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The past is behind

With Warburg Pincus in the driving seat, Future Capital?s shareholders will be in better hands

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and the have bought themselves some breathing space by selling Holdings Ltd to US-based private equity Llc. A minimum of 40 per cent of Future Capital will be bought by Warburg Pincus at Rs 162 per share.

The promoters have made money in the deal as the shares were allotted to them either at par or at Rs 117 on conversion of warrants. Biyani-led Pantaloon Retail (India) Ltd, the majority shareholder in the company, had also managed to take home some money as they, too, had invested between Rs 10 and Rs 117 in 2006 and 2007.

However, the investors who bought Future Capital shares from its initial public offering (IPO) are still starring at huge losses. The issue had hit the market at the peak of the bull run in January 2008 at a price range of Rs 765 per share, when the non-banking finance company (NBFC) was almost at the drawing board stage.

It was also an issue of great investor interest – it was subscribed 131 times.

In Rs crore FY12 % chg
Total income 743.8 85.2
PBIDT 554.8 100.4
Interest 397.7 110.7
Tax 45.8 31.7
Profit after tax 105.8 115.5
Adjusted EPS (Rs) 16.3 280.7
Consolidated financials                       Source: CapitaLine Plus

There has been nothing in Future Capital’s performance after its to justify the hefty premium charged on investors. It’s only in recent months that the company had gone aggressive and started showing good growth. Also, the only differentiator it has compared with other NBFCs is its presence in Pantaloon group shops. So, while the promoters managed to exit this money-lending business by selling it to a private equity fund, investors are left still holding the baby.

At Rs 162 per share, Warburg Pincus has valued the company at Rs 1,050 crore for a business that has generated Rs 105 crore in consolidated net profit in 2011-12 (higher by 115 per cent over FY11) and has a loan book of Rs 4,670 crore and a book value of Rs 105 per share. The acquisition is at a price to book value of 1.54 times, while at the current share price of Rs 143, the price to book value works out to Rs 1.37. There isn’t too much premium that Warburg Pincus has paid for the acquisition, compared to its existing price as well as the peers trading in the market.

The moot question now facing investors is ‘Will the fortunes of Future Capital improve with a change in management?’. There are very few success stories in the market, where the fortunes of a listed company has changed after a private equity fund has come in.

All Warburg Pincus brings to the table is money bags. Along with buying the promoter out and putting in money to make the open offer, the private equity firm will be putting in Rs 100 crore in the business.

Future Capital will keep on growing till the new promoters keep on infusing capital and leverage this with further funding from other sources. Warburg Pincus, having access to lower cost of international capital, is better placed than the cash-starved Pantaloon group.

A private equity fund invests in the business to make money on sale of the business. Typically, they are not too keen on dividend income, and focus on capital gains.

At some time in the future, after growing the business to a reasonable size, they exit. Given the valuation at which Warburg Pincus has entered into the deal, the firm has at least got its entry right. It is now a question of monitoring growth and exiting.

The cards are stacked in favour of investors betting on with the private equity player. In fact, new investors have the advantage of entering the company at a price lower than what Warbus Pincus has paid for acquiring the stake, as the stock currently trades at Rs 143, compared to the acquisition price of Rs 162. While for existing IPO investors, it will be a long time before the stock sees its issue price. Nevertheless, they are in better and stronger hands now than they were earlier, and so it may not make sense for them to exit in the open offer.

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