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MOSL: FUTURE RETAIL (Buy)-Focus on profitability drives bold steps

Future Retail: Focus on profitability drives bold steps

(FRETAIL IN, Mkt Cap USD2.7b, CMP INR377, TP INR450, 19% Upside, Buy)

 

• Future Retail's revenue declined marginally in 3QFY20 due to closure of small-format stores and exit from select product categories.
• We cut our revenue estimate by 11% for FY21 to factor in store closures, lesser store adds and slower SSSG. We also cut our EBITDA estimate by a lesser 7% for FY21 due to loss of revenue from store closure. 

Store closure, exit from select product categories support profitability

• Revenue fell 3% YoY to INR51.3b (7% miss), but the gross margin improved remarkably by 270bp YoY to 28.7%. Thus, pre-Ind AS 116 EBITDA grew 12% YoY to INR3.1b (16% beat) with the margin improving by 80bp YoY to 6%.
• FRL closed three Big Bazar stores and 157 small-format Easyday and Heritage stores at net level. At gross level, it closed six Big Bazaar, 157 Easyday, and two E-zone stores. Further, it exited from toys, stationary and branded electronics categories. This impacted revenue by ~12%, but improved the gross margin (as we believe Easy day operates on low gross margin) and curtailed other costs.
• PBT came in at INR1.9b (30% beat, -3% YoY), aided by higher other income (3x YoY to INR148m). PAT stood at INR1.9b (30% beat) as FRL continued to report no tax expense.