Investors cheer as Kishore Biyani gets his mojo back

Future Retail stock best performer in segment, with 317% return this year; however, most positives seem already priced in

The image of Kishore Biyani, the poster boy for retailing, took a hit when he had to sell his Pantaloon Retail flagship to the Aditya Birla Group in May 2012, to prune debt.

With Biyani fighting back, things have changed. The stock of his flagship, Future Retail (FRL), has risen 317 per cent in 2017 so far, to Rs 536 on the BSE. This is the most among retailing companies, indicating Biyani has got back his magic touch as his company adopts an asset-light model.

In fact, the share prices of most of his Future Group companies have increased sharply in 2017, by 200-345 per cent. Avenue Supermarts (the D-Mart chain) listed in March and has risen 264.7 per cent to Rs 1,090, from its issue price of Rs 299 a share.

FRL, which operates Big Bazaar, Easy Day, fbb, Foodhall and eZone, is now in talks to acquire the Shoppers Stop-backed HyperCity. This could be the third major acquisition by FRL in about two years. It acquired Easy Day small stores from Bharti Retail in May 2015 and the retailing business of Hyderabad-based Heritage Foods in November 2016. The company now has total retail space of 13.8 million sq ft, with presence in 26 states and 240 cities, across 901 stores.

"In its food business, HyperCity tends to focus a lot on private labels, an agenda which also remains at the top of the list for FRL," said Manish Jain, analyst with foreign brokerage Nomura Securities. "With its asset-light strategy, FRL would be able to expand the footprint of HyperCity, something the current management has apparently been unable to do."

Investors are willing to back FRL's acquisition plans as the company shows a clear turnaround in business. In the first quarter of the current financial year, ending June, it recorded impressive Same-Stores Sales growth (SSSG) of 11.8 per cent, along with a 143 basis points (bps) improvement in operating profit margin (PBIDTM) to 4.5 per cent, as operating leverage has reduced the cost of retailing.

"Future Retail continues to restructure operations and move out of low margin and high inventory businesses," says Amnish Aggarwal, analyst with domestic brokerage Prabhudas Lilladher. Under its restructuring initiative, the company has converted 15 large Heritage Fresh stores into Big Bazaar ones, which would not have apparel and general merchandise. It also closed 11 eZone stores in the quarter. Easy Day is gradually improving, though it is still reported a negative Ebitda (earnings before interest, taxes, depreciation and amortisation) margin or loss of one per cent.Further, goods and services tax (GST) implementation is expected to provide efficiencies in operations, due to full set-off in input taxes, efficiencies in supply chain and increased competitiveness in value apparel. There is a five per cent GST on apparel priced below Rs 1,000, which are 32 per cent of the company's sales.

The results of all the initiatives undertaken are showing in the financial performance. For the quarter ending June, the company reported an 18.2 per cent year-on-year increase in net sales to Rs 4,705 crore; net profit more than doubled to Rs 147 crore.

"Business restructuring has lent better management focus and gives investors an opportunity to play an asset-light, pure retail model," says Tanmay Sharma, analyst with Edelweiss Securities.

Edelweiss expects the company to sustain a double-digit SSSG momentum (about 12 per cent year-on-year on an average, over FY18 and FY19), led by competitive pricing, data analytics, better store layout and customer offers.

"The company is geared for gradual margin improvement (about 75 bps higher over FY17-19), led by increase in the private label mix (fashion is about 95 per cent private label, overall 30 per cent) and turnaround in Easy Day. Which, with better operating leverage and improvement in inventory days (expected to improve further from 106 days in FY17 to 95 in FY19), will result in improving cash flow and return ratios (915 bps jump in return on equity over FY17-19)," says Sharma.

From the stock perspective, though, even as all the 10 analysts polled by Bloomberg have a 'buy' recommendation on FRL, their target price of Rs 535 suggest most of the positives are already priced in. Investors could thus consider it on price correction. Among other key stocks is Future Lifestyle, where four of five analysts have a 'buy' and the target price indicates an upside potential of 28 per cent from the current Rs 382.