Analyst Corner: Equity dilution a major step for cost-saving for Future Retail

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Published: January 7, 2020 3:10:16 AM

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.

Analyst Corner, Equity dilution, major step, cost saving, Future Retail, FCL holding 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%.

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.

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