India Equities IPO Note

Financial Services
Not Rated
Future Capital Holdings

Analyst: Rupin Shah Use of IPO proceeds

Email: rupin@parsoli.com The primary use of the issue proceeds is to augment the capital base to meet
Tel: +91-22-40912726 future capital requirements for expansion of company’s retail financial services
business and for other general corporate purposes

Company Background
th
Issue Opens 11 Jan, 2008
Future Capital Holdings Limited (FCH) is a financial services company of the
Future Group. FCH was incorporated in October 2005, registered as a Non-
Banking Financial Company (NBFC) and is promoted by Pantaloon Retail
Issue Closes 16th Jan, 2008 (India) Limited (PRIL), the flagship company of the Future Group. Future Group
is based on consumption-related businesses in India and is one of India’s
leading organized multi-format retailers.

Business Overview
Issue Details
FCH generates its revenues primarily from three segments viz. Investment
Face value Rs.10 Advisory Services, Retail Financial Services and Research.

Price Band Rs 700 - 765 Investment Advisory Services: In this segment, the company provides private
equity and real estate investment advisory services to onshore and offshore
Issue size (Shares) 0.6cr clients. This includes investment analysis, research and recommendations. In
Private Equity Investment advisory services, the company focuses mainly on
Issue size (Amount) 450cr – 491cr evaluating investments in high growth companies backed by entrepreneurial
Present Equity talent in consumption-led sectors. Consumption-led sectors include fast-moving
Capital 57cr consumer goods, media, entertainment, food and beverages, fashion,
healthcare and consumer-led infrastructure.
Post-Issue Equity Retail Financial Services: In Retail Financial Services, the company provides
63cr
two main retail financial services products viz. Consumption Loans and
Personal Loans. Consumption Loans are given to finance the purchase of
Promoter Holding Pre-
84 durables, furniture and other consumer goods while personal loans are
Issue (%)
unsecured credit lines to individual customers.
Promoter Holding Post Research: FCH provides advice to their clients on developing real estate
75
Issue (%) assets including malls and market cities which are integrated developments that
include convention centers, three or four star hotels, service apartments,
Book Building commercial offices, residential apartments, community centers and various
forms of retail space. FCH has an agreement with PRIL ensuring the exclusive
right to provide financial products and services at present and future malls,
QIBs Up to 60% stores and retail outlets in India which are owned, controlled or managed by
PRIL and its subsidiaries.
Non-Institutional At least 10%

Retail At least 30%

4th January, 2008 FOR PRIVATE CIRCULATION

Future Capital Holdings
The financial services industry in
India is subject to regulation by
governmental and self-regulatory
organizations
FCH is backed by an established
brand having strong understanding
of the Indian retail segment
14th January, 2008
IPO Note
Industry Overview
The Indian financial service business is highly competitive. The company faces the
competition directly from all larger private and public sector banks which have larger
retail consumer bases, larger branches network and greater access to capital. In
Indian market, large Indian banks such as ICICI and HDFC banks have significant
investment in retail credit compared to NBFCs. Investment in Indian retail sector is
heavily regulated and the Foreign Investment Promotion Board (FIPB) imposes the
stringent restriction on foreign direct investment in the Indian retail sector. The FIPB
has, however, recently begun to ease restrictions on foreign direct investment in the
retail sector.
The FIPB has, however, recently begun to ease restrictions on foreign direct
investment in the retail sector. In 2006, for instance, it revised its regulations to
permit foreign firms to acquire stakes of up to 51% in single brand retailers and in
2007 it extended this to apply to retailers in certain sub-sectors of the retail industry.
Moreover, the financial services industry in India is subject to regulation by
governmental and self-regulatory organizations. These regulations address issues
such as investor protection, capital adequacy, market conduct, margin
requirements, foreign investment and foreign exchange. In recent years, existing
rules and regulations have been modified, new rules and regulations have been
enacted and reforms have been implemented which are intended to provide tighter
control and more transparency in India’s financial sector. Changes in government
and other regulatory policies affecting the financial services industry could require
changes to systems and business operations and could involve additional costs and
management time. Other general changes in economic and regulatory policy may
also affect the company’s business, as they affect the businesses, financial
condition and investment policies of the customers. India has been charting a
course of economic liberalization and deregulation in recent years.
Strengths
Backed by Future Group’s strong brand presence
FCH is being promoted by Future Group and its strong and established brand
name will act as a growth driver for the company’s expansion of retail financial
services distribution network. The company would be supported by Future
group with its business insight, relationships and its distribution network.
Leveraging the Group’s extensive knowledge of consumer behavior and
spending patterns will differentiate the company from its peers. The company
has the exclusive right to provide financial products and services at present and
future malls, stores and retail outlets in India that are owned, controlled or
managed by PRIL and its subsidiaries. Thus the company would have access to
PRIL’s large customer base that converted into 4.5cr transactions in its stores
during FY2007.
Good understanding of retail consumption sector
FCH has an experienced and expert team of professionals which gives the
company a competitive advantage. Besides, the company has good
understanding of retail consumption and commercial real estate sector backed
by Future Groups strong presence in the Retail segment.
FOR PRIVATE CIRCULATION
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Future Capital Holdings IPO Note

The company plan to use IPO Key Concerns

proceeds primarily forusiness
Changes in interest rates may Risk of changes in interest rates
negatively affect the company’s
The company
future revenue planwhile
stream to userisk
IPO The company’s business would be highly affected by fluctuation in interest
from defaulting
proceedscustomers
primarily formounts rates. In case of an increase in rates, loans would be less attractive to
the industry
expansion of its fina consumers and a falling interest rate scenario would pose a refinancing risk to
the company.

Default risk from lending to retail customers

The company plans to focus on consumption loans, personal loans as well as

credit cards for its retail financial service business. As retail investors are less
financially resilient than larger borrowers with difficulties in assessing their
creditworthiness, there will be huge risk of non-recovery of unpaid amount from
defaulting or insolvent customers. Furthermore, increasing non performing
assets could materially affect the financial condition of the company and also
the ability of refinancing.

Rationale

Backed by strong Group presence
and booming Indian economy, the
company is expected to capture a
significant pie of the Financial
Services market in India.
FCH is promoted by India’s leading Organised Retailer, PRIL, Flagship Company of
Future Group, which is holding a 55.0% stake in the company’s post-issue share
capital. FCH has the liberty to leverage on synergies provided by Future Group
companies through its exclusive agreements to distribute financial services products
within their outlets. In addition to this, the group’s knowledge & understanding of the
Indian retail sector and a strong and experienced management backed by an
established brand are expected to act as growth drivers for the company. Moreover,
the strong economic growth and the rising consumption levels in India provide FCH
with significant opportunities to leverage the Group’s franchisee strength and build
on its business volumes. The investment advisory business is currently the main
revenue generating business for the company. The company also has made a foray
into retail financial services targeting the large customer base of the Future Group
under the brand name of “Future Money”.

Thus, considering the Group’s strong presence in the Indian retail segment and the
country’s booming economic growth, we believe the company is in a good position
to capture the growth potential offered by the financial services segment in the
country. However, we have not rated the stock due to our limitation to recommend
only such stocks that are Sharia-compliant.

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Future Capital Holdings IPO Note

Key Financials

Exhibit 1: Income Statement Rs crore

Income Statement FY2007 H1FY2008
Income from Operations 39.0 31.2
Other Income 0.0 0.1
Total Income 39.0 31.3

Total Expenditure 30.7 37.6

EBIDTA 8.2 (6.4)
EBITDA Margin (%) 21.1 (20.6)
Depreciation/Amortisation 0.8 1.3
PBIT 7.4 (7.6)
EBIT Margin (%) 19.1 (24.4)
Interest Expenses 2.5 3.6
PBT 4.9 (11.3)
Total Tax 0.3 1.0
Net Profit Before Minority Interest 4.7 (12.2)
Minority Interest & other adjustments 1.2 (0.2)
PAT 3.5 (12.4)
Net Profit margin (%) 9.0 (39.8)
Source: Red Herring Prospectus (RHP)

Exhibit 2: Balance Sheet Rs crore

Particulars FY2007 H1FY2008
Liabilities & Provisions
Share capital 44.4 56.8
Share Application Money 11.0 0.0
Reserves & Surplus 51.0 185.3
Net Worth 106.5 242.1
Minority Interest 1.8 0.2
Secured Loans 55.5 55.4
Total Liabilities 163.7 297.7

Fixed Assets 88.3 93.9

Investments 53.5 130.8
Deffered tax assets 0.8 1.3
Loans & advances 36.4 136.0
Current Liabilities 14.9 63.7
Provisions 0.4 0.6
Net Current Assets 21.1 71.8
Total Assets 163.7 297.7
Source: RHP

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