Eye Rs 1200cr working cap debt, light balance sheet: Biyani

Q: What are your views on this merger?

Mittal: We clearly believe that this is a evolving industry, expanding industry, growing fast, it needs economies of scale. If one sees any industry which is service industry, it needs much more faster growth in the economies of scale than most of the other industries. There are some structural issues around this industry in India and we felt that it is a great fit, a great merger and a great strategic partnership with Future Group keeping in mind the geography that there are no overlaps, keeping in mind that we come from the DNA – in terms of people, in terms of strategy, in terms of growth.

I have great admiration for what Kishore Biyani has created in the retail space over the years. He can guide the retail industry, he understands the whole landscape of that. So, from our point of view, the merger only accentuates and pushes the growth much faster. That is how this merger has come into play.

Q: Can you throw some light with respect to the financial contours of the deal, the shareholding that Bharti will be enjoying – the swap ratio that is at play here, just a broad look at the financial contours of this entire transaction?

Mittal: Primarily, both businesses are kind of merging and demerging. We have taken our infrastructure piece out and merged with their infrastructure piece and they have taken out their retail piece and merged it into our piece. So, we have got shares in some convertible debentures as we go along which will get converted over a period of time.

We will get substantial stake in the joint entity, it will move from 10 to 14-15 percent depending on how the conversions take place. I think that is the arrangement and understanding that we have had and eventually we will play a role on the board – the governance and a strategic role.

Q: Speaking debt first, that has been one effort that has consistently been made by the Future Group to pare its debt. Just a word on how the debt component of this transaction will be handled and how subsequently it will be divided between the two companies, one for the retail frontend, the other one for the backend.

Biyani: We are looking at close to Rs 1200 crore of debt going as a working capital into the retail entity. Retail entity will raise a large business. Once we are making this into pure retail, the balance sheet will become very strong, it will be a very light balance sheet and all the focus is on return on capital employed on the smaller balance sheet which we are creating out of the retail business.

In terms of our infra business, it will have its own business of manufacturing, sourcing, it has its investments, it has multiple investments, and it has its infrastructure leasing business. So, they will get revenues out of that and they will service the debt and whenever we sell–off investments the loan comes down. So, what we are looking at is there is no increase of loans which will happen in both the companies and both the companies will run independently and balance sheets will become stronger of both the companies.

Q: Just a word on how the debt will be divided between the two companies, I imagine Rs 3800 is the total figure as far as FRL was initially concerned. Now that it has been divided how will the debt be segregated between the two entities?

Biyani: I think the working capital debt moves to the retail business and the term debt remains in the existing company.

Q: A word on this distinction that has been made - One with respect to retail front-end operations and the other with respect to the backend operations. Can we assume that this distinction amongst other reasons was also made for perhaps the door that has been left open by the government that 100 percent FDI is allowed in backend operations? So, are you looking for perhaps potential foreign investors? Can we expect that in the days to come?Biyani: I don’t think the design has been that we have to look at FDI investment. We are not looking at increase of investments right now in both the companies but if the cost of borrowing can come down through some international fund raising, we can look forward to it. That has not been the design for this transaction.

Q: Also speaking of the Easy Day brand; one brand as you had initially said that has been created and nurtured by Bharti. What are the plans as far as Easy Day is concerned? Are we to see Easy Day as perhaps a format for the smaller stores? Is that something on the cards?

Biyani: It is a very strong brand and we would love to retain it and grow it in the geographies where the brand is already present.Q: In what format are you looking to accommodate this brand of Easy Day that is now being merged with FRL?Biyani: That is a supermarket business where we believe this brand will be continued in a much significant manner.

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Q: What role Bharti will be looking to play as far as a minority share holder is concerned and the role that it is going to play as far as this merged entity.

Mittal: We will put the integration to play. The management teams, which are going from Bharti retail and are getting merged into the larger entity, will play their management roles. Integration team has been put in place which will decide the contours now. From the shareholders point of view, we will play a role on the board as a strategic shareholder as a partner. That will be our role going forward as far as the shareholders are concerned.

Q: With respect to the merged entity there is perhaps an apprehension among analysts and investors about a possible overlapping or a redundancy. Is this something that is on the cards? Is there a legitimate fear of cannibalisation and can we perhaps expect a rationalisation of stores going forward, especially in geographies where there are similar businesses in similar territories?Biyani: We have done the assessment of the entire geography and in fact, this was a perfect fit in terms of geography. Overlap only happens in three stores where it can be converted into some other formats. And besides the rest of the 197 stores, there is no overlap at all. I do not so there will be any redundancy, lay-off or any cut down on any stores.

Q: Just a couple of questions on the road forward now. Now again a clear distinction is being made with respect to the back-end operations, the logistics part of it; can we assume that there will be an effort made to perhaps look at inorganic growth with respect to acquiring cold storage logistics companies that would only boost the company’s efforts as far as the food business is concerned. Biyani: We have done that acquisition already. Prior to merging this business, we acquired a cold chain company and we now can handle various temperatures. We run one of the more efficient consumer logistics company in the country and we are operating all India with more than 1000 fleet. We have a very robust logistics business. And now we have started 60 percent business; 65 percent comes out outside the group. We handle logistics fore many e-commerce companies also. We are starting last mile delivery. We are getting into food and fast-moving consumer goods (FMCG) distribution in a big way. So, logistic definitely benefits with a merger like this.

Q: Also, you spoke of this merged entity. A word on how does this play to the paradigm of the small payments bank. That has been something where you have, in the past, expressed interest. How does this merged entity with a greater geographic spread now play into that matrix of small payments bank?Biyani: Had we got into a partnership earlier, we would have gone into one with a payment bank. I believe the combination of a bank retailer and a telecom operator is the best combination for a payment bank. Nevertheless, with the kind of geographical reach we have, expansion of another 60-70 cities is possible. it increases our customer base for our payment bank.Q: Along the same lines, are there perhaps similar synergies being explored between the two groups to look at this initiative of a small payments bank?Mittal: That is being done and applied for. RBI will use its discretion of giving in various industries and that is probably the right approach also. The consumer reach has to be wide-spread and that is the objective of the small payments bank. Q: Are you looking at a collaborative approach with perhaps similar tie-ups.Mittal: Two licenses have already been applied. We will have to wait and watch how it pans out and what the end result will be. Q: One last question. This is with respect to e-commerce. There is a sense amongst various analysts that once e-commerce steps in especially to FMCG, there will be a certain degree of blood-baths on the streets. What is your assessment on that in terms of competing with this latest challenge and how you are gearing up for e-commerce?Biyani: FMCG business is not easy to operate in e-commerce space and that is where omni-channels always work. It is never pure-play commerce always, because the cost of delivery will be so expensive than the cost of technology. We have a larger foot print; we are operating in every city. Every store can be used as a warehouse. I believe there is no way where an FMCG can enter a pure e-commerce space.