IS THIS COMPANY WORTH INVESTING FOR FUTURE?

Today we will try to analyze a retail company which is part of the Future group. Over the last 5 years, the Future group has expanded in many verticals. Let us come to basics and try to understand the structure of this conglomerate group.

Future group has been running several companies under their umbrella. Their retail business are mentioned as under

  1. Future Retail Ltd
  2. Future Lifestyle  Fashion Ltd
  3. Future Consumer Limited
  4. Future Enterprise Limited

Today our discussion will be limited to Future Retail Ltd. The company runs stores such as BigBazaar, Easyday, FBB, Foodhall, e-Zone and HomeTown. Besides these stores company own a lot of FMCG brands which they sell in their own stores and in some partner’s stores. They own following brands

  1. Golden Harvest- Offers staples like rice, wheat, sugar etc
  2. Fresh & Pure- Give wide range of edible oil, ghee, tea and coffee etc
  3. Ektaa- Brands collection of some specific local tastes preferences in rice, pulses, snacks and other ethnic food items.
  4. Veg Affair- Offers collection of frozen vegetables, ready-made mixes etc
  5. Desi Atta Company- Provide various types of flours
  6. Tasty Treat- Ready made snacks and frozen snacks as well
  7. Soo Fresh- Provides consistent quality of fruits and vegetables
  8. Sangi’s Kitchen- a delicious range of Indian and International dips and sauces.
  9. Nilgiris- Dairy and bakery products
  10. Karmiq- Provide variety of dry fruits and health-centric oils (rice bran, olive etc)
  11. Sunkist- Mix varieties of juices & beverages
  12. Think Skin- Gives Skin products
  13. Kara- acquired by Aditya Birla group, gives personal hygiene stuff for sanitizing wet wipes
  14. Care Mate- Provides products in personal hygiene space (face tissues, hand wash aluminium foils etc)
  15. Clean Mate- Give collection of portfolio of cleaning bars, room fresheners, toilets etc

The retail industry is always been capital intensive and this company is doing innovation to stay ahead of its competitors.

The overall Indian FMCG market is estimated to be USD 185 billion, of which the branded portion constitutes merely USD 65 billion. This branded portion of the market is expected to almost double by 2020 and touch USD 240 billion by 2025. At present barely one-third of the market is branded, which is largely skewed towards home and personal care and beverages. Urbanization, growing income levels and aspirations are leading to premiumization and growth of branded products.

Future retail is understanding customer needs and trying to adopt the same at very faster pace. They maintain these brands to give a customer a varied variety of items with keeping margin level higher. In the last 1 year, they have started developing, manufacturing and distributing items from their owned food park in Karnataka.

Recent Business Developments

  1. The company has partnered with the Government of Rajasthan’s public distribution network to upgrade each of the fair price shops and help them sell a wider range of assortment.
  2. Additionally company has entered into joint venture with Mibelle AG, a Swiss-based entity for marketing and distribution of imported personal care products under the brand name “Swiss Tempelle” in India.
  3. Further, the company has also commenced its operations for marketing and distribution of oats and oats based cereal products in India through its subsidiary company at Sri Lanka.
  4. With a focus on exploring cross-border opportunities, and developing new markets in food/FMCG category, your Company has also formed an entity at Jebel Ali, UAE.

Competitive Edge

  1. The Company has access to over 700 modern retail stores of the group spread across various formats to cater to the needs of different customers.
  2. Manufacturing capabilities of the Company are underscored by strong manufacturing abilities in dairy and bakery, frozen vegetables and snacks, chutney and oats.
  3. The company has partnered with a data analytics company to analyze its customer patterns and cater its customer needs. The company is already having payback loyalty programme and mobile wallet to enhance brand support.
  4. The company also strengthened its social media teams to engage on multiple platforms including Twitter, Facebook and Instagram. Now option such as prebooking of products is also available.
  5.  The Future Pay app is being used by 1.2 million customers and 3 Lakh bills have been verified by the Price Match feature. The price match feature allows its users to get the lowest price available.

 

Company financial highlights

We will be comparing QoQ results only as Future Retail was separated from its parent company in 2015 itself.

The company is consistently showing good quarterly results with significant improvement in Sales, Operating profits.

Coming to borrowing or debt of the company. The company has negligible debt as of Mar 2016. After the restructuring of parent Future Consumer Ltd, most of the long-term borrowings are transferred to its parent company.

Long-term borrowing: 0.81 crores

Short-term borrowing: 1077.59 crores

The company is taking the considerable amount of money to feed its working capital requirements which is not good.

Valuations

CMP: 500, P/E: 57, Industry P/E: 106.54

Retail in India is still at a nascent stage and is expected to grow till 2025.  Looking at the market size of the company we see that there will be a significant increase in Revenues and profits will follow it.

The average industry P/E is trading at huge valuation and demanding large growth with the retail sector. The present levels are definitely expensive with no margin of safety. There may be a significant correction if the sector does not perform as demanded by markets.

We should understand the risk of a downturn and invest with caution. We can add or buy on any good correction of the market. The market has a huge expectation with Retail industry and with huge expectation come greed which will never allow retails stocks to trade at low P/E levels.

Read: New to investment, try Zerodha’s SmallCase

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