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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.

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