IPO: Future Ventures issue is not for the faint-hearted

By VS Fernando

Short-term investors in Future Ventures, whose issue opened for subscription on Monday, can try their luck at the IPO as one expects active interest in the counter because of the big names involved.

But while the visibility of the Future Group is high, it has not exactly been a great ride for investors. The group went public one year before Infosys, but there the comparison ends. The financial track record and distribution to shareholders are miles apart since the two are in different industries.

[caption id=“attachment_1999” align=“alignleft” width=“380” caption=“Future Group venture Big Bazar. Image Source AFP “]  [/caption]

In 19 years, Pantaloon Retail India (PRIL) - the flagship - had made just one bonus issue that too was issued after taking an exorbitant premium of Rs 490 for the Rs 10 paid-up share through its 1:5 rights issue! Post-rights, in the last five years, PRIL’s share has fetched only a modest annual return of 13%, including dividends, and the gain on shares allotted in Agre Developers Ltd.

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The group’s second public company, Pantaloon Textile, subsequently renamed as Pantaloon Industries, too offered negligible returns in the first 10 years. For reasons best known only to the promoters, they de-listed the stock after an open offer in the year 2006.

The third public float of the group, Future Capital Holdings Ltd (FCH), was made at an ultra-high price of Rs 765 in early 2008. Incidentally, the same investment bankers Enam, JM Financial and Kotak Mahindra, who are managing FVIL’s present offer, handled the super-high-priced FCH’s IPO which has inflicted a loss of more than 75% on investors.

At a recent press meet, the promoter of Future group reportedly said that the investment bankers wanted a higher price for FVIL’s IPO but, keeping in view the losses suffered by FCH’s investors, he had opted for a very low price. One could well ask: if the promoter was concerned about the investing public’s loss, he could have done what ADAG’s promoter did. The Anil Ambani company reduced the average cost of public investors’ holdings in Reliance Power by issuing bonus shares (to only public investors) out of the exorbitant premium collected during the IPO.

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Another public company, Galaxy Entertainment, taken over by the Future group in early 2006, too has a pathetic record to speak about. At the time of Future’s takeover, Galaxy was commanding a price of more than Rs 260 but today it is languishing at less than Rs 20!

Issue Objective

The main object of Future Ventures’s (FVIL’s) IPO is to fund incubation, acquisition, nurturing and development of business ventures in consumption-led sectors. However, no concrete plan has been finalised to deploy the IPO proceeds.

Parentage

From a readymade garment manufacturer, who hit the Indian capital markets for the first time in 1992 under the banner of Pantaloon Fashions, the Kishore Biyani-promoted `Pantaloon’ group has come long way. Today, the group has transformed itself into one of the country’s leading organized multi-format retailers under the banner Future.

Business

Though FVIL is nearly one-and-a-half decades old, the company entered serious business only after it was taken over by the Future group in 2007. In the last four years, FVIL has sought to create, build and operate ventures in the business segments of fashion, FMCG, food processing, home products, rural distribution and vocational *education.

The company exercises operational control or influence in the business ventures that it promotes, or in which it acquires interests. Besides providing capital, FVIL operationally manages and strategically mentors these businesses. As per the offer document, the company already has 14 such business ventures, six of which are its subsidiaries.

Prospects

Up to December, 2010, out of its existing capital of Rs 826 crore, FVIL has made investments worth Rs 742 crore in various ventures/projects. With the present issue proceeds, FVIL promises to develop many more business ventures, though the risk factors mentioned in the prospectus suggest that the company has not yet identified any opportunities.

Post-IPO, the company would have an equity base of more than Rs 1,500 crore. Servicing such a large capital will be an uphill task in the near future as the company’s current topline itself is less than Rs12 crore on an annualised basis!

IPO Timing

The present IPO is the fourth in 19 years from the Future stable. Incidentally, the past three public floats were made during three stock-booms! In fact, FVIL’s IPO, too, was originally planed in 2008 for a much larger size of 373.61 crore shares - that is nearly five times the present offer.

At that time, the Sensex was hovering around its historical peak of over 21,000. Unfortunately for the company, and fortunately for investors, Sebi took nearly seven long months to issue its observations. By that time the mood of the market too underwent significant change and the IPO validity expired in December, 2008.

What’s interesting is the company filed the draft offer document with Sebi on February 21, 2008, that is a day after former Sebi chairman, GN Bajpai, joined the company’s board. Despite its former chief chairing FVIL, Sebi cleared the IPO only in September, 2008. For the present clearance, too, Sebi has taken five months.

Mushrooming Group Firms

At the time of its first public issue (Pantaloon Fashions) in 1992, the group had only four companies/firms. These increased to seven in 1994 when Pantaloon Textile went public. The number of companies in the group shot up to over 55 by 2008 when Future Capital was floated in 2008. Come 2010, the number has exceeded 85! How much time can the promoters devote for public companies when they have so many private companies to look after?

Concerns

• Future Ventures (FVIL) is to work closely with PRIL and FCH whose own record is far from impressive. PRIL failed to keep the promises made at the time of its IPO in 1992 and FCH inflicted huge capital losses on investors.
• FVIL does not intend to declare dividends in the near future. Investors should, therefore, derive their returns only through capital appreciation, which depends on how the investee-companies would fare.
• As per the Master Licensing Agreement with Future Ideas Company Ltd, FVIL has to pay royalty of Rs.1 crore for fiscal 2011 which will be incrementally upped to Rs.2.4 crore in 2014-15, for using the Future logo. For a venture capital company, its track record can only be its USP. Hence, one is unable to understand why it has to use the Future logo by paying royalty, particularly when the venture is making losses.
• The goodwill on consolidation is Rs 228 crore. The excess of cost to the company on its investment in the subsidiaries and joint ventures over the company’s portion of equity is recognised in the financial statement as goodwill.
• FVIL’s has seen consistent losses and negative cash flows on consolidated basis. The book value of the share is Rs 8.75 on a consolidated restated fiscal year 2010-11 as against the offer price of Rs 10-11.
• FVIL’s business ventures present a mixed bag, with many of the investee-companies posting losses during the last financial year.
• Market savvy stock broker-turned-investor Rakesh Jhunjhunwala was engaged as director between February 20, 2008, and August 4, 2010; Utpal Sheth, reportedly a senior executive at Jhunjhunwala’s company, held 1.5 crore shares two years ago, but he does not figure now among top shareholders holding 1.5 crore shares or more.
• Future Group promoter Kishore Biyani does not have a voter ID card.

Conclusion

Notwithstanding Future Capital’s bitter experience, since FVIL’s offer is being made at or near par value, speculators may well play up the price on listing in order to keep the interest alive in the counter. As such, short-term investors who would like to take the risk may get in through the IPO route and exit on listing, hopefully pocketing the gains!

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Syndicated by India Aarthik Research (Feedback to vsf@iarlive.in)

* V S Fernando is a veteran IPO Analyst who has been tracking domestic Public Offerings since 1986.