Prologue to an IPO

IPO WATCH

True to its image, Provogue is expensive.

'Fashionable' has probably been an ineffective adjective to describe the idiosyncratic stock markets. But not anymore. Provogue, which manufactures and sells branded fashion garments, is due to hit the markets with its maiden initial public offer (IPO) on June 10, 2005.

The issue comprises 40.49 lakh equity shares being offered at a price band of Rs 130-150 which take the post-issue paid-up capital to 1.62 crore shares of Rs 10 each.

The issue is expected to garner Rs 60.74 crore (at the higher end of the price band) for the company which will be deployed to expand branded store chains as well as existing garment manufacturing facilities and product design centres, and to meet working capital margin.

The issue comes at a price earnings (P/E) ratio of 33.65 times (at the higher end of the price band based on FY05 earnings and post-issue paid-up capital). Since the issue is first of its kind, there are no comparable companies. Provogue, it seems, attempts to redefine existing trends.

The fashion studio
The company was set up in 1998 and currently has about 41,000 square feet of retail space through exclusive stores, national chain stores (like Shopper's Stop, Westside and Lifestyle) and multi-brand outlets which are mainly situated in the metros and big towns.

Of this, studios constitute 33,000 sq ft and others make up for 8,000 sq ft. Currently, it offers apparel, belts, eyewear and the likes on its shelf.

The expansion using the proceeds of the issue will primarily be into smaller towns and also involve setting up of megastores.

In the next five years - that is, by 2010 - it plans to hike its retail selling space to 5 lakh square feet which results in a CAGR (compounded annual growth rate) of 65 per cent.

If the same growth rate is applied to sales as well, Provogue should show an income of Rs 767 crore (excluding the business of Acme Global, a manufacturer of dye stuff and chemicals and an exporter of garments which merged with the company) by the end of the next five years. That looks ambitious. "Growth will depend on the differential you create," defends Nikhil Chaturvedi, managing director, Provogue.

May be. Considering favourable demographics, surging spending power and the increasing number of fashion-conscious people, Provogue may witness rapid growth and better reflect the changing face of the Indian customer. The company's expansion phase will involve entry into women's wear, children's clothing, jackets, luggage, etc.

"International foray will be addressed once we have established our presence here," says Chaturvedi.

In line with its fashion apparel, Provogue also has lounge bars under the name 'Provogue Lounge' at various locations.

In his peculiar style, Chaturvedi asks, "how many people ask what you are wearing tonight? They always ask: where are you going tonight?" We agree. The lounge is an image driver for the company and adds flavour to the brand. Otherwise, he says, there is no brand equity.

Out of trend?
Competition looms large over Provogue. With the advent of national chain stores and multi-brand outlets, individual brands and stand-alone stores are finding it increasingly difficult to compete with mega-units which are proving to be one-stop shops for all garment shopping. With such huge areas of shopping experience available, one wonders if Provogue will be able to withstand competition.

"Fashion brands have always beaten store brands. We cannot be worried about a phenomenon that has not happened in 30 years," counters Chaturvedi. But the point is that in the vastness of malls and huge chain stores, brands tend to get lost and be treated as just another product available.

Provogue, however, is also looking at setting up more of its own stores (about 82 per cent of retail space and currently about 80 per cent) but that pull towards visiting a single-brand store needs to be tested.

Sale! Sale! Sale!
The company posted an income of Rs 115.02 crore in FY05 crore, including an income of Rs 52.35 crore from sales of Acme Global. 
 

Financials
(Rs cr)	FY05	6-m ended Mar 04	FY03
Total income	115.02	27.38	40.77
Total expenses	104.26	25.68	37.24
Operating profit	10.76	1.7	3.53
OPM (%)	9.35	6.21	8.66
Net profit	7.21	1.28	1.88
NPM (%)	6.27	4.67	4.61

Excluding this, the company posted an increase of 14.4 per cent over the previous year (annualised). The growth is lower since last year's income consists of the peak season demand. Operating margin stands at 9.35 per cent compared to 6.2 per cent last year.

In terms of sales of apparel only, margins are much higher, about 46 per cent overall - 56 per cent from exclusive Provogue stores and 35 per cent from multi-brand stores.

Advertisement and distribution spend accounts for about 23 per cent of sales. "We will be happy to get it down to 19 per cent," says Chaturvedi. The company derives about 55 per cent of revenue from its exclusive stores and post-expansion, no retail store will contribute more than 5 per cent of total revenues.

Price of the tag
At 33.65 times FY05 earnings the issue does look expensive and ambitious. But given the kind of growth rate the company envisages, it gives us a valuation of 20.3 times and 12.3 times its FY06 and FY07 earnings respectively.

However, there are some subjective factors that can affect performance like changing fashion trends and consumer preferences and seasonality of the business.

Moreover, the expansion phase, which is due to begin, involves setting up stores in smaller towns where lifestyle and preferences are not the same as those in metros and bigger towns.

This may result in a slow down in growth, slower than that of growth in retailing space. Here, if we are take a conservative estimate of about 32.5 per cent (half of CAGR in retailing space), then the issue looks valued at 25.4 and 19.1 times its FY06 and FY07 earnings respectively.