Mumbai: On a day when the market snapped a two-day rally, Future Retail Ltd made stellar gains on Dalal Street. Traders queued up to buy shares of the Kishore Biyani-led company as foreign brokerage firm Morgan Stanley initiated coverage with an overweight rating, which fired up the stock to a record high at Rs271.45 per share intraday, rising 14% on Tuesday.
But this is not a one-day phenomenon; the stock has been on a tear this year, climbing 95.68%, while benchmark indices are up around 8% in 2017 so far. In contrast, its peer Shoppers Stop has gained only 13.29% in this year.
So, why the rush to buy Future Retail shares?
According to Morgan Stanley, de-merger of the retail infrastructure has transformed Future Retail into an asset-light business handling the retail operations of Future Group’s hypermarket (Big Bazaar) and convenience store formats (Easyday).
“There are signs of improvement in business fundamentals and a marked change in management philosophy on capital efficiencies and growth. Restructuring has allowed the value of the retail business to emerge—hitherto it had been dwarfed by high working capital, investments in non-core businesses, and consequent high debt,” it says in a note.
The brokerage firm also expects further upside as restructuring allows value of the retail business to emerge. The stock has already climbed 56.46% since it was re-listed in August 2016.
It feels that the stock could be re-rated, driven by overall operational improvement from accelerated same-store sales growth (SSSG), margin expansion due to product mix improvement and greater capital efficiency. Morgan Stanley has set a target price of Rs340 per share and sees the stock touching Rs500 per share in a bull case scenario.
“It trades at 15 time EV/EBIT (enterprise value/earnings before interest and tax), 0.6x EV/sales, and 17 times price to earnings on our FY19 estimates, versus a respective 12 times, 1.3 times and 14 times for global industry peers. In the context of our CAGR (compounded annual growth rate) estimates of 30% for EBITDA (earnings before interest, tax, depreciation and amortisation) and 31% for net profit, FY17-20, suggesting consistent earnings delivery, we believe the multiples offer material upside,” the note says.
However, it warns that SSSG slowdown, disappointing pace of store openings and flat inventory days may pose a threat to the company’s upside.
In the December quarter, Big Bazaar reported SSSG at 15% versus an average of 10% in the three years prior to the restructuring. Morgan Stanley sees FY2017-20 SSSG of 6-12% for Big Bazaar, 8-10% for the convenience stores and 3-5% for other formats (Home Town, e-Zone, and Foodhall).
Future Retail has a multi-format network of stores, including Big Bazaar (hypermarket), FBB (apparel retailing), Easyday (convenience stores), Foodhall (speciality food retailing), HomeTown (home improvement retailing) and Ezone (electronics retailing)—with a total store count of 738 across India as of FY16.
