Ambani-Biyani deal: Retail arm leads Future firms' rally on bourses

In a weak market, the listed stocks of Future Group were the biggest gainers on Monday. The gainers were led by Future Retail (FRL), which was up 20 per cent. Most other stocks hit their upper circuit, gaining 5 per cent each. As part of the deal announced on Saturday, Future Group will be selling its retail assets to Reliance Retail in a deal pegged at Rs 24,713 crore. 

Listed entities of the group will merge into Future Enterprises (FEL) at a determined swap ratio before the asset sale to Reliance Retail. Some brokerages believe the swap ratios are favourable and, therefore, there are substantial upsides for shareholders of Future Lifestyle Fashions (FLFL), FRL, and Future Consumer (FCL). 

Based on the swap ratio, analysts at Antique Stock Broking peg the intrinsic value of FLFL, FRL, and FCL at Rs 234, Rs 204, and Rs 18, respectively. Even after the increase in prices, the stocks could see more upsides. While the upside for FLFL and FCL is pegged at around 50 per cent each, that for FRL is at 26 per cent. Reliance Securities’ Vikas Jain says existing investors can hold the shares and wait for some price upmove over the next few months. 

While the near-term could lead to an uptick in prices, brokerages are sceptical about the post-merger returns. Analysts at Prabhudas Lilladher in a note indicated that the scheme of arrangement is unlikely to provide major benefit to Future Group shareholders. Analysts at the brokerage, led by Amnish Aggarwal, say while they don’t rule out near-term uptick in Future Group stocks, given the huge discount to prevailing FEL price, they recommend a sell on rallies and a switch to Reliance Industries from Future Group companies.

The reason for the pessimism is the sharp rise in the number of shares to 12.26 billion in the merged entity. Given the dilution and operating profit of just Rs 433 crore, post-merger returns — despite strong growth projections — are not certain. While the supply deals to various RIL entities — as is the minor stake of around 13 per cent — are positives for FEL, a significant rerating for the firm is unlikely. In fact, Anand Rathi Research expects a correction in FEL stock price from current levels — after merger, most of the prized retail assets are being sold on a slump-sale basis.