Future Retail stock rating is Buy; Edelweiss says vision 2047 conveys scale of ambition

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Updated: November 28, 2017 3:17:18 AM

Strong SSSG, improving margins, and better inventory turns estimated to push RoE to 24.1% over FY17-19.

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Future Retail (FRL) last week unveiled Vision 2047: Tathastu. The Future Group’s target now is to become a $1 trillion company by 2047 by blending online and offline retail to provide seamless experience to consumers. Its strategy is to address the issue of high logistics cost and prohibitive acquisition cost in e-commerce via proximity of physical stores to customers (within 2 km radius) and loyalty programmes (10% discount on all products). The company has tied up with best technology provider in the world (Google and Facebook) to leverage consumer data to enhance customer experiences. FRL remains among our top picks in the retail space. Maintain Buy.

New Retail 3.0
FRL’s strategy is to acquire new customers by opening 10,000 stores by 2022 (1,100 in FY18) and provide them store membership and market place. The company is eyeing 20 million consumers (2,000 members per store) resulting in Rs 1,500 bn opportunity over the next 5 years. It is planning to use data gathered via the market place to target consumers. Consumers can buy products online/offline and avail credit/pay through the Future Group’s wallet. In our view, the group is looking at owning the customer completely by providing end-to-end services and seamless experience via online and offline platforms.

Physical and digital blend is the way forward
In India, 400 million consumers are connected to the internet, of which 300 million are smartphone users. These consumers, on an average, spend 3 hours a day on the internet. By 2020, India is expected to have 650 million internet users with 500 million smartphone users consuming 10GB data. Thus, management believes, digital will drive offline business as consumers will use the best of online and offline platforms. Hence, companies can blend these platforms to provide seamless experience to consumers. Digital can provide a deep understanding of consumer behaviour, which can be used to personalise offerings to consumers.

Outlook and valuations: On strong course; maintain ‘BUY’ On sustained strong SSSG, improving margins and better inventory turns, we estimate 742bps jump in RoE to 24.1% over FY17-19. We maintain ‘BUY/SO’ with TP of Rs 628 (30x FY19E EV/EBIDTA). At CMP, the stock trades at 24.6x FY19E EV/Ebitda.

Future Group Vision 2047
FRL’s aim is to build Asia’s leading integrated consumer business. Currently, the company influences more than 500 million consumers and is expected to sell 300 million garments in 2018. It is looking to open stores within 2 km of every consuming area and is targeting 10,000 stores by 2022. It will also provide digital wallet service Future Katha. Hence, it anticipates becoming a $1 trillon company by 2047. The plan is to use the consumer database to sell insurance. It is also planning tie-ups with third party agencies to offer entertainment and travel services.

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