FUTURE RETAIL LIMITED

Transcription

1 FUTURE RETAIL LIMITED Ratings Facilities Amount (Rs. crore) Ratings 1 * Remarks Long-term Bank Facilities 950 CARE A [Single A] Short-term Bank Facilities 625 CARE A1 [A One] Total Facilities 1,575 Commercial Paper (carved out of working capital limits) 90 CARE A1 [A One] Long-term Non-convertible Debentures 250 CARE A Long-term Non-convertible Debentures 200 [Single A] Long-term Non-convertible Debentures 600 Total Instruments 1,140 Reaffirmed Reaffirmed * All ratings continue to be under credit watch on account of the proposed amalgamation of Future Retail Ltd s 100% subsidiary Future Value Retail Ltd with itself. Rating Rationale The ratings continue to derive strength from the experienced promoters and management team, Future Retail Limited s (FRL) proven track record with a leading position in the organized retail business in India and pan-india presence across multiple formats. The ratings also derive strength from the company s ability to raise capital, on-going divestments across non-core businesses and management focus as regards reduction of debt. The ratings, however, continue to be constrained by moderate debt coverage ratios of FRL, working capital intensive nature of the business and intense competition, which can adversely impact the profitability of FRL. Furthermore, the ratings continue to factor in the support FRL may have to extend to its loss-making subsidiaries/joint ventures, until such time that they are either financially stable or FRL s stakes in the same have been sold. The ability of FRL to obtain the necessary approvals towards concluding its planned disinvestments and consequently monetize investments in its subsidiaries and joint ventures in a timely manner, improve profitability margins in the competitive industry scenario, manage its working capital requirements efficiently amidst growing scale of operations and improve debt coverage parameters via expected infusion of equity are the key rating sensitivities. Background FRL is the flagship company of the Future Group (one of India s largest retailers). Currently, FRL is engaged in home & electronics retailing (on standalone basis) and into value and fashion retailing through the wholly-owned subsidiary - Future Value Retail Limited (FVRL). As on December 31, 2012, FRL, along with FVRL, had 458 stores with mn sq ft of retail area. This excluded the 90 stores of Pantaloons and Pantaloons Factory Outlet format business, which were demerged from FRL. FRL is in the process of realigning its businesses in order to create a simplified business structure with independent companies in hypermarket and supermarket chains (FRL), fashion (Future Lifestyle Fashions, FLFL) and food and FMCG businesses (Future Ventures India Ltd, FVIL). FRL is also in the process of merging its 100% subsidiary FVRL with itself. The various businesses under the three formats, post-realignment, are as follows: Company Name Nature of Business Formats Included Other Investments Future Retail Ltd Hypermarkets, Supermarkets, Big Bazaar Future Supply Chain 1 Complete definition of the ratings assigned are available at and other CARE publications 1

2 Company Name Nature of Business Formats Included Other Investments Future Lifestyle Fashions Ltd Future Ventures Home improvement and consumer durables chains Fashion company with department stores and portfolio of companyowned private brands Integrated food and FMCG company with food parks Food Bazaar FBB Home Town ezone Other specialty formats like Foodhall etc. Central Brand Factory all Planet Sports KB s Fairprice Big Apple Aadhaar Tasty Treat Fresh n Pure Solutions Future Lifestyle Fashions Future Ventures Apollo & Goldmohur Apparel Parks Capital First AND BIBA Turtle Indus Lee Crafts Celio Clarks Holii Capital Foods Amar Chitra Katha On June 4, 2012, the private equity firm Warburg Pincus entered into a definitive agreement with FRL and FVRL to acquire 40% stake in Future Capital Holdings (FCH) for Rs.420 crore. The deal was completed on September 28, Currently, FRL s holding in Capital First Ltd (rated CARE AA+ / CARE A1+ for its bank facilities and non-convertible debentures) has reduced to 9.12%. Furthermore, through other subsidiaries & JVs, FRL also has presence in retail support services, & insurance (life & non-life through JV with Generali, FRL effectively holds 49.5% stake in the JV). FRL is in the process of selling off its stakes in the insurance businesses. Credit Risk Assessment Experienced promoters and management The promoters of FRL have been closely involved in the management of business, and in defining and monitoring the business strategy for the company. The promoters have been regularly either infusing or raising equity to finance the growth plans of FRL. Furthermore, the promoters are supported by a strong management team, having significant experience in retail. Business segment FRL on consolidated basis 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). The lifestyle segment of FRL has been demerged into FLFL and FVRL is proposed to be merged into FRL, turning it into a primarily value retail company. As a result, the major store formats that shall be in FRL are Big Bazaar, Food Bazaar, Big Bazaar (FBB), HomeTown and ezone. The divestment of the Pantaloon format business from FRL has been completed in FY13 and its contribution in FY12 (refers to the period July 1, 2011 to December 31, 2012; hence, FY12 numbers are not strictly comparable to FY11) was Rs.2,431 crore out of its total consolidated operating income of Rs.20,215 crore (12.03%) and corresponding EBITDA was Rs.268 crore out of the total of Rs.2,345 crore (11.43%). The operating details of the major store formats that would remain in FRL post restructuring are as follows: Big Bazaar Food Bazaar FBB Home Town and HomeTown Express ezone Established in No. of cities present in

3 No. of stores (as on Dec. 31, 2012) Big Bazaar Food Bazaar FBB Home Town and HomeTown Express ezone Total Area (mn. sq. ft.) Leadership position in organised retail FRL is one of the leading retailers in India and along with FVRL, it occupies a total retail space of 14.28mn sq. ft with 458 stores as of December 2012, as compared with mn. sq. ft. and 461 stores as on June 30, This figure does not include 90 stores and 1.98mn. sq.ft. of Pantaloons and Pantaloons Factory Outlet format stores, which have been sold to Aditya Birla Nuvo Ltd (ABNL). On a group level, FRL has a pan India presence in value (Big Bazaar, Food Bazaar, KB Fair price & others), lifestyle (Central, Brand Factory & others) & home retailing (Home Town, ezone& others), and across various price points. The large scale of operations of FRL provides greater bargaining power with various suppliers and real estate developers. Exposure to non-core business As discussed above, FRL has sold its controlling stake in FCH. FCH s contribution to FRL s consolidated income in FY12 was Rs crore and corresponding PBT was Rs.207 crore. As part of the transaction, FRL has acquired strategic assets from erstwhile FCH in the form of future receivables from Centrum Group entities amounting to Rs.154 crore in September Further, FCH could require support from FRL against loans given to the Deccan Chronicle group (worth Rs. 170 crore) which has already been taken over by a promoter group entity of FRL. The promoter group entity has also taken over the corresponding collateral shares pledged and other securities offered against these loans. Furthermore, FRL effectively holds 49.5% each in the two insurance JVs (Future Generali India Insurance Co Ltd and Future Generali India Life Insurance Co Ltd). FRL has entered into a share purchase agreement with Industrial Investment Trust Limited (IITL) for sale of 22.5% stake in its life insurance subsidiary for an amount of Rs crore and the deal is awaiting IRDA and other regulatory approvals. FRL plans to sell its remaining stake of 27% in FY13 as well. Furthermore, FRL has also signed a non-binding agreement with Larsen & Toubro (L&T) for sale of its entire 49.5% stake in the general insurance business, for which, it is expected to receive a consideration of around Rs.500 crore and this deal is also awaiting regulatory approvals. Both these transactions are expected to conclude in FY13. Revenue & profitability On a consolidated basis, FRL posted a total income of Rs.20,215 crore in FY12 (vis-à-vis Rs.12,236 crore in FY11) and PAT of Rs.345 crore (vis-à-vis Rs.144 crore in FY11). However, this PAT amount also includes Rs.379 crore of extraordinary income on account of stake sale of erstwhile FCH and other non-current investments. The SSG growth slowed down significantly primarily on the account of the weak consumer sentiments and subdued economic conditions. The same-store sales growth (SSG) for FY12 stood at 7.3% for lifestyle, 2.5% for value and -2.8% for home segment while SSG for Q1FY13 for the same segments were 9.6%, 8.1% and -4.1%, respectively. Although FRL improved its operating margins for the period under consideration, its PAT margins (excluding income from sale of stake in FCH) declined on account of high interest costs. Capital structure and debt coverage indicators On a consolidated basis the overall gearing ratio has remained nearly constant at 1.62x, as on December 31, 2012, as compared with 1.64x, as on June 30, However, the FY12 figure includes Rs.800 crore of Optionally Fully Convertible Debentures as unsecured debt, which has since been transferred from FRL s books on account of the sale of Pantaloons format business to ABNL. If we consider that amount as neither debt nor equity, then the gearing for December 31, 2012, drops to 1.43x. Furthermore, the total debt to GCA has improved to 6.53x as on December 31, 2012, vis-à-vis 13.74x as on June 30, 2011, on account of inflow of Rs.323 crore from stake sale of erstwhile FCH. However, with the company s divestment of its Pantaloons format business as well as its fashion retail business to FLFL as well as various divestments of its non-core financial services businesses, total debt is expected to come down by the end of FY13. Further, the company also expects equity infusion in the coming years; this is expected to further improve the capital structure of FRL and would be a key rating sensitivity for the company. Prospects The Indian retail industry is currently going through a difficult phase fuelled by the weak consumer sentiments and postponement of the purchases. Going forward, revival in the consumer sentiments, curtailing of debt funded expansion plans and efficiently 3

4 managing the supply chain would be critical for the industry. With the growth momentum in the Indian economy expected to continue, albeit at a slower pace, the retail sales during FY15 is expected to surge 1.5x from FY12 sales levels, recording a CAGR of 14.8% during FY12-FY15. Furthermore, the relaxation in FDI norms relating to multi-brand retailing to allow foreign investments upto 51% is expected to attract a host of foreign retailers in the country. In addition, this would also prove beneficial to Indian retailers operating in the multi-brand retailing space with new JVs being formed by the Indian retailers with their foreign counterparts. (Source: CARE Research) Financial Performance (Consolidated) (Rs. Cr) For the period ended / as at Mar.31, (12m, A) (12m, A) (18m, A) Working Results Net Sales 9,051 11,328 19,056 Total Operating income 9,817 12,236 20,215 PBILDT 861 1,053 2,345 Interest Depreciation PBT PAT (after deferred tax) Gross Cash Accruals Financial Position Equity Capital Networth 3,375 4,181 4,178 Total capital employed 7,657 11,442 11,266 Key Ratios Growth Growth in Total income (%) Growth in PAT (after D.Tax) (%) Profitability PBILDT/Total Op. income (%) PAT (after deferred tax)/ Total income (%) ROCE (%) Average cost of borrowing (%) 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)

5 DISCLAIMER Shri. V.K. Chopra, Rating Committee Member is a Non-Executive Director on the board of Future Retail 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. 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. 5

6 CARE is headquartered in Mumbai, with Offices all over India. The office addresses and contact numbers are given below: HEAD OFFICE: MUMBAI Mr. D.R. Dogra Managing Director Mobile : dr.dogra@careratings.com Mr. Rajesh Mokashi Dy. Managing Director Mobile rajesh.mokashi@careratings.com Mr.Ankur Sachdeva Vice President Banking & Financial Services Mobile: ankur.sachdeva@careratings.com CREDIT ANALYSIS & RESEARCH LTD. HEAD OFFICE 4th Floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (East), Mumbai Tel: care@careratings.com Fax: KOLKATA Ms. Priti Agarwal Cell: Tel: / 1602 E- mail: priti.agarwal@careratings.com 3rd Flr., Prasad Chambers (Shagun Mall Bldg), 10A, Shakespeare Sarani, Kolkata CHENNAI Mr. V Pradeep Kumar Cell: Tel: / Fax: pradeep.kumar@careratings.com Unit No. O-509/C, Spencer Plaza, 5th Floor, No. 769, Anna Salai, Chennai AHMEDABAD Mr. Mehul Pandya Cell: Tel: Fax: mehul.pandya@careratings.com 32, Titanium, Prahaladnagar Corporate Road, Satellite, Ahmedabad NEW DELHI Ms. Swati Agrawal Cell: Tel: / swati.agrawal@careratings.com 3 rd Floor, B -47, Inner Circle, Near Plaza Cinema, Connaught Place, New Delhi BENGALURU Mr. Dinesh Sharma Cell: Tel: dinesh.sharma@careratings.com Unit No. 8, I floor, Commander's Place, No. 6, Raja Ram Mohan Roy Road, (Opp. P F Office), Richmond Circle, Bangalore HYDERABAD Mr. Saikat Roy Tel: saikat. roy@careratings.com 401, Ashoka Scintilla , Himayat Nagar Hyderabad PUNE Mr. Rahul Patni Cell: Tel: rahul.patni@careratings.com 9th Floor, Pride Kumar Senate, Plot No. 970, Bhamburda, Senapati Bapat Road, Shivaji Nagar, Pune JAIPUR Mr. Rahul Jain Cell: Tel: /14 rahul.jain@careratings.com 304, Pashupati Akshat Heights, Plot No. D-91, Madho Singh Road, Near Collectorate Circle, Bani Park, Jaipur