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Result highlights
For Q3FY2011 Provogue India Ltd (PIL) reported a strong operating performance,
which exceeded our expectations. The adjusted profit after tax for the quarter
came in at Rs12.8 crore (up 44.6% year on year [YoY]), which was much ahead
of our estimate of Rs9.7 crore for the quarter.
The company’s income from operations grew by 18.1% on a year-on-year (Y-oY) basis and by 2% sequentially to Rs145.4 crore, which was ahead of our
expectation of Rs138 crore. The growth was led by a strong festive demand in
the domestic market and a good export performance. The same-store sales
growth for the quarter came in at 12% while exports contributed 44% to the
revenue.
Unlike the other retailers, whose gross margins were affected by a high cost of
raw materials (especially cotton), PIL’s gross margins for the quarter stood
resilient at 39.1%. The company got the benefit of lower prices of fabrics as
the same were booked in January 2010 itself while the higher full-price sales
during the quarter also aided in maintaining the gross margin.
Along with the resilient gross margin, strong operational efficiency and
significant cost rationalisation beared fruits and thus (employee cost down
13.9% YoY, other expenditure down 5.5% YoY) aided PIL’s operating profit to
grow at a phenomenal 78.7% on a Y-o-Y basis. The company’s operating profit
margin (OPM) expanded by 580 basis points YoY to 17.1% as against 11.3% in
Q3FY2010 and our estimate of 12.4% for the third quarter of FY2011.
Despite a very strong growth in the operating profit, the bottom line growth
was restricted to 9.4% YoY at Rs9.7 crore on account of a lower other income
(Rs4.6 crore in Q3FY2011 vs Rs5.8 crore in Q3FY2010) and a one-off write-off in
the form of an exceptional loss on account of the restructuring of the Indore
Promart stores. Adjusting the Promart write-off, the adjusted earnings for the
quarter was at Rs12.8 crore, up 44% on a Y-o-Y basis.
PIL is poised to report a healthy earnings compounded annual growth rate (CAGR)
of 22.8% (over FY2010-13) in its core business of fashion brand retailing on the
back of strong store expansion, buoyant demand and enhanced product range.
We like the stock and consider it a good bet to play the buoyancy in the Indian
retail and retail infrastructure segments. Hence, we maintain our Buy rating
on the stock.
Revenue growth led by same-store performance
The top line for the quarter came at Rs145.4 crore (a Y-oY growth of 18.1% and a sequential growth of 2%), which
was above our estimate. For the quarter under consideration,
exports contributed around 44% to the turnover vs the
general trend of 35%. The company added 11 stores during
the quarter; thus the revenue upliftment was a result of
new store plus strong same-store sales performance. The
same-store sales growth came in at 12%.
Usage of old inventory coupled with full price realisation
due to festive season led to resilient gross margin
Unlike the other retailers, whose gross margins were
affected by a high cost of raw materials (especially
cotton), PIL’s gross margins for the quarter stood resilient
at 39.1%. The company got the benefit of lower prices of
fabrics as the same were booked in January 2010 itself
while the higher full-price sales during the quarter also
aided in maintaining the gross margin.
Strong leverage results in 87% Y-o-Y surge in operating profit
A strong operational improvement during the quarter
aided PIL’s operating profit to grow at 78.7% on a Y-o-Y
basis. There was a marked improvement in the other
expenditure and the employee cost on account of
warehouse consolidation and the closure of non-viable,
non-profitable stores. The employee cost saw a Y-o-Y
decline of 14% while the other expenditure dropped by
5.5% YoY (we believe this was largely on account of a low
advertisement expenditure in the quarter under
consideration). Thus, aided by a resilient gross margin
and spectacular leverage the OPM expanded by a
stupendous 580 basis points on a Y-o-Y basis from 11.3%
in Q3FY2010 to 17.1% in the quarter under consideration.
Adjusted earnings way ahead of our estimate
The reported profit after tax for the quarter was Rs9.7
crore (against our expectation of Rs9.7 crore). Adjusting
for the one-off restructuring write-off of Rs4.2 crore that
the company incurred on account of the closure of the
Indore Promart store, the adjusted profit after tax comes
at Rs12.8 crore (up 44% YoY), which was significantly
higher than our estimate of Rs9 crore.
Prozone update
The Aurangabad property was launched on October 8,
2010, with Shoppers’ Stop, Globus and Star Bazaar
opening their doors on the very first day. The property
is spread over 8 lakh square feet 80% of which is already
leased out and 65% is occupied by the tenants with an
average monthly rental of Rs40 per square feet. For
Q3FY2011 the property clocked in gross rental revenue
of Rs3 crore.
On a steadystate basis, we estimate Prozone
Aurangabad to fetch annual revenue of Rs32 crore in
FY2012, with 20% vacancy assumption.
The management is in the process of getting requisite
approvals to start construction at its Indore,
Aurangabad (commercial) and Coimbatore sites. We
believe that there would be a delay of at least three
to four months compared with our earlier estimated
timeline for these new sites. The announcement of
commencement of work at any of these sites would
be a trigger for the stock’s performance.
Other update
As on December 30, 2010, the total cash and cash
equivalent in the consolidated books stood at
approximately Rs300 crore.
The total consolidated debt in the books stood at Rs330
crore.
Maintaining estimates despite outperformance
Though the adjusted earnings have been higher than our
estimate, we are not upgrading our earnings estimates
for FY2011 and FY2012, as we would like to review the
demand environment in Q4FY2011 to take a call on the
FY2012 numbers. At the current level the upside risk of
an earnings upgrade remains high. Further we also
introduce our FY2013 estimates in this note with the
earnings per share (EPS) for the fiscal estimated at Rs4.5.
Valuation and view
We believe that PIL provides an exciting opportunity to
play the domestic consumption space with its lifestyle
segment, Provogue (earnings expected to grow at CAGR
of 22.4% over FY2010-13), and exposure to the retail real
estate business, Prozone, which is developing mixed-usage
retail-centric properties in tier-II cities (with equity
funding in place). The current market cap of Rs460 crore
(a price/earnings ratio of 10.9x FY2012E) does not even
capture the full potential of PIL’s retail business. The real
estate business (PIL’s share of Rs39) has not been factored
in any way. Thus, we continue to have a bullish view on
the stock with a price target of Rs95.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Result highlights
For Q3FY2011 Provogue India Ltd (PIL) reported a strong operating performance,
which exceeded our expectations. The adjusted profit after tax for the quarter
came in at Rs12.8 crore (up 44.6% year on year [YoY]), which was much ahead
of our estimate of Rs9.7 crore for the quarter.
The company’s income from operations grew by 18.1% on a year-on-year (Y-oY) basis and by 2% sequentially to Rs145.4 crore, which was ahead of our
expectation of Rs138 crore. The growth was led by a strong festive demand in
the domestic market and a good export performance. The same-store sales
growth for the quarter came in at 12% while exports contributed 44% to the
revenue.
Unlike the other retailers, whose gross margins were affected by a high cost of
raw materials (especially cotton), PIL’s gross margins for the quarter stood
resilient at 39.1%. The company got the benefit of lower prices of fabrics as
the same were booked in January 2010 itself while the higher full-price sales
during the quarter also aided in maintaining the gross margin.
Along with the resilient gross margin, strong operational efficiency and
significant cost rationalisation beared fruits and thus (employee cost down
13.9% YoY, other expenditure down 5.5% YoY) aided PIL’s operating profit to
grow at a phenomenal 78.7% on a Y-o-Y basis. The company’s operating profit
margin (OPM) expanded by 580 basis points YoY to 17.1% as against 11.3% in
Q3FY2010 and our estimate of 12.4% for the third quarter of FY2011.
Despite a very strong growth in the operating profit, the bottom line growth
was restricted to 9.4% YoY at Rs9.7 crore on account of a lower other income
(Rs4.6 crore in Q3FY2011 vs Rs5.8 crore in Q3FY2010) and a one-off write-off in
the form of an exceptional loss on account of the restructuring of the Indore
Promart stores. Adjusting the Promart write-off, the adjusted earnings for the
quarter was at Rs12.8 crore, up 44% on a Y-o-Y basis.
PIL is poised to report a healthy earnings compounded annual growth rate (CAGR)
of 22.8% (over FY2010-13) in its core business of fashion brand retailing on the
back of strong store expansion, buoyant demand and enhanced product range.
We like the stock and consider it a good bet to play the buoyancy in the Indian
retail and retail infrastructure segments. Hence, we maintain our Buy rating
on the stock.
Revenue growth led by same-store performance
The top line for the quarter came at Rs145.4 crore (a Y-oY growth of 18.1% and a sequential growth of 2%), which
was above our estimate. For the quarter under consideration,
exports contributed around 44% to the turnover vs the
general trend of 35%. The company added 11 stores during
the quarter; thus the revenue upliftment was a result of
new store plus strong same-store sales performance. The
same-store sales growth came in at 12%.
Usage of old inventory coupled with full price realisation
due to festive season led to resilient gross margin
Unlike the other retailers, whose gross margins were
affected by a high cost of raw materials (especially
cotton), PIL’s gross margins for the quarter stood resilient
at 39.1%. The company got the benefit of lower prices of
fabrics as the same were booked in January 2010 itself
while the higher full-price sales during the quarter also
aided in maintaining the gross margin.
Strong leverage results in 87% Y-o-Y surge in operating profit
A strong operational improvement during the quarter
aided PIL’s operating profit to grow at 78.7% on a Y-o-Y
basis. There was a marked improvement in the other
expenditure and the employee cost on account of
warehouse consolidation and the closure of non-viable,
non-profitable stores. The employee cost saw a Y-o-Y
decline of 14% while the other expenditure dropped by
5.5% YoY (we believe this was largely on account of a low
advertisement expenditure in the quarter under
consideration). Thus, aided by a resilient gross margin
and spectacular leverage the OPM expanded by a
stupendous 580 basis points on a Y-o-Y basis from 11.3%
in Q3FY2010 to 17.1% in the quarter under consideration.
Adjusted earnings way ahead of our estimate
The reported profit after tax for the quarter was Rs9.7
crore (against our expectation of Rs9.7 crore). Adjusting
for the one-off restructuring write-off of Rs4.2 crore that
the company incurred on account of the closure of the
Indore Promart store, the adjusted profit after tax comes
at Rs12.8 crore (up 44% YoY), which was significantly
higher than our estimate of Rs9 crore.
Prozone update
The Aurangabad property was launched on October 8,
2010, with Shoppers’ Stop, Globus and Star Bazaar
opening their doors on the very first day. The property
is spread over 8 lakh square feet 80% of which is already
leased out and 65% is occupied by the tenants with an
average monthly rental of Rs40 per square feet. For
Q3FY2011 the property clocked in gross rental revenue
of Rs3 crore.
On a steadystate basis, we estimate Prozone
Aurangabad to fetch annual revenue of Rs32 crore in
FY2012, with 20% vacancy assumption.
The management is in the process of getting requisite
approvals to start construction at its Indore,
Aurangabad (commercial) and Coimbatore sites. We
believe that there would be a delay of at least three
to four months compared with our earlier estimated
timeline for these new sites. The announcement of
commencement of work at any of these sites would
be a trigger for the stock’s performance.
Other update
As on December 30, 2010, the total cash and cash
equivalent in the consolidated books stood at
approximately Rs300 crore.
The total consolidated debt in the books stood at Rs330
crore.
Maintaining estimates despite outperformance
Though the adjusted earnings have been higher than our
estimate, we are not upgrading our earnings estimates
for FY2011 and FY2012, as we would like to review the
demand environment in Q4FY2011 to take a call on the
FY2012 numbers. At the current level the upside risk of
an earnings upgrade remains high. Further we also
introduce our FY2013 estimates in this note with the
earnings per share (EPS) for the fiscal estimated at Rs4.5.
Valuation and view
We believe that PIL provides an exciting opportunity to
play the domestic consumption space with its lifestyle
segment, Provogue (earnings expected to grow at CAGR
of 22.4% over FY2010-13), and exposure to the retail real
estate business, Prozone, which is developing mixed-usage
retail-centric properties in tier-II cities (with equity
funding in place). The current market cap of Rs460 crore
(a price/earnings ratio of 10.9x FY2012E) does not even
capture the full potential of PIL’s retail business. The real
estate business (PIL’s share of Rs39) has not been factored
in any way. Thus, we continue to have a bullish view on
the stock with a price target of Rs95.
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