Shares of Future Retail Ltd rose over 7% during trading hours on Monday, after The Economic Times reported that Google and Paytm Mall will team up to invest ₹3,500-4,000 crore in the company for a 7-10% stake. The retailer clarified to BSE that the board has taken no such decision. Still, the Future Retail stock closed 5.4% higher eventually.
What could be the reason?
Perhaps, as an analyst said, these global companies want a slice of the fast-growing Indian retail market and it is quite possible that they may pay better valuations for an exposure here. To be sure, news of such deals and tie-ups has been around in recent months. If a deal is announced in the near future, its structure will also be important from the stock’s point of view.
Future Retail’s share price surge reflects on India’s retail sector
For Future Retail investors, this fiscal year hasn’t brought much cheer. After having a stellar run on the bourses in FY18, the stock has underperformed the BSE 200 index so far this year.
Not without reason. Financial results of the last two quarters haven’t been particularly encouraging. In the March quarter, same-store sales growth for Future Retail came in at 6%, the slowest in the past eight quarters at that time.
Same-store sales growth is the comparable sales growth of stores that have been operational for over a year.
Another quarter down the line, the measure dropped to 3.6% in the June quarter. That suggests negative same-store sales growth (strong double-digit dip) in the Easyday business (small convenience stores) reckon analysts from Jefferies India Pvt. Ltd.
The Easyday business was adversely affected due to price deflation in the staples and staple connected category (35% revenue mix in the format). On the brighter side, Big Bazaar same-store sales numbers have been relatively decent.
Future Retail has been executing well in Big Bazaar especially in the higher-margin fashion segment, but Easyday is yet to show results, said Jefferies analysts in their FY18 annual report analysis on 14 August.
Accordingly, investors would do well to monitor the progress on Easyday and HyperCity (bought last year) business performance. The company expects HyperCity stores to be at an Ebitda (earnings before interest, taxes, depreciation and amortization) of over 5% in the next six-nine months.
It goes without saying that an overall improvement in same-store sales growth would augur well for the Future Retail stock.