Anant Raj Industries- The return of the specialist :: Macquarie Research

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Anant Raj Industries
The return of the specialist
Event
 Anant Raj (ARCP) is a construction/infrastructure company in northern India
that began operations in 1969. It is focused on a build-and-rent/lease
business model for commercial developments, and its projects are
concentrated in the National Capital Region (NCR). To date, ARIL has
delivered more than 11.5m sqf of developments and currently possesses land
reserves totalling 982 acres (or GFA of 75m sqf).

Impact
 Focussed on strong core markets. Markets such as Delhi in the NCR have
witnessed a strong recovery in high-end residential sales since March 2009.
The edge in this submarket is held by companies with a location advantage.
Anant Raj’s high-end residential projects score well in this regard.
 Recovery in leasing in the IT/ITES office space. We believe that ARCP is
well placed to benefit from this trend. Commercial projects contribute 33% to
its NAV. In the near term, we anticipate that a pickup in leasing will help the
company’s cashflow, as its 1m sqf IT park in Manesar is ready for occupancy.
Meanwhile, the street remains negative on the commercial market. As a
result, the stock is pricing in cap-rate and rent assumptions that reflect market
conditions from the 2008 crisis. This is overly pessimistic, in our view.
 Solid balance sheet; conservative style. We believe that ARCP’s near
zero-debt balance sheet stands out amongst peers. Notably, this is likely to
strengthen as higher-yielding assets come on stream in the next 12–18
months. Rent inflow is likely to exceed Rs1bn in FY12, by our estimate. This
strength emanates from ARCP’s conservative management style. The
company focuses on markets it understands. As a result, approximately 90%
of its land bank is located in NCR. Unlike its other local market peers, the
company was not tempted to buy land in remote locations at unjustifiable
valuations in 2006– 08. Contrary to what was then popular wisdom, ARCP
raised funds and sold assets. This resulted in ARCP entering and then
emerging from the 2008 crisis with a net-cash balance sheet – a unique
characteristic.
Action and recommendation
 We maintain our Outperform rating with a target price of Rs157. We believe
that its strong balance sheet and market exposure could cause ARCP to trade
closer to an 20% NAV discount.


Anant Raj Industries Aide Memoire
Operational issues
1. What is your outlook on residential prices and volumes in the NCR market?
2. Which product types (residential-mass/luxury, commercial and retail) are likely to see the most action in the next 12 months
and the next three to five years?
3. Please throw some light on your upcoming projects over the next two to three years.
4. What has been the response in the projects launched already?
5. What do you think could be bottlenecks in achieving planned expansion in terms of material supply, capacity and capital?
Financial issues
1. Please share some thoughts on the capital requirement for your planned expansion. Do you have any fundraising plans?
2. Please throw some light on your targeted cash flow from operations in the next 12 months.
Regulatory issues
1. What would you think are the biggest risks facing the company? Do you think there are any regulatory/policy risks?
2. What are the regulatory and policy risks the sector and company are facing?