Provogue - Equitymaster - Snippet

We are enthused by the industry in which Provogue operates, owing to the huge growth potential in RTW and of organised retailing in India. Each Provogue store has an average of 1,800 customers per day with a 50% conversion ratio and an average transaction size of Rs 1,600, which is above the industry average. Also, the time to market from ramp to rack is around 45 days, as compared to 100 days even for International major GAP, which is a big positive. Currently, the company outsources 50% of its work and going forward, plans to manufacture only 15% in house, which is a good strategy, as it will make it a focused designer house. Provogue contributes 1.5% to Shoppers Stop's revenues on 0.25% of retail space, which shows the company's brand strength. Also, inspite of roping in Bollywood stars, the advertising to sales ratio is a decent 8%, which is quite sedate, considering the industry the company operates in.

Unfortunately, there is no other listed company, whose business model is exactly same to that of Provogue's. In our view, the company is likely to clock over 25% revenue CAGR growth over the next two years, with revenues increasing to over 1.5 times its current size. This will be primarily led by its expansion plans. Also, as the company plans to increase its own stores, where it reaps higher margins, this is likely to reflect in atleast maintaining current profitability. The stock trades at a market cap/sales of 2x currently and based on our assumption, we anticipate it to be between 1x to 1.3x on FY07E revenues. In contrast, other retail companies are trading higher, which means that there is room for the stock to appreciate.

We believe organised retail is the future and going forward policy decisions like a central uniform VAT and allowing FDI in retail space will fasten the industry momentum. In our view as the issue is steeply valued based on current earnings, the company has left little on the table for the investors. Thus in totality, if one is looking for listing gains, there might me some, but fundamentally too, the stock looks good from a 2 year investment horizon. However, the company's business format is too dependent on up-market clients' and hence may get affected in an economic downturn. Thus, if you have a high-risk appetite, the issue is worthwhile to invest.