Future Enterprises Ltd – Value Beyond Debt
“Chips of the Old block” – Spinoffs, Partial Spinoffs and Rights Offerings – Chapter 3 of the book, “You can be a stock market genius” by Joel Greenblatt
There are plenty of reasons why a company might choose to unload or otherwise separate itself from the fortunes of the business to be spun off. There is really only one reason to pay attention when they do: you can make a pile of money investing in spinoffs.
Case study: Host Marriot/Marriot International (Please read the same from the book)
Sometimes, the motivation for a spinoff comes from a desire to separate out a “bad” business so that an unfettered “good” business can show through to investors. This situation may also prove a boon to management. The “bad” business may be an undue drain on management time and focus. As separate companies, a focused management group for each entity has a better chance of being effective.
Why was Future Enterprises spun off as a separate entity?
- As a part of the scheme of arrangement between Future Retail Limited and Bharti Retail Limited, Future Enterprises Limited was created with combined retail backend and infrastructure of both these companies to support the retail front end.
- The company owns the fixed assets used in setting up and operating hypermarket chain of Big Bazaar, fbb, Easy Day, eZone, Home Town, Foodhall, KB’s convenience store networks etc. Income is by the way of lease rentals from the front end retail entities.
- Essentially all the debt of the retail group was shifted to the back end retailing infrastructure company along with all its investments.
- Future Retail is only the front end retailing company which is an asset light business now.
The initial excess supply has a predictable effect on the spinoff stock’s price: it is usually depressed. Supposedly shrewd institutional investors also join in the selling. Most of the time spinoff companies are much smaller than the parent company. A spinoff may be only 10 or 20 percent the size of the parent. Even if a pension or mutual fund took the time to analyze the spinoffs business, often the size of these companies is too small for an institutional portfolio, which only contains companies with much larger market capitalizations – hence selling by institutional investors take place.
What happened to the stock price after it got listed?
Stock price tanked from Rs 24 to Rs 14 in a matter of 4 months. Large institutional investors sold around 14% of the total equity of the company during the last year.
|Arisaig Partners (Asia) Pte Ltd||3rd||7.48%|
|Wgi Emerging Markets Smaller Companies Fund||2nd||2.49%|
|Government Pension Fund Global||4th||1.89%|
Time to buy – when these investors were selling. Relevant declarations/bulk deals etc are given to the exchanges once these large trades are executed. Keeping track of them is the key.
Almost a year down the line, the stock price has doubled to Rs 34 from its November’16 lows. Now let’s see what we have in store for this company.
And before you proceed further, some one once said ” the biggest tool to write fiction is Excel”. I have let my imagination run wild on excel which you will see now. Even If I eliminate the use of this tool, the numbers do tell a story.
Analysis of Future Enterprises Ltd (Standalone parent)
- The company has huge investments which are tabled below, which the company plans to monetize over the next 3 years to retire the term debt fully and become a debt free, cash generating business.
- Here, let’s assume that the entire debt of the company will be zeroised as per the plans of the management of the company by sale of current investments which the company has. (we will discuss that separately and have a look at the operating numbers only)
Profit & Loss Account
* Other income shows gains made on sale of investments in non-listed business’ over the next three years. Interest paid is also reduced as debt is retired from the sale.
– A careful look at the numbers show that the company can be a cash generating machine for the Future Group. Lease rentals from group companies is the primary source of income.
– If debt is repaid in full, the company can throw cash of Rs 700-800 crs year on year from fy 2020 onwards which will take care of the capex requirements.
|Equity Share Capital||85.57||94.57|
|Capital Work in Progress||420.11||386.34|
|Non Current Investments||1,862.03||1,731.24|
|Other Current Assets||1,215.47||1,394.38|
The term loans/debt amount to around INR 4800 crs and the intention of the management is to repay the same in full to make the business a debt free one.
- Two investments amounting to around for INR 870 crs has been sold by the company (explained in the table below). The full impact of the sale of these 2 investments will come in FY 18 financials
- Total Investments current value is around INR 4600 crs (explained next) which is sufficient to wipe off the entire debt of the company.
Future Enterprises Ltd – Investments Structure
The company has a plethora of entities as subsidiaries, joint controlled entities and associates as detailed in the table below
- We have tried to estimate the value of the holdings based on recent market transactions, actual price of the listed entities.
- We wouldn’t give a holding company discount to these valuation numbers, since the intention of the management is to sell of the entire holdings to retire debt.
|Company||% Holding||Sub Holdings||% Total Holdings||Moneys received from stake sale||Estimated Valuation of remaining stake|
|INR crs||INR crs|
|**Future Consumer Enterprises Ltd||9.99%||9.99%||490.00||NIL|
|*Future Lifestyle Fashions Ltd||16.00%||16.00%||380.00||NIL|
|Apollo Design Apparel Parks Limited||39.00%||39.00%||250.00|
|Goldmohur Design and Apparel Park Limited||39.00%||39.00%||250.00|
|Galaxy Entertainment Corporation Limited||31.55%||31.55%||7.75|
|Future Generali India Insurance Company Limited||25.50%||Indirect via Shendra – 24.40%||49.90%||1,500.00|
|Future Generali India Life Insurance Company Limited||3.00%||Indirect via Sprint – 24.40%||27.30%||500.00|
|***Sprint Advisory Services Private Limited||49.80%||Future Generali India Life Insurance Company Limited||49.00%||NA||NA|
|***Shendra Advisory Services Private Limited||49.80%||Future Generali India Insurance Company Limited||49.00%||NA||NA|
|Future Supply Chain Solutions Ltd||57.40%||57.40%||185.00||1,800.00|
|Future Media India Ltd||35.37%||35.37%||50.00|
|Futurebazaar India Ltd||100.00%||100.00%||60.00|
|Future E-Commerce Infrastructure Ltd||40.33%||40.33%||0.00|
|Staples Future Office Products Ltd||60.00%||Office Shop Pvt Ltd -100%||60.00%||150.00|
- *FLFL stake was sold off in December 2016, the impact will be visible in FY 17 balance sheet. The annual report is not yet out, which would show the cash flows and impact of the sale. Primary review of the numbers show that the overall debt has increased by a lesser amount compared to investment in fixed assets, assumption being money was used in capex
- **FCEL stake was sold off in July 2017, the impact will be visible in fy 18 balance sheet
- ***PIL Industries Ltd holds 49.00% stake both in Sprint & Shendra. PIL is a promoter group company having stake in all Future group entities.
|Monetized||To be monetized|
|Total Value of Investments (Rs Crs)||1,055.00||4,567.50|
Apollo Design Parks Pvt Ltd
- 4.5 acres land in the heart of Mumbai, Dadar
- Manufacturing and trading of readymade garments
- Revenues FY 16 – INR 313 crs
- PAT FY 16 – INR 7.3 crs
- Valuation – 15x PAT = 110 crs
- Valuation Estimation considering real estate = INR 600 crs (Management estimated to get around 500 crs valuation in a recent analyst presentation for both mills)
Goldmohur Design and Apparel Park Limited
- 7.5 acres of land in the heart of Mumbai, Lower Parel
- Manufacturing and trading of readymade garments
- Revenues FY 16 – INR 305 crs
- PAT FY 16 – 7.6 crs
- Valuation – 15x PAT = 110 crs
- Valuation Estimation considering real estate = INR 600 crs ((Management estimated to get around 500 crs valuation in a recent analyst presentation for both mills)
Galaxy Entertainment Ltd
- The company has 6 centers offering gaming and entertainment services including food court and bakery services.
- Loss making Listed entity with a market cap of INR 25 crs
- Revenues in FY 17 – INR 40 crs
- New developments include supply of bakery products to “Birdys” in Mumbai & Big Bazaar stores leading to additional revenue of INR 25 crs p.a.
General Insurance business (Pardon my ignorance as to valuation wrt insurance companies)
- The general insurance business is valued at around INR 3000 crs as estimated by the company
- FEL holds 49.90% of the entity valued at around INR 1500 crs
Life Insurance business
- The general insurance business is valued at around INR 2000 crs as estimated by the company
- FEL holds 27.30% of the entity valued at around INR 550 crs
Future Supply Chain Solutions Ltd
- FSC is India’s first fully integrated and IT enabled end-to-end Supply Chain and Logistics company in India with capabilities in handling Modern Warehousing, Express Logistics, Cold Chain and E-Commerce Logistics.
- Revenues FY 16 – 520 crs (30% growth over last year)
- PAT FY 16 – 30 crs (20% growth over last year)
- Last valuation for a PE deal = INR 1450 crs in April 2016 (3.5x FY 15 sales and 60x FY 15 PAT)
- Current Estimated Valuation = 3.5x FY 18 sales (520*1.25*1.2) = INR 2730 crs (25% growth in FY 17 and 20% growth in FY 18)
- FEL stake = 57.4% of 2730 = INR 1800 crs
Future Media Ltd
- Future Media (India) Limited (FMIL) is the Group’s media venture, aimed at creation of media properties in the ambience of consumption and thus offers active engagement to brands and consumers. FMIL offers relevant engagement through its media properties like Visual Spaces, Television and Activation
- Revenue FY 16 – 32 crs
- PBT – INR 1 crs
- Valuation as a multiple of sales – 5x sales = INR 150 crs
Future Bazaar India Ltd
- Future Bazaar is an online arm of Future Group selling gift vouchers for purchase of products at the group owned stores.
- Revenues FY 16 – INR 12 crs
- Loss making entity
- Valuation – 5x sales = INR 60 crs
Future E-commerce Infrastructure Ltd
- Future E-Commerce Infrastructure Limited (FECIL) is to capture the consumption space through the internet, as well as other technology based and digital modes and provide infrastructure assets for the same
- Revenue FY 16 – INR 10 crs
- Loss making entity
- Valuation – Zero
Staples Future Office Pvt Ltd
- WorkStore is India’s largest office products company serving businesses of all sizes for everything they require to run their workspaces and offices.
- Revenues FY 16 – INR 82 crs
- PBT – (INR 8.6 crs)
- Valuation – 2x Sales = 160 crs
Office Shop Pvt Ltd
- OSPL is into retail business of stationary and office supplies.
- Revenues FY 16 – 40 crs
- PBT – (INR 1.76 crs)
- Valuation – 2x sales = 80 crs (higher multiple taken because of better margins of this business)
Investment thesis & valuations
- Key assumption is that the key jewels of the group – investments in Insurance and Supply chain will be monetized to unlock value
- The EBITDA margins are in the range of 25% for the back end entity, and we have assumed that the numbers will grow conservatively 10% year on year till FY-2020
- Last but not the least, this back end entity is eligible for FDI in retail
- 5x of EBITDA gives us a valuation of INR 6200 crs
- 5x of PAT gives us a valuation of INR 5500 crs (of course assumptions on sale of investments applicable)
|EBITDA multiple||PAT multiple|
|Current Market Cap||1500 crs||1500 crs|
|Estimated Market Cap (FY 2020)||6200 crs||5500 crs|
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