Future Retail ltd-Updates on Deal with Bharti

Future retail was recommended earlier (Click here)at 85/-, it is now at 115. I have bought more at 115 today.

I was expecting something from Future group like stake sale in its supply chain arm Future supply chain solutions Ltd, which is one of the biggest in india. But instead it has chosen to merge its business with Bharti retail. As part of the new arrangement, Future Retail's retail undertaking will be merged into Bharti Retail, while the retail infrastructure undertaking of Bharti will be merged into Future Retail. 

So they will merge their retail business into one and their backend retail infra business like supply chain etc into other. We'll be getting shares of both. Future Retail will be renamed as Future Enterprises and Bharti Retail will called Future Retail and will be listed separately as a front-end retail company. Retail entity will have a debt of Rs 1,200 crore and the infra entity will have a debt of Rs 3,500 cr.

Together they will be having 570 retail stores across india which is huge and they can give a run for their money to online retailers like Flipkart. Retail business will generate turnover of around 15000 cr which is second only to reliance retail at 20000 cr which is having around 2500 stores. Future retail is having grand plans of 4000 stores.

Online retail is building its strong base by acquiring customers at a huge cost…but it Is able to afford that because of equity money invested into these at skyrocketed valuations. These valuations are based on Gross Merchandise billing rather than profit figures as online retail is still in its infancy. But online retail will not be able to kill offline because Walmart is still existing that too at a very large scale.

I see this online and organized offline retail as a value addition exercise. Organized retail has and still has the ability to add huge value to our traditional retail model which was inefficient and not beneficial to small producers like our farmers. Middlemen were eating the profits of farmers. But organized retail with huge investments in backend operations like cold chain and high tech warehouses, made possible the bulk buying from farmers at competitive rates that too from their gates.

They can pass this value addition to consumers also…because back in last year, during our onion criss they were selling onions at half the price of local vendor, who was getting his vegetables from local mandis.

But I don’t see any major value addition by online retail unless they built similar facilities or capabilities. They may be saving my time, but they pay to others for their time to process and deliver our order. Whether they will benefit because of the scale of operations but big question is at which point they will add some value into this whole retail process or whether they will capture the other’s business without adding any value?

Because a business can survive only if it adds some value to some process or activity whether it is a battery or a warehouse.

Organized retailers like Future has integrated business…they also manufacture the products from basic staple foods to fashion apparels…so they are better placed to squeeze the margins from this whole process of retail as they can offer their products at their retail points at slightly lower prices.

I am always in search of companies, the business of which has some material entry barriers. Online retail doesn't have any such entry barrier, anybody can start a website and with marketing they can attract consumers and investors....but they can't move into offline that easily because it requires setting up of retail chains and warehouses at multiple locations which is very strategic and requires huge capital.

High real estate prices are the main reason behind the likes of Walmart not entering Indian market in spite of approval of FDI in retail

So i think, Future group will surely enter into online channel with huge renowned focus because with their large number of stores they can offer same day delivery from their online sites. So we know now that Offline can enter into online anytime not the online into offline.

We are yet to know the details of operations of both the entities. But I feel they will sell some non core assets in the back end entity to reduce the debt. Also the synergies of the both the groups will play big part in further strategic future decisions like the retail arm can use the services of Airtel’s telecommunication network and Bharti to use its resources for retail business as it seems Bharti is not interested in running the show but in investment. Also possible synergies in payment gateways and mobile wallets will be a big factor.

I’ll come up with more details with time. I am having huge faith in Kishore Biyani, as he is having retail in his DNA and understands retail like nobody else do. He invested small amounts in fashion startups like Biba, Lee cooper and clarks shoes and later he sold Biba and AND fashions at 450 crore after having invested around 80-90 cr,  he also sold the stake in capital foods for 180 cr after investing just 13 cr.

There is blood bath going into Indian retail and only the ones with thick skin will survive. It is now becoming a game of who can bear the maximum blows and Kishore Biyani may just have got the strength now to withstand the blows.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)