Reliance Industries may renegotiate Future group valuation: Bankers

FRL sales to drop by 71% in FY21 owing to pandemic impact; sales in FY22 to remain about 30% lower than in FY20, according to Fitch

With the Future group of companies witnessing a steep fall in sales and profits, investment bankers are saying their valuation has taken a severe beating over the past one year.

With the Covid-19 crisis expected to affect sales for the next three quarters, bankers said Reliance Industries Ltd (RIL) may re-negotiate the Rs 25,000 crore valuation of the Future group assets.

For the three months ended December 2020, all Future group companies reported a combined revenue of Rs 3,228 crore and a loss of Rs 1,450 crore.

This was as compared to pre-Covid sales of Rs 9,652 crore and a profit of Rs 250 crore for the quarter ended December 2019.

The forecast for 2021-22 is grim, taking into account lack of buyers at the stores.

Analysts with Fitch Ratings said the coronavirus resurgence in India would delay the recovery of Future Retail Ltd’s (FRL’s) operating cash flow, following prolonged weakness since the first quarter of the fiscal 2021. This will affect FRL’s higher-margin non-fast-moving consumer goods business, which faces tougher pandemic-related restrictions. Moreover, FRL’s access to credit remains constrained, as evidenced by the absence of fresh facility grants under the “one-time restructuring plan” (OTR), it said.

Investment bankers said the RIL-Future deal was facing litigation from Amazon, which has moved the Supreme Court against the transaction, thus delaying the closure of the deal.

“There is a very high chance that RIL would like to re-negotiate the transaction, keeping in mind the recent developments,” said a banker.

In August last year, Reliance Retail Ventures Ltd (RRVL), a subsidiary of Mukesh Ambani-owned RIL, had announced it was acquiring the retail, wholesale, logistics, and warehousing businesses from the Future group for Rs 24,713 crore. According to the plan, Future group companies such as FRL, Future Consumers, Future Supply Chain Solutions, Future Lifestyle Fashion, Future Brands, and Future Market Network were to be first merged into Future Enterprises Ltd.

Later, the retail and wholesale undertaking was to be transferred to Reliance Retail and Fashion Lifestyle Ltd (RRFLL), a wholly-owned subsidiary of RRVL. At the same time, the logistics and warehousing undertaking will be transferred to RRVL. However, when both parties moved the National Company Law Tribunal to get clearance for the merger proposal, Amazon, which held stake in a Future promoter entity, has moved court and the acquisition is now pending.

But bankers said this might come as a blessing in disguise for RIL, which can re-negotiate the deal, taking into account the grim sales forecast for the group companies from a host of rating agencies (see chart).