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Puravankara Projects
Reuters: PPRO.BO Bloomberg: PVKP IN
Significant strengths but offset
by concerns
Considerable strengths but neutralised by liquidity and execution concerns
Puravankara Projects’ (PVKP) strengths (brand equity, strong B/S and disclosures
and a largely paid, low-cost land bank), coupled with a robust IT sector and
Bengaluru outlook, should drive its real estate demand. However, we are
concerned about the near-term, INR3.8bn debt repayment in 12 months and a
spike in projects under construction (>22msf in FY11 vs. <11msf in FY10) despite
a cumulative execution of only c.7msf. With macro headwinds, we cut FY12-13
estimates by up to 42% and reduce our target price to INR90; maintaining Hold.
While strengths and robust IT and Bengaluru outlook should drive
demand…
Puravankara’s strong franchise, asset-light model, strong balance sheet and
quarterly disclosures and largely paid low-cost land bank are some of its key
strengths. Furthermore, a robust outlook for the IT sector, with (a) c.22% revenue
CAGR likely in FY11-13E, (b) wage hikes of c.15% likely in FY11 and (c) increased
hiring targets for FY12E by major IT companies, will likely continue to drive real
estate demand in Bengaluru, accounting for c.67% of Puravankara’s land bank.
…near-term liquidity and execution concerns limit growth/upside potential
However, INR3.8bn in debt repayment over the next 12 months in an era of
tightening liquidity and rising interest rates is a key concern. Furthermore,
Puravankara has executed only c.7msf to date, while its nearest peer, Sobha, has
executed c.43msf. Despite this, PVKP’s projects under execution spiked from
<11msf in FY10 to >22msf in FY11, raising execution concerns.
Estimates cut up to 42%; target price lowered to INR90; maintain Hold; risks
With significant macro headwinds (tightening liquidity, high inflation, etc.), we cut
our estimates for FY12-13 by up to 42% and our DCF-based target price to
INR90/share (previously INR108/share). We maintain Hold. Upside risks include:
(a) improvement in the macro environment, (b) ability to raise funds/sell the land
bank and (c) ramp-up in pre-sales. Downside risks include: (a) debt repayment of
INR3.8bn in 12 months and (b) execution, given its ramp-up in launches.
Investment thesis
Outlook
Puravankara Projects has built a strong franchise in Bengaluru over the past two decades.
With its asset-light model, strong balance sheet, largely paid land bank of which c.67% is in
Bengaluru (an IT-driven city), Puravankara seems ready to benefit from the improving outlook
in the IT sector. The company’s focus on affordable housing through the launch of Provident
(100% subsidiary), focusing on affordable housing, and JV with Mexico-based Homex to
target even lower entry-level housing is likely to drive financials over the next three years. We
expect a CAGR in revenues, EBITDA and PAT of 35%, 41% and 37%, respectively, for FY11-
14. The repayment of INR3.8bn in debt over the next 12 months in an era of tightening
liquidity for the sector and high inflation remains a key concern. While the outlook for
Bengaluru is robust and the company maintains superior disclosures as compared with
industry standards, execution risks cause us to rate the stock a Hold.
Valuation
We prefer a DCF-based valuation for property assets as it captures the value of the land bank
(the main driver for the sector) and is not significantly influenced by the lumpy nature of
earnings. Our major assumptions are: (a) constant prices and costs (following a c.3%
increase in base prices and a c.10% increase in construction costs); (b) the entire land bank is
likely to be developed in c.13 years; (c) cap rate of 12% and WACC of 17.5% (16.5% earlier)
and (d) effective tax rate of 27.5%, from which we arrive at a GAV of INR185/share.
However, considering the deteriorating macro-economic factors (tightening liquidity, high
inflation, etc.), we increase our discount to DCF-based GAV to 25% (earlier 10%) to arrive at
an adjusted GAV of INR139/share. We then exclude the liabilities of INR49/share
(INR46/share for net debt and INR3/share for payables for the land bank) to arrive at a DCFbased
NAV of INR136 and target price of INR90/share.
Risks
Upside risks: 1) improvement in the macro environment (GDP growth, interest rates and
property prices and liquidity in financial markets); 2) ability to raise long-term funds
(debt/equity) or sell more of the land bank; and 3) significant pre-sales in its low-margin,
affordable housing project (Provident) and entry-level housing (Homex-JV).
Downside risks: 1) debt repayment of INR3.8bn over next 12 months and 2) ability to execute
given the significant ramp-up in launches.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Puravankara Projects
Reuters: PPRO.BO Bloomberg: PVKP IN
Significant strengths but offset
by concerns
Considerable strengths but neutralised by liquidity and execution concerns
Puravankara Projects’ (PVKP) strengths (brand equity, strong B/S and disclosures
and a largely paid, low-cost land bank), coupled with a robust IT sector and
Bengaluru outlook, should drive its real estate demand. However, we are
concerned about the near-term, INR3.8bn debt repayment in 12 months and a
spike in projects under construction (>22msf in FY11 vs. <11msf in FY10) despite
a cumulative execution of only c.7msf. With macro headwinds, we cut FY12-13
estimates by up to 42% and reduce our target price to INR90; maintaining Hold.
While strengths and robust IT and Bengaluru outlook should drive
demand…
Puravankara’s strong franchise, asset-light model, strong balance sheet and
quarterly disclosures and largely paid low-cost land bank are some of its key
strengths. Furthermore, a robust outlook for the IT sector, with (a) c.22% revenue
CAGR likely in FY11-13E, (b) wage hikes of c.15% likely in FY11 and (c) increased
hiring targets for FY12E by major IT companies, will likely continue to drive real
estate demand in Bengaluru, accounting for c.67% of Puravankara’s land bank.
…near-term liquidity and execution concerns limit growth/upside potential
However, INR3.8bn in debt repayment over the next 12 months in an era of
tightening liquidity and rising interest rates is a key concern. Furthermore,
Puravankara has executed only c.7msf to date, while its nearest peer, Sobha, has
executed c.43msf. Despite this, PVKP’s projects under execution spiked from
<11msf in FY10 to >22msf in FY11, raising execution concerns.
Estimates cut up to 42%; target price lowered to INR90; maintain Hold; risks
With significant macro headwinds (tightening liquidity, high inflation, etc.), we cut
our estimates for FY12-13 by up to 42% and our DCF-based target price to
INR90/share (previously INR108/share). We maintain Hold. Upside risks include:
(a) improvement in the macro environment, (b) ability to raise funds/sell the land
bank and (c) ramp-up in pre-sales. Downside risks include: (a) debt repayment of
INR3.8bn in 12 months and (b) execution, given its ramp-up in launches.
Investment thesis
Outlook
Puravankara Projects has built a strong franchise in Bengaluru over the past two decades.
With its asset-light model, strong balance sheet, largely paid land bank of which c.67% is in
Bengaluru (an IT-driven city), Puravankara seems ready to benefit from the improving outlook
in the IT sector. The company’s focus on affordable housing through the launch of Provident
(100% subsidiary), focusing on affordable housing, and JV with Mexico-based Homex to
target even lower entry-level housing is likely to drive financials over the next three years. We
expect a CAGR in revenues, EBITDA and PAT of 35%, 41% and 37%, respectively, for FY11-
14. The repayment of INR3.8bn in debt over the next 12 months in an era of tightening
liquidity for the sector and high inflation remains a key concern. While the outlook for
Bengaluru is robust and the company maintains superior disclosures as compared with
industry standards, execution risks cause us to rate the stock a Hold.
Valuation
We prefer a DCF-based valuation for property assets as it captures the value of the land bank
(the main driver for the sector) and is not significantly influenced by the lumpy nature of
earnings. Our major assumptions are: (a) constant prices and costs (following a c.3%
increase in base prices and a c.10% increase in construction costs); (b) the entire land bank is
likely to be developed in c.13 years; (c) cap rate of 12% and WACC of 17.5% (16.5% earlier)
and (d) effective tax rate of 27.5%, from which we arrive at a GAV of INR185/share.
However, considering the deteriorating macro-economic factors (tightening liquidity, high
inflation, etc.), we increase our discount to DCF-based GAV to 25% (earlier 10%) to arrive at
an adjusted GAV of INR139/share. We then exclude the liabilities of INR49/share
(INR46/share for net debt and INR3/share for payables for the land bank) to arrive at a DCFbased
NAV of INR136 and target price of INR90/share.
Risks
Upside risks: 1) improvement in the macro environment (GDP growth, interest rates and
property prices and liquidity in financial markets); 2) ability to raise long-term funds
(debt/equity) or sell more of the land bank; and 3) significant pre-sales in its low-margin,
affordable housing project (Provident) and entry-level housing (Homex-JV).
Downside risks: 1) debt repayment of INR3.8bn over next 12 months and 2) ability to execute
given the significant ramp-up in launches.
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