Provogue

Investors with a long-term perspective can buy the stock of Provogue (India), a premium retailer in apparel and accessories. At Rs 51, the stock trades at 17.7 times trailing the four-quarter earnings at a discount to peers such as Shoppers' Stop and Trent. The stock trades at about 14 times estimated FY-11 per-share earnings.

Provogue has an established and significant brand recall in both menswear and women's wear. Backward integration in the manufacture of apparel has resulted in higher operating margins.

The improvement in sales from the discount chain Promart, and retail infrastructure development through a joint-venture are other positive factors for this retailer.

Premium play

Provogue retails formalwear and casuals for men and women. The product line also covers value-added offerings such as shoes, body-care products and accessories. Provogue commands sizeable brand recall. A marketing association with movies such as Wake Up Sid and Aladin further strengthen the reach of the brand.

Products are sold through a store network that combines exclusive outlets and larger department stores such as Globus and Lifestyle and other multi-brand outlets. Store count, as of October 2009, is 126 owned stores and 110 shop-in-shops. Plans are on to end FY-10 with an own-store count of 143, an additional 50 stores by end-2011 together calling for an investment of about Rs 43 crore.

Provogue's product range comes with a premium tag, targeted at youth. Provogue competes with brands such as Colour Plus. Premium retail has borne much of the brunt of the spending slowdown in the second half of 2008 and initial 2009. Sales have since picked up from the June 2009 quarter, albeit at a slower pace than value retail.

Provogue has managed strong growth in sales, with the December ‘09 quarter recording a 22 per cent sales growth over the same period last year.

Diversification

Though premium retail is picking up, value players hold an edge. Provogue has kicked off its value initiative through discount stores which offer a range of brands such as Peter England, John Players, Scullers and Jealous Jeans at discounted prices. Called Promart, the chain has two stores in Tier-II cities. Such discount offerings on branded apparel are similar to Pantaloon's Brand Factory, and is likely to draw in a larger customer base.

Revenue contribution of this venture is minimal given its limited reach. Therefore, while this format holds potential, step-up in contribution will depend on the company's ability to expand footprint.

Retail stores aside, Provogue has teamed up with the UK-based Liberty International to develop malls in smaller cities. The first mall in Aurangabad is set to open in 2010 with tenants such as HyperCity. In the pipeline are malls in smaller cities such as Nagpur, Indore and Jaipur.

The company is also well-placed on the funding side for both realty ventures and retail expansion with a debt-equity of 0.3 times, and an interest cover of 3.7 times. Provogue also exports fabric and dyestuff which form about a third of revenues.

Higher margins

Sales clocked a 32 per cent three-year CAGR with net profits managing a 31 per cent growth. Operating margins are at a strong 18.5 per cent for FY-09, up from the 17 per cent a year before.

However, even as debt-equity ratio is on the lower side, interest costs did eat into margins, and, together with depreciation have brought net margins down to 8.4 per cent for FY-09.

Still, operating and net margins are higher than most retail peers. For the nine-months ended December ‘09, operating margins slipped slightly to 17.5 per cent, though net margins held at 7.9 per cent.

via BL