Future Enterprises DVR Management Discussions.

MANAGEMENT DISCUSSION AND ANALYSIS

The year 2013-14 saw the emergence of Future Retail Limited as a pure play retail Company focusing on hypermarket, electronics and home businesses. The Company completed the amalgamation of value and home businesses into one single entity, completed various realignment initiatives along with the sale of its non-core assets. The Company commenced divestment of its non-core retail investment in previous financial period with sale of its consumer finance Company to a leading private equity player. Further Company also sold a part of its stake in its life insurance venture. The management expects to exit the remaining stake in the remaining non-core entities which shall be value accretive to the Company. This has resulted in a simplified entity structure and consolidation of operations. These steps taken by the management will provide better returns in form of improved profitability, increase economic value of businesses, improve overall stakeholders satisfaction and further help in better governance and compliance.

During the period, the Company continued to remain cautious on store network expansion and focused on driving growth through higher productivity and enhancing profitability through higher efficiencies of its existing network. The Company expanded its presence across its formats in existing and new cities with the aim of increasing productivity and profitability, the focus is on increasing footfalls, customer ticket sizes and sales of high margin categories. Through an upgraded product mix across categories at attractive price points and various promotional events, the Company is successful in attracting new customers to our stores and also enhancing the shopping experience of existing customers.

Operational Overview

The Companys focus on optimizing the store network, increasing store efficiencies along with higher store productivity and upgraded product offering resulted in higher operating margins.

The re-invention of the fashion business has led to the complete transformation of Big Bazaar. With the aim of building to connect with the youth, fbb created a strong product line with extremely competitive pricing. This strategy resulted in higher margins over the last five quarters. Even in the food segment, the Company focused on newer and upgraded categories offering customers a wider choice resulting in higher revenue realization per customer. The home segment including furniture, home furnishing and electronics underwent a revamp during the period. Leveraging Big Bazaar network to grow the electronics business witnessed a turnaround and rapid expansion.

The Company undertook various initiatives to strengthen its technology platform at the store level as well as at the back end. This resulted in improved efficiencies at the store level through faster check-outs for customers, optimized resource planning, and reduced time-to-market of new stores.

Customer and Marketing Overview

During the period, the Company carried out various activities and promotional events to engage with the customers across formats. The re-energized weekly promotional event, Wednesday Bazaar resulted in higher footfalls during mid-week. The revamped store network was successful in attracting new customers.

Taking forward the message Lets make India Thoda Aur Stylish, team fbb has designed a massive campaign. The association of fbb with Femina Miss India 2014 and celebrity endorsement of Shikhar Dhawan created a perfect platform for the brand in highlighting its chic and high street fashion wear collection promising to deliver latest and fresh fashion for its customers at affordable prices.

This financial period ended with the launch of "Making India Beautiful" campaign for Big Bazaar stores. The focus will be on celebrating newer categories in the hypermarket segment. The campaign celebrates aspirational and premium categories which are expected to and will deliver higher sales and profitability in the next financial year.

The Company operates one of the largest loyalty programs in India with over 15 million members across its formats. This program is leveraged for driving promotions and direct communication with customers offering customized merchandise.

During the period, the Companys flagship format, Big Bazaar was adjudged as the fourth Most Trusted Brand in the services category, in a consumer survey done by global market research firm, The Nielsen Company. Among the other brands in the top five were Airtel, Vodafone, State Bank of India and BSNL.

Competition

With presence in 98 cities, the Company has built a strong presence in the key consumption centers. At the same time, we continued to register our presence in fast growing cities across the country. The Company also has a formidable, scalable and mature business hence the competitive pressure, especially at the national level, in the hypermarket business continues to be feeble. The Companys vast experience, strong sourcing abilities, a strong portfolio of private brands and loyalty programs are expected to provide a fundamentally stronger position to face competition.

Human Resource Initiatives

The Company believes in creating a culture and environment that allows its people resources to best utilize their skills, knowledge and leadership abilities and collectively excel in serving the customers. The Company carries out various programs of learning and development of its employees to groom them to take up higher responsibilities. The focus has been on creating an environment of continuous learning and development. These programs also lead to increased accountability and authority of the employees enabling them to drive growth and profitability. The Company has achieved continued success in attracting the best talents from the industry and creating a confident and committed team. At the same time, the company continued to invest heavily in training and development in order to meet the growing needs of its business.

For the year 2014, Future Retail was considered to be amongst the Top 50 indias best companies to work for by the Great Place To Work institute.

Business Outlook

With political clarity emerging, the business and consumer confidence is expected to improve. in the new financial year, geared with a streamlined organizational design, the Company intends to grow its retail businesses. The Company expects that with improvement in consumer sentiment and increased consumer spending will enable the growth momentum. The management continues to be cautiously optimistic towards the external economic environment and expects consumer demand to become more consistent and robust in the forthcoming financial year.

The various steps taken towards divestment of non-core assets and consolidation of retail business helped building a focused retail organization with the strong foundation. This has given confidence to the Company to pursue a higher rate of store network expansion in existing and new consumption centers.

The Company has launched an omni-channel strategy enabling it to reach out to customers that are not catered by the current store network. This platform will act as a further growth channel for the Company. This channel will grow leveraging the existing store network, current supply chain set-up and technology platform.

Within its retail business, a number of initiatives focusing on increasing productivity and profitability of stores, an upgraded merchandize mix, streamlined supply chain and distribution, increased investments in technology, customer engagements, loyalty programs and improving the customer experience, has already started to show results.

Risks and Threats

The state of external environment, including factors like interest rates, inflation, and growth in economic activity and job creation and consumer sentiment continues to be the biggest source of threat as well as opportunity for the Company. Any further slowdown in the economic activity in the country, significant job losses or high rates of inflation can severely impact the consumption and therefore growth of the Company. Other external factors, including a steep rise in interest rates or drastic changes in the policy or regulatory environment can pose financial challenge for the Company. However, the steps taken by the Company during this financial period, including deleveraging the balance sheet, focusing on its core competence of its retail business, improvement in efficiency and productivity of its existing operations, capturing new class of customers and ensuring higher spends from its existing set of customers are aimed at mitigating each of these risks.

The set standards and policies and defined responsibilities at each level of management ensure that risk of execution and management is minimized. Further the standards and policies set are reviewed on regular basis and revised as per the requirements to further minimize the risk. Use of information technology for implementation and execution of various functions ensures that the risk of execution is minimized further.

Internal controls and their adequacy

The Company had identified the key risks and control process to mitigate the same. The Company continues this process of Enterprise Risk Management as a continuing process, in order to identify the new risks and to define and establish the control process to mitigate the identified risks. Further the internal Control Framework for financial reporting, organization structure, documented authorities & procedures and internal controls are being reviewed by internal audit team on continuous basis and any issues arising out of the said audit are addressed appropriately. The Company is continuously upgrading its internal control systems by measuring state of controls at various locations. Controls in SAP, an ERP system have been strengthened with help of review conducted by Ernst & Young.

The Audit Committee, comprising independent directors is involved in regular review of financial and risk management policies, including borrowing limits & revision of the same, significant audit findings, the adequacy of internal controls and compliance with the accounting standards.

Review of Financial Performance of the Company for the period under review.

The financial performance of the Company for the period under review was not comparable to the previous financial period for the following reasons.

a. The previous period accounts comprise of financial performance of Pantaloons Fashion Business and Fashion Business for the entire financial period of eighteen months before same has been removed from the financial performance of the current financial period pursuant to Pantaloons Format Scheme and Fashion Scheme (as defined in the Directors Report) becoming effective.

b. Further value retail business which was operated by Future Value Retail Limited (FVRL), wholly owned subsidiary of the Company till the previous financial period is part of the financial results of the Company in the current financial period pursuant to the Retail Scheme (as defined in the Directors Report) becoming effective.

c. The previous period of accounts was for eighteen months period, whereas the current financial period is of fifteen months period.

Sales

The Companys Sales and Other Operating Income has increased from Rs. 6,987.73 Crores to Rs. 11,577.44 Crores with YOY growth of 98.82% for fifteen Months period ended March 31, 2014. The Company has also recorded Same Store Sales growth of 5.8% for fifteen months period ended March 31, 2014.

Profit before Tax

Profit before Tax (including exceptional items) of the Company for fifteen months period ended March 31, 2014 stood at Rs. 1.27 Crores as compared to Rs. 288.32 Crores during the previous financial period.

Interest

Interest & Financial charges outflow has increased from Rs. 460.41 Crores in previous period to Rs. 692.54 Crores for fifteen months period ended March 31, 2014. The increase in interest and financial charges is on account of additional borrowings, transfer from FVRL merger, funding the growth plans and increase in rate of interest during the period.

The interest & financial charges cover for fifteen months period ended March 31, 2014 under review is 1.59 times as compared to 2.30 times in the preceding financial period.

Net Profit

Net Profit (including exceptional items) of the Company for fifteen months period ended March 31, 2014 under review stood at Rs. 2.81 Crores as compared to Rs. 273.26 Crores in the previous financial period with a decrease of Rs. 270.45 Crores.

Dividend

The Company has proposed a dividend of Rs. 0.60 (30%) per equity share. The dividend would be payable on all equity shares of the Company including Class B Shares. Class B Shares would be entitled to 2% additional dividend as per the terms of issue of Class B Shares (Series 1).

Capital employed

The capital employed in the business is Rs. 9,519.59 Crores as at March 31, 2014. Return on capital employed during 2013-14 is 10.75% as compared to 12.05% during 2011-12.

Surplus management

The Company generated a cash profit of Rs. 405.36 Crores for fifteen months period ended March 31, 2014 as compared to Rs. 593.06 Crores in the previous financial period, registering the de-growth of 17.98%. The balance amount, after cash outflow on account of proposed dividend, is ploughed back into the business to fund the growth. The growth of the Company has partly been funded by the cash generated from the business as well as from additional funds borrowed during the financial period.

Equity Share Capital

There is no change in the equity share capital of the Company and it has remained at Rs. 46.32 Crores.

Debt-equity

Debt-equity ratio of the Company has increased with the additional funds borrowed for the expansion of the retail operations of the Company. Debt-equity ratio has increased from 1.06 in the previous period to 1.93 as at March 31, 2014.

Earnings Per Share (EPS)

The Companys Basic Earnings per Share (EPS) has reduced from Rs. 12.08 to Rs. 0.12 per share for fifteen months period ended March 31, 2014.

Cash Earnings Per Share (CEPS)

The Companys Cash Earnings Per Share (CEPS) has reduced to Rs. 17.50 in compare to Rs. 26.22 in the preceding financial period.

Investment

The Companys investment portfolio has reduced from Rs. 2280.23 Crores to Rs. 1349.52 Crores for fifteen months period ended March 31, 2014. The reduction in investment during the financial period is mainly due to sale of investments, merger and demerger of business.

Note: 1. All Profit & Loss account numbers for fifteen months period ended March 31, 2014 have been annualized to calculate year on year growth on 2011-12 (18 Months) numbers.

2. Financial numbers for the period ended March 31, 2014 are for the period of fifteen months hence not comparable with that of previous financial period of eighteen months.