08 AUG 2017 Company Report
Future Retail Related party transaction details RETAIL
Sells FCEL FMCG products of Rs 13 bn Paid Rs 5.75 bn lease (FRL earns 22-25% rentals for furniture Although technically not a gross margin on this) and fixtures related party transaction, FEL supplies raw material (textile) to contract manufacturers who sell apparel to FRL and FLFL.
We highlight Rs 8 bn working capital on FEL for this, which could have potentially been on FRL’s books
Pays Rs 2.5 bn to FSC for supply Cross selling apparel chain services (FRL and FLFL sold Rs 1.25-1.50 bn worth each others apparels)
33 08 AUG 2017 Company Report
Future Retail Eventual opening up of FDI in multi-brand retail could be a positive RETAIL
Regulatory environment: Regulations for multi-brand retailing Timeline of regulatory changes in retail sector were eased in 2012, allowing FDI upto 51% but after Y ear mandatory approval from state government. 1997 FDI of up to 100% allowed under the automatic route of ‘cash and carry’ We expect the entry of global players in multi-brand retail 2006 FDI of up to 51% allowed in single-brand retail with prior approval will be limited in near term, as the government is not fully in 2008 Proposals to introduce FDI in multi-brand retailing Government approved 51% in FDI multi-brand retail and 100% in single favor of it. However, we believe the regulations in 2012 multi-brand retailing will eventually be eased to that in brand with approval from FIPB Easing of local sourcing norms for 'state-of-the-art' and 'cutting edge' single-brand retailing 2016 technology products in single brand retailing Grocery retail is a ‘local’ business, not a ‘global’ one: Local sourcing, knowledge of consumers and ability to tackle local regulations have driven success for local retailers. Details of 51% FDI in multi-brand retail In most markets, local retailers continue to be the largest Minimum investment cap of USD 100 mn 30% of procurement of goods must be from SMEs players, implying that traditional globalization strategies Minimum 50% FDI in back-end infrastructure (cold storage, logistics, soil testing have not worked well. We analyzed the F&G retail market labs, seed farming & agro-processing) across emerging nations and highlight that the foreign Only 11 states have opened up – state-wise permission is mandatory players have generally lagged the local players Cannot buy an existing company F&G retail in emerging markets is dominated by local players
Largest local retailer Largest foreign retailer
25% 20% 20% 18% 15% 15% 10% 7% 7% 8% 5% 3% 2% 0% South Africa Russia Turkey Brazil
Source: Industry, Axis Capital 34 Board of Directors 08 AUG 2017 Company Report
Future Retail Board of directors RETAIL
• Managing Director of Future Retail and the Group CEO of Future Group Kishore Biyani • Considered a pioneer of modern retail in India, his leadership has led the Group’s emergence as India’s leading retailer Managing Director operating multiple retail formats and brands that cater to the entire basket of Indian consumers
• Associated with the company for over 20 years Rakesh Biyani • Leads the management and expansion of the Group’s flagship formats, Central, Big Bazaar and Food Bazaar Joint Managing Director • Actively involved in category management, retail stores operations and information technology
• Vice Chairman of Bharti Enterprises with interests in retail, telecom, financial services, manufacturing, realty and Rajan Bharti Mittal agri-business Non-Executive Director • Actively involved in overseeing the activities of the Bharti Group at the corporate level and in the new businesses of Bharti Group
Gagan Singh • CEO - Business (India) and Chairperson Sri Lanka Operations of Jones Lang LaSalle Independent Director • Previously, has been associated with Benetton India, DCM International, Soaltee Group and Ranbaxy Laboratories
• Senior Advisor to TPG India and brings with him the experience of 39 years of building consumer business all over the Ravindra Dhariwal World Independent Director • Previously associated with Bennett & Colemon & Co. Ltd. as CEO, President of International News Media Association, Pepsico
• Seasoned finance professional with 34 years of experience and an impressive track record of accomplishments Shailendra Bhandari • In his previous assignment, he was MD & CEO of ING Vysya Bank Independent Director • Previously he has also been associated with Tata Capital, Centurion Bank of Punjab, ICICI Asset Management, HDFC Bank and Citibank
• Currently runs a cross-border advisory practice, working closely with a network of family offices and Institutional Sridevi Badiga Investors in the Middle East Independent Director • In the past, she had worked in Kuwait, Bahrain, Qatar and Dubai primarily in Investment Banking
36 Appendix – I: Group and company overview 08 AUG 2017 Company Report
Future Retail Future Group: An overview of all listed companies RETAIL
Comp any Description Brands Company financials^ (Rs mn) Sales EBIT PAT Net deb t FRL is India’s leading multi-format retailer operating 901 stores spread over 13.8mn sqft and servicing over 300mn Retail formats Future Retail customers annually across 240 cities as of Mar’17. Post Big Bazaar, EasyDay, Foodhall, fbb, 170,751 5,487 3,683 11,030 Limited (FRL) the acquisitions & restructuring in FY16, FRL is now well Home Town, E-Zone positioned to play the structural growth in modern retail in India. FCL is an integrated Food & FMCG company. It focuses Brands on sourcing, manufacturing, branding, marketing and Future Consumer Sunkist, Tasty Treat, Golden Harvest, distribution of basic foods, ready to eat meals, snacks, 21,158 -678 -610 2,909 Limited (FCL) Kosh, Sangi's Kitchen, Karmiq, Clean beverages, and personal hygiene and home care Mate, Care Mate, Kara products. Retail formats Central, Brand Factory, Planet Sports FLFL owns and markets over two dozen fashion brands Future Lifestyle Owned brands through exclusive brand outlets, department stores and Fashions Limited aLL, Scullers, Jealous 21, Indigo Nation, 38,771 1,710 460 4,524 multi brand outlets, as well as company operated chains (FLFL) Urbana such as Central, Brand Factory and Planet Sports. Licensed brands Lee Cooper, John Miller, Bare FEL develops, owns and leases the retail infrastructure for the Group. The company also holds the Group’s Investments Future Enterprises investments in subsidiaries and joint ventures including Future Supply Chain, Future Generali 44,855 3,392 350 49,218 Limited (FEL) insurance, textile manufacturing, supply chain and Insurance, Staples logistics. Group 9,911 3,882 67,680 Source: Company, Axis Capital ^ all financials are for FY17
38 08 AUG 2017 Company Report
Future Retail Future Retail Ltd: Restructuring and M&A activities since 2012 RETAIL
Corporate restructuring and M&A history since 2012
Acquired Fab furnish business Acquired retail, agri and bakery businesses of 2017 Demerged Central/ Brand Factory Heritage Foods and other fashion business to a new entity - Future Lifestyle Fashion (FLF) 2016 Sold 22.5% stake in Future Generali Life Insurance 2015 Announced plans to demerge Home Town into separate company 2013
2012
Separated back-end infrastructure and Investments to Future Enterprises (FEL) Acquired EasyDay stores from Bharti Retail in a stock swap Acquired master franchisee rights of retail business of Future Consumer (KB’s, Big Apple and Aadhaar) Sold Pantaloons to Aditya Birla Group (Madura Garments) Divested Financial Services business (Capital First) to Warburg Pincus
Source: Company, Axis Capital
39 08 AUG 2017 Company Report
Future Retail FRL: Stockholder return over the long-term RETAIL
Stock price rose 67x over FRL started FY02-07, as retail Stock was under pressure business and financial companies saw valuations as FRL performance restructuring, deleveraging soar with selling space weakened while debt its balance sheet and expansion increased creating a sharper focused retail company
150 132 (%) 100
50 29 (21) 0
(50) Aug'02 - Jul'07 Aug'07 - Jul'12 Aug'12 - Jul'17
Source: Company, Bloomberg, Axis Capital
Given the extensive restructuring at Future Retail (formerly Pantaloons Retail Ltd), investment in 1 equity share of the company before 2012 means the shareholder would currently hold (i) 1 equity share of Future Retail, (ii) 1 equity share of Future Enterprises, (iii) 1/5 equity share of Aditya Birla Fashion & Retail and (iv) 1/3 equity share of Future Lifestyle Fashions
40 08 AUG 2017 Company Report
Future Retail FRL: Various retail formats RETAIL
Future Retail
♦ Focus is on ♦ Convenience stores ♦ The gourmet food ♦ The apparel ♦ FRL intends to ♦ FRL to demerge the improving are a key focus chain serves as a business will be a move to entire Home profitability at Big area for FRL, with learning platform to key to establishing predominantly vertical into a Bazaar with plans to expand identify, experiment presence in the selling electronics separate entity moderate store store network from and then high growth value online under the giving it a more expansion plans 538 at Mar’17 to mainstream fashion segment Koryo brand focused leadership from 235 stores at 2,000 stores in 5 forthcoming trends, and dedicated ♦ We estimate sales ♦ We estimate that Mar’17 years cuisines and management for 54 standalone FRL will gradually categories ♦ We estimate sales ♦ We estimate sales fbb stores (at reduce the ♦ Home Town to post 13% CAGR CAGR of 63% over ♦ The format has Mar’17) to post standalone recorded Rs 6 bn over FY17-20 FY17-20 seven stores 30% CAGR over e-Zone stores from sales from 37 located at the most FY17-20 30 at Mar’17 to stores (at Mar’17) premium locations 24 by Mar’20 with 3% EBITDA in Bangalore, margin in FY17 Delhi, Mumbai and Gurgaon
41 08 AUG 2017 Company Report
Future Retail FRL: Geographic store footprint RETAIL
Jammu & Kashmir (1,0,7)
Punjab HP Uttarakhand (6,0,118) (1,0,0) (1,1,20) Chandigarh (1,0,0) Delhi/NCR Haryana (9,4,143) (8,1,30) Sikkim Assam (1,0,0) (3,1,0)
Rajasthan Uttar Pradesh (12,1,9) (26,7,37) Bihar (6,2,0) Gujarat Jharkhand (11,3,0) Madhya Pradesh (6,0,0) Tripura (7,1,0) Chhattisgarh (1,0,0) (6,0,0) Odisha (7,0,0) West Bengal (25,6,0) Maharashtra (40,11,27) Telangana (9,5,80)
Goa (1,1,0) Andhra Pradesh Karnataka (4,3,0) (27,4,31) LEGEND State (Big Bazaar, fbb, EasyDay)
Tamil Nadu (10,1,36) Kerala (9,3,0)
Source: Company, Axis Capital
42 Appendix – II: Industry 08 AUG 2017 Company Report
Future Retail India retail: Ready for the next level RETAIL
Indian retail market at USD 616 bn in FY16 is the fifth Indian retail market largest in the world. It has posted healthy CAGR of ~15% over past decade
Though large, the market is highly fragmented with share of organized retail significantly lower at ~9% in FY16
Lower share of organized retail in India is in sharp contrast to that in other developing economies like China, Indonesia and Brazil where the share stands at 20-40% and in developed economies like the US, Japan, France and Germany where it is 70-80% Source: Avenue Supermarts IPO Prospectus Despite these multiple issues, the organized retail in Modern retail penetration India is expected to grow 21-22% annually to 100 (%) USD 115 bn by 2020, or 12% of total retail because 80 80 80 85 of structural drivers like rising disposable incomes, 80 66 positive demographics (large youth population, 60 36 40 urbanization, nuclearisation of families), increasing 40 30 33 quality/ brand consciousness and preference for 20 20 10 convenience
0
UK
USA India
Brazil
Prospects to be further enhanced by improving Japan
China
Russia
France
Germany Indonesia
economic outlook for India Argentina Source: Avenue Supermarts IPO Prospectus
44 08 AUG 2017 Company Report
Future Retail Food & Grocery (F&G): Huge untapped potential RETAIL
F&G constitutes largest share of Indian retail market… …however, still a small share in organized space
Footwear, 1% Jewellery & Others, 3% Apparel, 20% Watches, 23% Pharmacy, 3% Home & Living, 4% CDIT, 6%
Jewellery & CDIT, 16% Watches, 8% F&G, 24%
Apparel, 8% F&G, 67% Home & Living, Others, 4% Pharmacy, 3% 5% Footwear, 5%
Source: Avenue Supermarts IPO Prospectus Source: Avenue Supermarts IPO Prospectus
Share of organized retail across categories Size of organized retail market across categories
60 16 (%) 13.0 12.7 (USD bn) 40 10.8 12 40 8.7 27 25 22 8 20 12 10 10 3.0 2.7 3 4 1.8 2.5
0 0
F&G
F&G
Others
Others
Footwear
Watches
Footwear
Consumer
Electronics
Wellness
Watches
Apparel Apparel &
Consumer
Jewellery Jewellery &
Electronics
Wellness
Accessories
Apparel Apparel &
Pharmacy Pharmacy &
Jewellery &
Accessories
Pharmacy Pharmacy &
Home & Living&Home Home & Living&Home
Source: Avenue Supermarts IPO Prospectus Source: Avenue Supermarts IPO Prospectus
45 08 AUG 2017 Company Report
Future Retail Factors that will drive F&G modern retail CAGR of 24% over FY16-20 RETAIL
Supply side Demand side
Bulk of India’s ~8 mn ‘Mom-and-Pop’ retail stores do not Only secular consumption trend is premiumization, which make money especially if adjusted for opportunity cost of would imply rapid explosion in number of SKUs time, money and real estate. More than 80% of retailers consumed per household
make
and the next generation is unwilling to take over the Organized retail would benefit, as increasing value business especially if other job opportunities exist seeking behavior implies that consumers begin looking Strong economic growth will ensure the decline of for value even in daily consumption items traditional retail format
The fact remains that changing demographic profiles, increasing income levels, urbanization, technology, globalization and a free flow of ideas from within and outside the country, is bringing about a dramatic shift in consumer tastes and preferences. Customer segments are maturing faster than ever. Even as some Indians become sophisticated shoppers, tens of millions of less experienced but no less avid consumers are joining the fray every year. Kishore Biyani, ‘It Happened In India’
46 08 AUG 2017 Company Report
Future Retail Company financials (Standalone) RETAIL Profit & loss (Rs mn) Balance sheet (Rs mn) Y/E March FY17 FY18E FY19E FY20E Y/E March FY17 FY18E FY19E FY20E Net sales 170,751 206,517 235,855 275,656 Paid-up capital 944 987 987 987 Other operating income - - - - Reserves & surplus 24,593 32,329 42,074 57,278 Total operating income 170,751 206,517 235,855 275,656 Net worth 25,537 33,316 43,061 58,265 Cost of goods sold (128,344) (155,638) (178,676) (208,616) Borrowing 12,590 8,276 - - Gross profit 42,407 50,879 57,179 67,040 Other non-current liabilities - - - - Gross margin (%) 24.8 24.6 24.2 24.3 Total liabilities 38,127 41,592 43,061 58,265 Total operating expenses (36,595) (42,869) (46,834) (53,865) Gross fixed assets 6,083 6,083 6,083 6,083 EBITDA 5,813 8,010 10,344 13,175 Less: Depreciation (546) (966) (1,387) (1,808) EBITDA margin (%) 3.4 3.9 4.4 4.8 Net fixed assets 5,538 5,117 4,696 4,275 Depreciation (326) (421) (421) (421) Add: Capital WIP 119 119 119 119 EBIT 5,487 7,589 9,924 12,754 Total fixed assets 5,656 5,236 4,815 4,394 Net interest (2,042) (1,565) (538) - Total Investment - - - - Other income 238 219 359 932 Inventory 37,352 43,959 47,427 54,498 Profit before tax 3,683 6,244 9,745 13,686 Debtors 2,281 2,546 2,908 3,398 Total taxation - - - (4,106) Cash & bank 1,560 3,307 5,666 19,189 Tax rate (%) - - - 30.0 Loans & advances 17,074 17,074 17,074 17,074 Profit after tax 3,683 6,244 9,745 9,580 Current liabilities 31,249 35,982 40,281 45,741 Minorities - - - - Net current assets 32,471 36,357 38,246 53,871 Profit/ Loss associate co(s) - - - - Other non-current assets - - - - Adjusted net profit 3,683 6,244 9,745 9,580 Total assets 38,127 41,592 43,061 58,265 Adj. PAT margin (%) 2.2 3.0 4.1 3.5 Net non-recurring items - - - - Reported net profit 3,683 6,244 9,745 9,580
Source: Company, Axis Capital
47 08 AUG 2017 Company Report
Future Retail Company financials (Standalone) RETAIL Cash flow (Rs mn) Key ratios Y/E March FY17 FY18E FY19E FY20E Y/E March FY17 FY18E FY19E FY20E Profit before tax 3,683 6,244 9,745 13,686 OPERATIONAL Depreciation & Amortisation 326 421 421 421 FDEPS (Rs) 7.8 12.6 19.7 19.4 Chg in working capital (3,901) (2,139) 469 (2,102) CEPS (Rs) 8.5 13.5 20.6 20.3
Cash flow from operations 1,735 6,090 11,172 7,899 DPS (Rs) - - - 5.0
Capital expenditure - - - - Dividend payout ratio (%) - - - 25.8 Cash flow from investing - - - 8,586 GROWTH Equity raised/ (repaid) 1 36 - - Net sales (%) - 20.9 14.2 16.9 Debt raised/ (repaid) 1,231 (2,814) (8,276) - EBITDA (%) - 37.8 29.1 27.4 Dividend paid - - - (2,961) Adj net profit (%) - 69.5 56.1 (1.7) Cash flow from financing (810) (4,343) (8,814) (2,961) FDEPS (%) - 62.1 56.1 (1.7) Net chg in cash 925 1,747 2,358 13,523 PERFORMANCE RoE (%) 16.6 21.2 25.5 18.9 RoCE (%) 16.8 19.6 24.3 27.0 Valuation ratios EFFICIENCY Y/E March FY17 FY18E FY19E FY20E Asset turnover (x) 5.2 5.5 6.2 7.2 PE (x) 51.7 31.9 20.5 20.8 Sales/ total assets (x) 2.7 2.8 2.9 2.9 EV/ EBITDA (x) 34.7 24.4 17.9 13.0 Working capital/ sales (x) 0.2 0.2 0.1 0.1 EV/ Net sales (x) 1.2 0.9 0.8 0.6 Receivable days 4.9 4.5 4.5 4.5 PB (x) 7.5 6.0 4.6 3.4 Inventory days 82.7 80.8 76.8 75.8 Dividend yield (%) - - - 1.2 Payable days 61.5 59.8 59.6 58.8 Free cash flow yield (%) 0.0 0.0 0.1 0.0 FINANCIAL STABILITY Source: Company, Axis Capital Total debt/ equity (x) 0.6 0.3 - - Net debt/ equity (x) 0.5 0.2 (0.1) (0.4) Current ratio (x) 2.0 2.0 1.9 2.2 Interest cover (x) 2.7 4.8 18.4 -
48 Disclaimer
Disclosures:
The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).
1. Axis Securities Ltd. (ASL) is a SEBI Registered Research Analyst having registration no. INH000000297. ASL, the Research Entity (RE) as defined in the Regulations, is engaged in the business of providing Stock broking services, Depository participant services & distribution of various financial products. ASL is a subsidiary company of Axis Bank Ltd. Axis Bank Ltd. is a listed public company and one of India’s largest private sector bank and has its various subsidiaries engaged in businesses of Asset management, NBFC, Merchant Banking, Trusteeship, Venture Capital, Stock Broking, the details in respect of which are available on www.axisbank.com. 2. ASL is registered with the Securities & Exchange Board of India (SEBI) for its stock broking & Depository participant business activities and with the Association of Mutual Funds of India (AMFI) for distribution of financial products and also registered with IRDA as a corporate agent for insurance business activity. 3. ASL has no material adverse disciplinary history as on the date of publication of this report. 4. I/We, author/s (Research Team) and the name/s subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my/our views about the subject issuer(s) or securities. I/We (Research Analyst) also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. I/we or my/our relative or ASL does not have any financial interest in the subject company. Also I/we or my/our relative or ASL or its Associates may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Since associates of ASL are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. I/we or my/our relative or ASL or its associate does not have any material conflict of interest. I/we have not served as director / officer, etc. in the subject company.
Sr. No Name Designation E-mail
1 Sunil Shah Head of Research [email protected] 2 Pankaj Bobade Research Analyst [email protected] 3 Hiren Trivedi Research Associate [email protected] 4 Poonam Darade Research Associate [email protected] 5 Rohit Chawla Research Associate [email protected] 6 Kiran Gawle Associate [email protected]
5. ASL has not received any compensation from the subject company in the past twelve months. ASL has not been engaged in market making activity for the subject company. 6. In the last 12-month period ending on the last day of the month immediately preceding the date of publication of this research report, ASL or any of its associates may have: i. Received compensation for investment banking, merchant banking or stock broking services or for any other services from the subject company of this research report and / or; ii. Managed or co-managed public offering of the securities from the subject company of this research report and / or; iii. Received compensation for products or services other than investment banking, merchant banking or stock broking services from the subject company of this research report;
ASL or any of its associates have not received compensation or other benefits from the subject company of this research report or any other third-party in connection with this report.
Term& Conditions: This report has been prepared by ASL and is meant for sole use by the recipient and not for circulation. The report and information contained herein is strictly confidential and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ASL. The report is based on the facts, figures and information that are considered true, correct, reliable and accurate. The intent of this report is not recommendatory in nature. The information is obtained from publicly available media or other sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. The report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments for the clients. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ASL will not treat recipients as customers by virtue of their receiving this report. Disclaimer
DEFINITION OF RATINGS
Ratings Expected absolute returns over 12 months
BUY More than 10%
HOLD Between 10% and -10%
Disclaimer: SELL Less than -10%
Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to the recipient’s specific circumstances. The securities and strategies discussed and opinions expressed, if any, in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient.
This report may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this report should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this report (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. Certain transactions, including those involving futures, options and other derivatives as well as non-investment grade securities involve substantial risk and are not suitable for all investors. ASL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. Past performance is not necessarily a guide to future performance. Investors are advice necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice.
ASL and its affiliated companies, their directors and employees may; (a) from time to time, have long or short position(s) in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities or earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or investment banker, lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting this document.
ASL and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, the recipients of this report should be aware that ASL may have a potential conflict of interest that may affect the objectivity of this report. Compensation of Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ASL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.
Neither this report nor any copy of it may be taken or transmitted into the United State (to U.S. Persons), Canada, or Japan or distributed, directly or indirectly, in the United States or Canada or distributed or redistributed in Japan or to any resident thereof. If this report is inadvertently sent or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ASL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors.
The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The Company reserves the right to make modifications and alternations to this document as may be required from time to time without any prior notice. The views expressed are those of the analyst(s) and the Company may or may not subscribe to all the views expressed therein. Copyright in this document vests with Axis Securities Limited.
Axis Securities Limited, Corporate office: Unit No. 2, Phoenix Market City, 15, LBS Road, Near Kamani Junction, Kurla (west), Mumbai-400070, Tel No. – 18002100808/022-61480808, Regd. off.- Axis House, 8th Floor, Wadia International Centre, Pandurang Budhkar Marg, Worli, Mumbai – 400 025. Compliance Officer: Anand Shaha, Email: [email protected], Tel No: 022-42671582.