DSIJ Mindshare

Prozone: Pro Success or Zoning Away?



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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Business Strategy

In the second half of 2006, Provogue entered into a joint venture with the FTSE 100 property company, CSC, which has a current valuation of 7 billion pounds and over 35 years of experience in global real estate development. The company already has over 16 million square feet of retail space in its portfolio, with footfalls of 320 million a year. With this alliance,it started acquiring land on a large scale from FY08, and the freehold land value on the consolidated balance sheet increased to Rs 229.18 crore in FY11.

According to the management of Prozone CSC, all of the land required for the announced projects has been already been acquired, and the construction has to be timed strategically, ensuring visible developments for prospective customers. Moreover, the management has strategised well to select and long-term opportunity. A threestep approach is considered, where the industrial growth, IT presence and population demographics are evaluated to determine the selection of cities.

Area (Square Feet)

Project

Retail

Commercial

Residential

Indore

 

 

2400000

Jaipur

 

 

1500000

Mysore

 

 

1200000

Aurangabad

800410

774000

 

Coimbatore

664318

400000

1500000

Nagpur

675000

400000

1600000

 Provogue, with a core retail business, has got a significant advantage from this alliance, gaining leverage in terms of knowledge, experience, systems and processes, training and management skills, among others. It has provided Provogue’s understanding of the Indian retail need and emerging retail markets with long-term professional experience and industry-specific expertise. Commenting on the strategy, David Fischel, CEO of CSC Group Plc said, “We firmly believe in the need to specialise, and are increasingly focussed on areas where we produce competitive advantage. Our mixed-use centres are built with a long-term ownership vision of typically 20 years. These type of developments have proved to be highly stable and resilient, and an excellent way of locking into the real growth of the economy”.

While other real estate players are sitting on huge piles of debt that have resulted in lack of liquidity and funding, leading to a large number of stalled projects, Prozone CSC is hardly worried due to the availability of cash with CSC and also on account of a low net debt, which currently stands at Rs 72.46 crore. The management has a clear strategy to deal with debt efficiently. Their aim is 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.

Valuations

The company’s value can be arrived at by looking at the various deals that Prozone has entered into since 2006. Various players have bought a stake either in the company or in three of the Special Purpose Vehicles (SPVs) set up for the retail-centric, mixed-use projects at Aurangabad, Coimbatore and Nagpur. Following these deals, the company has been valued in the range of Rs 810 crore and Rs 1141.54 crore. Triangle India Real Estate Fund and LTG International, founded by UK based Lewis Trust Group, have bought stakes in the three SPVs, valuing them in the range of Rs 874.29 crore and Rs 1600 crore.

We are of the view that all these projects were valued at a time when the industry was booming and investors were optimistic about the growth of real estate. We have taken into account various factors revolving around the current scenario. Considering the net present value (NPV) of the cash flows that would come in from all the SPVs and keeping in mind Prozone’s stake in each of them, we have arrived at a cumulative value of around Rs 325 crore. Taking into account the number of shares based on our valuation, we expect the company to be listed at a price in the range of Rs 26-28 per share.

Conclusion

We believe that Prozone has a significant benefit arising out of the alliance with CSC, and that this would certainly give the company an edge in terms of knowledge and performance. At the same time, efficient management of cash flows by strategically timing projects to tackle debt tactfully would definitely work in favour of the company if the execution takes place as planned. However, we think the retail real estate scenario is favourable over the long term, though the retail developments at Coimbatore and Nagpur are competitive and would take efforts to pan out as desired.

Prozone may have set out with the right bricks & mortar and blueprint, but investors must time their investments wisely in the short term. Those aiming for long-term benefits can accumulate the stock at the current levels.

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