Provogue-Cyclical Retail business on a strong growth path:: Alchemy

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Provogue India (PROV IN)
Consumer, Cyclical
Retail business on a strong growth path
Provogue reported a strong quarter driven by 12% SSS growth, and the
streamlining of costs which resulted in a 580bps EBITDA margin expansion. The
outlook for the retail business remains strong with expected own store area
growth of 28% in FY11, which will also drive margin expansion (gross margins
of 54% versus 40% of shop-in-shops and 15% of export business). The opening
of the Aurangabad mall has kick-started real estate monetisation, which is
expected to pick up further over the next 12 months (see Exhibit 3). We
maintain our Strong Buy rating on Provogue and increase our target price to
`105/share.


Revenues in line; EBITDA growth spikes on streamlining of costs, operating leverage
Provogue reported revenues, EBITDA and adj PAT of `1.43bn, `222mn and `125mn,
higher than our estimates of `1.46bn, `154mn and `79mn, respectively. Revenue
growth of 17% was driven by 12% SSS growth and higher export revenues. Net store
addition was just four during the quarter (two stores were shut down). Gross margin
contraction of 70bps YoY was due to a higher mix of export revenues in 2QFY11.
EBITDA growth of 87% and margin expansion of 580bps was driven by the streamlining
of costs mainly through the closure of non-performing stores, and operating leverage.
Adj PAT growth (adjusted for `42.5mn of write-downs due to downsizing and shifting
of the Ahmedabad Promart store) was 43% due to lower other income.
Outlook for retail strong; huge value resides in real estate
Provogue opened 12 stores in October 2010; the management says the stores are doing
better than expected. With consumer sentiment looking strong, operating efficiencies
starting to accrue and store additions finally materialising, we see a strong outlook for
retail sales. We have upgraded our FY11 and FY12 estimates accordingly (see Exhibit 4).
Furthermore, monetisation at Prozone was kick-started by the opening of the
Aurangabad mall in October; the company has also lined up residential/commercial and
retail launches at its Coimbatore, Nagpur and Indore developments (See Exhibit 3). Also,
according to the management, the deal restructuring with Old Mutual is a step closer to
completion.
Balance-sheet efficiencies still a work in progress
The retail business continues to have a high working capital requirement of 7.5 months,
although the company indicated that they are in the process of consolidating their
distribution centres, which should improve working capital days in 2HFY11.
Valuation
We have raised our price target to `105/share (from `82/share) (see Exhibit 5) due to
higher visibility of earnings growth in the retail business and more clarity on real estate
monetisation. We maintain our Strong Buy rating on Provogue.