NEW DELHI: Short supply of cash flow in tandem with soaring promoter debt may place Kishore Biyani holdings in Future Retail, which houses the Big Bazaar chain, and other assets in the spotlight.
While the company is evaluating multiple options to lower debt and free-up a high pledged stake in the retail arm including the merger of insurance joint venture Future Generali, lenders enforcing their rights and ongoing liquidity constraints could pose potential challenges in future, say analysts.
“We understand that the promoter group is evaluating options including monetisation of stakes in entities and investment properties as well as raising equity from new and existing partner. These steps, if successful, will raise financial flexibility at the promoter entities and lower the risk of a change of control being triggered for the redemption for the US-dollar bonds, said said Snehdeep Bohra, associate director of Fitch Ratings.
However, a subdued valuation, possible delays in finalising new investments and lenders enforcing their rights following the breach of collateral cover requirements could present significant challenges, despite a court ruling providing interim relief until May 4, 2020 from lenders invoking pledges on shares of Future Retail, he added.
Due to the plummeting stock prices, the company may not get a good valuation. On Wednesday, Future Retail stock closed at Rs 73.15 a share, down 5 per cent — giving it a total market valuation of just Rs 3,858 crore.
Total debt of the group's listed companies stands at Rs 12,778 crore as of September, 2019 with a total pledge estimated to be in the range of 92-98 per cent by value. In Future Retail, promoters own 49.51 per cent, of which 52.28 per cent are pledged, show regulatory filings.
Fitch also pointed out that Future Retail is significantly reliant on short-term debt, which amounted to Rs. 3,300 crore as of September 2019, while it has scheduled long-term debt maturities in FY21 of Rs. 150 crore. “There are no meaningful long-term debt maturities before 2025, when $500 million of secured notes mature,” the ratings agency added.
Analysts also said that the present crisis presents opportunities to well-established players like Avenue Supermarts and Reliance Retail. “Just as Gap did when it bought activewear maker Athleta in 2008, during another economic crisis, many companies are targeting struggling players and may look to pad weak points in their offerings,” said a Mumbai-based analyst.
While Reliance with a heavy pocket is in a better position to grab a potential stake in the debt laden company, for Avenue Supermarts it would be win-win as it will help them expand their presence while combining the strengths of Future Retail, the person added.
Amazon, which already holds 3.6 per cent stake in Future Retail could also be a potential buyer to expand reach in India.
Future Retail, which is the largest organised retailer in India, has a presence in 437 cities with a total store count of 1,388 stores at the end of Q3FY20. The multiple formats -- supermarket and hypermarket -- it houses include Easy Day, FBB, Big Bazaar, Heritage Fresh and recently acquired chain HyperCity.
As Biyani himself admits, "Diversifying into too many categories apart from food, fashion and home furnishings over the years with limited success in some of them" is the crux of the problem.