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Puravankara Projects Ltd -Margin disappoint but healthy volume; Maintain Buy
„Margin disappoint in 3Q, Maintain Buy
Puravankara reported net profit of Rs287mn, down 19% QoQ and 30% lower than
our estimate. The disappointment was primarily due to a drop in EBIDTA margin
from 25% to 21% against our expectation of improvement in margin and higher
taxes. The higher costs recognized in the Venezia project primarily led to the
margin contraction. We have lowered our earnings estimate for FY11-13 by 10-
15% to factor in lower margin and sales recognition (delay in new launches). We
maintain our Buy rating and reduce our PO to Rs135 from Rs156 as we expect
volume growth to be sustained while upcoming launches help improve cash flows
in FY12.
Healthy sales volumes
The sales volume at 0.77mn sq ft was in line with our estimate, and appears on
target to meet the FY11 guidance of 3mn sq ft. PVKP is behind on its launch
target, though management is confident of two new launches in 4Q – Chennai
and Coimbatore, which should help sustain volume growth of over 25% in FY12.
The sales volume is primarily been contributed by affordable housing projects and
the Purva Skywood project (launched in Bangalore in FY11)
Cash flows remain elusive
The debt increased by Rs758mn in 3Q to Rs10.5bn and is now up 19% in FY11E
even though PVKP has invested only Rs736mn in land payments. The negative
cash flows primarily reflect continued investment in construction of projects like
Venezia and Highland, where sales have remained sluggish. PVKP is comfortable
on the liquidity front as it has Rs4bn of credit line, while the debt and interest
obligation is only Rs5bn over the next 12 months. We are now estimating only
10% reduction in debt in FY12E.
Maintain Buy; PO cut our PO by 13% to Rs135
We have reduced our PO by 13% to Rs135 to factor in higher debt and lower
margin. The debt has increased in FY11 from Rs8.8bn to Rs10.5bn against our
expectation of flat debt levels. In addtion we now expect overall margin to be
lower at around 29% in FY11E-FY13E against our earlier expectation of 32%.
The lower margin reflects higher contribution from the affordable segment and
non Bangalore projects over the next 2 years. However we maintain our Buy
rating as we expect the volume to show good growth as demand remains strong
across South India due to steady prices and high affordability.
Bangalore and IT sector on sound ground
The IT industry is expected to add a record 0.4mn employees in 2011 against just
0.1mn added in 2010. The continued strength in the IT industry is expected to
keep demand for residential high in Bangalore while property prices in most micro
markets are still below the 2007 peak. We expect Puravankara to be a key
beneficiary of these trends as it derives 70% of its NAV from Bangalore.
Volumes holding up
The sales volume continues to remain solid even though Puravankara has fallen
behind its target of launching 12mn sq ft of new projects in FY11. The volume
remained healthy particularly in its affordable housing projects and its new project
Purva Skywood launched in Sarjapur Road in Bangalore earlier in FY11. The
YTD volume at 2.3mn sq ft is on target to meet our estimate of 3mn sq ft in
FY11E. We have built in 3.8mn sq ft of sales in FY12E and would largely be
dependent on new launches in upcoming months. We are though worried about
the large inventory in the nearing completion projects like Venezia and Highlands
though management has stated that it has held back sales and plans to push
aggressively once the projects are completed over the next 2 qtrs to achieve
better realization
Cash flows estimate reduced for FY12
The cash flow continues to disappoint as the sales have been sluggish in older
projects like Venezia and Highlands while the delay in new launches have not
helped the matter. This has led to increases in debt consistently to fund the new
launches as well as land payments for affordable housing projects. The net debt
is now at Rs9.8bn and we expect the debt to see contraction only from FY12
when a larger number of projects go live and its nearing completion projects pick
up sales traction. We now estimate free cash of Rs1bn only in FY12 against our
earlier estimate of Rs2bn. (mostly due to slightly lower margin, higher interest
cost and investment in land)
But the company well placed to meet its debt repayment obligations over the next
12 months. It has an overall obligation of Rs5bn of debt and interest payments
while it already has a line of credit for Rs4bn from banks. The launch of new
projects should create more room for borrowing for construction funding.
Earnings lowered by 12-15%
We have cut our earnings estimate for FY11-13 to factor in lower margin at 29%
against our earlier expectation of 32%. This primarily reflects higher cost related
to construction and interest costs for under construction projects. We have
lowered our margin estimate also to factor in higher sales from non Bangalore
(Chennai/Coimbatore) and Provident projects. The revenue will also be affected
by delays in launches.
Price objective basis & risk
Puravankara Projects Ltd (XPJVF)
Our preferred valuation methodology is NAV, calculated by discounting the cash
flows from each of the real estate projects. Our price objective of Rs135 is
therefore based on our NAV of Rs159. We expect Puravankara to trade at a
discount of 15% to large developers like DLF on discount to NAV basis, because
of its smaller size and concentration of land bank primarily in one location -
Bangalore. Key assumptions underlying our NAV are WACC of 15.1%,
capitalization rate of 11% and inflation of 5% from FY13 on both selling price and
construction costs. On a P/E basis, at our PO of Rs135, the stock would trade at
16x FY12E earnings. Downside risks are lower than expected volume and delay
in new launches.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Puravankara Projects Ltd -Margin disappoint but healthy volume; Maintain Buy
„Margin disappoint in 3Q, Maintain Buy
Puravankara reported net profit of Rs287mn, down 19% QoQ and 30% lower than
our estimate. The disappointment was primarily due to a drop in EBIDTA margin
from 25% to 21% against our expectation of improvement in margin and higher
taxes. The higher costs recognized in the Venezia project primarily led to the
margin contraction. We have lowered our earnings estimate for FY11-13 by 10-
15% to factor in lower margin and sales recognition (delay in new launches). We
maintain our Buy rating and reduce our PO to Rs135 from Rs156 as we expect
volume growth to be sustained while upcoming launches help improve cash flows
in FY12.
Healthy sales volumes
The sales volume at 0.77mn sq ft was in line with our estimate, and appears on
target to meet the FY11 guidance of 3mn sq ft. PVKP is behind on its launch
target, though management is confident of two new launches in 4Q – Chennai
and Coimbatore, which should help sustain volume growth of over 25% in FY12.
The sales volume is primarily been contributed by affordable housing projects and
the Purva Skywood project (launched in Bangalore in FY11)
Cash flows remain elusive
The debt increased by Rs758mn in 3Q to Rs10.5bn and is now up 19% in FY11E
even though PVKP has invested only Rs736mn in land payments. The negative
cash flows primarily reflect continued investment in construction of projects like
Venezia and Highland, where sales have remained sluggish. PVKP is comfortable
on the liquidity front as it has Rs4bn of credit line, while the debt and interest
obligation is only Rs5bn over the next 12 months. We are now estimating only
10% reduction in debt in FY12E.
Maintain Buy; PO cut our PO by 13% to Rs135
We have reduced our PO by 13% to Rs135 to factor in higher debt and lower
margin. The debt has increased in FY11 from Rs8.8bn to Rs10.5bn against our
expectation of flat debt levels. In addtion we now expect overall margin to be
lower at around 29% in FY11E-FY13E against our earlier expectation of 32%.
The lower margin reflects higher contribution from the affordable segment and
non Bangalore projects over the next 2 years. However we maintain our Buy
rating as we expect the volume to show good growth as demand remains strong
across South India due to steady prices and high affordability.
Bangalore and IT sector on sound ground
The IT industry is expected to add a record 0.4mn employees in 2011 against just
0.1mn added in 2010. The continued strength in the IT industry is expected to
keep demand for residential high in Bangalore while property prices in most micro
markets are still below the 2007 peak. We expect Puravankara to be a key
beneficiary of these trends as it derives 70% of its NAV from Bangalore.
Volumes holding up
The sales volume continues to remain solid even though Puravankara has fallen
behind its target of launching 12mn sq ft of new projects in FY11. The volume
remained healthy particularly in its affordable housing projects and its new project
Purva Skywood launched in Sarjapur Road in Bangalore earlier in FY11. The
YTD volume at 2.3mn sq ft is on target to meet our estimate of 3mn sq ft in
FY11E. We have built in 3.8mn sq ft of sales in FY12E and would largely be
dependent on new launches in upcoming months. We are though worried about
the large inventory in the nearing completion projects like Venezia and Highlands
though management has stated that it has held back sales and plans to push
aggressively once the projects are completed over the next 2 qtrs to achieve
better realization
Cash flows estimate reduced for FY12
The cash flow continues to disappoint as the sales have been sluggish in older
projects like Venezia and Highlands while the delay in new launches have not
helped the matter. This has led to increases in debt consistently to fund the new
launches as well as land payments for affordable housing projects. The net debt
is now at Rs9.8bn and we expect the debt to see contraction only from FY12
when a larger number of projects go live and its nearing completion projects pick
up sales traction. We now estimate free cash of Rs1bn only in FY12 against our
earlier estimate of Rs2bn. (mostly due to slightly lower margin, higher interest
cost and investment in land)
But the company well placed to meet its debt repayment obligations over the next
12 months. It has an overall obligation of Rs5bn of debt and interest payments
while it already has a line of credit for Rs4bn from banks. The launch of new
projects should create more room for borrowing for construction funding.
Earnings lowered by 12-15%
We have cut our earnings estimate for FY11-13 to factor in lower margin at 29%
against our earlier expectation of 32%. This primarily reflects higher cost related
to construction and interest costs for under construction projects. We have
lowered our margin estimate also to factor in higher sales from non Bangalore
(Chennai/Coimbatore) and Provident projects. The revenue will also be affected
by delays in launches.
Price objective basis & risk
Puravankara Projects Ltd (XPJVF)
Our preferred valuation methodology is NAV, calculated by discounting the cash
flows from each of the real estate projects. Our price objective of Rs135 is
therefore based on our NAV of Rs159. We expect Puravankara to trade at a
discount of 15% to large developers like DLF on discount to NAV basis, because
of its smaller size and concentration of land bank primarily in one location -
Bangalore. Key assumptions underlying our NAV are WACC of 15.1%,
capitalization rate of 11% and inflation of 5% from FY13 on both selling price and
construction costs. On a P/E basis, at our PO of Rs135, the stock would trade at
16x FY12E earnings. Downside risks are lower than expected volume and delay
in new launches.
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