The Hindu Business Line : Provogue: Invest at Rs 150

INVESTORS with an appetite for high risk can consider subscribing to the initial public offering of Provogue, a pure-play branded apparel player. Our recommendation is not linked to any gains upon listing. At Rs 150, the upper end of the price band, the offer price values the stock at 33 times its per share earnings on an expanded equity base. The stiff valuations demand an aggressive growth rate over the next couple of years.

Given the expectations built into the offer price, the tolerance for poor performance in any quarter would be low. As it may take the company a few years to emerge a significant player in the retail space, the stock may command only a modest premium for its business plans. In this context, we have considered Provogue a pure play in the branded apparel's space and not as a story in retailing.

Provogue plans to capitalise on opportunities in the retail sector. The proceeds of the offer would mainly fund its expansion into metros and some of the smaller cities.

Provogue sells its products through a combination of own retail stores, national chain stores such as Shoppers' Stop, Globus and Lifestyle and multi-brand outlets.

As retailing through own stores provides higher margins, a rising contribution to revenues from Provogue's outlets augurs well. But lower profitability from its export business, that accounts for 40 per cent of revenues, and higher costs of distribution are likely to cap margin growth in the near term.

In this backdrop, revenue expansion is likely to be the key driver of the earnings growth. While the company increases its penetration, its bet on fashion taking off in the second-rung cities would have to pay off.

A slower off-take in second-rung cities could cramp its revenue growth.

Also, while the company is likely to gain prominence as an apparel brand, it may not meet with similar success as a retailer of other products. The company is broadening its product range to include ladies' wear, children's wear, luggage, body products and shoes. Even if it makes a mark in these segments, their contribution to earnings growth is not likely to be significant for a few years.

An aggressive advertising and marketing campaign has enabled Provogue command a superior brand recall compared to numerous small brands that have entered the market in recent years.

This is also despite the clutter in the premium segment with brands such as Louis Philippe, Van Heusen and Arrow; these, however, cater more to the formalwear segment. Provogue and Color Plus (owned by Raymond) have a distinct positioning in the premium segment with a mix of formal and casual-wear clothing. This limited competition should work to the company's advantage over the next couple of years, as the rest may take time to build comparable brand equity.

Provogue's proposal to set up 40 small and 21 mega stores (of 5,000 square feet each) over the next two years, will also help improve its visibility as an apparel brand. With the branded apparel market growing at 12 per cent annually, Provogue is well placed to outpace the industry growth rate. Its focus on the fashion-conscious buyers — a small yet expanding market — should help drive superior growth rates.

It will also use a small part of the proceeds to fund an expansion in its manufacturing capacity; this is mainly to speed up its time to market. Unlike other players, Provogue is likely to be more dependent on outsourcing and licensing arrangements, even after expansion, which will enable it to keep its investments in manufacturing at low levels. As the bulk of its investments are to expand its retail presence, the company is likely to lure in more customers and expand its share in the branded apparels space. This could lead to an improvement in profitability levels over the long term.

The company exports finished fabrics, dyestuffs and textile machinery. This is a low-margin, high-volume business. Provogue took over the export business from a group company a year ago. Though Provogue does not plan any significant investments in this business, there is likely to be a healthy revenue growth. Exports as a proportion of revenue may decline only over a two/three-year period. As margins in the export business could have a downward bias, it could continue to act as a drag on overall profitability. This may change when revenues from new initiatives in the domestic market start to make a healthy contribution to revenues.

Offer details: On offer are 40.5 lakh shares. The price band is Rs 130-150. The post-offer equity base is Rs 16.2 crore. The promoters' stake would be about 50 per cent after the offer. The offer opens on June 10 and closes on June 16. The lead manager is SBI Capital Markets. The offer document is available on the web site of SEBI — www.sebi.gov.in.

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