Biyani again tries the Buffett way

Kishore Biyani, the founder of Future Group, is treading cautiously with the initial public offer of his venture capital arm, Future Ventures, this time.

FVIL is modelled on iconic investor Warren Buffett's investment company, Berkshire Hathaway, which invests in companies and holds stakes for the long term. FVIL first filed for an IPO in 2008, but didn't proceed with it. It has now applied again to do so, only the second venture capital firm to go for an IPO after IL&FS Investment Managers tapped the markets earlier.

A close look at the draft red herring prospectus filed by FVIL then and now reveal many changes in IPO size, operating structures and so on. To begin, the promoters, Biyani and his flagship Pantaloon Retail, among others, have scaled down the IPO size by at least five times, at Rs 750 crore. The  IPO target in 2008 was Rs 3,730 crore.

Though the company executives declined to comment, an informed source said: "When they filed the IPO for the first time, we were in the boom time. Now we are in the recovery stage. Targeting such amounts is unrealistic now.''

The company has also changed its operating structure. Instead of just a fund structure -- investing and picking up stakes in businesses -- it says it also an operating company, which plays a role in operations of the company invested in, apart from holding stake.

"They want to invest in small companies and make these big,'' says a stock analyst with a Mumbai-based brokerage.

There is also a change in focus. The first DRHP said the company wanted to create, build and invest in 'consumption-led' sectors. The later one has narrowed  focus within that. It has identified fashion, fast moving consumer goods, food processing, home products, rural distribution and vocational education for its primary focus.

This change has closely followed the Future Group's consolidation in the past  year or so. The group's flagship, Pantaloon Retail, has moved away from the non-core, non-retail sectors to retain itself as a profitable entity, while focusing on areas such as fashion, FMCG and food. Food accounts for a third of the group's Rs 10,000-crore revenue and there is an integrated strategy guiding back-end and front-food initiatives.

The scale of FVIL's operations have also improved. It holds a dozen companies instead of only the couple it had when it filed for a DRHP in 2008.

"The idea is to take the advantage of aggregation in each vertical (division). They may have invested in 10 firms, but when you aggregate them, it will look like one company,'' said an investment banker who has studied the model.

For instance, under the fashion vertical, FVIL has firms such as AND Designs, a women's apparel business; Biba Apparels, another women's apparel venture; Holii Accessories, a joint venture with Hidesign, a manufacturer and retailer of fashion accessories such as leather handbags and wallets; and Indus-League Clothing which makes and sells ready-wear garments under brands such as Indigo Nation, John Miller, Scullers and Urban Yoga.

Structure

FVIL has also changed its relationship with Future Capital Holdings, the financial services arm of the Future group. As consultant, FCH used to earn two per cent commission and 20 per cent share in profits of the FVIL's business. It remains now in only an advisory capacity.

Sameer Sain, the co-founder and managing director, quit recently from the post of MD after Biyani and he separated the business of FCH. Financial services went to Biyani and  Sain took the investment advisory, which manages funds such as the private equity fund, Indivision; the real estate fund, Horizone; and the logistics fund, Indospace.

Despite the changes, the banker said that Biyani wants to replicate the model of Warren Buffett -- invest in companies and derive value in the long run, through exits and public issue.

However, analysts are not enthused with the company's business strategy. "There should be more clarity on the target areas as to where exactly the company will invest. Investors need clear visibility on returns,'' says a stock analyst who did not want to be named.

"At Rs 200 crore top line, they are asking for high valuations. If they had launched the IPO during the peak, they would have managed that kind of valuation,'' he adds.

According to DRHP, FVIL's total income went up 36 per cent at Rs 177.9 crore in 2009-10, its losses have come down to Rs 10.7 crore from Rs 53.5 crore in the previous year. The numbers may change once full consolidation of companies take place.