An increase in the income and the number of hypermarket and big malls in cities and towns has given rise to higher consumption. This has led to an increase in consumer financing via credit cards and loans. And as organised retail share increases, the need for consumer financing will go up simultaneously. The business opportunity for the Future Capital Holdings is clearly in place. The business of the company is restructured into investment advisory, retail financial services and research service areas.
As the financial services arm of the Kishor Biyani-led Future Group, there are clear advantages as well. The retail financial services division offered by Future Money has the exclusive right to provide financial products and services to the group’s malls. This gives ready access to a large customer base through Pantaloon Retail India (PRIL) as it has 95 outlets located in 26 cities. The consumption story is yet to unfold its complete potential; hence three digit growth rates in disbursement will be easily possible. As of November 30, 2007, the company has disbursed consumption and personal loans of Rs 3.21 crore and Rs 7.20 crore respectively. It also intends to provide a couple of more financial services like credit cards, general and life insurance. And for this, it has tied up with financial institutions.
In the advisory line of business, the company acts as an advisor to private equity players It also advises Indivision Capital Management (ICM), the investment manager of $425 million Indivision Fund. The company has advised ICM on multiple investments in the retail and consumption-led sectors in deals such as Lilliput, VLCC, BEB and Sula Wines. A part of the advisory services will focus on the real estate sector and here FCH is the investment manager of Rs 350 crore Kshitij Fund and also the advisor to the investment managers of Rs 1376 crore Horizon Fund and Rs 786 crore Indus Fund. The research wing, Future Capital Research, will focus on conducting and publishing research content on macro-economic trends in India.
The issue
Now, the company intends to raise approximately Rs 491 crore (upper band price) from this issue and get listed on the bourses. It intends to utilise the funds for consumer financing purpose. The disbursement of loans will be done through Future Money.
From a fundamental perspective, the company has incurred losses in the last six months of the FY07-08. The net loss is Rs 12.43 crore and the income is Rs 31.27 crore. However, the last financial year net profit at Rs 3.49 crore and income of Rs 38.99 crore was positive. Based on these numbers the standard valuation metrics go awry. There is not enough history available here. Hence investors should look at the promoter’s profile, their track record, as one of the parameters. There is no doubt that Pantaloon Retail shareholders have seen immense wealth being created. The share price of Pantaloon Retail has moved from Rs 35 levels in 2004 to above the Rs 800 mark. The promoters have created a strong presence in the country and its brands are strongly established. Though, from a traditional fundamental perspective, the return on equity numbers has not been exceedingly impressive.
Now, looking at the business as such, financial services have been at the forefront of garnering all the positive sentiment in the stock market and this is expected to continue for some time as the demand is immense.
The management seems to be cashing out on this sentiment with a huge premium. Traditionally, financial services companies tend to get a below market valuations, or at best at market valuations. This is because of the huge risks associated with the financial services businesses.
Unlike the cash business of retail, retail finance is a different ball game. Collection-led issues have been creating controversies all around. Investors with a short-term perspective might not have much to worry about, but for those with a long-term perspective will have to take all these factors into consideration.