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Future Retail gains steam as Kishore Biyani rides demonetisation

LiveMint logoLiveMint 18-04-2017 P.R. Sanjai

Mumbai: Future Retail Ltd, India’s biggest department store chain that gained from the government’s surprise demonetisation move, still has room to extend the rally that’s more than doubled its market value this year.

The shares of the food-to-fashion retailer are set to rally 22% in the next 12 months, according to the average analyst price target compiled by Bloomberg. The stock has surged 128% since 1 January, beating returns from rivals such as billionaire Kumar Mangalam Birla-controlled Aditya Birla Fashion and Retail Ltd and Tata group’s Trent Ltd.

A shortage of cash hit purchases of soaps to cars after Prime Minister Narendra Modi in November junked high-value currency bills, driving shoppers to large-format stores like Future Retail that accept credit cards. Sales may jump 25% this year as the company adds to its chain of 1,000-plus stores, India’s biggest, group chief executive officer Kishore Biyani said in an interview.

“Demonetisation was one big tailwind in recent months and the single goods-and-services tax will be the next big push,” said Himanshu Nayyar, Mumbai-based analyst at Systematix Shares & Stocks Ltd, referring to the sales tax regime that will help retailers buy materials seamlessly from across states after it is rolled out from 1 July. His one-year price target of Rs345 is 18% higher than Monday’s close.

Investors are warming up to India’s brick-and-mortar retailers at a time when their online rivals face an intense discount war and eroding valuations. Shares of billionaire Radhakishan Damani-owned Avenue Supermarts Ltd, which sells staples at knockdown rates, have more than doubled from their IPO price in March. The stock hasn’t been added to a popular index yet because of its short trading history. Trent, which sells branded clothes, has advanced 32% since 1 January. Aditya Birla Fashion has climbed 26%.

Credit card spends at Future Retail’s Big Bazaar and Easy Day stores, which stock food and household items, saw non-cash billings surge 86% in the November-March period, the company said. The surprise currency recall was announced on the night of 8 November.

Turnaround

“Demonetization has in fact helped us clock more revenue,” Biyani said by phone. “We’re also looking to add 2 million square feet this financial year” that began April 1, he said.

Future Retail swung to a profit in the nine months ended December, reporting a net income of Rs245 crore versus a loss of Rs89.8 crore in the year earlier period. Revenue jumped almost fourfold to Rs12,600 crore, according to its website.

The turnaround isn’t just because of Modi’s currency policy change.

In recent years, the company has exited non-core businesses and hived off its supply chain infrastructure to a group firm as part of efforts to lower debt. At the same time, it bought smaller chains, including a dairy products retailer Heritage Foods (India) Ltd, to expand in the convenience stores segment. This area is expected grow 43% annually in the next five years, according to Mumbai-based Antique Stock Broking Ltd.

Earnings outlook

Future Retail’s after-tax profit could swell to Rs895 crore by March 2020, compared with an estimated 3.3 billion in 2017, driven by a 31% yearly growth in revenue from convenience stores in the period and a decline in inventory levels, Antique’s analyst Abhijeet Kundu wrote in a March report. An expected return on equity of 20% for 2018 is higher than the global mean of 15.8%, he said. Antique has a price target of Rs387.

“What’s left in Future Retail is very scalable, asset-light and has been delivering growth in the past three quarters,” Systematix’s Nayyar said. “Heritage, Nilgiris, Easyday are high potential convenience formats. These could be the big story contributing to the company’s bottomline in the future.” Bloomberg

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