Provogue (India) Ltd - Demerger

Provogue is going through a demerger. For a lot of investors out there, looking at a company like Provogue would be quite a taboo and honestly, its difficult to argue with that view! :-) Still, I decided to give it a look without having any mindblocks, and a few surprising things emerged! Let us take a look at what is happening.

The Scheme

The scheme of demerger-amalgamation envisages the demerger of the 'retail estate centric real estate development business' of the company into a separate company and listing of the same. The entire structure is a bit complicated, so instead of explaining it, let us try and view it in pictorial form.

Through the scheme itself, Provogue would be reducing its capital from FV Rs.2 to FV Re.1. (I think it would be primarily to write off the goodwill on Provogue's balance sheet.) This would happen post demerger. Through the demerger, shareholders of Provogue will get equal shares of the demerged company Prozone Capital (Ratio of 1:1). All the necessary approvals have been received and the company can now declare the record date for the same.

The opportunity (?)

Provogue is currently valued by the market at CMP Rs.26 as follows:

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Currently, besides the retail business, Provogue also has another business housed in its subsidiaries. It owns and leases out malls, primarily in tier 2 and 3 cities. This business is more in the 'setting up' stage and is currently not earning any profits. However, the company has also done an interesting thing. It has acquired land parcels around their proposed malls, which also gives it a third business line, that of real estate development! These businesses are housed in Prozone Enterprises, in which Provogue holds 75%. The rest 25% is held by UK based Capital Shopping Centers Group (CSC). Consider the following:

• CSC paid Rs.202 cr for its 25% stake in 2006, valuing Prozone Enterprises at more than Rs.800 cr.
• Triangle Real Estate Fund paid Rs.306 cr in 2010 for 35% stake in 3 SPVs of Prozone Enterprises, valuing them at Rs.865 cr.
• Prozone Enterprises' 10 lakh sq.ft. Aurangabad Mall is already operational, with large occupancy reported. The mall could bring in at least Rs.30-35 cr yearly lease rentals at peak occupancy.
• More malls are planned at Coimbatore, Indore and Nagpur.
• Prozone Enterprises is also constructing a  commercial offices center  near the Aurangabad Mall. Expected saleable area is 4 lakh sq.ft.
• Omni Infra, a subsidiary of Prozone is in the process of constructing a residential township at Indore. Phase 1 of the same will consist of 11 buildings, with a total saleable area of 1 million sq.ft.
• As per unconfirmed reports, Prozone owns a total about 150 acres of land.
• All the subsidiaries are adequately financed, primarily because the company has been able to dilute equity at substantial premium. 

Even though the total assets and holdings in Prozone Enterprises are not clear, its Aurangabad Mall alone can be worth Rs.100 cr at least, assuming Rs.30 cr lease rentals and Rs.10-12 cr PAT. It is not clear whether the company intends to lease out or sell space in the Aurangabad commercial offices center, but if they decide to sell it, that alone can easily net them at least Rs.100 cr (on a very lower side). The 1 million sq ft Phase 1 of the Indore township can earn them Rs.50-60 cr more, assuming a profit of Rs.500 per sq.ft. We cannot take a call on the remaining assets of Prozone Enterprises, since proper data is not available.
Take a look at this table, taken from Provogue's AR..

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So we are getting all of the above plus Provogue's own retail business for a market cap of Rs.300 cr and an EV of Rs.550 cr! That is quite interesting! Value creation through demerger indeed! ;-)

Risks / negatives

When we are talking about Provogue, this section becomes very important! :-)

• The promoters/management of the company are, well, how should I put it..umm..very adventurous! (drug case etc) It is also obvious that they are interested in their stock's market price (approved a buyback and then did nothing). It is a management that I would rate very low and I would not trust them at all. This is a huge huge negative, specially in the context of putting money in special situations.
• The 'value' in Provogue exists primarily because the management has been able to dilute equity, both in Provogue as well as its subsidiaries at atrocious prices and valuations. (Provogue had made a private placement at 200 bucks, then one more at 97). Now that the price is 25 bucks, the huge money which came in at such prices makes the balance sheet look much better in comparison to the present market cap! :-) The business, per say, earns no cash and I absolutely hate such businesses.
• Information is not properly available. Provogue is like a cabbage! Inside the layer of the main company lies a layer of subsidiaries. If you peel off that layer, there is another layer of step-down subsidiaries inside. Peel off that layer and...well you get the point. There are total 27 subsidiaries of Provogue and various businesses are housed in various subsidiaries as SPVs. Since detailed info about the subsidiaries need not be given as per law, it is very difficult to gauge which has what! 
• There is large institutional holding in the company. (I imagine they must be very pissed off, since they have bought at much much higher prices). One of the institutions which had more than 5% has been selling continuously, keeping the price bogged down. Now something like this should not usually bother us, but in special situations, where exit has to be fast, this should be seen properly. (Btw, Mr.Rakesh Jhunjhunwala has increased his holding in the recent Dec 2011 quarter. I wonder how this news did not lead to a rally in the stock!!)
• It is not clear how the PE guys who put money in SPVs are going to exit. I would like to know that, since I would also be a shareholder along with them!

My take

I am not at all interested in the standalone business of Provogue. It is a cash guzzling business with a questionable management. Its the demerged part which interests me. That seems to be a much better business. With CSC holding 25% there, the probability of the management doing any blatant hanky-panky also reduces greatly. So the strategy would be to sell of Provogue shares on the ex-date.

If it were any other company with a decent management, available at these valuations, I would have taken a very sizable position. However, with Provogue, I do not have the guts to take a big big position. (One may argue that these valuations exist only because its Provogue!!). The critical call to take is about how much would the price fall on ex-date. My call is that the price will not fall much, since there will be no impact on Provogue's EPS. Also, the balance sheet will not be hugely impacted, since lot of dilution has happened at subsidiary level. Capital reduction also does not lead to a great fall in price, if history is a guide. So, selling off Provogue on ex-date and holding the demerged company shares at very low effective cost makes most sense to me. 

Let us see how this one goes!

Cheers and happy investing!

P.S. Disclosure from my side: I was not under the influence of any drugs/substances at the time of writing this post. (I know this is a cheap shot, but could not resist taking it!!)



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