Future Enterprises Limited

Transcription

1 Future Enterprises Limited Ratings Facilities Long-term Bank Facilities (Term Loan) Long-term Bank Facilities (Term Loan) Long Term Bank Facilities (Fund Based) Short-term Bank Facilities (Non Fund based) Long-term Non-convertible Debentures (Rs. Crore) (961.06) (572.75) (0.00) (0.00) 0.00 (250.00) Ratings1 CARE AA- (Double A Minus) CARE A1+ (A One Plus) Remarks Reaffirmed Assigned - Withdrawn* *CARE has withdrawn the rating assigned to the NCD issue as the company has fully repaid the amounts under the said issue and there is no amount outstanding under the issue as on date. Rating Rationale CARE has reaffirmed the ratings assigned to the long term bank facilities and assigned CARE A1+ to the short term bank facilities of Future Enterprises Limited (FEL) (erstwhile known as Future Retail Limited) in view of the successful demerger of Retail Business Undertaking of erstwhile Future Retail Ltd. into Bharti Retail Ltd. (BRL) (renamed as Future Retail Limited), and demerger of Retail Infrastructure Business Undertaking of BRL into erstwhile FRL (renamed as Future Enterprises Limited). CARE has considered combined financials of FEL and Future Retail Limited (FRL) for analysis; given the strong operational synergies between the two companies (referred as FEL (combined). Further, FEL and FRL also propose to provide cross corporate guarantee for all the sanctioned debt in both the companies as of May 01, The rating of FEL (combined) derives strength from the experienced promoters and management team and management focus on on-going divestments across non-core businesses. The rating also derive strength from FRL s proven track record with a leading position in the organized retail business in India and pan-india presence across multiple formats The ratings, however, are constrained by moderate capital structure, moderate debt coverage ratios and low profitability exhibited by FEL (combined) in recent years. Further the rating also factors the working capital intensive nature of the retail business and intense competition. Futhermore, the ratings factor in the support FEL may have to extend to its loss-making subsidiaries/joint ventures, until such time that they are either financially stable or FEL s stakes in the same have been sold. The ability of FEL(Combined) to further improve capital structure by reducing debt, improve profitability margins in the competitive industry scenario, manage its working capital requirements efficiently amidst growing scale of operations, improve debt coverage parameters and divest investments as envisaged are the key rating sensitivities. Background Erstwhile Future Retail Limited is the flagship company of the Future Group (one of India s largest retailers) and is engaged mainly in home & electronics retailing and value retailing. On May 4, 2015, erstwhile FRL announced the merger with BRL (a step down subsidiary of Bharti Enterprises, which runs a chain of over 200 compact hypermarkets, and supermarkets under the brand name of Easyday) for a zero cash, all stock deal. On May 01, 2016, the company filed the certified copy of order issued by Honourable High Court of Bombay to make the scheme effective. Post approval, erstwhile FRL. has split its operations into retail and infrastructure (with effect from October 31, 2015) and has formed two separate entities in the following manner: Infrastructure, Investment and distribution operations: Erstwhile Future Retail Ltd. has now been renamed as Future Enterprises Ltd.(FEL) and would house the physical assets (store formats of erstwhile FRL and BRL including all the infrastructure assets situated in the stores) apart from strategic investments in various companies. Consequent to de-merger, the long term debt (comprising bank term loans and NCDs of erstwhile FRL) would now reside in the books of FEL. Retail operations: Erstwhile Future Retail Ltd. s retail operations have been consolidated with Bharti Group s Retail operations in an all- stock deal. Bharti Retail Ltd. (renamed as Future Retail Ltd.) would be taking over the working capital facilities (including Commercial Paper issuance) of erstwhile Future Retail Ltd. 1 Complete definitions of the ratings assigned are available at and other CARE publications 1

2 Erstwhile Future Retail Ltd. Retail Activity (FRL) Category/Product assortment Visual merchandise Marketing and Sales Promotion Operations at Store Operations at Corporate o Procurement decisions o IT decisions o Real estate/leasing decisions Infra Activity (FEL) In-store furniture / fixtures / fittings / electrical etc and store infrastructure IT infrastructure Fashion manufacturing and procurement Strategic investments held in various companies Bulk contracts for supply of products to companies Credit Risk Assessment Experienced promoters and management The promoters of FEL (combined) have been closely involved in the management of business, and in defining and monitoring the business strategy for the company. Furthermore, the promoters are supported by a strong management team, having significant experience in retail. Leadership position in organised retail Future group has presence in retail (value, home and electronics retail), insurance (life and non-life through JV with the Generali Group) and retail support services (through various subsidiaries). FRL is one of the leading retailers in India and occupies total retail space of mn sq. ft as at the end of March Aggregately, the Future group has pan India presence in value retailing (Big Bazaar, Food Bazaar, KB s Fairprice, Easyday), lifestyle (Central, Brand Factory, Planet Sports) & home retailing (HomeTown, ezone) and across various price points. The large scale of operations of Future group provides greater bargaining power with various suppliers & real estate developers. FEL earned a PBILDT of Rs.1049 crore on a total operating income of Rs.8376 crore in FY16 while FRL earned a PBILDT of Rs.101 crore on a total operating income of Rs.6860 crore in FY16. The operating details of the major store formats of FRL are as follows: Big Bazaar Food Bazaar Fbb HomeTown ezone Established in No. of cities present in No. of stores (as on March 31, 2016) Average size of stores (sq.ft.) Total Selling space (mn. sq.ft.) Exposure to non-core business FEL effectively holds (through direct & indirect ownership) 27.40% and 49.87% equity stake in Future Generali India Life Insurance Company Limited (life insurance business) and Future Generali India Insurance Company Limited (general insurance business) respectively. Future Generali India Insurance co. Ltd. continues to make losses and made a loss of Rs.5.25 crore in FY16. Along with this, FEL also holds 56%, 9% and 16% in Future Supply Chains Solutions Ltd. (FSC), Future Consumer Enterprise Ltd. (FCEL) and Future Lifestyle Fashions Ltd. (FLFL) respectively. During FY16, FCEL incurred a loss of Rs crore as against loss of Rs crore in FY15. FEL plans to divest its holdings in these companies over next 3-4 years. FRL has already divested 12.75% stake in FSC for a total consideration of Rs crore in April 2016 leading to a profit of Rs crore. Proceeds from stake sale are expected to partly pare company s debt as well as partially meet its future capex requirements. The ability of the company to divest its stake as envisaged remains to be seen and remains critical from credit perspective. Revenue & profitability FEL (Combined) during FY16, registered PBILDT and PAT of Rs.1150 crore and Rs.26 crore respectively on total operating income of Rs crore. Though the PBILDT margin of FEL (combined) stood at 7.87%, the PAT margin was negligible at 0.18% mainly because of the merger with the loss making BRL. BRL has been incurring overall operating losses on account of unabsorbed backend cost (logistic cost, Head office cost, infrastructure cost). However, FEL (combined) has not taken logistic division of BRL and is in process of installing its own IT technology in easyday stores which will result in substantial saving in cost from the next year. 2

3 Moderate Capital structure and debt coverage indicators The overall gearing of FEL (Combined) was 1.48x as on March 31, 2016, and its interest coverage for FY16 was 2.13x as compared to overall gearing of erstwhile FRL at 1.23x as on March 31, 2015 and interest coverage for FY15 was 1.75x. The gearing level increased in FY16 mainly due to delay in divestment of strategic investments coupled with debt raised for funding capex/ renovation of its own and BRL stores. Further, on account of Bharti Retail s Easyday store addition, the Company is in the process of introducing many of its private label brands and fashion category in the easyday store network. Accordingly, the Company has invested in the base working capital requirement for its private label brands and FMCG products being sold out of Easyday. However, going ahead, the company expects to partly prepay the debt from the sale of the non-core investments. Materialization of FEL (Combined) s plans as envisaged with respect to reduction in its debt levels shall remain critical from credit perspective. High Working Capital Cycle FEL (combined) has low receivables period like other retailers, however the inventory days are higher on account of bought out stock arrangement for its inventory which leads to higher working capital requirement. However, the average working capital utilization for the past 12 months ending April 2016 still remained moderate. Prospects With the growth momentum in the Indian economy expected to continue, albeit at a slower rate, retailing in India will be driven by rise in per capita income levels and corresponding increase in Private Final Consumption Expenditure (PFCE). Also other factors such as urbanization, increase in number of nuclear families, rising income levels and changing demographics will help drive the retail sales in the long term. Additionally, with changing lifestyle patterns and increase in awareness levels, the growth in organized retailing is expected to outpace the Indian retailing growth. In view of this, organized retailers such as FRL are in a better position to capture the opportunity of fast-paced growth in organized retail. Financial Performance (Combined financials of FEL and FRL) (Rs. Cr) For the period ended / as at Mar.31, 2015* 2016 (12m, A) (12m, A) Working Results Total Operating income 10,355 14,613 PBILDT 1,172 1,150 Interest Depreciation PBT PAT (after deferred tax) Gross Cash Accruals Financial Position Equity Capital Networth 4,964 4,930 Key Ratios Profitability PBILDT/Total Op. income (%) PAT (after deferred tax)/ Total income (%) Solvency Long Term Debt Equity ratio (times) Overall gearing ratio(times) Interest coverage(times) Term debt/gross cash accruals(years) Liquidity Current ratio(times) Quick ratio(times) Turnover Average collection period (days) Average creditors (days) Average inventory (days) Operating cycle (days)

4 *Erstwhile FRL (Standalone) Details of Rated facilities Long-term facilities I.A. Secured rupee term loans (Rs. Cr) S.No Name of Bank / Institution Sanctioned O/s as on June 22, 2016 Debt rated 1 IDBI Bank Ltd Indian Overseas Bank South Indian Bank Ltd State Bank of India Corporation Bank ECL Finance IDBI Bank Ltd State Bank of Patiala Proposed TOTAL B. Fund Based Limits Name of the Bank (Rs. crore) 1 Various Banks Total Total long-term facilities Rs crore 2.Short-term facilities Non fund based limits Sr. No. Name of the Bank (Rs. crore) 1 Various Banks Total Total short-term facilities Rs crore Note: Shri. V.K. Chopra, Rating Committee Member is a Non-Executive Chairman on the board of Future Enterprises Ltd. and hence, the note is not sent to him. To comply with the regulations, the Member is required not to participate in the rating process and the Rating Committee Meeting and press disclosure about the same is to be made by the CRA. Analyst Contact Name: Ms. Ashvini Patil Tel: ashvini.patil@careratings.com (This follows our brief rationale for entity published on 24 August, 2016) Disclaimer CARE s ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE has based its ratings on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. In case of partnership/proprietary concerns, the rating assigned by CARE is based on the capital deployed by the partners/proprietor and the financial strength of the firm at present. The rating may undergo change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the financial performance and other relevant factors. 4

5 CONTACT Head Office Mumbai Mr. Saikat Roy Mr. Amod Khanorkar Mobile: Mobile: saikat.roy@careratings.com amod.khanorkar@careratings.com CREDIT ANALYSIS & RESEARCH LIMITED Corporate Office: 4th Floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (East), Mumbai Tel: Fax: care@careratings.com Website: REGIONAL OFFICE AHMEDABAD Mr. Mehul Pandya 32, Titanium, Prahaladnagar Corporate Road, Satellite, Ahmedabad Cell: Tel: mehul.pandya@careratings.com BENGALURU Mr. Dinesh Sharma Unit No , 11th Floor, Prestige Meridian II, No. 30, M.G. Road, Bangalore Cell: Tel: , dinesh.sharma@careratings.com CHANDIGARH Mr. Sajan Goyal 2nd Floor, S.C.O , Sector 34-A, Chandigarh Cell: Tel: / 09 sajan.goyal@careratings.com CHENNAI Mr. V Pradeep Kumar Unit No. O-509/C, Spencer Plaza, 5th Floor, No. 769, Anna Salai, Chennai Cell: Tel: / pradeep.kumar@careratings.com COIMBATORE Mr. V Pradeep Kumar T-3, 3rd Floor, Manchester Square Puliakulam Road, Coimbatore Cell: Tel: / pradeep.kumar@careratings.com HYDERABAD Mr. Ramesh Bob 401, Ashoka Scintilla, , Himayat Nagar, Hyderabad Cell : Tel: ramesh.bob@careratings.com JAIPUR Mr. Nikhil Soni 304, PashupatiAkshatHeights, Plot No. D-91, Madho Singh Road, Near Collectorate Circle, Bani Park, Jaipur Cell: Tel: / 14 nikhil.soni@careratings.com KOLKATA Ms. Priti Agarwal 3rd Floor, Prasad Chambers, (Shagun Mall Bldg.) 10A, Shakespeare Sarani, Kolkata Cell: ; Tel: priti.agarwal@careratings.com NEW DELHI Ms. Swati Agrawal 13th Floor, E-1 Block, Videocon Tower, Jhandewalan Extension, New Delhi Cell: ; Tel: swati.agrawal@careratings.com PUNE Mr.Pratim Banerjee 9th Floor, Pride Kumar Senate, Plot No. 970, Bhamburda, Senapati Bapat Road, Shivaji Nagar, Pune Cell: Tel: pratim.banerjee@careratings.com CIN - L67190MH1993PLC