How Biyani Found a New Home for Future Capital

It was a chance meeting on a late evening 7 March Delhi-Mumbai flight that eventually resulted in Warburg Pincus emerging as a front runner in the race to buy Future Capital Holdings.

V. Vaidyanathan, managing director of Future Capital, was seated next to Narendra Ostawal, a principal at private equity firm Warburg Pincus. The two did not know each other and after exchanging pleasantries, Vaidyanathan started talking about Future Capital and took Ostawal through their business. A few days after that eventful flight he would receive an email setting up a meeting with Vishal Mahadevia, managing director, Warburg Pincus.

Nearly three months later, Future Capital has been sold to Warburg Pincus. Kishore Biyani who owns a total of 53.7 percent in the company will exit the company.

Biyani will offload his 53.7 percent stake in two tranches at a price of Rs 162 a share. Pantaloons Retail India, through which he owned Future Capital Holdings is expected to make Rs 560 crore from the deal. With this Biyani reduces about Rs 4,300 crore of debt.

The markets heaved a sigh of relief: Pantaloons stock closed at Rs 148 up 7 percent while Future Capital rose 5 percent to Rs 143. Warburg will put in Rs 100 crore into the business.

It was in July last year that Biyani announced his intention to get out of the business. He termed it a non-core asset. This was less than a year after he’d brought in V. Vaidyanathan from ICICI Bank.

From then on the two, Biyani and V. Vaidyanathan, were on the lookout for suitors. According to people familiar with the situation, a host of players including Barings Private Equity, Bain Capital and the Deccan Chronicle group expressed interest.

When Vaidyanathan joined Future Capital in August 2010, he inherited a company with a broken business model. Biyani had had an acrimonous split with partner Sameer Sain who took the private equity business and went on to form Everstone Capital. All that the company was did was lending for consumer durables and personal loans. The size of the loan book was a mere Rs 300 crore. He’s brought in professional managers: Pankaj Shanklecha, Chief Risk Officer, came in from Standard Chartered Bank; and Sailesh Shirali joined from DSP Merill Lynch.

Nearly two years later, Warburg is picking up an asset that has shown it has a scalable business model through two lines of business. The consumer durable goods lending continues, and has been scaled to Rs 100 crore. But, as Vaidyanathan, explained in a chat with Forbes India before the deal was done, that business can only take the company so far. Often those loans don’t stay on the books beyond eight or nine months and the effort required to take it to a few hundred crore is inversely proportional to the benefits. Still, the company has worked on making inroads into this business. It claims to have the fastest loan approval time, with customers getting an approval within three minutes at the store. Credit checks are done while they fill out their application forms.

Future Capital has gone about scouring India for small businesses that they can lend to. Loans here are typically start at Rs 1 crore and have a tenure of five to seven years. Vaidyanatan explains that not only is this business profitable, it is scalable. More importantly, there isn’t tremendous competition here as, the big banks like to court larger businesses. In the last year, Future Capital has built systems and processes to assess credit limits for a multitude of businesses: a small steel mill would have a certain return on investment and profitability, say, or a packaging business would have certain seasonal variations. All this knowledge helps them make an assessment on the loan amount. There is also the old fashioned checking out of books of accounts and physical assets. Vaidyanathan says that their default rates in this business have been zero. And the size of the loan book has ballooned to Rs 1700 crore. There are also gold loans and mortgages.

One factor that gave private equity players the confidence to invest was the consistent growth in revenue and profits. In the year ended 31 March 2011 the company made Rs 49 crore in profit on a revenue of Rs 372 crore. A year later that had risen to Rs 104 crore and Rs 740 crore respectively.

With the uncertainty over its ownership over, and a clear business model, Future Capital gets a chance to expand its businesses, possibly at a faster clip. Warburg gets two board seats but is not expected to play a part in day-to-day management. Vaidyanathan expects them to stay invested for five to seven years, years but is unwilling to say how much the business would have grown by then.

As for Biyani, he gets rid of a huge Rs 3,800 pile of debt. It will be interesting to see what he does next. People who know him say he will sell his stake in Future Generali, his insurance joint venture with Italy’s Generali.

The thoughts and opinions shared here are of the author.