Provogue's mall development arm scales down operations

Prozone, the mall development joint venture between apparel retailer Provogue and the UK’s Liberty International, is scaling down its projects.

It is reducing what it will build, cutting planned debt and deferring construction of parking lots at its upcoming malls, as retailers hold back their expansion plans in the current slowdown.

Earlier, Prozone was planning 10 malls in the country. It will now build only six, postponing the rest to a later stage, said Nikhil Chaturvedi, managing director of Provogue India.

The company is also scaling down the size of these upcoming malls. Originally, Prozone had plans to develop at least a million sq ft of space each in upcoming malls at Aurangabad, Jaipur, Nagpur and Indore. Now, it plans to build the malls in phases. The first phase will comprise only six lakh sq ft.

“We are reacting to market conditions and forces of demand and supply. We are going slow on the construction, building malls in phases and postponing construction of parking lots to beat the slowdown,” said Chaturvedi.

Almost all retailers such as Future Group, Reliance Retail and others have scaled down expansion, as shoppers defer purchases and downtrade to beat the slowing economy. Future Group, which was targeting a retail space of 30 million sqe ft by financial year 2011, now expects to have the space only by FY2013. Reliance Retail has closed 30 stores in the past year and Aditya Birla’s More has shut 45.

Analysts cited high leverage positions and rising debt to equity ratios as reasons for the slower expansion of retailers. “Across the board expansion plans are being relooked, due to capital scarcity and catchment reassessment. Given high debt levels and an almost dormant equity market, the capital for growth has become scarce,” says a report from Edelweiss Securities.

When Liberty invested Rs 202.5 crore for a 25 per cent stake in Prozone, the total investment in the six mall projects now going ahead, including those at Lucknow and Coimbatore, was pegged at Rs 1,000 crore, with Rs 400 crore as equity and Rs 600 crore debt. Later, the total investment was revised to Rs 2,000 crore, of which Rs 700 crore was planned as equity and Rs 1,300 crore debt.

But to reduce debt levels in the projects, Prozone has scaled down total debt in the project to Rs 600 crore, equity being the same.

“We are consciously reducing risk, as interest rates are very high. In mall projects, we have brought down the debt levels to 50 per cent from the earlier 65 per cent,” Chaturvedi said.

In April last year, Triangle India Real Estate Fund, promoted by South Africa’s Old Mutual Property Investments, picked up a 27 per cent stake in the special purpose vehicle (SPV) of Prozone Liberty for nearly Rs 457 crore. The SPV held stake in the four projects at Aurangabad, Indore, Nagpur and Jaipur.

Prozone is also postponing the construction of parking lots at its four malls to save on building time and reduce capital expenditure. Earlier, the company was building two-level basement parking at its malls. Now it plans to build the levels at a later stage to conserve funds, he added.

Prozone originally had plans to set up 20 malls over the next seven years, each over a million sq ft. “Every project has a payback cycle of six years. As the cost goes higher, the cycle goes up to eight-nine years, delaying projects,” he said.

Provogue is also beefing its discount retail operations. It is opening 10 Promart stores in the next year and eyeing revenues of Rs 180 crore. These stores give a discount of 35 per cent to 60 per cent to the last season’s apparel and related goods.