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Analyst Research Report Snapshot


Future Retail (FRL) - Qtr. Update - Dated - May 31, 2014




Axis Capital Limited


02 Jun 2014





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Future Retail’s (Bloomberg: FRL IN) March quarter performance was a mixed bag, as it managed to deliver the sharpest increase in margin profile (margin up 380 bps YoY, EBITDA up 35% YoY) against weak same-store sales growth. Yet adj. profit remained marginal at Rs 18 mn as margin benefit was offset by 34% increase in interest cost. In our opinion, debt reduction remains the most critical element for net margin restoration and shareholder value creation. We maintain our stance that operating cash flow is inadequate to reduce debt post funding requirement for growth and maintenance capex. Thus only a faster sale of non-core assets could de-leverage balance sheet and trigger a rerating. Our SOTP-based target price at Rs 101 (vs. Rs 86) has moved up due to increase in value of listed investment and due to relative valuations. At CMP of Rs 123 it implies 18% downside. Maintain SELL. Q5 highlights Key positives: (1) Operating margin for the quarter was up 380 bps YoY to 10.5% in Mar-14 quarter (vs. 7.7% in Mar-2013 quarter), led by margin improvement in apparel and FMCG segments. This is despite the weakness in same-store sales (SSS) at 2.2% for Big Bazaar and 2.1% for Home town and e-zone; (2) Inventory increase has moderated over the last few quarters; (3) General insurance business (25.5% stake) generated Rs 500 mn profits in FY14 and is now self funding its growth. Management expects sharp improvement in profitability in FY15 and subsequently evaluate a strategic sale; (4) SSS in April and May are in double digits, led by new promotional events and consumer activations. Key challenges: (1) Debt continues to increase (at Rs 60 bn, D/E at 1.8x) sequentially, as reflected by the sequential increase in interest cost. Plus interest cover at end of FY14 remains low at 1x, which implies debt reduction is critical; (2) Large unproductive capital expenditure towards store refurbishment (~Rs 2.5 bn) done last year for stores over 7 years old. The management has guided for Rs 500mn capex for old stores and Rs 2 bn for new stores i.e. 0.75 mn sq ft addition in FY15. Regards, Hemant Patel (Executive Director – Consumer) hemant.patel@axiscap.in; 91 22 4325 1105

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