Future Retail expects the acquisition to be profitable in FY19, a source said.
When contacted, Rakesh Biyani, joint managing director at Future Retail, said: “When there are synergies in operations, we would like to have one brand. Within six months, we believe the stores to evolve to the next level."
The source quoted earlier said: “The margin in the fashion segment is 30-40 per cent and in private labels it can go up to 60 per cent. By increasing the share of fashion, they can improve profitability significantly."
HyperCity is also expected to add 10 per cent to Big Bazaar's current retail space. The HyperCity deal would add about 1.2 million square feet (sq ft) of retail space to Future Retail, which operates on about 13.8 million sq ft of retail space across 221 cities, at present.
While HyperCity runs 19 stores in metros, Big Bazaar has 200-odd stores across metros, and Tier-I and Tier-II cities.
In its fifth acquisition in the past five years, Future Retail bought HyperCity for an enterprise value of Rs 911 crore. This is 0.8 times the sales of Rs 1,191 crore for last financial year. The value involved Rs 655 crore of stock and cash, and remaining part being debt.
“The acquisition would result in further consolidation in the business of Future Retail and increase its foothold in the hypermarket business,” Future Retail had said on Friday.
Abneesh Roy, senior vice-president at Edelweiss Securities, said the deal was a win-win proposition for both the players. “Future Retail will gain access to prime locations in metros and HyperCity’s private labels. The company can easily turn HyperCity profitable in the first year itself by enhancing apparel share, pruning headquarters’ cost and boosting synergy benefits,” Roy said. Further, HyperCity’s headquarters’ cost of Rs 55 crore in FY17 would ease off as Future Retail would harness its existing management. Also, HyperCity’s sales and marketing costs at 1.87 per cent of revenue in FY17 would be contained below one per cent, riding on scale and synergy benefits, Roy said.
A Reuters report said shares in Shoppers Stop rose nearly nine per cent to a three-year high on Friday, a day after it agreed to sell its supermarket chain HyperCity. The deal also sent shares of Future Retail sharply higher — its shares were up two per cent after earlier rising as much as 6.1 per cent.