BSE Sensex S&P CNX 19,990 6,069 Bloomberg FRL IN Equity Shares (m) 217.1 M.Cap. (INR b)/(usd b) 33.4/0.6 52-Week Range (INR) 276/127 1,6,12 Rel. Perf. (%) -10/-32/-20 Financials & Valuation (INR b) Y/E Dec 2012E* 2013E 2014E Sales 122.5 139.9 158.0 EBITDA 11.0 12.7 14.5 Adj. PAT 1.1 1.5 2.1 Adj. EPS (INR) 4.8 6.7 9.3 EPS Gr. (%) -45.2 39.9 39.0 BV/Sh.(INR) 139.5 144.5 151.1 RoE (%) 3.4 4.6 6.2 RoCE (%) 12.0 13.2 9.5 Payout (%) 25.0 22.4 21.5 Valuations P/E (x) 32.1 23.0 16.5 P/BV (x) 1.1 1.1 1.0 EV/EBITDA (x) 7.0 6.2 5.7 Div. Yield (%) 0.8 1.0 1.3 * 18 months CMP: INR154 9 May 2013 1QCY13 Results Update Sector: Retail Future Retail Under review Future Retail's 1QCY13 results were below estimates. Core retail PAT was down 83% YoY to INR20m (est INR74m). Net sales declined 2% to INR29.1b (est INR32.4b), while EBITDA margin stood at 8.6% (est 8.7%) as EBITDA fell 10% to INR2.5b (est INR2.8b). However, performance is not comparable YoY due to demerger of Pantaloon format. Same store performance improved, as expected. SSS growth was 9.6% for Lifestyle division, 8.1% for Value and -4.1% for Home division. Like-to-like gross space contraction during the quarter stood at 0.26msf as it rationalized space in Food Bazaar. Management expects further improvement in same store growth due to ensuing wedding season. Highlight of the quarter was turnaround in its electronics format - e-zone. The chain reported 27% same store growth and revenue growth of 43% to INR1.5b. This, as per the management, was a result of host of strategic initiatives undertaken in the last 18 months. Company is planning similar strategy for its Home Town format. Core retail debt stood at ~INR45b. For the Lifestyle format demerger and listing of new entity, FLF, company will take court's approval this month. On completion of deleveraging transactions, Future Retail's debt would be ~INR30b (transfer of INR12b debt to FLF, inflow of INR7b from insurance venture divestment, new capex). We will revise estimates, target price and rating, post management interaction. Our rating and TP is under review. Slowdown in discretionary consumption and worsening of consumer sentiments are key risks. Our indicative SOTP, after adjusting for Pantaloon's demerger, works out to INR210/share - we value the core retail business at 8x EV/EBITDA, Future Lifestyle Fashion at 10x EV/EBITDA (with 25% holding company discount) and other investments (Future Logistics, Staples etc) at book value. Gautam Duggad (Gautam.Duggad@MotilalOswal.com); +9122 3982 5404 Sreekanth P V S (Sreekanth.P@MotilalOswal.com); +9122 3029 5120 Investors are advised to refer through disclosures made at the end of the Research Report. 1
1QCY13 PAT down 83%; Same store growth remains strong ; e-zone shows significant improvement Core retail (includes standalone plus Big Bazaar, Fashion @ Big Bazaar and Food Bazaar) sales decline 2% to INR29b (est. INR32.4b) however numbers are not comparable YoY due to de-merger of Pantaloon format. Same store performance improved, as expected. Same store sales (SSS) growth was 9.6% for Lifestyle division, 8.1% for Value and -4.1% for Home division. Gross margins declined 160bps to 27.3%. However decline in EBITDA margins was restricted to 60bps to 8.6% (est 8.7%) due to 70bps and 40bps savings in employee and other expenses. Core Retail EBITDA declined 10% to INR 2.49b. Despite 12% decline in interest costs and 84% increase in other income PBT and PATdeclined83% as depreciation expenses went up 10% YoY. Standalone (includes Central, Brand Factory, e-zone, Home Town): Stand-alone numbers are not comparable as base quarter had Pantaloon numbers. Standalone gross and EBITDA margins came in at 32.3% and 7.7%, respectively. Snapshot of standalone, core retail and derived value retail numbers (INR m) 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 5QFY12 6QFY12 1QCY13 Sales 25,814 27,586 28,119 28,604 29,106 28,933 30,264 29,627 30,600 31,708 29,070 EBITDA 2,127 2,383 2,479 2,585 2,523 2,612 2,776 2,763 2,647 2,779 2,490 EBITDA Margin (%) 8.2 8.6 8.8 9.0 8.7 9.0 9.2 9.3 8.7 8.8 8.6 Interest 933 1078 1096 1177 1305 1582 1725 1804 1761 1567 1520 Adjusted PAT 428 472 505 492 330 135 120 39 29 44 20 PAT Margin (%) 1.7 1.7 1.8 1.7 1.1 0.5 0.4 0.1 0.1 0.1 0.1 Standalone (INR m) 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 5QFY12 6QFY12 1QCY13 Sales 9,915 10,243 9,887 9,996 10,784 11,080 11,059 11,176 11,921 12,529 9,115 EBITDA 958 1,074 683 664 1,198 1,259 993 1,043 908 1,034 701 EBITDA Margin (%) 9.7 10.5 6.9 6.6 11.1 11.4 9.0 9.3 7.6 8.3 7.7 Interest 420 462 484 524 657 736 794 846 814 756 528 Adjusted PAT 176 199 201 191 124 56 54 26-46 -49 25 PAT Margin (%) 1.8 1.9 2.0 1.9 1.2 0.5 0.5 0.2-0.4-0.4 0.3 Future Value Retail (INR m) 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 5QFY12 6QFY12 1QCY13 Sales 15,899 17,343 18,232 18,608 18,322 17,854 19,205 18,451 18,679 19,180 19,955 EBITDA 1,169 1,310 1,795 1,921 1,325 1,353 1,783 1,721 1,739 1,745 1,790 EBITDA Margin (%) 7.4 7.6 9.8 10.3 7.2 7.6 9.3 9.3 9.3 9.1 9.0 Interest 513 616 612 653 648 846 931 958 947 811 992 Adjusted PAT 252 273 304 301 206 79 66 13 75 93-5 PAT Margin (%) 1.6 1.6 1.7 1.6 1.1 0.4 0.3 0.1 0.4 0.5 0.0 Source: Company, MOSL 9 May 2013 2
SSS improves; Lifestyle up 9.6%, value retailing up 8.1% SSS grew 8.1% in Value retailing (up 5.1% in 6QFY12). Home Retail SSS declined 4.1% (down 3.4% in 6QFY12). Renovation of Big Bazaar stores has resulted in the sustained pick up in same store growth. Lifestyle division reported 9.6% SSS (12.7% in 65QFY12), underscoring the spill-over of improved consumer sentiment from festive quarter. Management in the press release commented upon expected improvement in profitability post the store optimization and category revamps undertaken in the recently. It expects further improvement in same store growth due to ensuing wedding season and good response to its Public Holiday sale in May. Highlight of the quarter was turnaround in its electronics format - e-zone. The chain reported 27% same store growth, and revenue growth of 43% to INR1.5bn. This, as per management was a result of host of strategic initiatives undertaken in the last 18 months - store size optimization, re-designing merchandise, exit from certain cities and categories etc. Company is planning similar strategy for its Home Town format. SSS growth improves for Value format Home format still remains under pressure Source: Company, MOSL Like to like net area contraction of ~0.26msf On like to like basis after excluding Pantaloon format, Future Retail's space contracted 0.26msf QoQ. Gross space addition was 0.33mn sqft. Total area under operation stands at 14.12msf. During the quarter, it opened 4 Big Bazaar and 2 Brand Factory. 9 May 2013 3
Key Retail Metrics 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 5QFY12 6QFY12 1CFY13 Retail Space (m sq ft) Big Bazaar 7.0 7.4 7.6 7.6 7.6 7.9 8.0 8.1 7.9 7.9 8.0 Central 2.2 2.4 2.5 2.6 2.8 3.0 2.9 3.2 3.2 3.3 3.3 Pantaloons 1.3 1.5 1.5 1.7 1.8 1.9 2.0 1.9 2.0 2.0 - Home Town 1.1 1.1 1.2 1.2 1.2 1.2 1.3 1.3 1.2 1.2 1.1 E Zone 0.5 0.5 0.5 0.5 0.4 0.4 0.4 0.4 0.4 0.4 0.4 Food Bazaar 0.5 0.5 0.5 0.6 0.5 0.5 0.5 0.5 0.5 0.5 0.4 KB's Fair Price 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.0 0.0 0.0 0.0 Others 0.7 0.7 0.8 0.9 1.1 1.2 1.2 1.1 1.2 1.2 1.0 Total 13.4 14.2 14.8 15.2 15.7 16.3 16.33 16.36 16.35 16.37 14.12 Store Count (x) Big Bazaar 136 143 148 149 149 157 160 162 160 161 162 Central 27 29 30 32 35 38 37 41 42 46 48 Pantaloons 48 53 54 59 59 64 65 65 65 67 - Home Town 11 11 12 12 14 15 17 17 14 14 13 E Zone 42 43 44 42 36 36 33 40 36 38 38 Food Bazaar 55 54 56 56 49 47 44 46 44 43 31 Net Store Addition (x) Big Bazaar 4 7 5 1 0 8 3 2-2 1 1 Central 2 2 1 2 3 3-1 4 1 4 2 Pantaloons 0 5 1 5 0 5 1 0 0 2 0 Home Town 0 0 1 0 2 1 2 0-3 0-1 E Zone 6 1 1-2 -6 0-3 7-4 2 0 Food Bazaar 2-1 2 0-7 -2-3 2-2 -1-12 Source: Company, MOSL De-leveraging transactions largely over Future group's strategic focus in the past 12-18 months has been to deleverage the balance sheet via divestment of non-core assets. Given the limited cash generation from Core Retail business, investments in non-core retail assets were bleeding the balance sheet in a rising interest rate regime. Following are the five de-leveraging transactions done so far: 1) Sale of Pantaloon Retail Format to ABNL (Aditya Birla Nuvo) - demerger complete - debt of INR8bn transferred, INR8bn OFCD to be redeemed. 2) Partial stake Sale of Future Capital stake to Warburg Pincus - transaction complete - cash flow of INR 4bn received. 3) Re-alignment of lifestyle businesses in a separate entity, to be listed - INR12bn debt will be transferred to the new entity.. 4) Stake sale in life insurance JV to IITL and 5) Stake sale in general insurance JV to L&T. Once the regulatory approvals are in place (likely by 2HFY14), the aforementioned deals should result in debt reduction of ~INR19b, excluding the INR16bn debt transfer to AB Nuvo. Details of de-leveraging transactions Transaction Deleveraging potential Approvals Transaction status - closure timlines (tentative) Re-alignment of Fashion business INR 12 bn Court approval pending June-July'13 Life Insurance Stake Sale INR 3 bn CCI,IRDA, RBI September'13 General Insurance Stake Sale INR 4bn CCI,IRDA September'13 9 May 2013 4
Valuation and view: Early signs of recovery; expect improvement in balance sheet ahead Same store performance has improved aided by various initiatives like store refurbishment, aggressive sales push around public holidays etc. However, profitability still remains under pressure. Post the de-leveraging deals, interest costs will come down further (down 11% for 1QCY13). Key investor concern around investments in non-core retail assets has been largely addressed, we believe. While we have not yet firmed our future projections pending clarity on financials - our indicative SOTP suggests good upside potential. We have adjusted the SOTP for de-merger of Pantaloon format. We value Core Retail business at 8x EV/EBITDA, Future Lifestyle Fashion at 10x EV/ EBITDA and other investments (Future Logistics, Staples etc) at book value. The benefits of recent restructuring will reflect going forward and result in improved balance sheet with lower leverage and higher interest coverage. However, we await more clarity on financials of different verticals post the recent business re-structuring initiatives before revisiting our investment thesis. We will be revising our estimates, target price and rating post detailed management interaction. Our rating and target price is under review. Slowdown in discretionary consumption and worsening of consumer sentiments are key risks. Indicative SOTP: adjusted for the Pantaloon demerger INR M EBITDA EV Debt Equity FRL's FRL's Per Share Remarks stake (%) share value Core Retail 8800 70,400 40,000 30,400 100 30400 131 Future Lifestyle 3630 36,300 15,000 21,300 70 14910 48 50% share swap + 20% indirect holding through FRL, 25% holding company discount Support businesses 7000 30 Excluding investments in insurance and Value Retail sub Total 210 9 May 2013 5
Future Retail: an investment profile Company description Future Retail is the largest organized retailer in Indiawith a retail space of more than 2m square feet underits belt. It retails multiple categories throughdifferent format offerings like hypermarkets (Big Bazaar), seamless mall(central) and standalone stores. Key investment arguments Pantaloon is the best play in the fast growingorganized retail play with its presence acrosscategories and formats. Pantaloon has a high share of private labels in itssales mix (approximately 50-60%) which enables itto earn high operating margins even in traditionallylow margin business of food retailing. Divestment of non-core retail assets will provide earnings boost due to reduction in interest cost. Key investment risks Slow space addition and accelerating store closerposes a risk to revenue growth. Weak SSS growth across all formats and high interestcosts are a threat to profitability. Recent developments Divested partial stake in Life and General insurance ventures for a total consideration of INR7bn. Record date of Pantaloon format demerger announced. Valuation and view We withhold estimates beyond FY12 pending clarityon residual operations post Pantaloon format stakesale. Our rating and TP is under review. Sector view We are cautious on the sector. We expect the sectorto clock a revenue growth of 15-20% CAGR over thenext three years. Players like Pantaloon Retail with a stronghypermarket format and presence in larger numberof categories are likely to be bigger winners. Longer term prospects bright, given rising incomesand low penetration. Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) 154 Under review NA Under Review Stock performance (1 year) Shareholding pattern (%) Mar-13 Dec-12 Mar-12 Promoter 44.2 43.7 44.7 Domestic Inst 12.6 14.3 14.3 Foreign 26.0 22.0 23.1 Others 17.3 20.0 17.9 9 May 2013 6
Financials and Valuation 9 May 2013 7
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