Puravankara Projects Ltd High debt with falling volumes; downgrade to Underperform 􀂄 BofA Merrill Lynch,

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P uravankara Projects Ltd
High debt with falling volumes;
downgrade to Underperform
􀂄 Increasing debt worrisome; PO lowered to Rs60
We downgrade Puravankara’s rating to Underperform with a reduced PO of Rs60
(cut from Rs125) – implying 10% downside from the current levels. Our PO is
based on a 30% discount to NAV due to rising debt and poor earnings
momentum. We have lowered our NAV estimate as we have valued the land
bank, unlikely to be launched over the next five years, at cost price, while we have
reduced our volume and pricing assumptions based on our Bangalore residential
market view. We expect Puravankara to disappoint on sales volume in FY12 as
competition intensifies in Bangalore while high mortgage rates reduce demand.
Debt level to increase further on poor cash flows
Puravankara has seen negative operational cash flows consistently in the past
two years though it has not invested aggressively in land additions. We believe the
rising debt and flattening sales will continue to pressure cash flow, leaving debt level
elevated over the next 12 months. The high debt will also impact its earnings.
New launches likely to be delayed
Puravankara has aggressive launch plans of over 20mn sq ft over the next 18
months even though the average annual sales run rate is around 3mn sq ft. We
believe management will disappoint on its launch guidance.
Expect consensus earnings to be cut sharply
We have lowered our earnings estimate sharply by 21% for FY12 led by 10%
reduction in sales revenue and compression in EBIDTA margin as prices correct
in Bangalore. Also our earnings estimate for Puravankara are now 27% and 36%
lower than the consensus for FY12/13. We expect market to cut estimate sharply
as new project launches get delayed with a poor off take in Bangalore.

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