Dealing with debt: Deleveraging infrastructure for future growth

Future Retail, the flagship firm of the Kishore Biyani-led Future Group, has been the best-performing retail stock this year, with 326 per cent gain in market value to Rs 26,807 crore on the BSE. The stock surged as investors cheered operational gains following Biyani’s restructuring plan that has seen emergence of four companies out of erstwhile Pantaloon Retail.
 
The Future Group operates through its retail arm, Future Retail; new fashion retail business, Future Lifestyle Fashions; the fast-moving consumer goods (FMCG) business, Future Consumer Enterprises; and retail infrastructure business Future Enterprises.
 
A pioneer of modern retail in India, Biyani racked up unmanageable debt on the books of his flagship firm Pantaloon Retail, as it continued funding loss-making stores, which resulted in the company having to sell its fashion retail business to Aditya Birla Nuvo in April 2012 for Rs 1,600 crore. Before the sell-off, debt for Pantaloon Retail had ballooned to Rs 7,692 crore when the company ended its financial year in June 2011. At that level, debt was 2.6 times the company’s equity of Rs 3,004 crore, making it unsustainable. The company then had a market value of Rs 6,168 crore. The company earlier followed July-June cycle for financial year but has now changed its financial year to March-ending.
 
Following the divestment of fashion retail business under Pantaloon Retail, the group eventually got restructured into four companies which are currently valued at Rs 45,149 crore. Other three companies —  Future Consumer, Future Lifestyle Fashions and Future Enterprises — have also added another Rs 11,804 crore of market cap this year.
 

While the consolidated debt of retail companies at Rs 7,684 crore remains at the same level, the equity has increased more than three times to Rs 9,162. This has brought debt-equity ratio to a comfortable 0.8.
 
Majority of this debt, Rs 5,286 crore, sits on the books of retail infrastructure company Future Enterprises. With equity of Rs 3,797 crore, this company still has its debt-equity at 1.4. However, Future Enterprises is expected to benefit when other businesses of the group scale up. This will help it generate enough cash to repay debt.
 
“De-merger of the retail infrastructure has transformed Future Retail into an asset-light business,” said Nillai Shah, analyst with Morgan Stanley India, in its report early this year. Future Retail has indeed become asset-light with Rs 1,244-crore debt, which is less than half of Rs 2,554 crore equity.
 
Future Consumer and Future Lifestyle Fashions have also equally benefitted from this restructuring as their debt-equity ratios are 0.5 and 0.4, respectively.
 
The restructuring of the retail empire has come with Biyani’s target of increasing revenue five times to Rs 1 lakh crore from Rs 22,000 crore, set in June 2015. The plan includes target of 10,000 neighbourhood stores. This is expected to bring in Rs 40,000-crore revenue in FY21.
 
It is also targeting Rs 20,000 crore of annual revenue by manufacturing FMCG, which would be sold both in its own stores as well as at other retailers. While Future Retail reported net sales of Rs 17,980 crore in the last financial year ending March, the four companies together had revenue of Rs 28,689 crore. This is up from Rs 12,888-crore net sales for erstwhile Pantaloon Retail in the financial year ending June 2011. “The group has made a course correction in the past five to seven years, moving away from reckless to profitable growth,” said Arvind Singhal, chairman and managing director at management consultancy firm Technopak. Biyani has now changed his approach and is aiming to make the group companies debt-free, barring short-term working capital loans, and is strongly focused on profitable growth.

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