Confusing concept and business model – AVOID

Future Ventures India Limited is tapping the capital markets with its IPO which has opened on Monday the 25th of April and closes on Wednesday the 27th of April for QIB’s and on Thursday the 28th of April for non QIB bidders. The size of the issue is Rs 750 crs and the price band is Rs 10-11.

Business
Future Ventures India Limited (FVIL) is a part of the Future group. The company seeks to create, build, acquire, invest in and operate innovative and emerging businesses in growing “consumption-led” sectors in India, which is defined as sectors whose growth and development will be determined primarily by the growing purchasing power of Indian consumers and their changing tastes, lifestyle and spending habits. Within the consumption-led sectors, we intend to focus primarily on opportunities in the business segments of (i) fashion, (ii) FMCG, (iii) food processing,(iv) homeproducts, (v) rural distribution and (vi) vocational education.

From the table above we find that the company has invested Rs 732 crs in various companies. From all of the companies as of date the clothing business of Indus League has reached of age and the business is mature in terms of sales, but is yet to reach the profitability that is expected of this business.

Objects of the Issue
The net proceeds of the issue after deducting issue expenses would be utilised for the objects of the issue. The objects of the issue are as follows: –

The company undertakes to utilise the Net issue proceeds within three years from the date of allotment of equity shares in the issue. In the event any part of the net proceeds is not utilised towards the objects of the issue within three years from the date of allotment of Equity Shares in the issue, the company shall distribute the unutilised portion of the Net Proceeds to the Shareholders of the Company as on the record date specified for the same, subject to compliance with the Companies Act and other applicable provisions of law.

Financials
The companies financials at this point of time are nothing much to talk about. They are appended below and the sales from retail merchandise have improved dramatically in the current nine months ending December 2010 from a level of Rs 124 crs in March 2010 to Rs 371 crs now. If one were to annualise the nine months numbers we are talking of a sales number of roughly 500 crs or four times sales growth. The number seems impressive but when one looks at the profitability all optimism disappears. The company at the net level has yet to break even and is still reporting losses. In reality even with a fourfold increase in sales one expected profits but that hasn’t happened.

It is even more surprising to note that a company which is investing, mentoring brands and businesses has incurred losses in stock market activities. Why the need to be playing the market is intriguing and baffling. The company has incurred losses of Rs 1408.38 lacs in March 2009 and Rs 318.49 lacs in March 2010. It would sure be interesting to find out how this activity was concerned with brand and business nurturing or mentoring as it does not have any connection with the same even remotely. Even though in the current nine months there has been no trading why any trading happened in the previous two years.

Comparisons
It is difficult to compare this company as the business model is unique. It could also be said that it is fairly confusing. FVIL is not a Private Equity investor, it is not a manufacturer, nor is it in a strict sense a holding company. It is therefore not comparable with any other company in the listed space. This also brings about a concern that anything which is not comparable does not get its fair valuation. Anything which does not get fair valuation typically trades at a discount to fair value. I believe Future Ventures will be no different.

I would like to admit that I am unable to classify this company and at best it can be said as a venture capitalist or Private Equity Investorinterested in two verticals namely fashion and FMCG. Within the FMCG stable there is a special focus on food and toiletries.

Concerns
The group had launched an issue of Future Capital Holdings in which the investors have lost a bomb. The management believes that this issue is being offered at par to help the poor investor recover some of the losses of that issue.

The group has invested 100% in Future Consumer Enterprise Limited and 90% in Future Consumer Products Limited. These seem to be investments where the group is trying to fulfil its dream of “Be Indian, Buy Indian”. It’s a nice nationalist feeling which all people would support but there is a lot of effort and money required to establish a brand and the products. One hopes that the products that this company launches turn profitable at an early stage.

The net asset value or NAV as on 31st December 2010 is below the issue price and is Rs 8.94 per share. The price band of the issue is Rs 10-11 and even assuming that the issue is priced at the lower end of the band it would mean a premium of almost 10-11% at the lower band and almost 22% at the upper band.

Conclusion
It’s a difficult business and though there seems to be a concept which is being sold through this issue, it is difficult to imagine immediate returns for investors. One needs to be patient to expect returns from this company and the wait could be some time coming. Bigger returns could come if investments turn profitable and Future Ventures exits the business. Looking at current investments it appears that nothing of that sort is likely in the immediate near term.

Investment in the company for the short term looks risky as no returns are likely. If however one has a long term outlook exceeding 18 months, investment may be considered. One must also keep in mind, that post the IPO, the company would have a huge capital base of 150 cr shares. I recommend that investors looking for quick returns should ignore the temptation of applying for an issue at par and just avoid the issue.

SEBI Disclaimer: – I do not intend to subscribe to the above issue.