Kishore Biyani-led Future group stocks — Future Consumer, Future Lifestyle Fashions and Future Retail — were the major gainers among retail stocks on Thursday, on re-rating hopes after the Walmart-Flipkart deal.
Also, Kishore Biyani expressing interest in selling minority stake to a global retailer spiked interest in the stocks.
Future group stocks gained in the range of 2-5 per cent. Other stocks such as Avenue Supermarts, Shoppers Stop, Trent, V-Mart Retail and V2 Retail ended mixed, either due to high valuation (main reason) or no direct benefits from the largest merger and acquisition in Indian retail.
Better placed vs peers
“The deal values Flipkart at $20.8 billion. Though this may look expensive in absolute basis, the valuation is at a discount to that of Avenue Supermarts and at a significant premium to that of Future Lifestyle Fashions, Future Retail & Shoppers Stop — our preferred picks in the retail sector,” said Edelweiss in a note.
According to analysts, stocks of companies such as Avenue and Trent factor in more than their superior fundamentals with valuation of around four times and three times enterprise value-to-estimated sales for FY19 and FY20, respectively. Stocks of small retailers such as V-Mart and V2 Retail are also trading at high valuations, compared to their size, due to rally in mid- and small-cap stocks in the past.
While Shoppers Stop is also trading at a similar valuation of Future group stocks, the latter is seen as a larger beneficiary from the Walmart-Flipkart deal and resultant change in industry dynamics.
Shoppers Stop is a leading departmental store chain in India. On the other hand, Future Group is largest in the food and grocery segment, which in turn has the largest share (67 per cent) in the $710-billion Indian retail industry. Further, Kotak Institutional Equities pointed out that organised retail penetration in grocery is the lowest at 3 per cent, indicating heightened interest by players. “As organised retailers step up on investments in the Indian retail space (both online and offline retail), we expect them to focus both on extant categories (electronics, apparel, home and living), as well as on the hitherto under-penetrated category of food and grocery,” it said.
From the M&A or joint venture angle also, Future Group stocks will be in favour. Though the sector is expected to continue to grow at a robust pace (20 per cent and 38 per cent compounded annual growth rate till FY20 for the overall sector and e-commerce, respectively), consolidation will be on the rise as players try to gain financial muscle in order to reap benefits of the consumption boom.
Partnership fillip
Analysts said that offline and online partnerships are likely to get a fillip and global retail giants could look at large physical retailers as attractive joint venture/ acquisition candidates for their India entry. Future Retail has acquired Bharti Retail, Heritage Fresh, and HyperCity Retail, etc, in the past few years. Analysts expect more such deals in future from Future Group.