What a deal with Future Retail means for RIL’s retail business

Shares of Future Retail Ltd (FRL) have risen 52% so far this month. One reason for this optimism is that reports suggest Reliance Industries Ltd is one among the suitors for assets held by the Future Group, including stakes in FRL and Future Lifestyle Fashions Ltd.

Note that RIL is India’s largest physical retailer, as on 30 March, with 28.7 million sq. ft of operating area, which includes Jio stores. RIL’s large offline presence will get a further boost if the reported deals with Future Group go through. At the end of the December quarter, FRL operated 16.1 million sq. ft of retail space, while Future Lifestyle had 7.5 million sq. ft.

BofA Securities analysts said in a note to clients that if the reported deals fructify, margins are likely to improve due to improving scale.

Of course, the deal value will be crucial, and investors will have to wait and see which of Future Group’s companies RIL eventually ends up buying. FRL and Future Lifestyle’s enterprise value stands at about ₹10,654 crore and ₹3,834 crore, respectively.

RIL should not have any issue in funding these deals given its healthy balance sheet following the recent fundraising spree. RIL has sold 24.7% stake in its digital services subsidiary, Jio Platforms Ltd, for ₹1.15 trillion. It is also raising ₹53,000 crore through a rights issue.

The stake sales will offer relief to Future Group on the debt front. This is all the more critical in covid-19 times when sales have taken a beating due to the restrictions and a general demand slowdown. A pertinent question here would be whether offline retailing is appealing, given the pandemic, which has increased demand for online services.

Rajiv Sharma, head of research, SBICAP Securities Ltd, said: “India’s organized retail penetration is significantly below China, Brazil and developed countries such as the US and the UK, reflecting the huge growth potential. Additionally, although there is huge potential for e-commerce in India, a pure-play e-commerce model is not sustainable for the long term due to high fulfilment costs and customer acquisition costs.”

At the same time, offline stores also need to have a presence on online platforms in order to keep up with changing consumer preferences.