Debt wish in the Ril-future deal

Lenders, vendors await the fate of their dues; many threaten to move courts if they aren’t repaid in 15 days

Meera Singh, a 65-yearold garment supplier in Mumbai, has been waiting for over a year for her dues from Future Retail Ltd. Despite repeated reminders to the then top management, she received only assurances that her dues would be cleared soon.

As the news of Reliance Retail’s takeover of Future hit the headlines, Singh, like hundreds of other vendors, is not sure about the fate of her dues. News that the company has not paid dues worth ~1,000 crore to its consumer products distributors has made her more nervous.

“We have only been receiving assurances since January this year from [Kishore] Biyani that our dues will be paid in full. But there is no action. We are just waiting and waiting. Reliance has also not made any announcement that my dues worth ~2 crore will be paid in full,” she said.

Lenders to Biyani’s personal entities and listed companies are also awaiting the fate of their dues from Future. According to the deal announced last week, Reliance will acquire the physical assets, brands and the warehousing and supply chain assets of Future Group for an enterprise value of ~24,700 crore by taking over ~19,000 crore of debt and paying ~5,700 crore in cash.

The Mukesh Ambani firm will also be investing an additional ~2,800 crore for a 13 per cent stake in Future Enterprises — after all listed entities are merged into it. Future Enterprises Ltd will continue to own manufacturing of consumer products, textiles and stakes in general and life insurance businesses. The plan offers no clarity on when vendors will be paid.

Reliance Industries stock is up 61 per cent over the past six months, as compared to a 5 per cent rise in the BSE Sensex (see chart). As of Wednesday, RIL’S market capitalisation was hovering at ~13.5 trillion — giving it a massive financial power to buy out weak rivals and take a lead over American e-commerce competitors such as Amazon and Flipkart (owned by Walmart). At the same time, as the Ambani firm moves away from pure refining and petrochemical business to a digital, telecom and retail company (both offline and online), it will end up spending up to $60 billion in growth capex alone across all its businesses in the next 10 years with a huge investment in the retail segment (see chart), according to Morgan Stanley.

India’s retail market is going to rise to $1.6 trillion by 2030. Of this, organised retail would be around $378 billion and e-commerce US$250 billion while the rest will be shared among the small shops. This is an opportunity RIL wants to tap with its vast network of stores including petrol pumps/convenience stores and its e-commerce platform, Jio-mart, which has tied up with local kirana stores. Reliance, say analysts, can capture the flow of goods, currency and data on consumer behaviour with its own captive network.

No wonder, RIL is positioning itself on all these parts of the value chain, and plans to invest an additional $14 billion in retail over the next decade as it consolidates the organised retail market. “With the company expanding its network to 200 cities year to date, we believe execution will be key for this venture. Also, with RIL looking to monetise the stake and get strategic partners, it will help de-risk the business despite competition from other large e-tailers. Also RIL, we believe, would focus on capturing the grocery market first,” the analyst said. This was where Future stores would fit in. RIL’S acquisition of Future Group should boost RIL’S market share in the organised grocery business and increase its penetration in smaller cities, where 21 per cent of Future Retail stores are located. It will also improve RIL’S logistical capabilities and help raise core retail revenues 31 per cent

It may be good news that a financially strong partner such as RIL is taking over the debt of Future Group firms; the final contours of the deal may entail a haircut for the banks (based on FY 2020 numbers). The combined entity would have 58 million square feet of retail space across 7,000 cities with 6,953 stores. The challenge for RIL will be the high inventory and debt levels at Future stores.

Though the Ril-future deal is good for the Ambani group, lenders say they are awaiting details from both companies on the deal. It may be good news that a financially strong partner such as RIL is taking over the debt of Future Group companies; the final contours of the deal may entail a haircut for the banks.

“The lenders and the vendors did not have much choice. Future Group companies were defaulting to loans and its stores were shutting down due to the Covid-19-related national lockdown,” said a banker close to the development. The banks, however, expect their principal to be protected by RIL. “The other option for the banks was to send Future Group companies to the NCLT (National Company Law Tribunal) for debt resolution which would take years. At least, with RIL acquisition the banks will be protected to certain extent,” said a banker.

Vendors such as Singh, meanwhile, will have to wait. Several vendors are complaining that they would move the courts if their dues are not paid in the next 15 days.

“I just want RIL to clear the dues of small vendors so that we can re-start our production lines,” says Singh.