Future Retail gleams in new avatar

Asset-light model should result in profitable growth

With 100 per cent stock rise this year, Future Retail is a winner. Some part could be down to coming share issue of Avenue Supermart, and improvement in financial performance after restructuring.

Future Retail was re-listed in August. Its net profit has surged for the past three quarters — total profit for the first nine months of FY17 was Rs 245 crore. In its new avatar, the company is projected as a pure-play retailer. Unlike its earlier model of taking debt to expand, Future Retail will be mostly asset-light, incurring only working capital costs. 

From FY15 till now, working capital days have reduced from 168 to 104 days. Any debt to be incurred for expansion such as store additions will be done by Future Enterprise, a sister concern. Future Retail will issue security deposits in lieu of funds raised. So, the focus of Future Retail would be to capitalise on its market leadership (22.4 per cent in FY16) in organised store-based retail and expand its multi-format strategy. 

Amit Vora, an analyst with PCS Securities, says recent acquisitions such as of Easy Day from Bharti Retail and Heritage Super Market should also augment same-store sales (SSS). “These acquisitions have been made at the right price and provide tax arbitrage opportunities,” he adds. 

Efforts to scale up the value chain in the food business through brands such as Kosh, Golden Harvest, Premium Harvest and KARMIQ are fruitful opportunities for expanding SSS and operating profit margin. Even in the non-food segment (60 per cent of revenue), the premium offerings have been well-received. 

Analysts at Morgan Stanley believe operating profit margin can increase from 3.5 per cent to 4.5 per cent in FY20. Gross margins (revenue minus cost of goods sold), however, might stay at 25 per cent in the foreseeable future, as near-term thrust is on improving operating leverage. 

The brokerage initiated a ‘buy’ with a target price of Rs 340 for the share (35 per cent up from the current Rs 251). This affirms that the next leg of re-rating could be driven by overall operational improvement from SSS growth, margin expansion due to product mix improvement, and greater capital efficiencies.

Version 2 of Future Retail holds potential for investors wanting to capture India’s consumption theme. But, given the recent rally, any noteworthy correction may be a better entry point.