CIA III B

Merger & Acquisitions

Topic: Valuation of Business

Submitted To:
Dr. Amit Kumar

Submitted By:
Shreya 21211748
Harshit Arora 21211677
Mehul Saxena 21211713
Ananay Gupta 21211625
Kritin Malhotra 21211698
Introduction to Reliance Retail:

Reliance Retail stands as a cornerstone in the landscape of India's retail industry, embodying
innovation, scale, and a commitment to redefining the shopping experience for millions. As a
subsidiary of Reliance Industries Limited, one of India's largest conglomerates led by visionary
entrepreneur Mukesh Ambani, Reliance Retail has emerged as a powerhouse in the retail sector,
spanning a diverse array of verticals including grocery, fashion, electronics, and more.

Established in 2006, Reliance Retail swiftly gained prominence by leveraging its robust supply chain
infrastructure, technological prowess, and a deep understanding of consumer preferences to establish
a formidable presence across the length and breadth of India. With a relentless focus on offering
quality products, unparalleled convenience, and competitive pricing, Reliance Retail has earned the
trust and loyalty of millions of customers nationwide.

At the heart of Reliance Retail's success lies its unwavering commitment to innovation and adaptation.
The company has continuously embraced cutting-edge technologies and digital solutions to enhance
customer experiences, streamline operations, and stay ahead of the curve in an ever-evolving retail
landscape. Whether through its omni-channel initiatives, innovative payment solutions, or strategic
partnerships, Reliance Retail remains at the forefront of revolutionizing how Indians shop.

Beyond its commitment to delivering value to customers, Reliance Retail also plays a pivotal role in
empowering local communities and fostering economic growth. By sourcing products locally,
supporting small and medium-sized enterprises, and creating employment opportunities across urban
and rural areas, the company is driving positive socio-economic impact on a significant scale.

As Reliance Retail continues to chart new territories and redefine the benchmarks of excellence in
the retail sector, its unwavering dedication to customer-centricity, innovation, and inclusive growth
reaffirms its position as a true trailblazer in the realm of Indian retail.

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Introduction to Future Group:

In the dynamic landscape of India's retail industry, Future Group stands as a beacon of innovation,
resilience, and customer-centricity. Founded by the visionary entrepreneur Kishore Biyani in 1987,
Future Group has evolved into one of India's leading conglomerates, encompassing a diverse portfolio
of retail formats that cater to the diverse needs and aspirations of Indian consumers.

With a relentless focus on understanding and anticipating consumer trends, Future Group has carved
a niche for itself by offering a wide array of products and services across categories such as fashion,
food, electronics, home essentials, and more. Through its flagship retail chains such as Big Bazaar,
Central, and Brand Factory, Future Group has endeared itself to millions of customers across the
country, earning their trust through its commitment to quality, affordability, and innovation.

Beyond its extensive retail footprint, Future Group's success is underscored by its ability to adapt and
innovate in response to changing market dynamics. From pioneering the concept of organized retail
in India to embracing digital technologies and omni-channel strategies, the company has consistently
stayed ahead of the curve, setting benchmarks for the industry at large.

Central to Future Group's ethos is its unwavering commitment to fostering inclusive growth and
community development. By empowering local artisans, supporting small-scale producers, and
creating employment opportunities in both urban and rural areas, the company is not only driving
economic prosperity but also making a meaningful impact on the lives of millions of Indians.

As Future Group continues to expand its presence and diversify its offerings, its core values of
customer-centricity, innovation, and inclusivity remain steadfast. With a legacy built on resilience,
adaptability, and a deep understanding of the Indian consumer psyche, Future Group continues to
chart new territories and redefine the boundaries of retail excellence in India.

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Information on Reliance Retail Acquired Future Group:

In a landmark development within India's retail landscape, Reliance Retail acquired Future Group,
marking a significant consolidation that reshaped the industry's dynamics. This acquisition, finalized
in 2020, emerged as one of the most noteworthy transactions in the country's retail history, combining
two of the largest players to create a formidable retail powerhouse.

Under the agreement, Reliance Retail acquired the retail, wholesale, logistics, and warehousing
businesses of Future Group, encompassing well-known brands such as Big Bazaar, FBB, Easyday,
and Central, among others. The acquisition brought together a diverse portfolio of retail formats
spanning groceries, fashion, electronics, and more, allowing Reliance Retail to significantly expand
its footprint and market reach across India.

The acquisition of Future Group by Reliance Retail not only added significant scale to the latter's
operations but also bolstered its presence in key segments of the retail market. With Future Group's
established network of stores and strong brand equity, Reliance Retail gained access to a vast
customer base and a robust retail infrastructure, further cementing its position as a leader in the Indian
retail sector.

Beyond the immediate benefits of scale and market penetration, the acquisition also presented
synergistic opportunities for both entities. By leveraging Reliance Retail's technological prowess,
supply chain efficiencies, and digital initiatives, the combined entity aimed to enhance customer
experiences, drive operational efficiencies, and unlock new growth avenues in an increasingly
competitive retail landscape.

However, the acquisition also faced regulatory scrutiny and legal challenges, reflecting the
complexities inherent in such large-scale transactions. Despite these challenges, Reliance Retail
remained committed to completing the acquisition and unlocking its full potential, reaffirming its
vision to revolutionize the retail industry and create value for customers, stakeholders, and the broader
economy.

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Method used to estimate valuation: Discounted Cash Flow (DCF) Valuation Model

Discounted Cash Flow (DCF) analysis is a fundamental valuation method used in finance to estimate
the intrinsic value of an investment by discounting its expected future cash flows to their present
value. This approach is grounded in the principle that the value of an investment is determined by the
cash flows it generates over its lifetime, adjusted for the time value of money.

At its core, DCF analysis involves projecting the future cash flows that an investment is expected to
generate, typically over a specified period, and then discounting those cash flows back to their present
value using a discount rate. The discount rate, often referred to as the "cost of capital" or "required
rate of return," reflects the opportunity cost of investing capital in the given investment and accounts
for factors such as risk and the time value of money.

By discounting future cash flows to their present value, DCF analysis enables investors to compare
the value of an investment today with the cost of acquiring it, providing a basis for making informed
investment decisions. If the present value of the expected cash flows exceeds the cost of acquiring
the investment, it may be deemed undervalued and potentially attractive for investment.

One of the key strengths of DCF analysis is its ability to incorporate the unique characteristics and
risks of each investment, as cash flow projections can be tailored to reflect specific market conditions,
growth prospects, and other relevant factors. Additionally, DCF analysis facilitates sensitivity
analysis, allowing investors to assess how changes in key assumptions, such as growth rates or
discount rates, impact the estimated value of the investment.

Despite its versatility and widespread use, DCF analysis is not without limitations and challenges.
The accuracy of DCF valuations is highly dependent on the quality of the underlying assumptions
and projections, which can be subject to uncertainty and variability. Moreover, DCF analysis may
overlook qualitative factors and intangible assets that contribute to an investment's value but are not
easily quantifiable.

In conclusion, Discounted Cash Flow analysis serves as a powerful tool for estimating the intrinsic
value of investments by quantifying their expected future cash flows and discounting them to their
present value. While DCF analysis has its limitations, its systematic approach provides investors with
a structured framework for evaluating investment opportunities and making informed decisions.
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Assumptions:

1. We have assumed that the retail industry will be in the high growth phase for the 7 years from
2020 (year of acquisition) to 2027 and after that growth rate will be stable.

Source: [Link]
overview-retail-sector-market-size-growth

2. The Corporate Tax rate is 30%.

Assumptions for the high growth phase:

• The risk-free return is 6.01%.

Note: The risk-free rate of return is the interest rate an investor can expect to earn on an
investment that carries zero risk and we have considered it to be equal to the interest
paid on a 10-year highly rated government Treasury note because it is generally the
safest investment an investor can make.

Source: [Link]
years/#title-yield-range

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• Market Risk Premium is 8.65%

Note: The market risk premium is the difference between the expected return on a
market portfolio and the risk-free rate. It provides a quantitative measure of the extra
return demanded by market participants for the increased risk.

Source: [Link]

• Beta for Future Group is 1.7.

Source: [Link]

• Cost of Raising Debt is 9.81%

Source: Annual Report of Future Group.

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 • The growth rate of the retail industry is 15%

According to an article on [Link] retail industry is projected to surge at a

Source: [Link]
india-overview-retail-sector-market-size-growth

Assumptions for the stable growth phase:

➢ Risk-Free Return is 5.65%

➢ Market Risk Premium is 7.65%

➢ Beta for Future Group is 1.2

➢ Cost of Raising Debt is 8%

➢ Growth Rate is 7%

Note: Because the Risk-free rate, market risk premium, beta, and cost of raising debt will be less in
the stable growth phase as compared to the high growth phase.

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Calculation of Valuation using the DCF model: