Only about a year ago, Pantaloon Retail (India) Ltd was valued at $1.35 billion (Rs5,305.50 crore). Now, one of its subsidiary companies, Future Capital Holdings Ltd, has hit the markets to raise up to $125 million, valuing it at $1.23 billion (Rs4,837 crore). Pantaloon will hold 55% of the firm post-issue, and the resultant ‘value unlocking’ is one of the main reasons the company has outperformed peers in the retail sector in the past year. The parent company’s valuation has more than doubled to $3.17 billion, at a time when peers such as Shoppers Stop Ltd and Trent have lost between 12% and 14% in value. Pantaloon plans to sell shares worth $500 million of another subsidiary, Future Ventures India Ltd.
While Pantaloon’s valuations have soared on the back of the value unlocking theory, so have that of Future Capital. A little over six months ago, Och-Ziff Capital Management Group picked up a 10% stake in the company for $24 million, valuing Future Capital at about $240 million. Recently, the US-based private equity firm sold 10.3% of its holding for a profit of about 300%.
Can Future Capital’s initial public offering investors expect such huge returns in a short time frame? That’s unlikely since current valuations already seem to discount earnings well into the future. Currently, a majority of the company’s revenues come from investment advisory services. Future Capital acts as investment adviser to the $89 million Kshitij Venture Capital Fund, where it earns an annual advisory fee as well as carry beneficial interest, essentially a performance-linked fee. It’s also an adviser to the investment managers to three offshore funds, which together manage $975 million in assets. The company has applied to the Reserve Bank of India to acquire the owner of these three investment managers, but as things stand, it earns a remuneration/fee, which is “agreed upon from time to time” with the investment managers.
Falguni Nayar, managing director at Kotak Mahindra Capital Ltd, points out that global alternative investment management companies are valued at 15-20% of assets under management. Using the higher end of that band, Future Capital’s investment advisory services would be valued at about $210 million. Of course, its valuation would increase if Future Capital is hired by more funds as an adviser. The company also earns revenues from research fees, but it is a fraction of its advisory fees.
The main driver of the firm’s revenues is expected to be its retail financial services, which will provide finance to customers at Pantaloon stores, retail insurance products and earn fees from a co-branded credit card with ICICI Bank Ltd, among other things. In its first quarter of operations until September 2007, this segment had revenues of Rs14 lakh. This business must scale up rapidly to justify the firm valuation of $1.23 billion.
There has been a resurgence in bank stocks lately, especially the smaller public sector bank stocks. With quarterly results around the corner, what are the things to watch out for in the banking sector?
Year-over-year credit growth increased to around 22.2% by end-December, compared with 21.9% at the end of September. Coupled with lower interest rates offered by some banks on retail loans during the festival season, the pressure on net interest margins is likely to continue, except for those banks that have raised capital. The recent softening of deposit rates is unlikely to be of much importance in the third quarter and the hike in the cash reserve ratio will add to the pressure. Other negatives include a rise in non-performing assets (NPAs) and the adoption of Accounting Standard 15, which requires banks to provide for their pension liabilities. Analysts say that ICICI Bank, State Bank of India and Bank of Baroda will also have to book losses on their exposure to credit derivatives.
On the positive side, the softening of yields should result in higher treasury gains, which will also be buttressed by gains from sale of equity holdings. NPA recoveries will continue to be robust.
Looking ahead, credit growth is expected to pick up and interest rates to start declining and this will ease the pressure on margins. Besides, more banks are set to raise capital, which will bring down their cost of funds.
As for banking stocks, the current rally in the smaller public sector banks is explained by a research report from S. S. Kantilal Ishwarlal Securities Pvt. Ltd, which pointed out that the valuation gap between private sector and public sector banks had gotten too high and that in a declining interest rate scenario this gap always narrows.
But perhaps the big positive for bank stocks at the moment is that they are a play on the robust domestic economy, which, in these times of international turmoil, is a huge attraction.
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