In This Issue:
- Editor’s Column – Credit Risk Funds Alpha, is it Enough for the Higher Risk
- Future Consumer Credit Note
- Weekly Issuer Data – AA and Below
- Rating Upgrades, Downgrades, and Other Data
- Current Quotes – Corporate Bonds
- Other Data
Editor’s Column – Credit Risk Funds Alpha – Is it Enough for the Higher Risk
Credits are tricky, one wrong investment means a capital loss that cannot be recovered. A default or downgrade(s) can lead to complete loss of liquidity, sharp fall in price of bond and extreme stress for investors. As against a credit, interest rate risk is easy to handle as liquidity allows investors to sell bonds as interest rates rise. Credits also carry interest rate and liquidity risk apart from credit risk, making it much riskier than regular interest rate funds.
Credit risk funds in India have gained in popularity especially with HNIs and retail investors as they are sold as a low volatility fund that can replace a fixed deposit. However, given the risks involved, credit risk funds carry much higher risk than fixed deposits of well run banks, and are strictly not comparable.
Looking at the last 5 year returns of credit risk funds (average of top 5 funds in terms of AUM) and comparing to short, medium and long duration funds, credit risk funds have generated returns of around 55bps to 125bps over duration funds. The question is whether this kind of alpha is enough for investors to compensate for the higher risks the funds carry?
Investors can use credit risk funds for generating alpha but not at all points of time. Falling interest rates have seen gilt funds generating over 15% returns, which given only interest rate risk, is very good. In scenarios of rising interest rates, economic optimism and improving corporate health, credit risk funds will earn their alpha on a risk adjusted basis.
Source:Company annual report
We have space where transactors can place their Bids or Offers for High Yield Bonds.
Please do send your comments to email@example.com on this newsletter, which will help us better the offering as we go along.
Future Consumer Credit Note
Credit – Positives and Negatives
- Captive consumer base through Future Retail
- Strong growth over the last 3 years indicating good management strategy
- Cash flow positive in FY 18
- Brands firmly established in the FMCG space
- Intense competition with cash rich companies driving down prices for volumes and market share
- Margins constantly under pressure
- Debt levels are rising
- Lack of multi distribution channels
Future Consumer (FCL), within just five years, has made its mark in thebranded FMCG market. Through its differentiated offerings, the companyis not only expanding existing categories but also launching innovativeproducts in emerging categories.Moreover, FCL hasefficiently leveraged group company Future Retail’s (FRL) retail network of 879 stores,giving it a competitive edge.
Future Retail (FRL)is one of the India’s largest retailers with 879 stores and more than 12million sq. ftof retail space. Future Consumer generates approximately 77% of the revenue through Future Group’s retail formats. Future Retail overall store count is set to increase to around 1,860 by FY22, whichwill drive revenueforFuture Consumer. Future Retail is already clocking double digit SSSG (Same Store Sales Growth) and with Future Consumer niche offerings, it is expected that this healthy growth rate will sustain going forward.
The working capital cycle of the company has decreased from 51 days in FY17 to 40 days in FY18, largely due to rise in collection days. Company’s liquidity position is strong as the current asset can cover 1.51x of current liabilities. The company’s net working capital requirement is 10.52% of revenues as per FY18 figures.
The company has total outstanding NCD issue of Rs 2,470 million as of FY18. The overall debt/equity has risen from 0.37x as on March 31, 2017 to 0.54x as on March 31, 2018,as the company raised Rs2 bn in non-convertible debentures (NCDs) in February 2018, from the CDC Group Plc., the UK government’s development finance institution. The NCDs have a 7-year tenure and will be used for capital expenditure, long-term working capital needs, and to support business growth.
Future Consumer Ltd – Company Profile
FCL is a part of the Future Group, which is one of the largest retailers in India with Future Enterprises Ltd being the flagship company of the group. The Company has established its presence as an integrated food company with operations ranging from sourcing,manufacturing, branding and distribution. The Company continues to strengthen its position as an integrated food and FMCG company and has built a strong portfolio of Food and FMCG brands relevant for today’s urban and ever evolving young consumer. This portfolio of brands is well supported by two key pillars, strong distribution network for supplies toover 100,000 stores and expertise in the fields of sourcing and manufacturing.
The promoters of Future Consumer Ltd (FCL) are involved in the management of business and in defining and monitoring the business strategy for the company and have been successful in building and scaling up the retail business in the country. Furthermore, the promoters are supported by a strong management team having significant experience in the FMCG and retail industry.
The promoters in the company hold 44.51% stakewhile public shareholding is55%and rest is held by employee trust and non-promoters &non-public group. Promoters have pledged 51.98% of their total 44.51% shareholding in the company.
Brand Business Growing at a rapid pace
Company currently has 26 brands under its umbrella, which generates 95% of the sales for the company. The brands are broadly divided in two categories, Food and Beverages and Home and Personal Care. Food and Beverages category contribute to 93% of total branded business while remaining 7% of the branded revenue is generated by Home & Personal Care.
Branded staples and fruits & vegetables,which form the bulk of its overall portfolio and are relatively low-margin categories,should see healthy growth, but overall margin expansion will be driven by the high-margin processed food and Home & Personal Care products.
Over the past three years (FY15-18), while the overall FMCG sector has seen muted CAGR of 5%, FCL has reported sales CAGR of 37%. Going forward, the company is expected to maintain its topline growth trajectory owning to its burgeoning brands portfolio, increasing scale of key brands, massive captive growth opportunity within the existing store network, and the rapidly expanding store network. Brands like Golden Harvest, Nilgiris, Fresh & Pure, TastyTreat and Clean Mate are already large, and others like Karmiq, Sangi’s Kitchenand Desi Atta Company are growing at a rapid pace.
Golden Harvest, a brand which caters to everyday kitchen essentials by providing premium quality flour, pulses, rice, dry fruits, cereals and spices has grown by more than 30% CAGR in the last three year to cross revenue of Rs 10 billion in FY18.
Tasty Treat, a snack brand has joined the Rs 1 billion revenue club in FY18, by growing at a CAGR of over 45% in the last three year from Rs 500 million to over Rs 1 billion in FY18.
Karmiq, a brand for dry fruits products has touched revenues of Rs 450 million in its first year of operation in FY18.
The Aadhaar wholesale centers will build a digital distribution network for the company. Wholesale centers will serve to any retailer, eateries,dhabas and restaurant owners. Further, the wholesale centers will also serve any service provider, institution, anyone with a Shops & Establishment number or GSTN no. or PDS Network. The company will bring modern analytics to the business operation that has long been run by intuition.
In the traditional FMCG channels, distribution costs account for20% of sales and advertising costs too contribute around 10-15%.However, as a proportion of sales, these costs are much lower for brands of FCL as it has a largely captive customer base within Future Retail stores. This lowers theimpact of higher net working capital for the company. This along with, superior operating cash flowsfrom rapidgrowth and revenue mix improvements will help to repay debt, which will drive improvement in RoCE for FCL. Company has net debt of Rs 5.40billion with a net debt-equity ratio of 0.54x as on FY18
Improvement in operational performance, however low margins
Company’s income from Operations grew by of 42% in FY18 from Rs 21,158 million to Rs 30,050 million. EBITDA margins more than doubled to 2.2%which lead to an EBITDA growth of 220.8% to Rs 664 million from Rs 207 million. PBT Loss narrowed by Rs312 million. PAT Loss narrowed by Rs 350 million. Cash Profits were at of Rs 168 million in FY18, up by Rs 452 million from Rs -284 million in FY 17.
Sales growth has been rapid (37%CAGR over FY15-18), and in fact, is on an uptrend, despite continual high base, while the EBITDA margin has improved from negative 4.92% in FY15 to enter positive territory in FY17 and reported at 2.2% in FY18. By FY19, the company is expected to turn profitable at the net consolidated level. However, the company “Vision 2021” target of clocking revenue of Rs 200 billion is ambitious.
Future Group has made poor capital allocation decisions in the past. Continuation of the same can pose a risk toFCL’s prospects.
FCL is highly dependent on Future Retail’sstore expansion plans. If the pace of store openings slows down for any reason,it will have a direct impact on FCL’s revenues.
FCL will need debt in its growth phaseto meet its working capital needs. The company’s return ratios may getimpacted if it decides to acquire a business or brand that is non-core in naturethrough debt.
Do you want to receive this on Whatsapp – Send a WhatsApp Message to this number +919920659677.