Mumbai: Shares of Future group companies gained on Thursday following the Walmart-Flipkart deal, riding hopes that the deal will spur more online-offline partnerships in India’s retail sector.
After clocking intraday gains of 5-17%, shares of Future Lifestyle Ltd, Future Retail Ltd, Future Consumer Ltd and Future Enterprises Ltd closed 2.11%, 4.67%, 3.87% and 8.83% higher on the BSE, a day after world’s largest retailer Walmart Inc. agreed to buy 77% of online retailer Flipkart for $16 billion.
According to Edelweiss Securities Ltd, the deal values Flipkart at 4.5 times FY18 enterprise value/sales. “Though this may look expensive on absolute basis, the valuation is at a discount to that of Avenue Supermarts and at a significant premium to that of Future Lifestyle Fashions, Future Retail & Shoppers Stop—our preferred picks in the retail sector. This merger... reiterates our conviction of boom in domestic organized retail sector, which is estimated to catapult to $115 billion by FY20 from $55 billion in FY16, higher than 20% compound annual growth rate (CAGR)," it said in a 9 May note.
As per Edelweiss estimates, valuation of Avenue Supermarts stands at 6.1 times of FY18 EV/sales while that of Future Lifestyle Fashions is at 2 times FY18 EV/sales and Future Retail is at 1.5.
The brokerage firm said the Walmart-Flipkart deal envisaged to change the domestic retail industry as online and offline partnerships are likely to get a fillip, online discounting may not necessarily increase as Walmart may drive private labels rather than focus only on gross merchandise volume (GMV) while FMCG companies are likely to benefit as Walmart’s expertise lies in hypermarkets and grocery retailing.
“This deal is icing on the cake for FMCG players considering that they have already sharpened focus on direct distribution, modern trade and e-commerce channels. Also, subject to regulations, there is likelihood of Walmart’s cash & carry business being integrated with Flipkart at some point in time—an added kicker," it said.
Prabhudas Lilladher Pvt. Ltd believes that after the deal, there could be further consolidation in the organized retail space in India which could benefit some of the domestic listed and unlisted players. “We expect increasing competition in organized retail, not only in fashion, lifestyle retailing and durables but also in food, grocery and general merchandise. Future Retail Ltd is leading the industry consolidation in the Hypermart and Supermart format and has acquired Bharti Retail, Heritage Fresh, HyperCity retail etc. in the past few years," Prabhudas Lilladher said in a note on 9 May.
According to Kotak Institutional Equities, in the long term, Walmart may look to provide a seamless omni-channel experience to customers and gain a larger chunk of the India retail pie.
“Walmart’s global expertise in sourcing products cheaply, and focus on staples leads us to believe that it will invest significantly in improving sourcing of food items direct from farms, and build supporting infrastructure in the form of transport and warehousing facilities," it said in a report on 10 May.
Kotak added that Walmart’s acquisition of Flipkart will effectively consolidate the Indian e-tail sector into a two-player market while the ensuing balance sheet strength will drive investments in infrastructure, efficiencies, and be ultimately positive for the Indian consumer. “That said, this also reflects the larger trend of foreign strategic players dominating various Indian e-commerce verticals. Offline players such as Future Retail and Avenue Supermarts will sharpen focus on their hyperlocal offerings," Kotak said.
Meanwhile, the Economic Times reported on 10 May that the Future Group is looking to sell at least 10% stake to a global retailer. Future Group founder Kishore Biyani was quoted in a news report, “I will sell a minority stake to the strongest global retailer"