Future Group was a vertically integrated retailer with in-house manufacturing and sourcing food, groceries, and garments. However, most of the profits were in the retail division while manufacturing and sourcing units operated on low margins and just about covered their operating and capital cost, leaving little surplus.
In FY20, the FMCG manufacturing unit reported Ebitda (earnings before interest, tax, depreciation, and amortisation), or operating profit, of Rs 126 crore over revenues of Rs 4,040 crore, and the fashion unit clocked operating profits of Rs 307 crore over revenues of Rs 3,331 crore. This translates into combined operating margins of 5.9 per cent.
Analysts say such a low margin in manufacturing is not financially sustainable and will hamper its growth plans.
may not have the financial resources to scale up into a large independent manufacturer and supplier,” said Shailendra Kumar, chief investment officer, Narnolia Securities.
According to him, most of the value in consumer goods and fashion lies in branding and retail rather than manufacturing, which has increasingly become a commodity business.
The six listed group companies, which are now merging with Future Enterprises, had reported combined revenues of Rs 39,000 crore during their latest trailing 12 months and operating profits of Rs 5,427 crore.
This translated into operating margins of nearly 14 per cent, among the highest in the industry. The margins are even higher for the Future group companies
and business units that Reliance Retail is acquiring.
These businesses reported net sales of around Rs 32,000 crore and Ebitda of around Rs 5,000 crore during their latest trailing 12 months.
This translated into operating margins of 15.7 per cent, one of the best in the retail industry.
In comparison Reliance Retail reported operating profits of around Rs 9,400 crore over net sales of Rs 1.63 trillion during the year ended March this year. It gave company operating margins 5.8 per cent last financial year.
Analysts say Biyani may try to improve margins by renegotiating the supply agreement with Reliance Retail but it won’t be easy. Retailers, especially big ones, have lots of bargaining power and in the short to medium term Future Enterprises
will depend largely on Reliance Retail to drive its volumes,” said Arvind Singhal, managing director KSA Technopak.