What’s in store for investors in Future Venture IPO?

Future Capital-experience apart, short term investors can try their luck in this IPO as one can expect some active interest in the counter on listing because of the big names involved.

OFFER AT A GLANCE
Name	Future Ventures India Ltd
Offer Quantity	68.18 cr to 75 cr Shares of Rs 10 each
% on Total Equity	45.2% to 47.6%
Offer Amount	Rs 750 cr.
Offer Price	Rs 10 to 11
Bid Quantity	600 & Multiples of 600
Bid/Offer Opens	April 25, 2011
Bid/Offer Closes	April 27, 2011-QIB portion
	April 28, 2011-Retail portion
Rated By	CARE
Rating	3/5
Lead Managers	Enam Sec., JM Financial, Kotak Mahindra
Registrars	Link Intime India

 

Issue Objective 

The main object of Future Ventures (FVIL) IPO is to fund incubation, acquisition, nurturing and developing of business ventures in the consumption-led sectors. However, no concrete plan has been finalized 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 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 decade-old, the company entered into serious business only after it was taken over by the Future group in 2007. In last four years, FVIL has sought to create, build and operate ventures in the business segments of fashion, FMCGs, 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 cr, FVIL has made investments worth Rs 742 cr in various ventures/projects. With the present issue proceeds, FVIL promises to develop many more business ventures, though the risk factors read that the company has not yet identified any opportunities.

Post-IPO, the company would have an equity base of more than Rs1500 cr.  Servicing such a large capital will be an uphill task in the near future as the company’s current top line itself is less than Rs12 cr on an annualized 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 cr shares that is nearly five times the present offer.

At that time Sensex was hovering around its historical peak of over 21000. Unfortunately for the company, and fortunately for the investors, SEBI took nearly seven long months to issue its observations. By that time the mood of the market too under went 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, G.N. Bajbai, joined the company’s board. Despite its former chief chairing FVIL, SEBI cleared the IPO only in September 2008. For the second clearance too, SEBI has taken five months.       

 

Poor Investor Returns

The visibility of Future Group is, no doubt, currently very high. But, how much has it benefited the investors? Interestingly, the group went public one year before Infosys yet, its financial track record and distribution to shareholders are in no way comparable to Infosys.

In 19 long years, Pantaloon Retail India (PRIL) made just one bonus issue that too was issued after taking an exorbitant premium of Rs 490 for Rs 10 paid-up share through its 1:5 rights issue! Post-rights, in 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.

The group’s second public company, Pantaloon Textile subsequently named 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 an ultra-high price of Rs 765 in early 2008. Incidentally, the same investment bankers Enam, J M Financial and Kotak Mahindra, who manage FVIL’s present offer, handled the unjustifiably priced FCH’s IPO which has inflicted a loss of more than 75% on the gullible investors. 

At a recent press meet, the promoter of Future group reportedly told that the investment bankers wanted a higher price for FVIL’s IPO but, keeping in view of the losses suffered by FCH’s investors, he opted for a very low price for FVIL. Here one may ask, if the promoter was so concerned about the investing public’s loss, why didn’t he emulate ADAG’s promoter, who reduced the average cost of public-investors’ holding in Reliance Power by issuing bonus shares (to only public investors) out of the exorbitant premium collected from them?

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

 

Mushrooming Group Firms

At the time its first public issue, Pantaloon Fashions in 1992, the group had only four companies/firms which were 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 public in 2008. Come 2010, the number has exceeded 85! How much time can the promoters devote for the 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 up the promises made at the time of its IPO in 1992 and FCH inflicted huge capital loss 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 Licencing Agreement with Future Ideas Company Ltd, FVIL has to pay royalty of Rs.1 Cr for fiscal 2011 which will be incrementally upped to Rs.2.4 Cr in FY 2015 for using Future logo. For a venture capital company, its track record can only be its USP. Hence, unable to understand why it has to use Future logo by paying royalty particularly when the venture is making losses.
• Goodwill on consolidation – Rs.228 Cr. The excess of cost to the Company, of its investment in the subsidiaries and joint ventures over the Company‘s portion of equity is recognized in the financial statement as Goodwill.
• FVIL’s consistent losses and negative cash flow on consolidated basis; Book Value of the share Rs.8.75 on consolidated restated FY 10 financials 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 Feb 20, 2008 and Aug 4, 2010; Utpal Sheth, reportedly a senior executive of Jhunjhunwala’s company, held 1.5 cr shares two years ago, does not figure now among top shareholders holding 1.5 cr shares or more.
• Future Group promoter, Kishore Biyani, does not have a Voter Identification Card!

 

Conclusion

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