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Future Group founder Kishore Biyani. Photo: Abhijit Bhatlekar/Mint (Abhijit Bhatlekar/Mint)
Future Group founder Kishore Biyani. Photo: Abhijit Bhatlekar/Mint

(Abhijit Bhatlekar/Mint)

Kishore Biyani: Finally taking solace in growth

Future Group shifts focus towards productivity and efficiency, not necessarily on expansion, to reduce debt

Mumbai: For two years now, Kishore Biyani, a man often described as India’s Sam Walton, has been fighting fires.

He has given up almost 2 million sq. ft of retail space, renovated half the Big Bazaar hypermarkets he runs, sold off businesses, and restructured operations.

Now, Biyani, managing director of India’s largest listed retail company Future Retail Ltd, and a man once given to hyperbole, usually related to his own expansion plans, is finally ready to talk growth.

“We have done everything that was required to be done and are now at ease," said Biyani, describing his journey as similar to the enlightenment of Ashoka, the king who ruled India some 250 years before the birth of Christ, and who gave up his militant ways after seeing the carnage wrought in the battle of Kalinga.

In Biyani’s case, the carnage had to do with debt accumulated as a result of reckless expansion.

Part of it has to do with his new terms of reference—an increase in productivity and efficiency, not necessarily expansion, he said in a 9 May interview. And part of it—take that, Walton—is a move away from one of Biyani’s favourite words sasta (inexpensive in Hindi) to high-value, high-margin products, such as 1,400 a kg Spanish tomatoes.

“The economics of doing business in India still remains challenging. The issue is to find a profitable and sustainable business model," said Nikhil Vora, managing director of IDFC Securities Ltd.

In pursuit of this model, Biyani first had to undo several things.

‘Good as done’

As part of the makeover, Biyani has split the erstwhile Pantaloon Retail into three: Future Retail, which essentially runs the hypermarkets, and other retail formats; Future Lifestyle Fashions Ltd, which manages the fashion and lifestyle business; and Future Ventures India Ltd, the food, packaged consumer products and children’s publishing business.

For all three entities, Biyani has defined “business", where he will be completely in control, and “assets" that he will sell off.

The assets include clothing brands Biba, Turtle and Celio; a venture selling Clarks shoes; accessory brand Holii; Capital Foods, a maker of ketchup, chutneys and pastes, baked beans and soups in cans, instant noodles and other ready-to-eat meals, in which Future Ventures has a 43.76% stake; and Amar Chitra Katha, in which Future Ventures has a 65.84% stake.

Biyani strikes a bullish note on the sell-offs. “All deals are as good as done," he said, without giving an exact time frame for the sales, adding that his plan is to be “debt-free".

The old Biyani feels the need to assert himself. The ultimate objective, he says, is to become “cash-rich and do acquisitions".

It will take a while to achieve the first part of the plan.

Future Retail’s consolidated debt was 6,985 crore at the end of December 2012. That will decline substantially in the next two quarters, said Biyani.

“We expect core retail debt to come down from 6,000 crore to 3,500 crore on the back of various other stake sales announced. This will lead to significant interest-cost savings, which will flow straight to the bottomline," said analysts Bharat Chhoda and Dhvani Modi of ICICI Securities Ltd in a 13 March report, which took note of the company’s changed focus to “grow profitably".

Impressive numbers

According to Biyani, Future Retail will end the year to December with revenue of 9,800 crore and increase this to 13,000 crore the following year. And its operating profit margin, an indication of how well it cuts costs, will be 8% by then, he adds.

The numbers for Future Lifestyle Fashions are equally impressive—revenue of 3,100 crore in 2013 and 3,800 crore in 2014.

Much of the growth will come from stores that have been in existence for more than a year (or same-store sales). Indeed, same-store sales at Big Bazaar, Food Bazaar and FBB (Fashion at Big Bazaar) increased 5.1% in the December quarter and 8.1% in the March quarter (they had fallen in the previous five quarters).

The trend in the fashion and lifestyle business is similar—same-store sales growth of 12.7% in December (largely on account of the festival season) and a respectable 9.6% growth in the March quarter.

“The key measure now is same-store sales growth. This will be in the high teens in the coming quarters," said Biyani, adding he is no longer bashful about closing stores.

The company now has 15 million sq. ft of retail space, excluding the Pantaloons department store chain, the separation of which following the sale to Aditya Birla Nuvo was completed on 9 April.

That remains a point of concern for analysts who worry that profit margins could fall.

“Now with Pantaloons demerger the company’s margins will take a knock," said Abhishek Ranganathan, vice-president (retail, real estate, institutional equity research) at PhillipCapital (India) Pvt. Ltd.

Ranganathan is also worried about the future of Future because inventory levels, according to his calculations, are about 50-60%, higher than that of peers.

Biyani is convinced he has the answer: more high-priced offerings (like the Spanish tomatoes that are being sold at Food Hall, a Future Retail chain that caters to the well-heeled); a focus on selling apparel through Big Bazaar; and renovating and restructuring the stores themselves with an eye on efficiency.

Indeed, over the past two years, the retailer has renovated or refurbished 80 of its 162 Big Bazaar stores and Biyani claims productivity at these outlets is up 30-35% from around 9,000/sq. ft/year.

FBB now accounts for 35-40% of the hypermarket chain’s sales, up from 25% a year ago.

Still, analysts such as Vora at IDFC are likely to be watching Future’s progress closely.

That’s because retailers across the country are reinventing themselves as they move further down the hype cycle—from having a presence in the next big business, to actually turning in profits.

Market challenge

On 16 April, Alok Agarwal, joint chief financial officer of RIL, said that by the company’s own measure, Reliance Retail was the market leader across all categories it was present in. Revenue at the retail arm grew 42% to touch 10,800 crore in the year to 31 March compared with 7,599 crore a year ago, according to the company’s annual report. The business broke even in 2012-13 with earnings before interest, taxes and depreciation of 78 crore.

Like Future, Reliance Retail is no longer hell-bent on expansion.

Across the sector, Aditya Birla Retail Ltd, which operates More super and hyper markets, also consolidated operations over the past year, exiting from markets such as Mumbai because of high real estate costs.

“Retailers are expanding, but they remain cautious of location and continue to rationalize (shut stores that don’t perform)," said Anshuman Magazine, chairman and managing director of CBRE South Asia Pvt. Ltd.

Meanwhile, the macroeconomic environment remains challenging with slowing economic growth and persistently high inflation causing consumers to cut back on discretionary spending.

“There has already been some consolidation in the food and groceries retail business. What remains to be seen is if there will be any further consolidation," said Anil Talreja, partner at Deloitte Haskins and Sells. He added that in the coming months, the retail space could possibly see announcements of joint ventures rather than outright mergers and acquisitions.

In September, the government allowed foreign direct investment in multi-brand retail and permitted multinationals to invest up to 51% in such ventures, contingent to the approval of state governments. Close to a dozen states, including Maharashtra, Delhi and Haryana, have allowed overseas retailers to open stores.

In the three-year period ended 30 April, the Future Retail stock fell 61.22%, underperforming the BSE Sensex, which rose 10.24%. The stock of rivals such as Shoppers Stop Ltd and Trent Ltd rose 90% and 34%, respectively, in the same period.

Future Retail ended at 149.65 apiece on BSE on Tuesday, down 1.64% from its previous close while the benchmark S&P BSE Sensex rose 0.16% to close at 19,722.29 points.

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