Future Capital Holdings Limited (FCH) Equity Research Desk IPO-Analysis 11 th January, 2008

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1 Recommend: NEUTRAL Issue Snapshot Issue Period: Jan 11 - Jan 16, 2008 Price Band Issue Size Market Cap Issue Size Employees: QIB: Non-Institutional: Retail: Rs Rs.765 Rs.4,496 - Rs.4,913 mn Rs Rs bn 6,422,800 shares 0 shares 3,853,680 shares 642,280 shares 1,926,840 shares Face Value: Rs.10 Book Value: Rs as on Sept 30,2007 Capital Structure: Pre Issue Equity Post Issue Equity Rs.568 mn Rs.632 mn Shareholding Pattern Preissue (%) Post issue (%) Promoters Promoter Group Employees Non - Promoters Public Total Total no. of shares 56,805,184 63,227,984 Website: Abhishek Kothari abhishek.kothari@spasecurities.com Mobile: Phone: Investment Highlights: Future Capital Holdings Limited is the financial services arm of the Future Group. The primary lines of business are: Investment advisory services, retail financial services & research. FCH is a subsidiary of Pantaloon Retail India Ltd. Investment Rationale: Experienced management; Unique & different business model; Good understanding of the retail sector; In its short period of operation, FCH has achieved more than US $1.1 bn worth assets under advice; Benefits from the Future brand name; In the retail financing business, FCH benefits from the huge clientele & shop-in-shop of Future group; FCH is planning for product diversification in retail financing business line like distribution of credit cards, acting as corporate agents for life & general insurance products; Made an application to acquire Keystone Company Ltd for offshore investment advisory. Concerns are: Limited track record of operations; FCH has recorded net loss for the period ending Sept 07; Majority of the investment advice are given on real estate & hospitality sectors, both of which are highly cyclical in nature which makes the revenues of FCH to be volatile apart from the minimum guaranteed fees; Heavy dependency on Future group for business insights, relationships & distribution network. ICRA has assigned an IPO Grade 3/5 to this issue. There is no clear rationale being given in the RHP which can justify the basis of issue price. Also the fact that the company has not generated enough revenues making it even more difficult to justify the issue price of the company. Valuation: The stock cannot be compared to any established firms in terms of financials & other parameters for the reason that FCH has started its operations just 20 months back. The model of retail financing is one of its kinds seen in India. The company has a vast pool of talented people at its management level who have come in from various reputed international companies. The company has allotted shares to its promoters at Rs.178 in Sept 07 & has now come up with an issue price of more than 4 times the allotment price & also there is no substantial change in the revenues of the company in the interim period to justify the issue price band of Rs.700 Rs.765. Hence, we recommend a Neutral rating to the issue. Page 1 of 10

2 Company Background The company was incorporated on October 18, FCH is the financial arm of the Future group, which is a business group focusing on consumption-led businesses in India & is also one of India s leading organized multiformat retailers. FCH is promoted by Pantaloon Retail India Ltd ( PRIL ), the flagship company of the Future Group, its managing director Mr. Kishore Biyani & Mr. Sameer Sain. Currently, FCH has three lines of business namely: 1. Investment Advisory - FCH provides private equity & real estate investment advisory services to onshore & offshore clients. These investment advisory services include investment analysis, research & recommendations; 2. Retail Financing Services In June 2007, FCH launched its retail financial services offering Future Money. Currently, FCH has 95 outlets of Future Money spread across 25 cities. The two main retail financial services products offered by FCH are: i. Consumption loans, which are loans to finance the purchase of durables, furniture & other consumer goods & ii. Personal loans, which are unsecured credit lines to individual customers. As of November 30, 2007, the consumption loans disbursed were Rs mn which represented 31% of the total loans disbursed & the personal loans disbursed were Rs. 72 mn which represented 69% of total loans disbursed; 3. Research - Future Capital Research conducts research on macro-economic trends in India to identify short & medium-term trends as well as long-term structural shifts in India s economy. It also develops proprietary indices to highlight trends in consumer behavior. FCH utilizes the research generated by Future Capital Research in their advisory activities & the company expects that such research will continue to assist them in advising on potential investments. FCL has three basic research products:- Future Insights: Research on macro-economic trends in India using primary & secondary data sources to identify short & medium-term trends that will impact future economic growth; Future Themes: Research using primary & secondary data & new methodologies to identify long-term structural shifts in the economy; FCH Indicators: Research which creates ongoing proprietary indices that aggregate primary data, in-house data & secondary data in order to highlight key movements in trends. An example is the FCH Consumer Activity Index. Company Snapshot Investment Rationale: 1. The experience & expertise of the management team, the finance, operating & investment professionals provides FCH with a competitive advantage. For example: Mr. Sameer Sain, the CEO & cofounder, was formerly a Managing Director at Goldman Sachs International, Investment Management Division. Mr. Shishir Baijal, who has bought over 29 years of industry experience to support the investment advisory experience within the company. The private equity investment advisory business is led by Mr. Sanjiv Gupta, who is the former CEO of Coca-Cola India & Southwest Asia. Within retail financial services, the members of the senior management team, which is led by Mr. Rakesh Makkar who has over 17 years of experience & has previously served as Risk Director & CFO of Citi financial India & also as Head of the Retail Mass Market business for First India Credit, Temasek s financial services business in India. The research & insights business is led by Ms. Roopa Purushothaman, a former Vice President at Goldman Sachs International & a co-author of the influential paper Dreaming with BRICs: The Path to The company has a unique & different business model: i. Investment Advisory Services FCH only advices & does not manage the funds like any other bank or NBFC. In additional to their investment analysis, research & recommendations, they also mentor companies invested in by the fund whose investment manager they advice. ii. Retail Financial Services - The retail financial services business model is one of the first of its kind within organized retailing in India. FCH has distinguished themselves from other providers of financial products through their presence at the point of consumption. For this purpose, FCH has made an agreement with PRIL whereby FCH has the exclusive right to provide financial products & services at present & future malls, stores & retail outlets in India which are owned, controlled or managed by PRIL & its subsidiaries. The ultimate goal of FCH s retail business model is to become a one-stop shop for financial products & services. Page 2 of 10

3 3. As one of India s leading retail groups with over ten years of experience in meeting the needs of Indian consumers, the Future Group has developed a good understanding of the retail & consumption-led sectors in India. The Future Group s insights into consumer behavior have contributed to FCH advice on investments in these sectors. The Future Group s understanding of the retail & consumption-led sectors is augmented by the research produced by FCH s research team. 4. In its short period of operation, FCH has achieved more than US $1.1 bn worth assets under advice. The details regarding the various funds to whom FCH are investment advisors are: i. Kshitij Venture Capital Fund, an onshore SEBI-registered venture capital fund, whose main focus is developing retail malls in India worth approximately US$89 mn; ii. Indivision Capital Management, the offshore investment manager of the US$425 mn offshore private equity fund, Indivision India Partners; iii. Horizon Development Management, the offshore investment manager of the US$350 mn offshore real estate fund, Horizon Realty Fund, LLC; iv. FHL Developments Company LLC, the offshore investment manager of the US$200 mn offshore hotel fund, Indus Hotel Ventures LLC. 5. FCH has been able to gain certain advantages due to the brand name of Future, which is a leading Indian business group focused on consumption-led business. The group is known for successful venture into the retail business like Pantaloons, Big Bazaar, E-zone, Central, Food Bazaar, etc., many of which are a national brand today. 6. In the retail financing business, FCH benefits from the huge clientele of PRIL, which is one of India s largest retail chain store. This is mainly because FCH markets its products via the stores of PRIL & its subsidiaries. The company has a methodology of providing finance to the customers who come for shopping in the stores of PRIL (they have set up their kiosks there). The company has exclusive rights with PRIL for the above said purpose & pays Rs.30 mn every year for this right as royalty. 7. FCH is planning for product diversification in retail financing business line: i. Distribution of credit cards FCH has entered into an agreement with ICICI Bank for the marketing & distribution of the Future Card. The Future Card will also be issue to the existing ICICI Bank Big Bazaar Cardholders. As on August 31, 2007, the number of ICICI Big Bazaar Cardholders was 0.5 mn; ii. Insurance Products PRIL has entered into a joint venture with Assicurazioni Generali, a leading Italian insurance company, for the distribution of life & general insurance products in India. Through Future Money, FCH is in the process of finalizing detailed terms for acting as a corporate agent for Future Generali India Insurance Company Limited for general insurance products & for Future Generali India Life Insurance Company Limited for life insurance products. 8. On November 6, 2006 & September 11, 2007, FCH s subsidiary, Future Finance applied to the RBI, for approval to acquire 100% of the equity share capital of Keystone Company Limited ( Keystone ). Keystone is the holding company of the offshore investment managers that FCH advise, namely Indivision Capital Management for the Indivision Fund, Horizon Development Management for the Horizon Fund & FHL Developments Company LLC for the Indus Fund. This will enhance the company s presence internationally & also help them in offshore investment advisory. Concerns are: 1. The company is newly incorporated & has very limited track record of financial & other data s which can be used for analyzing whether the business is sustainable. 2. FCH has recorded net loss of Rs mn for the period ending Sept Majority of the investment advice are given on real estate & hospitality sectors, both of which are highly cyclical in nature which makes the revenues of FCH to be volatile apart from the minimum guaranteed fees. 4. The company for its financial products has heavy dependency on Future group for business insights, relationships & distribution network. ICRA has assigned an IPO Grade 3/5 to this issue. This indicates average fundamentals of the company. Page 3 of 10

4 Peer group comparison: Company EV/EBITDA (x) P/E (x) MCAP/SALES (x) P/BV (x) EPS (Rs.) Share Price (Rs.) Dividend/ Share (Rs.) FCH at Lower Band (353.17) (3.86) FCH at Upper Band (385.16) (3.86) Indiabulls Financial Services Ltd IL&FS Investsmart Managers Ltd India Infoline Ltd , Reliance Capital Ltd , * Source: SPA Research. Industry Scenario India is amongst the fastest growing major economies in the world with a real GDP growth rate of 9.2% at the end of the second quarter of FY India is the third fastest growing economy in the developing country category. Over the last few years, the perception of credit in India has changed significantly & retail credit is now being used as a means to fulfill the aspirations of India s large and growing middle class. This is particularly true with regard to consumers under the age of 30, who represent 61% of India s total population. Increases in disposable incomes, as well as low interest rates & competition among borrowers, have helped to fuel demand for retail credit. Despite the rapid growth in recent periods, penetration of credit is still relatively low in India & significant opportunities exist in retail financial services. Retail loans represented only 10% of GDP in India in 2005, compared to 27% in emerging Asia and 58% in mature markets. Penetration of credit cards in India is also relatively low. In addition, disposable incomes are continuing to rise & are expected to fuel further spending by consumers. Page 4 of 10

5 Key Financials: Financial Performance Amt (INR,mn) (100.00) 0.00 FY 2006* FY 2007 H1FY08 Income from operations EBITDA PAT (200.00) Ratio Indicators % 50.00% 0.00% FY 2006* FY 2007 H1FY % RONW OPM NPM Peer Comparison of Key Ratios 80.00% 60.00% 40.00% 20.00% 0.00% % % % RONW OPM NPM FCH at Lower Band FCH at Upper Band Indiabulls Financial Services Ltd IL&FS Investsmart Managers Ltd India Infoline Ltd Reliance Capital Ltd Page 5 of 10

6 Financial Snapshot (Rs. In Million) H1FY08 FY 2007 FY 2006* Sales Total Income Operating Profit (64.23) Net Profit (122.11) EPS* (Rs./share) (1.93) Share capital Reserves & Surplus 1, Net worth 2, , Total Debt Book Value* (Rs./share) *The no. of shares is of the post issue equity i.e mn shares. Income Statement Rs, mn Income from operations Employment Costs Administrative & General Expenses Operating Expenditure Operating Income Other Income Gross Profits Finance & Interest charges Depreciation Preliminary Expenses Written Off Profit Before Tax Tax Profit After Tax Extraordinary Items Net Profit H1FY08 FY 2007 FY 2006* (64.23) (63.51) (112.59) (122.11) (122.11) Page 6 of 10

7 Cash Flow Statement Rs, mn H1FY08 FY 2007 FY 2006* Cash flow from operations Cash for working capital Net Operating Cash Flow - A Net purchase of fixed assets Payment for capital advance Net purchase of investments Payment of goodwill on acquisition Net Cash Flow From Investing - B Proceeds from equity Proceeds / Repayment from borrowings Financial expense Net Cash Flow From Financing - C Net Cash Flow (A+B+C) Cash received on acquisition / amalgamation Opening Cash Closing Cash (54.54) (177.21) (0.36) (97.46) (0.08) (53.85) (807.31) - (14.52) (7.76) - (0.17) (174.20) - (14.03) (75.01) - (82.57) (1,064.28) - 1, , (0.30) (36.39) - 1, , , , Page 7 of 10

8 Balance Sheet Rs, mn Sources of Funds Equity Share Capital Reserves & Surplus Miscellaneous expenditure (written off) Networth Secured Loan Unsecured Loan Loan Funds Minority Interest Total Liability H1FY08 FY 2007 FY 2006* , , , , , Application of Funds Goodwill Gross Block Less: Depreciation Net Block Capital work in progress Net Fixed Assets Defeerred Tax Assets, net Investments Current Assets Sundry Debtors Cash & Bank Investment held for sale Stock on hire Loans & Advances Less: Current Liabilities & Porvisions Net Current Assets Total Assets , , , * The figures for FY 2006 are on a standalone basis. The rest of the figures are on a consolidated basis. Page 8 of 10

9 Objects of the issue: 1. Expansion for Future Money offering, particularly the growth of loan portfolio. 2. General corporate purpose. 3. Issue expense. The detailed cost of the above objects of the issue is given below: SNo. 1. Particulars Augment the capital base for expansion of the Future Money offering, in particular for disbursements of loans. Total Estimated Cost (INR, mn) 2. General corporate purpose. 3. Issue expense. Total The complete object of the issue is being financed through the proceeds of the issue. The objects of the issue have not been appraised by any bank or any financial institution or an independent organization. Page 9 of 10

10 Disclaimer: This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. SPA Securities Limited (hereinafter referred as SPA) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The intent of this document is not in recommendary nature. The views expressed are those of analyst and the Company may or may not subscribe to all the views expressed therein The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. SPA or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. SPA or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. SPA and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. SPA has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement 1. Analyst ownership of the stock - No 2. Group/Directors ownership of the stock No 3. Broking relationship with company covered - No This information is subject to change without any prior notice. SPA reserves the right to make modifications and alternations to this statement as may be required from time to time. Nevertheless, SPA is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries. SPA CAPITAL SERVICES LIMITED SPA MERCHANT BANKERS LTD. SPA SECURITIES LTD. SPA COMTRADE PRIVATE LIMITED SPA INSURANCE SERVICES LTD. Investment Advisory services, AMFI Reg. No. ARN-0007 SEBI registered Category-1 Merchant Bankers SEBI Regn. No. INM Member NSE-Capital Market & Wholesale Debt Markets,SEBI Regn.no. INB ,F&O Market,SEBI Regn.no. INF Member BSE-Capital Market,SEBI Regn.no.INB Member of NCDEX & MCX. NCDEX TMID-00729, NCDEX FMC no.ncdex/tcm/corp/0714 Direct Broker for Life and General Insurance broking IRDA Lic. Code No. DB053/03 NEW DELHI 25, C-Block Community Centre, Janak Puri, New Delhi Tel: (011) , , Fax: (011) B- 1A- 132, Sector-51, Noida Ph: Fax: , Qutab Plaza, DLF City, Phase- I, Gurgaon Ph: Fax: MUMBAI 101, 10th Floor, Mittal Court - 'A' Wing, Nariman Point, Mumbai Tel: (022) / Fax: (022) / KOLKATA Diamond Chambers, Room no. 8-O, 8th Floor, 4 Chowringhee Lane, Kolkata Tel: (033) Fax: (033) BANGALORE 703 & 704, 7th Floor, Brigade Tower, 135, Brigade Road, Corporation Division no. 61, Bangalore Ph: JAIPUR UL-15, Amber Tower, Sansar Chand Road, Jaipur Tel: (0141) / Fax: CHENNAI 3H, 3rd floor, East Coast Chambers, 92/34, G.N.Chetty, T. Nagar, Chennai Tel: (044) Fax: AHMEDABAD 407, Anand Mangal Complex - I, Behind Omkar House, C.G.Road, Navrangpura, Ahmedabad Tel: (079) Page 10 of 10