Receives Rs 15 bn from FCL against equity issuance. In a much-awaited development, Future Retail (FRL) has received Rs 15 bn from Future Coupons (FCL) as part of the 39.6 m equity warrants issued in April ’19 (Rs 5 bn received earlier).

Against the warrants, FRL has allotted 24.8 million equity shares, while the balance 14.8 m shares will be allotted by Oct ’20 upon receiving the balance 0.2% amount, i.e. Rs 11 m. This will dilute equity by 7.3% with total FCL holding of 9.7% and Amazon’s (49% stake in FCL) effective holding of 4.9% in FRL. FRL has also announced raising $500m (~Rs 35.7 bn) in dollar-denominated bonds. This, along with the equity warrant issue, should fund the purchase of ~Rs 40 bn infrastructure assets from FEL.

In the interim, this could increase net debt to Rs 19.6 bn with net debt/Ebitda of 1.4x/1.3x in FY21/22E; RoCE may decline by ~500bp to ~13%. However, FRL should be able to reduce leverage with adjustment of Rs 6.2 bn advances held with FEL and ~Rs 3.8 bn potential gains from claw-back clauses with Bharti Retail and Heritage Foods.

We believe this as a major step toward saving cost and creating a transparent balance sheet (v/s earlier cross holdings of assets amongst group companies). This is because post completion of the asset purchase, FRL would save ~Rs 6.5-7 bn toward lease rentals to FEL and nearly Rs 1.5 bn on PBT. The stock trades attractively at EV/Ebitda and P/E of 14x and 23x, respectively.

Receives Rs 15 bn from FCL toward warrant issuance – much-awaited deal comes to fruition In Apr’19, FRL had allotted 39.6 m equity warrants to Future Coupons at Rs 505/share, of which 25% amount (Rs 125.25/share) – i.e. Rs 5 bn – was paid by FCL in advance. FRL has now allotted 24.8 m equity shares upon receiving the balance amount of Rs 9.4 bn (@ Rs 378.75/share) against 24.8 m equity warrants issued to FCL in Apr’19.

Also, FCL has paid 99.8% of the amount on remaining 14.8 m warrants (Rs 5.6 bn) but still continues to hold 14.8 m equity warrants, which can be converted into equity by 22nd Oct’20 upon payment of the balance 0.2% amount i.e. Rs 11 m (0.2% amount pending in order to avoid Sebi takeover regulations). Thus, overall, FRL has received a total of Rs 14.99 bn from FCL against warrants issued.

Allotment of 24.8 m equity shares to FCL will result in ~4.7% post equity dilution in FY20, while conversion of the remaining 14.8 m warrants will result in additional 2.6% equity dilution in FY21. Thus, total equity dilution via warrant issuances will stand at ~7.3%, which is already built in our estimates and financial model.