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Anant Raj Ind (ARCP IN)
Change in revenue mix in favour of residential segment will hurt
margins and Q3 FY11 earnings growth (-28% y-o-y)
Delay in launch of key residential projects and weak demand for
commercial assets of tier II players will keep valuation low
Retain Underweight (V), reduce TP to INR95 from INR113 to
factor in downcycle valuation
3Q FY11 outlook
We expect Anant Raj Industries Limited (ARIL)
to report c28% y-o-y growth in revenues, led by a
marginal increase in the lease rental income,
along with revenue booking on its Manesar
residential project. Channel checks suggest the
company has sold all 670 flats, of which c350
were sold during 3Q FY11.
We expect ARIL to report an EBITDA margin of
c60% (c92% during 3Q FY10) as a large portion
of its revenues during 3Q FY11 is likely to come
from residential projects, compared to rental
income and land sales during 3Q FY10.
ARIL’s stable debt-equity ratio of 0.25x should
not put pressure on profitability, unlike its major
peers. However, despite the healthy top line
growth, a lower EBITDA margin is likely to pull
down 3Q earnings by c28%.
We expect the company to announce an update on
the leasing of its Hotel Tricolour (in negotiations
since 2Q FY11) and an update on land acquisitions
in the National Capital Region (NCR) with a focus
on Gurgaon city. We believe investors will also look
at management guidance on the launch of its new
projects in Gurgaon (Sector 91) and Neemrana,
which are likely to provide revenue visibility over
the next 24 months
Investment summary
Delay in launch of key large projects is hurting
earnings growth. Despite having one of the best
land banks in our coverage universe, ARIL’s
stock price has sharply underperformed the
market. This, in our view, is primarily due to the
continued delay in launching some of its high
value residential projects in Hauz Khas and
Bhagwandas Road, both of which are in upmarket
Delhi locations.
While the company has successfully tried to
replace the launch of these projects with other
suburban launches (Kapashera and Manesar),
these projects are relatively small. We anticipate
the delay to continue for another 8-12 months as
both projects are yet to receive all the necessary
approvals. We have reduced our earnings growth
during FY11 and FY12 by 45-53%, primarily to
factor in these project delays.
Weak brand and small size will hurt
commercial lease volumes. Our central
investment thesis on the sector’s commercial
segment and ARIL has been that while demand
will come back strongly, the majority of the
demand will be captured by large players rather
than small and medium sized players.
The theme has played out well. For example, only
50% of ARIL’s Manesar IT park has been leased
out since construction was completed, and the
company has also had to reduce the size of phase I
of its Rai IT park by more than 50% and the
project is still only c50% pre-leased. We expect
our investment thesis to persist over the next 18-
24 months, which suggests ARIL will continue to
face delays in leasing out its commercial and
retail projects.
Comfortable leverage: ARIL should be able to
hold on to its investments. ARIL’s current net
debt-equity (0.25x) is the lowest within our
coverage universe (0.6x-0.7x). This, in our view,
should help it hold on to its investments in
commercial assets until demand revives.
Additionally, ARIL has increased its focus on
mid-income housing projects where land cost is
very low (INR100-200psf), and hence demand for
capital is unlikely to increase leverage. This
should allow ARIL’s balance sheet to remain
healthy even in a downcycle.
Key earnings forecast changes
We have revised our estimates for ARIL to factor
in the current market dynamics. We have lowered
our revenue estimates for FY11 and FY12 by 49%
and 40%, respectively, on the back of delays in
launching its high-end Delhi projects in Hauz Jhas
and Bhagwandas Road.
EBITDA margin estimates have been lowered by
520bps for FY11 and 710bps for FY12, as both
projects had a high EBITDA margin. In line with
this, we cut our earnings estimates by c46% for
FY11 and 53% for FY12. We are 6% lower than
consensus for FY11 and 40% lower for FY12.
Valuation
We value Anant Raj using a NAV approach,
discounting its cash flows from real estate projects
(Cost of Equity 15.8%, risk free rate 7.5%, market
risk premium 5.5% and WACC 15.8%). Our
target price of INR95 (INR113 earlier) is a 35%
discount to NAV, a bigger discount than for large
players like DLF (30%) and Unitech (40%) but
lower than HDIL (55%) and IBREL (50% NAV
discount). This is primarily due to the company’s
strong balance sheet (0.25x) and low holding cost
of high quality land bank (INR200psf).
Under our research model, the Neutral rating band
is 10ppt above and below the hurdle rate of 10.5%
for volatile India equities, or 0.5-20.5% above the
current share price. Our target price implies a
potential loss of -1.6% (including prospective
dividend yield), which is below the Neutral band.
Thus, we remain Underweight (V) on ARIL.
Risks
Earlier than anticipated launch of its high end
Delhi residential projects would act as a key
upside to our estimates.
Faster-than-expected improvement in ARIL’s
commercial projects’ occupancy rates.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Anant Raj Ind (ARCP IN)
Change in revenue mix in favour of residential segment will hurt
margins and Q3 FY11 earnings growth (-28% y-o-y)
Delay in launch of key residential projects and weak demand for
commercial assets of tier II players will keep valuation low
Retain Underweight (V), reduce TP to INR95 from INR113 to
factor in downcycle valuation
3Q FY11 outlook
We expect Anant Raj Industries Limited (ARIL)
to report c28% y-o-y growth in revenues, led by a
marginal increase in the lease rental income,
along with revenue booking on its Manesar
residential project. Channel checks suggest the
company has sold all 670 flats, of which c350
were sold during 3Q FY11.
We expect ARIL to report an EBITDA margin of
c60% (c92% during 3Q FY10) as a large portion
of its revenues during 3Q FY11 is likely to come
from residential projects, compared to rental
income and land sales during 3Q FY10.
ARIL’s stable debt-equity ratio of 0.25x should
not put pressure on profitability, unlike its major
peers. However, despite the healthy top line
growth, a lower EBITDA margin is likely to pull
down 3Q earnings by c28%.
We expect the company to announce an update on
the leasing of its Hotel Tricolour (in negotiations
since 2Q FY11) and an update on land acquisitions
in the National Capital Region (NCR) with a focus
on Gurgaon city. We believe investors will also look
at management guidance on the launch of its new
projects in Gurgaon (Sector 91) and Neemrana,
which are likely to provide revenue visibility over
the next 24 months
Investment summary
Delay in launch of key large projects is hurting
earnings growth. Despite having one of the best
land banks in our coverage universe, ARIL’s
stock price has sharply underperformed the
market. This, in our view, is primarily due to the
continued delay in launching some of its high
value residential projects in Hauz Khas and
Bhagwandas Road, both of which are in upmarket
Delhi locations.
While the company has successfully tried to
replace the launch of these projects with other
suburban launches (Kapashera and Manesar),
these projects are relatively small. We anticipate
the delay to continue for another 8-12 months as
both projects are yet to receive all the necessary
approvals. We have reduced our earnings growth
during FY11 and FY12 by 45-53%, primarily to
factor in these project delays.
Weak brand and small size will hurt
commercial lease volumes. Our central
investment thesis on the sector’s commercial
segment and ARIL has been that while demand
will come back strongly, the majority of the
demand will be captured by large players rather
than small and medium sized players.
The theme has played out well. For example, only
50% of ARIL’s Manesar IT park has been leased
out since construction was completed, and the
company has also had to reduce the size of phase I
of its Rai IT park by more than 50% and the
project is still only c50% pre-leased. We expect
our investment thesis to persist over the next 18-
24 months, which suggests ARIL will continue to
face delays in leasing out its commercial and
retail projects.
Comfortable leverage: ARIL should be able to
hold on to its investments. ARIL’s current net
debt-equity (0.25x) is the lowest within our
coverage universe (0.6x-0.7x). This, in our view,
should help it hold on to its investments in
commercial assets until demand revives.
Additionally, ARIL has increased its focus on
mid-income housing projects where land cost is
very low (INR100-200psf), and hence demand for
capital is unlikely to increase leverage. This
should allow ARIL’s balance sheet to remain
healthy even in a downcycle.
Key earnings forecast changes
We have revised our estimates for ARIL to factor
in the current market dynamics. We have lowered
our revenue estimates for FY11 and FY12 by 49%
and 40%, respectively, on the back of delays in
launching its high-end Delhi projects in Hauz Jhas
and Bhagwandas Road.
EBITDA margin estimates have been lowered by
520bps for FY11 and 710bps for FY12, as both
projects had a high EBITDA margin. In line with
this, we cut our earnings estimates by c46% for
FY11 and 53% for FY12. We are 6% lower than
consensus for FY11 and 40% lower for FY12.
Valuation
We value Anant Raj using a NAV approach,
discounting its cash flows from real estate projects
(Cost of Equity 15.8%, risk free rate 7.5%, market
risk premium 5.5% and WACC 15.8%). Our
target price of INR95 (INR113 earlier) is a 35%
discount to NAV, a bigger discount than for large
players like DLF (30%) and Unitech (40%) but
lower than HDIL (55%) and IBREL (50% NAV
discount). This is primarily due to the company’s
strong balance sheet (0.25x) and low holding cost
of high quality land bank (INR200psf).
Under our research model, the Neutral rating band
is 10ppt above and below the hurdle rate of 10.5%
for volatile India equities, or 0.5-20.5% above the
current share price. Our target price implies a
potential loss of -1.6% (including prospective
dividend yield), which is below the Neutral band.
Thus, we remain Underweight (V) on ARIL.
Risks
Earlier than anticipated launch of its high end
Delhi residential projects would act as a key
upside to our estimates.
Faster-than-expected improvement in ARIL’s
commercial projects’ occupancy rates.
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