Future Consumer (FCL) is an integrated consumer company having a portfolio of brands in categories such as staples, fruits & vegetables, processed foods, home care and personal care. It has a distribution network largely dependent on organised retailers and an overall footprint of ~80,000 stores. We believe that FCL is the best play on the huge window of opportunity (presented by a combination of macro factors and company-led initiatives) for brands using modern retail methods of distribution.
In addition, FCL appears best placed among Future Group companies from a revenue, profit and RoCE perspective, given the group’s focus on retail expansion to drive growth in its burgeoning brands portfolio. Improving mix and operating leverage are expected to drive significant margin expansion over the next five years.
We initiate coverage on FCL with a Buy rating. As the company is likely to be profitable at the consolidated net level only in FY19, we believe near-term P/E multiples are always likely to appear extremely expensive on a one-year forward basis. We, thus, value FCL on EV/sales basis, assigning a multiple of 2.2x (60% discount to EV/sales of coverage consumer universe). This results in a target price of `76, implying ~50% upside. As soon as FCL demonstrates profitability at the net level, we will move our valuation to P/E basis.
We believe FCL offers a rapidly compounding and potentially high RoCE play on the massive growth opportunity in the Indian FMCG sector and particularly for brands focused on modern retail segment. Our detailed analysis on potential investment returns from a three-year perspective suggests a healthy three-year CAGR return of 24%.
A promising play with better eventual RoCE prospects: FCL – a separately listed brands business of the Future Group – is a promising play on (i) rapidly expanding store footprint of the Future Group (the largest pan-India retailer in India), which has set a target at the end of FY17 to open 10,000 EasyDay stores by 2022 (611 stores as of 31st December 2017) and 350 Big Bazaar stores over the next 3-5 years (257 stores as of 31st December 2017) and (ii) increasing proportion of FCL’s brands in Future Retail stores to ~60% from ~20% now.