Archive | November, 2012

Win Win and Future Capital Holding

25 Nov

Win-Win in Stock Market- You must be joking!

Win-Win? Can such a phenomenon exist in stock market— which is a zero sum game?

Win-Wn

Win-Wn

The answer I believe is “It depends”. But I will not dwell on postulating theoretical possibility for it and go straight to the point. I really like the deal between Warburg Pincus and Biyani . This deal makes me want to buy some shares of Future Capital Holdings. Why?

Belt tightening

The first reason is the urgency of the situation for Kishore Biyani. Anyone looking at the debt levels of  Pantaloons can probably figure out that the debt is too high. Malls might not be making the kind of money they had been projected to.What would one expect from a good business man to do when things seem to be going downhill?

Too tight

Too tight

The answer is belt tightening . The management would also try and secure as much capital as possible to reduce debt and avoid an extreme situation. Securing funds might require the sale of unproductive/non-core assets. We saw both these things happen at Future Group in the form of employee layoffs and sale of non-core businesses. In fact they also sold one of their core business– Fashion Retail to Aditya Birla Nuvo.

When the times are Bad

In any deal the buyer gets an advantage if he knows that the seller is desperate. This also applies the other way round . For Example: The hike in cab fares during heavy rains. The desperate commuter will pay the hike to escape the rain.

Desperate times

Desperate times

Going by the first logic, I find that Warburg Pincus might have got a good deal at a price of Rs. 162 per share for Future Capital Holdings. In fact, it has also got an additional advantage in the form of Kishore Biyani taking over its exposure to Deccan Chronicle Holdings.

Growth and margin

The buyers have only paid about 25% premium on FCH’s book value, which seems cheap(again, hindsight can make me look bad here). The current margin and growth rates for FCH are quite impressive and would remain impressive even if they go down a little. The DCF projections also look quite solid.

A stitch in time…..

For Biyani this deal is a lifeline in his journey to keep Future Group solvent. Lifeline is to strong a word here, it might be called a “stitch in time”  that saves nine. For the shareholders of FCH this deal proved sweet when Biyani decided to take over the loan to DCH and prevented some red results.

The bigger picture I believe is that Warburg Pincus puts a value of Rs. 162 per share on FCH. Using Charlie Munger’s favorite saying here:

“Invert, always invert”.

I believe there is a chance to make a good return from this stock given a decent holding period(2-3 years). Going by Warburg’s record though, one can’t 100% sure about this. But then who can be 100% sure about anything?

Some updates

A few other good things have happened after Mr. Biyani’s prudent decisions to rein in Future group’s debt. The Indian Govt. has passed FDI in retail bill. The way has been paved for the exit that he had planned for almost a decade back. The next logical step for him would be to sell out and reap the rewards of his efforts and capital.

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