BackInterest accounts for two-third’s of Future Retail’s operating profit
This despite the fact that the Kishore Biyani firm underwent restructuring to reduce debt and simplify business
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Mumbai: A year after embarking on a restructuring of operations to reduce debt and simplify the business to attract investors, interest costs still account for two-third of the overall operating profit for Kishore Biyani’s Future Retail Ltd (FRL).
Moreover, with consumers tightening their belts and increasing operation costs in a tough macro-economic environment, the retailer with chains like Big Bazaar and Food Bazaar is unlikely to see any increase in profitability in the new financial year, said a 27 March report Prabhudas Lilladher Pvt. Ltd.
“Future Retail has just completed 12 months of operations post restructuring. It has reported sales of Rs9,200 crore, operating profit margins of 8.7% and adjusted loss of Rs19.2 crore, mainly due to high interest burden of Rs540 crore and depreciation of Rs316 crore. Debt stands at Rs5,700 crore and inventory at Rs3,200 crore," said the Prabhudas Lilladher report.
Over a year ago, Future Retail, formerly Pantaloons Retail India Ltd, went through a restructuring exercise to simplify its business structure by grouping like businesses together—and exiting unrelated ones. The exercise resulted in three entities—Future Retail which houses its value retail (hypermarkets and supermarkets), Future Lifestyle Fashions Ltd for fashion and lifestyle retail, and Future Ventures India Ltd for the consumer products businesses.
Prior to the restructuring, Future Retail’s consolidated debt stood at Rs6,985 crore (including Rs1,554 crore of convertible debentures). After declaring its December 2012 quarter results, it had said that the Pantaloons format separation and the splitting away of the lifestyle business will lower debt by Rs2,820 crore. It also had sold stake in its insurance business to lower debt.
The stake sale in the insurance venture will bring in Rs400 crore, said the brokerage in its report, but added that “the debt burden is unlikely to go down due to capex of Rs400 crore and Rs100 crore increase in working capital in the new year."
According to the brokerage, Future Retail will be unable to meet its estimates for debt to operating profit ratio. Operating profit is a measure of a business’ overall operating efficiency. “FRL is aiming for debt to operating profit of 3 in the medium term; however, we estimate that debt to operating profit will be in the range of 5.5-6 over FY14-16," said Amnish Aggarwal and Gaurav Jogani of Prabhudas Lilladher in their report, while explaining that it sees little probability of FRL achieving its targets even if it exits from non-core investments, excluding real estate development of two apparel parks.
Besides high interest and capex costs, the weakening consumer sentiments and ensuing volatility in same store sales growth is impacting FRL’s profitability.
“We estimate a loss of Rs28.4 crore in the 15-month period, ending March 2014 and loss of Rs29.3 crore in financial year 2015 due to high interest cost. We estimate interest cost at 67% of operating profit in financial year 2014 and 70% in financial year 2015. We expect FRL to turn PAT positive in fiscal 2016 as operating profit grows by 16% and Interest/EBITDA declines to 60%," said the report.
Same store sales growth is a measure of sales growth that comes from stores that have been in operation for over a year and does not take into consideration growth coming from opening new stores.
Biyani, meanwhile, is looking at acquisitions. “We are looking at acquisitions as and when the opportunities arise," said Biyani on 13 March on the sidelines of an event to launch a year-long advertising campaign FRL costing Rs100 crore.
In the new financial year, Biyani expects the same store sales growth of 25% as it increases its overall advertising spends considerably with the launch of a Rs100 crore year-along campaign to boost sales. “We believe the worst is behind us we are taking a bet on India," said Biyani at the event and added that after two years of consolidation where the company closed close to 1.5 million sq.ft of operational space it is now looking at expansion and will add 1.5 million sq.ft of space in the new year keeping closures to the minimum.
The Same Store Sales Growth for the value business which primarily operates Big Bazaar was 3.3% in the December quarter, while that for the home and consumer durables chains HomeTown and eZone was 2%.
As such in the March quarter the consumer sentiments continue to remain weak. The Spending Sentiment Index declined for the third consecutive month in March, said ZyFin Research Pvt. Ltd.
At 29.0, the index is at its lowest level since February 2013, said Zyfin in a report on Wednesday while explaining that consumers continue to voice their concerns over the slow rate of improvement in economic conditions, including employment and inflation and these concerns have caused the overall Consumer Confidence Index, a monthly measure of consumer sentiment in India to decline in March over February.
The stock of Future Retail close at Rs79.40 down by 0.5% while the BSE Sensex Index closed at 22.214.37 points up by 0.54%.
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