LETTER FROM THE MANAGING DIRECTOR
Dear Shareholders,
We are pleased to share with you the Annual Report for the financial period 2011-12 (18
months). The company has posted a consolidated revenue from operations of Rs. 20,186
crore, net profit of Rs. 276 crore and earnings per share (EPS) of Rs. 12.19 for the 18
months ended December 31, 2012.
It has been a tumultuous year for the Indian economy as whole and for your company. The
country’s GDP grew by 6.5% during 2011-12, the lowest in almost a decade. During the
first two quarters of 2012-13, growth further slipped downwards to 5.3% and 4.5%. Growth
in private consumption was actually much lower, hovering between 2% and 4% during these
eighteen months. As a consumer-led business, your company bore the brunt of it. Lower
economic growth, coupled with poor rate of job creation, high inflation, increasing
interest rates and the impact of the global economic slowdown affected consumer sentiment
negatively.
Amidst such an environment, your company’s management revisited some of the
fundamental characteristics of the organisation. We decided to monetise our investments
made in non-core areas of business and focus purely on the retail business. And within the
retail business, instead of adopting a unidirectional approach towards growth, we adopted
a multi-dimensional approach to growth. Growth, we believe, need not come from expansion
of business alone. Instead, we looked internally to identify and execute strategies that
lead to growth in efficiencies, productivity and return in investments of our existing
operations. Simultaneously, we worked towards improvement in consumer experience and
strengthening relationships that lead to growth in business from our existing customers
and store network.
Each of these steps has started showing some early results. But these are just the
beginning of what we believe is a steady transformation in the business. We call it our
Second Innings.
More from the same
We are fortunate to have got your help and support in building a retail network that
has so far earned us a leadership position in modern retailing of some of the key
consumption categories in the country. While, maintaining and building upon this
leadership remains a priority for us, we also need to reap the benefits of size, scale and
the lessons we have gained so far.
During the first decade of operations, the focus was on achieving disproportionate
growth by expanding into new categories and geographies. The aim was to capture a majority
share of the consumer’s wallet. This decade provided the lessons in terms of
categories, consumer tastes and consumer evolution along with price points for retailing.
The learning and understanding of each of these factors has prepared your company for its
second innings wherein it can focus on profitable growth, consolidation and convergence
across formats and categories; resulting in increased productivity and profitability.
Over the last eighteen months, your company has focused on growth not only through
adding new stores or attracting new customers, but also growth that comes through increase
in per square foot sales, increase in ticket size of existing customers and from building
and sustaining a merchandise mix that optimises return on investment. The company has
optimised its store network in every large city through rationalisation of space and
outlets. This has significantly reduced cannibalisation or one store losing out customers
to another nearby store from the same network. Simultaneously, the company led an
extensive renovation of a large number of stores to improve customer experience, brand
positioning and to appropriately revamp categories like electronics and home appliances,
mobile phones, home fashion and footwear.
The company was also able to successfully bring in new excitement and vigour in its
value fashion business through the introduction of the FBB brand. The theme, look and feel
of the fashion section within hypermarkets has now been completely transformed. In
addition, the company also opened 16 standalone stores under this concept. FBB now ensures
fresh experience design elements, better levels of customer focus, visual merchandising
that focuses on store productivity and a merchandise mix that speaks to the youth of the
country. The intent is now to develop FBB brand’s equity and establish it as a
leading retail brand in India.
We are also proud to share with you that our investments in critical areas like supply
chain solutions, technology, consumer analytics and loyalty programs is helping the
company tremendously in improving its customer delivery at lower costs, better planning,
forecasting and allocation of its resources and optimising its marketing spends. The
organisational design and culture that we have built has increased accountability and
authority of our employees in driving them to achieve higher profitable growth.
In effect, in an environment that discourages the use of additional resources to build
businesses, we are learning to achieve disproportionately more growth from the same set of
resources that we have with us.
Unlocking Value
During the last decade, we had also developed businesses in the financial services
sector with the objective to integrate it with our retail business, use the synergies to
drive further consumption and gain a larger wallet share of our consumers. While these
businesses grew at a steady pace, we failed to realise the synergies between our retail
business and financial services. We therefore decided to divest these businesses and
monetise our investments in non-core areas like financial services.
Lower economic growth and dip in consumer sentiment impacted business tremendously.
Revenue growth was subdued due to low same store sales growth and marginal growth in net
operational space due to store rationalisation.
While Same Store Sales Growth started to recover towards the end of the financial year,
Operational improvements and optimisation of costs resulted in consistent growth in
Gross Margins and EBDITA. Gross Margins improved from 29.0% in 2010-11, in the core retail
business to 29.5% in 2011-12
And EBIDTA Margins improved from 8.7% in 2010-11, in the core retail business to 9.1%
in 2011-12
"We are hopeful that the consumption demand will become more consistent during
2013 and as the green shoots of recovery show up, I can assure that we are more prepared
than ever to ride the wave of the Indian consumption story."
Further, deleveraging of balance sheet through monetisation of non-core assets and
demergers of business is bringing down interest outgo. This should result in improvement
of Net Profit in the forthcoming year.
Your company had invested Rs. 60 crore in Future Capital Holdings since inception.
During the year, the company exited almost its entire stake in the business in
favor of global private equity major, Warburg Pincus for Rs. 433.41 crore.
Similarly, your company’s investments in its insurance joint ventures with the
Generali Group have helped grow the business significantly. We are confident of
identifying partners for divesting our stake in life and general insurance business during
the first quarter of the new financial year. Both these divestitures will help in
deleveraging your company’s balance sheet to a large extent.
The company’s oldest retail chain, Pantaloons has a size and scale that is
comparable to many other listed retailers in the country. It is a business wherein
we believe that there is a significant scope to unlock value for our shareholders. Earlier
in the year, we decided to demerge this business and have as a majority partner
in this business, one of India’s leading business groups, Aditya Birla Group.
Further to these, we have also decided to demerge the company’s lifestyle fashion
business that includes chains like Central, Brand Factory, aLL and Planet Sports and
combine this with the group’s strong portfolio of domestic and foreign brands and its
investments in the fashion space, to form an independently listed company, Future
Lifestyle Fashions.
Each of these steps has been taken with a few objectives. The first and foremost was to
focus purely on retail as a business. And within the retail business, we intended to
simplify and focus independently on the three key areas of businesses within the company
– hypermarkets and supermarket operations, an integrated fashion company and an
integrated food and FMCG company. It is our intent and hope that these steps will not only
result in unlocking of value for all our shareholders’ but also build a more solid
foundation for the growth and efficiencies for each of these businesses.
Outlook
We are happy to share that even in these difficult times, the steps we are taking has
started to yield some results. The gross margins in the core retail business have improved
from 29.0% in the previous financial year to 29.5% during this financial period and the
EBDITA has also improved from 8.7% to 9.1%. The same store sales growth, which had dipped
abysmally during the first few quarters of the financial year, has shown some encouraging
improvement towards the end of the financial year. The deleveraging of the balance sheet
is also resulting in decrease in interest outgo and the full impact of this will be felt
during the forthcoming financial year.
At the policy level, we are seeing some welcome developments. The recent removal of the
excise duty on branded garments augurs well for the company in the days ahead. Further
steps like liberalisation and reform of retail and distribution sector and rolling out of
Goods & Services Tax (GST) regime will add further momentum to the growth of
consumption and retailing in the country.
The worst is now behind us. We are hopeful that consumption demand will become more
consistent during 2013 and as the green shoots of recovering show up; I can assure you
that we are more prepared than ever to ride the wave of the Indian consumption story.
During the past eighteen months, we have collectively taken some difficult decisions -
whether it was divesting some businesses that we had built from scratch or closing down of
certain stores or formats. These were not emotionally easy decisions. But these were
rational steps taken in the best interest of all our stakeholders and with the belief that
these will help put your organisation on a firmer footing for growth and value creation.
Today, we are looking at the future with renewed vision and approach for your
organisation. Thank you for having your faith and trust in us and we hope for your
continued support, encouragement and guidance in our endeavour of creating a world-class
retail organisation here in India.
Rewrite Rules, Retain Values
Kishore Biyani
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