Provogue India To Stock Split @ 5:1

Indian Fashion and garment powerhouse, Provogue (I) made a surprising decision to split their stock and that too by a ratio of 5:1 which means that every share owned will now be split into five more. The move is a surprising one considering the fact that Provogue’s latest quarter results showed a rise in sales by at least 31.1% while the net profit rose by around 28% as compared to the previous quarter.

Provogue has followed an aggressive marketing and advertising campaign heavily focused on India’s urban landscape for the past decade. The strategy has been highly successful catapulting them into a dominant position in garment retailing.

Their strategy of being able to combine fashion trends with quality garments and focusing the same on younger people has led them to consistently deliver profits.

The stock split was approved by Provogue’s Board of Directors but will take effect only after the formal approval from shareholders at their Annual General Body Meeting. This is however expected to be a mere formality which means that unless something drastic happens; the stock split will be definitely implemented most likely creating a price drop in Provogue’s shares.

It will be interesting to see the price of Provogue’s stock after the split, the announcement of the split led to a sharp rally in the opening hours of the market on Wednesday which saw the company quote at around 830 rupees/share. However it closed at sub 800 levels at 794.80 demonstrating a drop of 2 percent on the NSE.

Expect hectic activity here for the next few days.

Provogue are currently in a retail expansion mode. The next year has them setting up about 20 stores and in 2010 another 30 stores which is a total addition of Fifty + stores. They will be aiming to add more stores in cities where they have a well established business in addition to moving to newer cities, most likely emerging Tier- 2 cities.

The stock split is most likely an attempt to raise quick money for this massive expansion program. It is wiser for them to borrow money from investors via the stock market by splitting their shares instead of doing so by borrowing huge amounts from banks that have themselves been forced to raise lending rates to new highs.

Since this is only a split, their market capitalization will still remain the same. The key fact that Provogue are banking on is that they will be able to reach pre-split levels by posting consistent quarterly profits. However this will take time and is hence a long term plan.

The split is a blessing in disguise for all investors who have always wanted to invest in the company. The critical decision is to be able to forecast whether it will be better to invest pre-split or post split after the stock quotes at the revised price.

What will however work for Provogue is the definite projected growth of the Indian retail sector. The next decade will see the Country’s retail chain booming and importantly products being bought by the domestic consumer which is good news for all retailers including Provogue.