irst it was Shoppers' Stop that came out with an IPO in April. Now another retail brand - Provogue is set to hit the market today.
An Initial Public Offering is when a company makes its shares available to the public. These shares will then be listed on the stock exchange for investors to buy and sell.
Why the IPO?
When a company comes out with an IPO, the primary aim is to collect more money. The money could be utilised for expansion and growth of the company or even paying off debts.
In the case of Provogue India Ltd, the clothing brand wants to expand in a big way.
The company has its own stores which is refers to as studios. Now it plans to open 40 new small Provogue Studios across the country and 21 new megastores.
By directly being present in all towns and metros, the company will remove the hassle and financial payments made to intermediaries and increase its own margins.
While simultaneously making its presence felt across the towns and metros, it is also looking at increasing manufacturing.
PIL has a manufacturing facility in Daman that churns out 2,000 shirts per day. This capacity will be expanded to produce another 1,000 shirts per day. This will take PIL's shirt manufacture per day to around 3,000 most of which will find it's way into the lucrative export market.
The company plans to additionally bring out around 1,000 trousers per day, which are currently outsourced by the company.
Women's wear, shoes and jackets will also be added to the product line.
The Indian market
What's great
The apparel market in India today is growing at a robust 13% per annum.
The Indian demographics largely favour the growth of branded apparel. In the next few years, the 14 to 30 year age group is going to form the largest chunk of the population. This segment has a higher disposable income than the rest and shows an increased consumption towards high value and branded products.
PIL's strength is its strong brand equity among the youth in India. With 25% of the world's youth living in India and around 55% of Indians being less than 25 years of age, this is an immense market to have a significant presence in.
What's not
But that does not mean that competition could not gnaw into its high margins. In fact, the company faces stiff competition as other brands like Lee, Raymond, Arrow, Peter England, Shoppers' Stop and Pantaloon vie for attention.
A lot will depend on PIL's distribution and marketing strategy and how successful the company will be with top-of-the-mind recall.
Till date, with Fardeen Khan endorsing their products along with the catchy brand statement "Redifining fashion", they have managed to come out pretty well and successfully kept competition at bay.
However, as companies increase budgets for distribution and promotion, it will be no cake walk for PIL.
Moreoever, the publishers of fashion magazine Vogue, Advance Magazine Publishers Inc, USA, filed a case in 2003 against PIL alleging that their trademart resembles that of Vogue. The District Court at Gurgaon, Haryana rejected the stay application to restrain PIL from using the trademark.
AMP has appealed in the Punjab & Harayana High Court, Chandigarh. The appeal is pending.
While the chances are slim that the verdict will go against Provogue, if it does, it could have major financial repercussions on the brand and the business.
The export market
What's great
To protect its margins and profitability, the company is planning to diversify by opening retail outlets in international markets.
Of course, this will only be done once PIL successfully rolls out its expansion plans in India.
For the financial year 2005, PIL clocked a sales turnover of Rs 115 crore. 55% of the revenue was in the domestic market and 45% from the export of dyes, finished fabrics, chemicals and textiles machinery.
What's not
Majority of the company's exports are to countries in Africa and are dependent on a few customers. While 80% of the exports were to one single client around two years ago, it has dipped to 40%.
The heavy dependency on one customer is cause for concern.
Another cause for concern is the cost of goods sold as a percentage of sales. While it was 48% for the Indian market, it was a steep 73% for the exports market.
In a nutshell, it means that PIL spends more money to sell its goods in markets abroad than they do in India.
The financials
Profits
In the financial year ended March 31, 2005, PIL's gross profit margin stood at 46% (it was 37% in the year 2001).
Simply put, PIL earned Rs 46 out of every Rs 100 that they spent in their business before paying taxes and interest.
Profit After Tax increased from Rs 1.9 crore in the year ended September 2003 (later the company changed its accounting year to March-April format) to Rs 7.2 crore in 2005.
This represented a jump of 278%.
Debt Equity ratio
On the positive side, PIL's debt equity ratio is only 0.77.
This is the ratio of the company's liabilities (money it owes) to the total value of its shares. Hence it indicates that for every rupee the company owns, 77 paise is the debt.
This is a small debt portion to service resulting in smaller outgoing in terms of interest paid.
Bonus issue
Taking advantage of the above, the company promoters issued themselves a liberal bonus issue of 11 shares for every 5 shares that they hold. This move has increased the number of shares by 70,57,886.
Bonus shares don't come free. They are generated from the company's cash reserves.
Additionally, the company will have to pay dividend on more shares now than before the bonus issue.
To understand more about bonus shares, read The impact of bonus shares.
EPS and PE
Earnings per share is the net profit divided by the number of shares. As the denominator increases (number of shares) thanks to the bonus shares, the EPS decreases.
Post the bonus issue, PIL's total shares stand at 1,61,97,608. When net profit of Rs 7.2 crore is divided by this number we get an EPS of Rs 4.47.
The Price Earnings ratio is calculated by dividing the market price (in this case offer price) by EPS. At the two extremes of the price band the PE ratio comes to 29 to 33.
This is quite an expensive stock assuming that the company grows at a rate of 20% next year.
To understand these ratios in detail, read How to spot a good stock.
Should you or should you not?
In the short run, it looks promising. The company is in the right business at the right time and is reaching out to young people all over the country.
But, if it cannot take on the competition or move in line with the fashion trends, profits will be severely hit.
Taking an overall view, if you do manage to get an allotment at the lower price band, good for you. You can earn some 20% to 25% on listing.
If you plan to hold on, then stay invested for at least a year. When the company comes out with its financials in the year 2005-06, you might easily get a 60% return on the stock.
IPO dates: June 10 to June 16
Face value of shares: Rs 10
Price of shares: Rs 130 Rs 150
Number of shares issued: 40,49,402
Amount it plans to mop up: At the above price band, between Rs 52.64 crore and 60.74 crore
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