Future Retail Ltd. share price target

Post declaration of Future Group deal with Reliance Retail, we had given a call of sell on rallies (link to note). FRL shareholders in this deal will get shares of FEL which will have businesses like Consumer brands, Apparel Manufcaturing, Food park, Stake in Insurance ventures etc. we believe massive equity dilution in FEL (Rs12.26bn shares) and little profitability, makes the risk reward unfavorable. We believe FRL is no more a play on structural growth story of organised retail in India. we recommend exit from FRL and drop coverage on the stock....

Strategic flip-flops in expansion, 2. Uncomfortable leverage, high pledges and 3. Lack of execution makes us uncomfortable on FRL, valuations notwithstanding. Hence, we downgrade the stock to NEUTRAL with a DCF-based TP of Rs. 370/sh (earlier Rs. 500/sh; implying 11x FY22 EV/EBITDA). The TP cut is a function of 1. 5-8% EBITDA cut in FY21/Y22 to account for higher cost of retailing, 2. Lower profitability beyond FY22 too. Our previous BUY recommendation on Future Retail (FRL) was predicated on our belief that the retailer finally seems to have zeroed-in on its core after rummaging through multiple formats. However, we must admit its constant strategic flip-flops in assigning a core growth engine in a short span of time has left us stumped and certainly can be un-nerving for an investor. Ergo, we downgrade the stock to NEUTRAL (earlier BUY) with a revised TP of Rs. 370/sh (Implying 11x FY22 EV/EBITDA)

14 February 2020 Future Retails revenue declined marginally in 3QFY20 due to closure of small-format stores and exit from select product categories. We cut our revenue estimate by 11% for FY21 to factor in store closures, lesser store adds and slower SSSG. We also cut our EBITDA estimate by a lesser 7% for FY21 due to loss of revenue from store closure. Revenue fell 3% YoY to INR51.3b (7% miss), but the gross margin improved remarkably by 270bp YoY to 28.7%. Thus, pre-Ind AS 116 EBITDA grew 12% YoY to INR3.1b (16% beat) with the margin improving by 80bp YoY to 6%. FRL closed three Big Bazar stores and 157 small-format Easyday and Heritage stores at net level. At gross level, it closed six Big Bazaar, 157 Easyday, and two E-zone stores. PBT came in at INR1.9b (30% beat, -3% YoY), aided by higher other income (3x YoY to INR148m).

Tie up with Amazon opens up huge opportunities for Future Group in providing Omni channel retailing and placement of Group brands/private labels online Amazon's infusion of Rs15bn for acquiring 3.58% indirect stake in FRL with option to acquire full/part promoter holing in FRL between 3rd to 10th year is...

23 August 2019 FRL announced that Amazon plans to acquire a 49% stake in Future Coupons (FCL), the promoter group entity which holds a 7.3% stake (39.6m shares) in the company. It did not disclose the deal value; however, we estimate it to be at a significant premium to INR505 the price at which FRL issued warrants to FCL in Feb19. This potentially values the deal at ~INR15b. Amazon has the call option to buy up to 100% of the promoter stake, which can be exercised between the third and tenth under certain circumstances. The promoter group has restriction to any incremental share transfers, while Amazon has the right of first refusal (ROFR) for any additional stake promoter sale with certain conditions. Future Retail Feb19, FRL issued 39.6m shares (7.3% stake) through warrants to FCL, a promoter group entity, at INR505/share, valuing it at INR20b. Of this, 25% (i.e. INR5b) is already paid.

Showing consistency in SSSG, margin improvement: FRL reported revenue growth of 14% YoY (in-line) to INR52.3b in 1QFY20. EBITDA grew 20% YoY to INR2.7b on a pre-Ind-AS 116 basis (reported EBITDA at INR6.3b), with margin improving 30bp YoY to 5.1% led by healthy SSSG of 8.3% YoY. PAT (pre-IndAS) grew 11% YoY to INR1.7b (reported growth of +6% YoY, implying an impact of INR75m from the accounting change). Healthy trends at Big Bazaar; Easyday WIP: Big Bazaar (BB) recorded steady SSSG of 8.1% with three store additions (BB and FBB). In our view, BB grew revenue/EBITDA at 8%/18% YoY, led by healthy margin improvement....

EBIDTA margins up 40bps despite headwinds in Easyday and HyperCity We are cutting FY19 and FY20 EPS estimates of FRL by 6%-9% following lower than expected profits in 1Q due to 1) lower sales due to impact of GST, Ezone and Hometown in base and Hypercity renovation 2) Pressure on small...

Q3 comparable sales grew 21% supported by 10% SSSg. Gross profit grew 9% YoY with 70 bps gross margin expansion. EBITDA grew 65% on positive operating leverage. OPM improved 100 bps to 4.6%. PAT grew 81% due to lower finance costs.

In-line results: Q2 comparable^ sales grew 20% supported by 10% SSSg. Gross profit grew 12% YoY. EBITDA grew 65%, driven by positive operating leverage. PAT doubled to Rs 1.5 bn, as net profit margin improved 160 bps to 3.4%.

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.

Future Retail Ltd (FRL) is the retailing arm of the Future Group, selling products ranging from food, apparels, appliances to general merchandise through large and small store formats including Big Bazaar (BB), Easyday (ED), Foodhall, Fashion at Big Bazaar (FBB), and ezone. As of 31 December 2016, FRL had retail space of ~ 13 mn square feet (sq ft) with BB forming ~75% of the total space; ED~ 6%; HomeTown~10% and FBB (standalone stores) and ezone contributed equally to the balance. We like FRL's leadership position in the fast growing modern retail space; focus on improving profitability; and the strong expansion plans within the retail space. We expect FRL to...