Sizzling Stocks - Lanco Infratech ; Provogue ::Business Line,

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Sizzling Stocks - Lanco Infratech (Rs 22.6)

Lanco Infratech powered ahead last week gaining 39 per cent. This stock has been decimated in the last two years as it plummeted from a peak of Rs 75 to Rs 8.6. The long-term support between Rs 8 and Rs 10 helped cushion declines in October 2008 as well as in January 2009. Long-term investors can therefore hold the stock with stop at Rs 8.

Near term hurdles for the stock will be at Rs 31 and then at Rs 45. Medium-term view will turn positive only if the stock moves above Rs 45. Inability to move beyond will result in the stock oscillating in the band between Rs 8 and Rs 45 over the upcoming months.

Subsequent hurdles will be at Rs 42 and Rs 50.

Provogue (Rs 33)

This stock was in vogue last week as traders flocked to this counter, pushing the stock price 25 per cent higher. The prospects were looking extremely bleak in December as it made a new life-time low at Rs 17. But a promising uptrend is currently in motion that has already made Provogue gain 94 per cent from its trough.

Near term resistance for the stock is at Rs 37. If this level is crossed, a rally to Rs 50 is possible. The stock will face a strong hurdle around Rs 50 and an inability to move beyond this will result in the stock turning tail and moving down to Rs 25 or Rs 17 again.

52 week Flop: Provogue India :: Business Line

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Stocks with a consumption theme have been the darlings of the bourses in the recent bull run, even holding on to gains as broader markets fell. The stock of Provogue India, however, was a glaring exception, falling steeply over the past three years.

During the slowdown in late 2008 and early 2009, premium retailers such as Provogue were especially affected as consumers shut their wallets or traded down for value-for-money products. Provogue's stock took a sharp dive on flat revenues; FY-09 saw a sales growth of just six per cent. However, even as sales gradually recovered from the slump and Provogue began posting healthy revenue and profit growth, it was weighed down by its real estate plans.

The company planned to develop malls in smaller cities through a joint venture. The slowdown and real estate gloom delayed execution, with the first mall coming up only in late 2010. It further had to modify these plans into housing projects in a few cities on the backs of a number of malls by other players being set up there.

Meanwhile, a levy of excise duty on branded garments, high input costs and inflation biting into disposable income of consumers combined to crimp apparel sales for much of 2011. Provogue suffered two consecutive quarter of flat revenue growth, with the March and June quarters seeing growth of eight and four per cent respectively, compared to the year-ago periods.

PROVOGUE INDIA :: IDFC Emerging Stars Conference

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PROVOGUE INDIA 
OUTPERFORMER (RS35, MCAP: RS4BN / US$88M)


• Retail momentum remains strong: Provogue’s (PROV) retail growth remains on a strong footing on the back of 40-50
store additions in FY11 (including 20 under fit-out) and sustained same store sales growth. Provogue now has nearly
160 stores and is expected to add 25-30 stores annually over the next couple of years. This, coupled with rapid
expansion by the likes of Shoppers Stop, would help PROV’s retail business grow at 25%+ for the next couple of years.
• Results of corrective actions in FY10 now visible: In FY10, PROV started focusing on improving operational
efficiency through implementation of ERP, streamlining supply chain by bringing down distribution centres from 22
to 7, and closing down 19 loss-making stores. This is now visible in PROV’s performance, wherein other overheads
have dropped sharply from earlier levels and inventory days have come down by 25 days. As PROV further
streamlines its supply chain from centralized DC, we expect further reduction in inventory levels.
• Prozone – Aurangabad mall commences operations: Prozone’s 0.8m sqft mall in Aurangabad commenced operations
in October 2010. It has already leased out 80% of the space at an average rental of Rs42/ sqft/ month. About 65% of the
mall is already operational, with all the anchors barring the mutiplex having commenced operations. The mall has a
very strong tenant mix with anchors like Star India Bazaar, Westside, Shoppers Stop, Pantaloons, Croma, etc., and
other stores including Orama, Mothercare, Mom & Me, Lilliput, Provogue, Levi’s, Pepe, Reebok, Nike, etc. The mall is
expected to generate Rs350m-400m of rental income once operations achieve full scale.
• Construction of other properties to start soon: Prozone has 15.8m of developable land across Aurangabad, Indore,
Nagpur, Coimbatore and Jaipur. All project barring Jaipur, which is on hold, are in approval stage and will commence
construction in the next few months. These projects have been delayed while awaiting government approvals and
environmental clearances. While the Indore project will be purely residential, Nagpur and Coimbatore are mix-used
development plans. Given the cash flow of residential and annuity of retail, we see merit in the mix-used
development projects. Prozone will also launch its commercial project in Aurangabad. Next mall in Nagpur and
Coimbatore will be operational in 2013.
• Restructuring of deal with Old Mutual: According to the revised deal, Triangle Real Estate India Fund, promoted by
Old Mutual, will invest Rs3.06bn in Prozone’s SPV, Prozone International Limited, for a 35% stake (valuing the SPV at
Rs8.65bn post money). The SPV will have three projects – Aurangabad, Nagpur and Coimbatore. Of the total
investment of Rs3.06bn, Rs1.41bn would be the value of the stake sale by Prozone in the SPV and the remaining
Rs1.65bn would be fresh issuance into the SPV. Indore and Jaipur, which were earlier part of the SPV, will now be
directly owned by Prozone, while the Coimbatore project would move into the SPV. With this, Prozone would be fully
funded for its expansion.

Buy Provogue India- Strong all-round performance; target: Rs95: Share Khan

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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.

Provogue India: Buy says Business Line India

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Provogue India: Buy

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Diversification into real-estate development, along with strong brand presence, low debt-equity and better margins through backward integration, augur well.

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The company has a firmly established brand presence in the sizeable youth segment
Bhavana Acharya
Premium retailer Provogue's foray into construction and running shopping malls came to fruition as it opened its first mall in October 2010. That the mall houses established retailers such as Star India Bazaar and Croma is another indicator that execution risks, which had shadowed the prospects of this construction business, have abated to an extent.
Provogue has a firmly-established brand recall in apparel for men and women. Low debt-equity and better margins through backward integration are other positives. Provogue is turning its focus on developing two other malls in less-penetrated cities. The construction business, carried out through a joint venture, is supported by investments by private equity players.

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.