Future Retail recently announced the acquisition of HyperCity, one of India’s leading food & grocery retailers.
Future Retail recently announced the acquisition of HyperCity, one of India’s leading food & grocery retailers. We believe that the acquisition is a step in the right direction, and with Future group’s strong logistics ability and sourcing prowess, the turnaround should be quick. The acquisition is synergistic, in our view, and would give the company an opportunity to extend its reach in key metro areas and an opportunity to push its private labels. We believe the acquisition should be Ebitda positive in FY19F and contribute positively to EPS from FY19F.
Consequently, we have increased our revenue estimates by 2% and 6% for FY18F and FY19F, respectively; our EPS forecasts decrease due to additional share issuance. Our Ebitda assumption is unchanged for FY18F but increases by 3% for FY19F.
We remain optimistic on growth prospects: We believe, as the country’s leading food, grocery and fashion retailer, Future Retail would be a key beneficiary of the growth revival in urban India. Moreover, profitability should further improve backed by cost savings and operating leverage.
Risk-reward remains favourable: The stock currently trades at a P/E multiple of 26.8x on FY19F EPS of `20.1. While valuations may not be as inexpensive as they were a few months ago, we remain positive on the stock given the company’s superior growth prospects and continued turnaround in its business fortunes. We maintain our Buy rating with a revised TP of `619, which implies 15.3% potential upside and is based on an unchanged target P/E multiple of 28x (40% premium to global peers).