Covid-19 impact: Debt woes keep future uncertain for Kishore Biyani firms

The group’s flagship Future Retail has been hit the hardest by the lockdown
Kishore Biyani had played down the impending threat of Covid-19 during a presentation back in March, made to analysts worried about the high leverage across Future Group companies. He had reasoned that a combination of hot weather and young demographics would keep the economy insulated from the impact of the virus.

Fast forward five months, and Biyani is close to losing his retail empire. The economic tsunami has left the conglomerate high and dry. The group’s flagship Future Retail has been hit the hardest by the lockdown. It is yet to declare March quarter results, even as peers have announced their numbers for the June quarter. Further, the firm’s debt has been downgraded to a ‘C’ rating by Fitch, and it is close to defaulting on its dollar-denominated debt.

“Failure to report the March quarter numbers suggests Future Retail’s finances are in a really bad shape. The June quarter numbers will be worse off, and so will be the September quarter figures, which is the first danger sign for shareholders and lenders,” said a retail analyst.

The analyst added that it would be tough for the group to escape the financial hole a white knight bails it out.

The company declined to answer the query sent by Business Standard.

Experts, however, said the financial trouble had been brewing for some time, and the shutting down of stores was the last straw. “Biyani has always been ambitious and wanted to grow fast. He planned rapid expansion funded through debt and it began to hurt when revenues and profits came in lower than anticipated,” said Shailendra Kumar, head (research), Narnolia Securities.

The firm had reported outstanding debt of Rs 3,841 crore as of September 2019 (Q2FY20), up 50 per cent from the March 2019 quarter (Q4FY19). Subsequently, its net worth reduced 16 per cent, resulting in a debt-to-equity ratio of 1.2x as of Q2FY20, a sharp rise from 0.66x as of Q4FY19. Besides, Future Enterprises had reported consolidated debt of Rs 6,800 crore at the end of FY19. In contrast, Avenue Supermarts — which runs the DMart chain — is debt-free and sitting on Rs 4,000 crore of cash reserves, while Trent reported gross debt of Rs 300 crore and a debt-equity ratio of 0.12x as of FY20 end. Trent runs Westside and Star Bazaar.

The piling debt is reflected in Future Retail’s quarterly numbers. Between December 2015 and December 2019, revenue rate doubled from Rs 2,436 crore to Rs 5,193 crore. During the same period, operating profit jumped 9x to Rs 727 crore from Rs 83 crore, but interest liability rose 16x during the period — from Rs 18 crore to Rs 277 crore. Profit before tax grew a meagre 3x. 

The result was a steady erosion in debt servicing capability, as indicated by its interest coverage ratio (ICR) — the ratio of operating profit to interest liabilities. This metric declined from 4-5x in FY19 to a riskier 2.6x by December 2019. Rating agencies start doubting the ability to service debt if ICR falls below 1.5x.

Others blame the mismatch between Biyani’s ambition and resources. “Unlike successful business groups, Biyani failed to build a cash cow that could fund his growth spree. This forced him to spread himself too thin across the entire retail segment,” said a retail consultant. This is backed by Future Retail’s numbers compared to rivals. At the end of FY19, Future Retail had 1,511 stores in 428 cities, with total floor area of 16.1 million sq. feet. This network yielded net sales of Rs 22,225 crore and operating profit of Rs 1,059 crore.

The numbers translated to average revenue per store of Rs 15 crore, and average operating profit of Rs 70 lakh a store.

In contrast, Avenue Supermarts had 176 stores in 11 states and one union territory at the end of FY19 — a fraction of Future Retail’s network. Yet, Avenue Supermarts’ revenues were only 10 per cent lower than Future Retail’s, and operating profit was 60 per cent higher. A back-of-the-envelope calculation shows that every DMart store yielded revenue of Rs 114 crore and operating profit of Rs 9.6 crore on average in FY19, nearly 10x that of Future Retail.

As a result, analysts find Future Retail’s operations inefficient and wasteful. “Future’s retail operations and entire supply chain is very inefficient, compared to peers. This translates to low inventory turns, higher wastage, and greater operational and overhead costs,” said Shailendra.

Biyani also faces flak for his failure to build a robust middle management team for streamlining execution capabilities.

“First, the middle management in key group entities is thin, as they have few professionals with domain experience. This has overwhelmed the top management, including promoters, thereby resulting in poor execution,” said an analyst.

The inefficiency has resulted in poor profitability despite superior gross margins. In FY19, the firm reported gross margin of 30.2 per cent — 2.5x that of DMart (at 12.8 per cent). However, most of it was eaten up by higher operational and overheads, resulting in one of the industry’s lowest operating margin of 4.6 per cent. In comparison, DMart’s operating margin was 8.2 per cent in FY19, Trent’s was 9.6 per cent.

This has pushed Future Retail into a downward spiral of higher costs, and a higher selling price to recoup those costs have led to sub-par revenues and profits.

Biyani has to return to the drawing board to escape this cycle.

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