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Prozone: Pro Success or Zoning Away?

| 8/9/2012 9:04 PM Thursday



Prozone CSC, a joint venture between Provogue and the UK-based Capital Shopping Centres Group PLC, is expanding its horizons in the commercial and residential real estate space. With a listing on the bourses coming up soon, is the business worth investor interest?


KEY POINTS:


  • The company has been gearing up by acquiring large portions of land and actively engaging in synergies to leverage its jump into the industry.
  • The availability of cash with CSC, the cash flows expected from 2013-18 and a low net debt are advantages for the company. The management aims to keep the company debt free by clearing the funds taken for the development of malls using cash flows generated from the sale of residential and commercial property.
  • For the long term, the scenario is tilted in favour of the company due to the strong growth potential in Tier II and Tier III cities.

The Indian real estate industry has seen its share of highs and lows, and both have been rather extreme. Several factors accounted for a prolonged boom in the real estate industry, including the introduction of Real Estate Investment Trusts and Real Estate Mutual Funds, as well as liberalisation policies that encouraged FDI participation and boosted inflows to the sector. These factors, coupled with a tremendous growth in demand, cooked up a perfect atmosphere for growth.

The trend soon saw an equally drastic reversal. This was caused by a slump in demand on account of high funding costs and a spike in prices driven by higher construction costs and liquidity issues, particularly after 2008. According to real estate research firm Liases Foras, in the period between Q4 FY11 and Q4 FY12, the demand for real estate in six major Indian markets fell by an average of 40 per cent and the prices saw an uptrend in the range of five to 33 per cent.

Amidst this dark backdrop stands Provogue’s highly optimistic plan to make it big in the real estate industry. Since FY08, the company has been gearing up by acquiring large portions of land and actively engaging in synergies to leverage its jump into the industry.

In the first half of 2012, Provogue undertook a demerger of its 75 per cent holding in Prozone, and the scrip declined from a high of Rs 36 per share to Rs 18 per share. The company’s real estate venture, Prozone CSC, is set to be listed on the bourses around August 14, 2012. Is this move wrongly timed? Or has the company carved out a favourable position for it to succeed regardless of the uncertain economic environment? Further, now that the company has planned listing the entity, let’s see what price this newly-listed scrip can command.

Prozone’s Portfolio

Prozone CSC is a joint venture between Provogue and Capital Shopping Centres Group PLC (CSC), a UK-based Real Estate Investment Trust (REIT) that is largely focussed on shopping centre management and development. Prozone’s plan is to develop retail-centric, mixed-use developments in the emerging urban areas of India. The company launched its first retail project in Aurangabad in October 2010 and has received a tremendous response since its inception. It has a strong foothold in the organised retail space in Aurangabad, with almost 79 per cent occupancy and monthly footfalls of around 8 lakh.

Now that the Aurangabad mall has seen considerable success, Prozone’s retail strategy is to develop large scale retail spaces in Tier II cities, setting a strong footprint and giving retailers the space to expand and create a strong entry barrier for competitors. The company expects to commence operations by developing 664318 square feet of mall space in Coimbatore and that of 675000 square feet in Nagpur by October 2014. However, we feel that it will be rather difficult for the company to mirror its success in Coimbatore and Nagpur, considering the existence of some big players and the projects in the pipeline. In Coimbatore, Brookefields has gained considerable popularity, and has a total area of 0.45 million square feet. Among the ones on the anvil, Fun Republic (0.42 million square feet) and TVH Kovai Mall (0.7 million square feet) would certainly toughen the road ahead for Prozone. In case of Nagpur, the 0.18 million square feet Empress City Mall has been quite below average in terms of footfalls despite being the only big mall in the city. Considering the aforementioned factors, we have a cautious outlook for both these projects in the short-to-medium term. For the long term, though, we feel that the scenario is tilted in favour of the company due to the strong growth potential in Tier II and Tier III cities.

Along with these retail projects, the company also plans to build residential townships in Indore, Jaipur and Mysore, with the development taking place in phases. Residential projects worth around 1.5 million square feet are also planned around the malls in Coimbatore and Nagpur, where the company is sitting on excess land for retail-centric development.

Commercial development has also been planned around all the three malls. There has been a good response seen in the first phase of commercial development at Aurangabad, where the company has sold 190000 square feet of space. Although these cities have been relatively less affected by the real estate slowdown, we believe the lower demand trend will continue for a while. Cash flows will flow in gradually from 2013-18, when the scenario would hopefully have improved.

 

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