Investors were concerned about debt levels in Future Retail and the ability of its promoters in reducing pledges
Amazon will infuse about ₹1,500 crore by acquiring about a 4.5% stake in the company via a stake purchase in Future Coupons Ltd
Future Retail’s path to profits hinges on how quickly the firm is able to raise resources and complete its restructuring exercise.
A tie-up with Amazon Inc. was seen as a positive. Amazon will infuse about ₹1,500 crore by acquiring about a 4.5% stake in the company via a stake purchase in Future Coupons Ltd, which holds shares in Future Retail. Besides, Amazon has call options to pump up this stake in the future.
But the Future Retail stock seems to be less enthused. In the past year, the stock has corrected by 29% against an increase of 9.6% in the Nifty 500. Investors appeared to be concerned about debt levels in Future Retail and the ability of its promoters in reducing pledges. Its total debt increased to about ₹3,650 crore in the second quarter FY20.
“While recent transactions (the Amazon stake purchase, warrant issues), among others, could shrink company pledges (now 67% of promoter holding), more needs to be done on this front. Hence, further capital infusion is a key monitor-able," said analysts at HDFC Securities in a note to clients.
One part of the company’s restructuring exercise involves buying back its stores from Future Enterprises Ltd.
A part of the funding for this restructuring is expected to come from the recently concluded Amazon deal. “Company expects the acquisition of gross block worth ₹4,000 crore from Future Enterprises Ltd to be completed by March 2020 (against the earlier deadline of September 2020), which will help it to significantly reduce lease expenses worth ₹650 crore on an annual basis," said Axis Securities in a note to clients.
Additionally, Future Retail has also been rationalizing its stores. It has closed stores across all formats, including loss-making stores of Big Bazaar, Foodhall and E-zone.
While a focus on profitability is positive, investors said its partnership and progress with Amazon remains crucial. Analysts see its all-India operations as a key reason for Amazon’s stake purchase, and see a potential further increase in stake as a trigger for the stock. Of course, it remains to be seen how far the benefits from the deal flow into the company’s profit.