Tuesday, February 14, 2012

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:

Click to enlarge




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..

Click to enlarge

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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27 comments:

Raja said...

Few points:
1. I just saw a exchange filing. STCI Finance increasing their stake from 7.78% to 9.96%, and looks like this STCI (Securities trading finance corp) is controlled by Bank of India. Is this any way significant to the story ?

2. They did buy back 20.5 lac shares for a total consideration of 12.39 crores in 2009. Ref. AR 09-10, page 46. Was there another buy back announced after that, to which you are referring ? On a side note the AR's are really colorful, reminds me of Prof Bakshi's post on temptation food.

3. Can you help me to understand how PAT of 17.79 crore became 16 crore by adding 829 lacs under minority interest. What does the minority interest actually mean in layman terms.

Nooresh said...

Hi,

One angle --- Many companies after placement at huge levels have suddenly started demerging the group companies -- Namely Indiabulls,Triveni,Pantaloon and many such companies.

This generally leads to selling in the demerged business as it is too small in market cap! and is sold till eternity by the funds holding it.

I was looking at Agre Developers,Triveni engg and many more examples will list them soon.

So wouldnt it be a good bet to buy the demerged entity on listing as there will be a lot of overhang coz of institutional holding.

What dirt value would you give to the demerged entity ?? as i still believe the funds bought Provogue retail as the business and not prozone so they will sell prozone

Neeraj Marathe said...

Hi Raja,
1) Let me check it, but if its STCI, it would be regarding pledging of shares by promoters. STCI wont be holding the stake in the company.
2) Yes, the buyback was supposed to be for 50 lakh shares, they ended it after 20 lakh shares, even though the price was much much below their max price. My statement that they did 'nothing' is therefore factually incorrect, although what i wanted to stress is that they did not complete the buyback as intended. (Temptation Foods AR was created quite stir at that time, i remember very well:-) )
3)regarding minority interest: If a company has a subsidiary which is not 100% owned, then there will be minority shareholders in it. Their share of profit in the subsidiary is minority interest, which needs to be reduced in consol financial statements, since we cannot consolidate 100% profit of the subsidiary. (in very simple terms). Here, since there is loss, their share of loss has to be accounted, which will lead to lesser losses in the books of the parent company.
cheers!
Neeraj

Neeraj Marathe said...

Hi Nooresh,
Absolutely perfect thinking, in my view. It could very well happen the way you have described. Assigning market cap to it would be very difficult due to absence of info, but a market cap of about 150 cr (about Rs.13 per share) seems quite cheap.
cheers!
Neeraj

Rohit Chauhan said...

Hi neeraj
I had a look at this opportunity and this is completed a gut feel - all these PE, 'big investor' deals smell fishy

I think we agree that the market is irrational in the short term, but over medium to long term - value wins out. 3-4 yrs is a long time.

again the PE investors or RJ are supposedly smart guys ..so why will they invest at these nose bleed valuations ? something looks fishy here ..if you get my hint !


I have wieghted these facts a lot in the past ..but now i have started trusting my gut feel

anyway worth tracking and doing a token investment for educational purposes

Neeraj Marathe said...

Hi Rohit,
We have all seen well respected PE guys as well as investors make disastrous investment decisions. Whether this particular one is fishy or is there more than meets the eye is something we will never know.
The risk is absolutely there, which is why i wont take a very large position in it..although, my position is not a token one too! :-)
Cheers!
Neeraj

Arpit Ranka said...

Hi Neeraj,

Am totally with Rohit on this one (without the token investment though)..

Moreover, there is a massive minority interest in the company (Rs ~300 crs). Not much transparency on this but it significantly changes the EV and economics of the opportunity.

As for land angle, the fact that mgmt smell of week, I would be surprised if the value is unlocked and share freely with the minority shareholders..

cheers

Neeraj Marathe said...

Cant agree with you more Arpit. Risk is truly enormous.
Cheers!
Neeraj

sameer said...

Hi Neeraj,
Assume that record date is 17 march 2012. Then when we should sell it??? on 17th March OR 18th Match or other date?????

Regards
Sameer

pratik said...

Hello Sir,
I am a starter in the investment industry and regularly follow your guidelines...
please forgive me if I ask anything Lame...
Sir the similar opportunity is being seen in cinemax india Ltd.
I think it's a decent opportunity...
Sir waht your take on Cinemax...

Neeraj Marathe said...

Hello Sameer,
There is also something called ex-date, which will be one day prior to the record date.
So if the record date is 17th March, one can sell the shares on 16th March (assuming it isnt a holiday) and still get shares of the demerged company. The ex-date is also displayed on the exchanges website.
Cheers!
Neeraj

Neeraj Marathe said...

Hello Pratik,
Nothing lame in what you asked at all. You are very right, Cinemax is also going through something similar. However, high court approval for the same is pending and i have not looked at it in detail yet.
cheers!
Neeraj

Anonymous said...

Neeraj Sir,

9 th March is record date for provogue demerger so ex date is 7 th march as 8 th is a holiday on the occasion of holy.Till 6th march it is present day's provogue(face value 2), if all those who cant wait for listing of prozone(may be 6 months down the lane) tries to sell on 6th march and there are no buyers price will come down drastically.Can one buy if the price comes down dratically on 6th march?

Neeraj Marathe said...

Speaking for myself, based on my risk taking appetite, i would not be buying..
cheers!
Neeraj

Lakshay Ahuja said...

Hey,
I hold 100 shares of provogue and i could not follow the market since the past two-three months. As a result i didn't know anything about the ex-date and record date and i also couldn't sell the provogue shares. What should i do??

Lakshay Ahuja said...

Hey,
I hold 100 shares of provogue @ Rs72. I couldn't follow the markets for the past 3-4 months so i didn't know anything about the record date and ex-date. What should I do now?

Neeraj Marathe said...

Hi Lakshay,
What can you do! Just sit tight and wait for the same to relist again. You have no other option anyways!
cheers!
Neeraj

pratik said...

Sir, I missed put on the opportunity to participate in the provogue case. But i am still interested in the assets unlocking aspect of prozone.What will you suggest me to do at this particular moment.

Neeraj Marathe said...

Hello Pratik,
Well, since you are interested in the assets unlocking aspect of prozone, at this moment, all you can do is wait for Prozone to list. Nothing else can be done buddy.
cheers!
Neeraj

Sachin said...

Hi Neeraj,

I am not able to sell Provogue Shares on ex date and holding decent quantity @ Rs 28. Please guide what I will do. Whether Provogue standalone basis is valuable more than Rs 15 or not. Whether I Sell or hold. What about Prozone. What You thing real value of Prozone is per share.

Regards,

Sachin

Neeraj Marathe said...

Hello sachin,
Although provogue looks cheap, I am not interested in it due to its business model and promoters. However, since you already hold it, do wait for some time.
Prozone, I expect at least 15-17 bucks. But no idea when it will b listed.
Cheers!
Neeraj

Anonymous said...

Hi Mr.Marathe,
BTW its happened to be name of one of our professor to whome we regards the most..... :)

I tried to find every information about Provogue on the internet but not succeeded....

During the time i bought the 700 shares of provogue @ 15.1 on avg(3500 @ 14.7 and 3500 @ 15.50)....

I have gone through its financial data....few things i found very lucrative P/B ratio... its beta....and yoy growth....One thing i missed is its cash flow...and which is very -ve.... by the time i come to cash flow i already bought the shares.....Thinking that it is rock bottom price.....irrespective of whether FDI will come or not....
Only reason was to buy margin of safety.....But its cash flow data start making me more skeptical about the stock....
And even afte reading your blog it made me start thinking..
Though i have gain 4% in 4-5 trading days....
What you think should i hold the stock @ this point of time or should take short position by selling it...

Neeraj Marathe said...

Hello Anon,
The things about provogue that look attractive are so only because they have been able to dilute at a very high price..if they hadnt done that, the high book value, less debt etc would never have been possible. However, unlike a balance sheet, cashflow is something that cannot be made up! which is where one can clearly see the poor business of provogue..
And MOS in provogue???!!! Well, no comments! :-)
Cheers!
Neeraj

Aman said...

HI Neeraj, excellent post,
so any news when is Prozone gonna be listed again.
Another one i am looking forward to is Indiabulls Infra & Power Ltd, was demerged from IB Real Estate in December 2011, but still no listing.
I have not been able to find any info either on Sebi or exchange website's regarding their listing.
Is there any time line which Sebi/exchanges has prescribed for relisting of all these demerged entities.

Awaiting to hear from u

Regards
Aman Jain

Neeraj Marathe said...

Hello Aman,
For listing of resulting entity, a lot of legal procedural formalities have to be completed. There is no mandated time-line for this, so it can take its own sweet time. Delays can happen for ridiculous reasons. I remember during the demerger of Kesar Enterprises, the resulting entity Kesar Terminals took a lot of time to get listed, since SEBI asked them to complete half yearly audit and also asked them to justify the name of the new entity!
Your best source of info in this regard would be to talk with the company secretary of the concerned company.
Hope this helped.
Cheers!
Neeraj

Sachin said...

Hi Neeraj,

As prozone is listed now. Any view on same. What will be your guidence from long term point of view.

Regards,

Sachin

Neeraj Marathe said...

Hello Sachin,
I personally do not have a position in Prozone, nor do i intend to buy at the present market cap..the following questions come to mind
1) Will their business continue to do well? will the success in their first mall be replicated in other cities as well?
2) What would be the capex and dividend policy going fwd? As a shareholder, how does one benefit?
3) Most importantly, are there other, better opportunities available to invest?

I think taking a call on these factors will be quite helpful..
cheers!
Neeraj