Buy Future Retail, price target Rs 498: Edelweiss
Moreover, Amazon has been granted call option to acquire all or part of the promoter’s shareholding in FRL, exercisable between the third and 10th years.
According to the management, the deal is at a significant premium to warrant conversion price (Rs 505). Moreover, Amazon has been granted call option to acquire all or part of the promoter’s shareholding in FRL, exercisable between the third and 10th years.
"It’s been our view that in the highly competitive retail sector, players opting for omni-channel platform will ace the game and thus it was imperative for FRL to join hands with a global player to bolster it financially as well technologically. The Amazon pact will help FRL: (i) set up an omni-channel business model; (ii) restructure board to up corporate governance standards; and (iii) reduce related-party transactions. All these, we believe, entail re-rating potential which is currently trading at ~50% discount to Avenue Supermarts’. We maintain a buy rating on the stock with a target proce of Rs 498," the brokerage said.
"Future Coupons had been issued Rs 2,000 crore worth FRL warrants. Of this, it had already invested Rs 500 crore. While at this juncture we are not sure of the exact valuation at which Amazon will pick stake in FRL, our base assumption is that balance Rs 1,500 crore which Future Coupons was to infuse is the quantum that Amazon would have infused. Factoring this, we arrive at an implied acquisition price of Rs 773, a 53.2% premium to the warrant conversion price," it said.
The brokerage said it perceives FRL’s pact with Amazon as a prudent move in the current retail eco system. "Risk, however, emanates from regulatory changes which may derail deal contours as well as Reliance Retail’s aggression. While scope for re-rating remains, we will closely monitor execution of joint business development plan and progress on the same. At CMP, the stock is trading at 16.6 times FY21E adjusted for INDAS 116 EV/EBITDA (9.0 times FY21 unadjusted EV/EBITDA)," it said.