Puravankara Projects PVKP IN -- BUY : Nomura Research

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Puravankara’s 2QFY12 PAT at INR265mn (-26%y-y & -15%q-q) missed both our own as well as consensus estimates by 28% and 13% respectively, on account of lower-than-expected revenue, higher interest /tax expense & loss from associates. We expect a negative reaction to this set of headline numbers on the back of an operationally weak quarter, lower-than-expected profits and rise in gearing. However, we expect cash flow visibility to improve in FY12/13F as the company will be launching ~4.6mn sq ft in Bangalore, where absorption has remained stable in the current macro environment. Maintain BUY.

1. Puravankara’s 2QFY12 headline revenue of INR 1.98bn (+28%y-y & 4%q-q) came largely in line with both our own as well as consensus expectation of INR 2.08bn and INR 1.89bn respectively. After change in accounting policy starting April 11, the company booked INR 0.66bn of revenue against land in 2QFY12, which was higher than our expectation of INR 0.25bn. If we strip out this, adjusted revenue of INR 1.32bn (-14%y-y & -20%q-q) was significantly below our expectation and missed our estimates by around 28%.

2. The gross margin at 34.1% remained largely stable q-q; however, given contribution from revenue booked against land rose (we expect higher margin on land component), we believe margin on projects slipped q-q. Management has guided an average margin of around 35% on Puravankara (mid-income & luxury) & Provident (affordable) housing projects.

3. Tax expense was higher, as tax rate rose q-q from 29.5% in 1QFY12 to c.38% (2QFY12).

4. PAT at INR 265mn (-26%y-y & -15%q-q) missed both our own and consensus estimates by 28% and 13% respectively. This miss was on account of lower-than-expected revenue, higher interest / tax expense along with loss of INR 20mn booked from associates.

5. Operationally, area sold during the quarter dipped to 0.57mn sq ft (~totaling INR 2.0bn) after maintaining an average sales run rate of around 0.82mn sq ft over the past four quarters. The lack of no new launches in the quarter resulted in lower sales volume. However, the company noted that it will be launching cumulative 1.73mn sq ft (luxury residential 1.07mn sq ft, affordable residential 0.65mn sq ft) by end-November 2011.

6. On the balance sheet side, net debt rose marginally by INR 334mn over the past quarter to 11.4bn. Notably, net debt/equity has risen from steadily from 60% to 70% over the past year.

7. The company is planning to launch 6 new projects (total saleable area of 4.6mn sf) in FY12 in Bangalore. As evident from the recent strong performance of new launches by other Bangalore based developers namely Prestige & Shobha, we believe Bangalore appears relatively better placed in terms of residential sales absorption. The new launches in the upcoming quarters should help the company achieve higher sales volume, in our view.

Due to an operationally weak quarter, lower-than-expected bottom-line and rise in gearing, we expect a negative reaction to this set of headline numbers. However, we maintain BUY on the stock on account of better cash flow visibility in FY12/13 from higher sales volume that we believe the company will able to generate.this set of headline numbers. However, we maintain BUY on the stock on account of better cash flow visibility in FY12/13 from higher sales volume that we believe the company will able to generate.