Buy Anant Raj Industries – 3QFY2011 Update; Targe Rs. 145 : Angel Broking

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Anant Raj Industries – 3QFY2011 Result Update

           Angel Broking maintains a Buy on Anant Raj Industries with a Target Price of Rs. 145.

Anant Raj’s (ARIL) 3QFY2011 results were broadly in line with our expectations.

The top line was driven by mid-income residential projects. PAT stood at `50cr

(up 4.6% qoq). ARIL continues to focus on mid-income residential projects and

intends to launch another 3mn sq. ft. in 4QFY2011. However, we have lowered

our FY2012 estimates by 37% to factor in the delay in the launch of its super

premium residential Hauz Khas project. The promoters have not converted

warrants (20mn) citing that it would have led to dilution of >5%, thereby

triggering an open offer. ARIL’s net debt-equity stands at 0.2x, which is the lowest

amongst peers. We maintain Buy on the stock.

Revenue driven by new residential launches: ARIL had launched two residential

projects in the NCR in 1HFY2011–Kapashera (0.28mn sq. ft.) and Manesar (1mn

sq. ft.) at `5,000/sq. ft. and `3,300/sq. ft., respectively. During the quarter, ARIL

booked combined revenue of `102cr from Kapashera (`6.4cr) and Manesar

(`94.5cr). Historically, ARIL’s revenue has been driven by land/FSI sale and rental

income, where it booked revenue on net sales basis (which excludes land cost).

Consequently, OPM has been at 85–95%, as it includes only employee and

administrative expenses. In 1QFY2011, ARIL had changed its accounting method

from net sales to gross sales, where expenses include land and construction cost.

Thus, OPM came in at 62.1% (down 3,037bp yoy and up 1,485bp qoq). We

expect OPM to remain at these levels with increasing share of residential projects.

Outlook and valuation: ARIL’s near-term revenue visibility is set to be driven by

mid-income residential projects; and with the commercial segment gaining

traction, rental income is set to improve. The launch of the Hauz Khas project will

be a key catalyst for the stock’s performance, which has got delayed by over a

year. We maintain our Buy rating on the stock with a revised Target Price of `145

(`178), which is at 25% discount to our one-year forward NAV.

Steady rental income

ARIL’s rental revenue grew by 6% qoq to `19.8cr in 3QFY2011. The company

earned `6.9cr from Manesar IT Park, `8.1cr from three hotels, `1.2cr from Karol

Bagh Mall and `3.6cr from Jhandewalan and Faiz Road. Further, we expect ARIL’s

Manesar and Kirti Nagar properties to reach their peak occupancy levels in 6–9

months, as leasing activity improves. Management has indicated that the

company’s Kirti Nagar property (0.75mn sq. ft.) has been pre-leased to the extent

of 0.3mn sq. ft. at `100/sq. ft. and expects tenants to move in by 1QFY2012.

Rentals at the Kirti Nagar Mall have been renegotiated from `150/sq. ft., as

indicated earlier by the management.

Increasing land acquisition

During 1HFY2011, ARIL acquired 153 acres of land for `564cr. These land

parcels were primarily bought in Gurgaon (125 acres), Sonepat (10 acres) and

Neemrana, Rajasthan (18 acres). Out of the 125 acres in Gurgaon, 110 acres of

land is agricultural land where it intends to develop group housing and township.

On the remaining 43 acres, the company intends to launch a mid-income

residential project over the next six months. This is in line with ARIL’s strategy to

acquire land at a cheaper cost. Consequently, the company has turned net cash to

net debt of ~`700cr as of 3QFY2011 to fund land acquisition. Initially, the

company had planned to raise equity to fund its new land acquisition. As market

conditions were not conducive, management was reluctant to dilute at current

levels. Consequently, the promoters have not converted warrants (20mn) citing that

it would have led to dilution of >5%, thereby triggering an open offer. Thus, the

sum of `44cr paid by the promoters stands forfeited by the company.

Delay in the launch of super premium residential projects

ARIL’s stock price has sharply underperformed the market on account of the delay

in launching some of its high premium residential projects in Hauz Khas and

Bhagwandas Road, both of which are in up-market Delhi locations. The company

has successfully tried to replace the launch of these projects with other suburban

launches (Kapashera and Manesar), but 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. Consequently, we have downgraded our

FY2012 estimates by 37%.

Investment arguments

Land acquisition at discounted price

Almost all of ARIL's land bank (1,000 acres) is exclusively located in the NCR,

within 50km of Delhi, with approximately 525 acres in Delhi. This land bank has

been acquired at an historical average cost of `300/sq. ft., with recent transactions

by ARIL executed at `370/sq. ft., `450/sq. ft. and `130/sq. ft. in high-growth

areas such as Gurgaon, Manesar and Sonepat, respectively. ARIL's successful land

acquisition strategy is attributed to its acquisition through the allocation route from

DDA at significantly low prices compared to the prevailing rates and its focus on

being an NCR player, which helps in identifying areas with high economic

potential in Delhi.

Residential projects to drive near-term visibility

ARIL recently launched two residential projects in NCR–Kapashera (0.28mn sq. ft.)

and Manesar (1mn sq. ft.) for `5,000/sq. ft. and `3,300/sq. ft., respectively.

Management has indicated that the entire property of Kapashera and ~50% of

Manesar property have been sold out so far. The Manesar property was acquired

at `450/sq. ft. in 2009. Management has guided for `500cr of revenue in FY2011

from the residential segment. Further, we expect ARIL’s Manesar and Kirti Nagar

properties to reach peak occupancy levels in 6–9 months as leasing activity

improves. The company will also have five hotels operational by the end of

FY2011, with transfer of occupancy risk to third party in return of fixed rentals.

Consequently, we expect ARIL to report rental income of `184cr in FY2012 as

compared to `49cr reported in FY2010.

Well-capitalised balance sheet

Post the recent land acquisitions (`1,000cr), ARIL has a net debt balance of `700cr

(0.2x) from having net cash balance of `190cr in 1QFY2011, which is the lowest

amongst peers. This augurs well for the company even in a downturn and gives

headroom to leverage at reasonable costs for the timely execution of projects.

Outlook and valuation

ARIL’s near-term revenue visibility is set to be driven by mid-income residential

projects; and with the commercial segment gaining traction, rental income is set to

improve. The launch of the Hauz Khas project will be a key catalyst for the stock’s

performance, which has got delayed by over a year. We maintain our Buy rating

on the stock with a revised Target Price of `145 (`178), which is at 25% discount to

our one-year forward NAV.