Niche player issue

Provogue's valuations looks reasonable

Cashing in on the retailing boom, Provogue is the latest entrant in the primary market with a Rs 60 crore IPO. The branded fashion garment maker plans to set up more of it own retail outlets and expand its garment manufacturing facilities and product design centres.

Provogue curently has 41,000 square feet of retail space through its exclusive stores (33,000 sq ft) the remainder being with other channels.

Currently, Provogue sells its garments through its own outlets as also through national retail chains such as Shoppers' Stop and Westside. It also exports fabrics, chemicals, dyestuffs and textile machinery to African markets, providing a complete solution, rather than exporting each item individually.

The market for branded apparel in the country is huge it is estimated to be growing at 13 per cent per annum with the men's aparel segment alone estimated by KSA Technopak at Rs 32,600 crore in 2004. Thus, there is definitely scope for chains such as Provogue to grow.

However, while brands no doubt have a value, the retail apparel and accessories segment is becoming extremely crowded with Indian and foreign brands jostling for space, not to mention store brands.

Also, while retail chains such as Pantaloon or Trent are also in the fashion business selling apparel and accessories, they have derisked their businesses by catering for several other products including food. Moreover, they have also achieved some scale. Nonetheless, there is room for a niche player like Provogue.

In FY05 Provogue posted sales of Rs 115.02 crore, which includes an income of Rs 52.35 crore from sales of its division which exports fabrics, dyestuffs and chemicals. The shares are being priced in the band of Rs 130-150 which translates into a P/E multiple of 16.35- 18.86 times based on FY05 earnings of 7.95 paise.

There is no listed company which is strictly comparable with Provogue, but given that the business model appears to be capable of generating a 20 per cent growth, the valuation seems reasonable.

Mutual funds

Buoyed by the good sentiment in the equity markets, mutual fund companies have been launching new schemes like there is not tommorrow. With every scheme positioning itself differently, fund launches have become more of a marketing game than of fund management.

Most of the thematic funds launched in the past year have rode on the back of the good sentiments in equity markets data bears out that all new ideas may not be worth investing in.

For instance, look at the Principal PNB Fund. In a hurry to cash in on the opportunity in the international stocks as soon as the Central Bank allowed mutual funds to invest in overseas stocks with an Indian presence, Principal PNB launched a fund to grab this opportunity.

As international markets displayed weaker performance than Indian equities, the fund has been a laggard with a return of 3.28 per cent over the past one year.

Compared to this, the Sensex gave a return of 35.17 per cent. What happened to funds focussed on primary markets in the early nineties and during the tech boom is also well known.

Out of the three schemes launched last week, Tata mid-cap is a run of the mill plan which will invest in emerging companies with good potential; Birla Gen Next seeks to invest in companies which will grow because of rising consumerism and Kotak Contra Fund seeks to invest in stocks which are being ignored by the market and hence are available at discount to fair price. The risk with contrarian investing is that the value may not get unlocked for a long time though.

Mangalore Refinery & Petrochemicals

Mangalore Refinery & Petrochemicals Ltd (MRPL) has reported a 24.45 per cent fall in its profit before tax to Rs 542.02 crore in the March quarter of FY05 , despite net sales rising 43.46 per cent to Rs 5136.63 crore. Profitability has been reduced partly due to the company's other income which has fallen 67.13 per cent in Q4 FY05.

The company had a forex loss of Rs 12 crore as compared to a gain of Rs 66.15 crore in the March quarter of the previous year. Also, the company's cost base has risen. For instance, other expenditure jumped 46.58 per cent to Rs 167.09 crore.

Meanwhile, crude throughput has grown about 9.87 per cent to 3.15 million metric tonnes (MMT) in the last quarter. However, analysts point out the company's average gross refining margins (GRMs) in Q4 FY05 were about $ 6 per barrel as compared to approximately $ 7 per barrel in the previous year.

Lower GRMs are being attributed to the recent cut in import duty which was brought down to 3 per cent from 7 per cent. The regional benchmark, Singapore refining margins had also eased about 30 per cent on a y-o-y basis and averaged about $ 4.27 per barrel in Q4 FY05.

Nevertherless, the company's overall operating profit expanded 24.1 per cent to Rs 539.55 crore in the last quarter, but operating profit margin fell 164 basis points to 10.5 per cent. Going forward, gross refining margins in the short term, it appears, are capped.

However, the underlying concern is that standalone refiners like MRPL may soon have to start sharing the subsidy losses on petroleum products with the oil marketing companies. That would put further pressure on profits.

With contributions from Shobhana Subramanian, N Mahalakshmi and Amriteshwar Mathur