28Mar2013
Update|Sector:Retail
FutureRetail
CMP:INR141
UnderReview
INR4b cash flow from stake sale in general insurance JV; De‐
leveraginglargelydone;Targetprice,RatingUnderReview
(PFIN,MktCapUSD0.6b,CMPINR141,TPandRatingUnderReview)
- FutureRetail(erstwhilePantaloonRetail,PF)hasannouncedstakesaleinnon‐
coregeneralinsurancebusinesstoL&TGeneralInsurance.
- PF’sstakewillcomedownfrom51%to11.5%whilepromoterfamily’sstakewill
bereducedfrom23%to11.5%.L&Twillown51%postthedeal.
- Deal size is INR5.1b; PF will receive ~INR4b while promoter family will get the
rest. As per management, PF had till date invested ~INR2.3b in the general
insurance venture. The sale proceeds will be used to de‐leverage PF’s balance
sheet.
- Recently, Future Retail had announced stake sale in Life Insurance JV with
GeneraliIthadsold22.5%ofits51%staketoIndustrialInvestmentTrust.Cash
inflowexpectedfromthedealis~INR3b.
- Regulatoryapprovalsforboththedealsareawaitedandcashinfusionwilllikely
happenaroundSeptember2013.
- PFisfollowingthestrategyofdivestinginvestmentsinnon‐coreassets.Sofarit
has announced five deals. As per our workings, these deals will help it reduce
core retail debt by INR35b, which currently stands at INR62b. Future Capital
transaction is complete while rest of the transactions are at various stages of
completion and cash inflow from these transactions is expected over June‐
September’13.
- While we have not yet firmed our future projections pending clarity on
financials – back of the envelope SOTP suggests good upside potential from
current levels. Stock has corrected ~46% YTD CY13 owing to continued weak
Same Store dynamics and lack of meaningful news flow around FDI in multi‐
brand retail (stock had reacted positively after FDI in multi‐brand retail was
approvedbyGovernment).
- WevaluePF’sresidualstakeinPEFRLat12xEV/EBITDA,CoreRetailbusinessat
8xEV/EBITDA,FutureLifestyleFashionat10xEV/EBITDAandotherinvestments
(Future Logistics, Staples etc) at book value. Thus, we arrive at an indicative
SOTP value of INR203. We place our current Neutral rating and Target Price
UnderReview.
Detailsofthedeal:39%of51%stakesold;cashinflowof~INR4bforPF
- Future Retail (erstwhile Pantaloon Retail, PF) has entered into an in‐principle
arrangement with Larsen & Toubro Limited for merger of its insurance joint
venture company Future Generali India Insurance Company (FGIICL) with L&T
General Insurance Company (“LTGI”) and sale of partial stake to L&T and its
other joint venture partner Participatie Maatschappij Graafschap Holland NV
(whichisasubsidiaryofAssicuranzioniGeneraliSpA)inthemergedentitytobe
created.
- Currently Future Group holds 74% and Generali remaining 26% in the General
Insurance Venture. Out of the 74% stake of Future Group, PF holds 50% and
promoterfamilyowns24%.
- As per the transaction details, PF will be selling 39% of its existing 50% stake
whilepromoterfamilywillbeselling~12%ofitsexisting24%stake.Thus,after
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FutureRetail
thedeal,PFandpromoterfamilywillhold11.5%stakeeach.Newshareholding
postthedeal:Generali26%,L&T51%,andFutureGroup23%.
- Deal size is INR5.1b; PF will receive ~INR4b and promoter family the rest. The
fundswillbeusedtode‐leveragePF’sbalancesheet.
- As per management, Pantaloon had till date invested ~INR2.3b in the general
insurance venture. We note that as per FY11 Annual Report (June ending), PF
hadINR1.21bofinvestmentsingeneralinsurancecompany.
Details of recent life insurance deal: 22.5% of 51% stake sold; cash inflow of
~INR3bforPF
- Recently, PF had announced stake sale in life insurance JV with Generali ‐ in
FutureGeneralIndiaLifeinsuranceCompanyLimited(FGILICL).Itsold22.5%of
its 51% stake to Industrial Investment Trust. PF will continue to own 28.5% in
thecompanywhilepromoterfamilywillhold23%.
- Cash inflow expected from the deal is ~INR3b.As permanagement,stakesale
hadhappenedatbookvalue.
Flashbackoftheearlierde‐leveragingtransactions
De‐merger of Pantaloons Fashion Format to ABNL (announced in May and Sep
2012)
- In Sep 2012, PF had approved sale of its Pantaloons format business to Peter
EnglandFashions&RetailLtd(PEFRL),asubsidiaryofAdityaBirlaNuvo.
- All requisite approvals for the scheme have been received (shareholders, CCI,
Courts).
- Aspartofthedeal,PFshareholderswillreceive1shareofPEFRLforevery5held
inthecompany.ItalsoenvisagestransferofINR16bdebttoPEFRL.
- WeestimaterevenueofPEFRLatINR18binCY13withoperatingmarginof12%.
DemergerofFashionbusinessesintoFutureLifestyleFashions(FLF)(announcedin
Nov‐12)
- PF and FVIL (Future Ventures India Ltd) de‐merged their respective fashion
businessesintoanewentity‐FutureLifestyleFashions(FF)‐tobelisted.
- PFwilltransferINR12.26bofdebtfromitsbookstoFF.
- Company has got the requisite clearances from CCI and the stock exchanges;
courtapprovalisawaited.Thede‐mergerwilllikelybecompletedbyJun‐13.
- Shareswapratio:a)1equityshareinFFforevery3sharesheldinPF.b)1equity
shareinFFforevery31sharesheldinFVIL.
- Posttherealignment,PRILshareholderswillhold49.8%inFutureFashion,FVIL
shareholders30.5%,andPRIL(asacorporateentity)19.7%.
- As per management, FF can do a revenue of INR30b with 11‐12% operating
margins.
De‐leveragingtransactionslargelyover;expectCoreRetaildebttohalveoncethe
transactionsarecomplete
- Futuregroup’sstrategicfocusinthepast12‐18monthshasbeentodeleverage
the balance sheet via divestment of non‐core assets. Given the limited cash
generationfromCoreRetailbusiness,investmentsinnon‐coreretailassetswere
bleedingthebalancesheetinarisinginterestrateregime.
- Asdiscussedabove,sofarithasannouncedfivedeals.–
1) SaleofPantaloonRetailFormattoABNL(AdityaBirlaNuvo)
2) PartialstakeSaleofFutureCapitalstaketoWarburgPincus
3) Re‐alignmentoflifestylebusinesses
4) StakesaleinlifeinsuranceJVtoIITLand
28Mar2013
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FutureRetail
5) StakesaleingeneralinsuranceJVtoL&T.
As per our workings, once the regulatory approvals are in place (likely by
2HFY14),theaforementioneddealsshouldresultincashinflowof~INR35b.This
wouldhelpreducethecoreretaildebtby~55%.CurrentCoreRetaildebtstands
atINR62b.
DeleveragingdealstoresultinINR35bofdebtreduction
Core retail business: Weak consumer sentiment may impact same store
performance
- PF’scoreretailperformancehadshownsignificantimprovementin6QFY12led
bybuoyantfestivedemand.
- However,ourchannelchecksandstorevisitssuggestlikelymoderationinsame
storegrowthin1QCY13.Consumersentimenthasdeterioratedsequentiallydue
touncertainmacrosandhighinflation,thusimpactingfootfallsandconversion.
- This quarter’s Sabse Sasta Din – the flagship discount sale period around
Republic Day weekend in late January – saw ~20% YoY growth, as per
management.
WhileJanuarysawgoodfootfalls,Februarywasdismalfor mostretailersand
discretionarycategories–Jewellery,Paintsetc.
Spaceadditionhassloweddown
28Mar2013
3
FutureRetail
Valuations&view:BackofenvelopeSOTPsuggestsattractivepotentialupside.
- Series of de‐leveraging transactions will help alleviate the balance sheet strain
forPF.
- Key investor concern around investments in non‐core retail assets has been
largelyaddressed,webelieve.
- However, core retail performance still remains hostage to the subdued
consumerconfidence.
- While we have not yet firmed our future projections pending clarity on
financials, our indicative SOTP suggests good upside potential from current
levels.Stockhascorrected~46%YTDCY13owingtocontinuedweaksamestore
dynamics.
- IntheindicativeSOTP,wevaluePF’sresidualstakeinPEFRLat12xEV/EBITDA,
Core retail business at 8x EV/EBITDA, FF at 10x EV/EBITDA and other
investments(FutureLogistics,Staples,etc)atbookvalue.
PlacingTargetPriceUnderReview;OurindicativeSOTPsuggestsattractivepotentialupsideafterrecentcorrection
28Mar2013
4
FutureRetail
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28Mar2013
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