Future Ventures India — IPO: Avoid

While the prospects for the consumer businesses that the company holds may be strong, execution risks make the offer unattractive.

Future Ventures India (FVIL) is an investment company (registered as an NBFC) that bets on the retail and FMCG segments through equity stakes in companies that operate in the two sectors. While the India consumption story is strong, with foreign retailers vying to enter Indian markets, execution risks cloud prospects for investors in FVIL. The nascent state of the company's ventures, net losses at the consolidated level and the unlisted investment book which makes valuation difficult, peg up the risks associated with the FVIL IPO.

Valuations

Though the offer is at a price band of Rs 10-11, it does not appear particularly attractive on traditional valuation parameters. One, the company has reported net losses on a consolidated basis for each of the last three years, even as revenues rose from almost nothing to Rs 178 crore for 2009-10.

The bulk of this income originated from sale of retail merchandise. For the nine months ended December 2010, revenues vaulted to Rs 399 crore. Though the company earned positive operating profits, net losses stood at Rs 23.5 crore. If one annualises the revenues, the market capitalisation to sales sought for the offer would be a stiff three times.

Two, at the upper end of the price band, the company's consolidated book value on a post-issue basis will be Rs 9.87. Of the book value, 33 per cent is accounted for by intangible assets, represented mainly by goodwill. Additionally, the book value is bolstered by the issue proceeds, which will contribute half of the post-offer book value.

Business prospects

FVIL holds equity stakes in 14 business ventures spanning the FMCG, rural retail and urban retail businesses. Additionally, the company plans to invest in food parks. In the FMCG segment, it owns the private label brands of the Future group.

In the retail segment, it is invested in Indus League Clothing (90 per cent stake) with established brands such as John Miller and Indigo Nation, popular ethnic apparel chain Biba (17.3 per cent) and the nascent Holii Accessories (50 per cent).

While the prospects for the consumer businesses that the company holds may be strong, there is still a lack of earnings visibility. Though the company proposes to raise Rs 750 crore from this IPO, there is limited clarity on where this will be deployed as the company has “not yet identified any opportunities for investing” the proceeds. The management clarifies that the company plans to invest one sixth of the funds raised in existing businesses while the rest of the proceeds may be used in funding new ventures.

Profits for the latest fiscal were largely contributed by the apparel segment; the FMCG and rural retail initiative Aadhar Retailing have made net losses during this period. A successful turnaround in the FMCG business and resultant profits may be a long way off, given the competition it faces from bigger established players and its limited presence in the Future Group's retail chains such as Big Bazaar and Food Bazaar.

Investments in food parks, a recent foray, may also require huge investments with returns subdued during the initial years. The first of three food parks is now in the initial stages of implementation and revenues are likely to flow in after two years.

Risks also stem from the fact that Future Ventures is concentrated in the retail and FMCG sectors. The Indian domestic consumption is huge with healthy growth potential and organised retail penetration is minimal and has scope for development. Future Ventures' retail undertakings also straddle both urban and rural retail, giving it a wide market reach.

Even so, for the relatively nascent businesses (FMCG and food parks) Future Venture is invested in, reaping benefits may take some more time. Additionally, these investments are making only marginal profits at the subsidiary level and are not really supporting the bottomline which continues to be in the red. Persistent inflation could further squeeze discretionary consumer spends, where Future Ventures is making the most money.

Given its strong pedigree, Future Ventures can benefit from the advisory role of its parent. It could also use the existing resources of the Future group, as it is currently doing optimally. However, given the execution risks that abound , individual investors may be better off betting on stocks in the retail or FMCG space with established track records.

Given the unlisted nature of the investment book, a key means for investors to reap the rewards of owning this stock would be for a value unlocking through a partial or full stake or listing of the individual entities such as Indus League Clothing.

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