With growth not in sight, Future Retail's debt hangover continues

Stake sales not enough; need to improve operational profit by addressing productivity issues, say observers

Kishore Biyani, pioneer in organised retailing, has been on a deleveraging exercise since he decided to sell a majority stake in his flagship, Pantaloons Retail, to Aditya Birla Nuvo for Rs 1,600 crore in April last year and restructured his business under Future Retail.

This was followed by a 53.6 per cent stake sale in Future Capital Holdings to private equity firm Warbug Pincus for Rs 560 crore in June last year. Yet, the company's net debt grew to Rs 7,327 crore at the end of 2012, an uncomfortable 2.23 times to equity. The company further announced sale of a 22.5 per cent stake in Future Generali Life Insurance to investment company IITL for about Rs 300 crore and a 50 per cent stake in Future Generali General Insurance for about Rs 600 crore in March this year. It plans to generate an additional Rs 3,500 crore in the next 18 months by selling stake in various investments to bring the debt down to Rs 4,300 crore at the end of 2013. These investments include consumer products firm Capital Foods and apparel brands Turtle and Biba.

However, debt reduction isn't enough. Latika Chopra, analyst at international brokerage JPMorgan, says in her report after the January to March quarter results, "A large part of the underperformance has been led by weak revenue and earnings growth trends, uncertainty on gains from the company's restructuring strategy and high leverage. While the management has announced certain potential divestments (stake in insurance joint ventures) to reduce overall debt, we believe improvement in the underlying retail business model is necessary to regain investor confidence." (Click for table)

The core retail business, which includes the standalone Future Retail and its subsidiary, Future Value Retail, posted a turnover of Rs 2,907 crore and operating profit (earnings before interest, taxes, depreciation and amortisation, or Ebitda) of Rs 252 crore. But the net profit in the quarter was low at Rs 2 crore, as it incurred Rs 152 crore as finance cost.

The result for the quarter is not comparable with the corresponding period of the previous year, consequent to demerger of the Pantaloon business on April 9.

The quarterly result does not include businesses from Pantaloons. Besides, the company is moving from reporting a July to June financial year to one from April to March. Hence, it announced an 18-month financial result at the end of December last year and proposes to report a 15-month financial at the end of March 2014, before it moves to April to March year reporting in 2014-15.

The high finance cost in the quarter, eating away the operational profit, clearly indicates the need to further deleverage the balance sheet. But improvement in operational profit is also necessary if it wants to bring down the debt level through internal accrual. The Ebitda margin of the company in the quarter was nine per cent, not impressive given the prevailing high level of finance cost in the country. The lifestyle retailing business, which includes Central, Brand Factory and Planet Sports, showed a drop in same-store sales (SSS) growth in the quarter to 9.6 per cent from 12.7 per cent in the previous one. The home retailing business, comprising eZone and Home Town, showed a higher decline at 4.1 per cent from 3.4 per cent in the previous quarter.

But SSS under the value retail business, including Big Bazaar, Food Bazaar and FBB (fashion at big bazaar), showed improvement as it renovated the stores.

It posted SSS growth of 8.1 per cent, compared to 5.1 per cent in the previous quarter. The company now plans to merge the value business subsidiary with parent Future Retail this month. Besides, the company has implemented a centralised sourcing and distribution mechanism, expected to lower cost and make the inventory management more efficient. It has also put focus on loyalty programmes and has enrolled 14 million members to reduce customer acquisition cost and optimise marketing spend.

"If the management can further improve productivity, squeeze capital requirement and sell non-core assets in stated timelines, we believe there could be a significant re-rating," said domestic brokerage Axis Capital, in a recent report.

The company did not respond to detailed queries sent to ascertain its plan for operational improvement.