Future Retail’s plan to cut debt will ease stress on profits
The company can now issue equity of upto `2,000 crore and utilize at least three-fourths of proceeds to cut debt
High debt has caused a lot of grief to the profits of Future Retail Ltd. Stand-alone debt stood at about ₹ 5,100 crore at the end of March. In the 15 months ending 31 March, its earnings before interest and taxes (Ebit) was ₹ 663 crore, whereas interest cost alone was ₹ 693 crore.
But relief may be in sight. The company’s board has approved an equity issuance of upto ₹ 2,000 crore and a proposal to utilize at least three-fourths of the proceeds to reduce debt. The company’s debt will decline to that extent and yield some savings on finance costs. That should reduce the burden on profit.
If the company raises the maximum amount of ₹ 2,000 crore, then debt is expected to decline by about 30%. Sure, the stock declined by 7% in reaction to the announcement, possibly on profit-booking and at the prospect of equity dilution. But since the beginning of this fiscal year, its shares have risen by as much as 64%.
While that augurs well, the economic slowdown and a conscious decision to go slow on space addition mean that an improvement in sales growth at shops operational for at least a year will be important for revenue growth. Unfortunately, the situation isn’t too rosy on that front either.
In the March quarter, such expansion for the firm’s value business, primarily Big Bazaar, was 2.2%, while that for home and consumer durables chains HomeTown and eZone was 2.1%. On the bright side, the company’s Ebitda (earnings before interest, taxes, depreciation and amortization) margins increased in the March quarter, both sequentially and on a year-on-year basis. That was mainly on account of a better product mix and closure of underperforming stores.
While the stock already seems to reflect most of the positives, better sales growth in stores that have been open for at least a year should help in keeping sentiment positive.
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