Puravankara Projects: BUY :: Business Line

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The company’s focus on the mid-income segment and strength in its main market of Bangalore are positives.

The continuing doldrums in the residential real estate market has held down Puravankara Projects’ (Puravankara) stock price in the sub-hundred range for close to two years. The stock saw a marginal recovery recently, on news that the company plans to raise Rs 450 crore to Rs 500 crore through Institutional Placement Programme (IPP). But it remains an underperformer to peers Prestige Estates and Sobha Developers over the last year.

At the current market price of Rs 94, the stock discounts its trailing 12-month earnings by around 9.3 times, lower than levels of 12 to 15 times in the past. This along with Puravankara’s active focus on the mid-income (affordable premium) segment, signs of strength in its primary market of Bangalore and project pipeline in multiple geographies make the stock a good buying opportunity.

That said, the company’s high leverage and the risk perception attached to realty sector make this stock a suitable bet only for investors with a high-risk tolerance.

AFFORDABLE SEGMENT GROWING

Puravankara offers premium residential apartments, with an average price of around Rs 4,300 per square foot (Q3 FY13). Provident Housing, its fully owned subsidiary, offers affordable premium apartments with an average price of Rs 2,750 per sq ft.

Provident accounted for 25 per cent of the area sold and 18 per cent of consolidated revenue in the last quarter. Provident accounts for 40 per cent of the sq ft of ongoing projects and 5.2 million sq ft of the 10.7 million sq ft planned launches, indicating a growing share of this segment.

Assuming an average size of 900 to 1,200 sq ft per unit and 30 per cent overhead, an apartment would cost Rs 30 lakh to Rs 40 lakh. This is affordable by the Rs 5 lakh to 10 lakh income earners, assuming an affordability metric of 4 to 5 times annual income. The Budget proposal of Rs 1 lakh additional tax benefit for home loans of up to Rs 25 lakh by first time buyers is likely to help demand in this segment, a positive for Puravankara.

UPTICK IN BANGALORE MARKET

Puravankara operates primarily in the Bangalore residential market. This geography accounts for over 50 per cent of the company’s area under construction. According to ICRA estimates, the Bangalore market is expected to grow at 4 to 6 per cent annually for the next two years, driven by growth in IT and manufacturing sectors. Completion of ongoing infrastructure projects will help enhance connectivity and increase property value.

National Housing Bank’s Residex index for Bangalore indicates an uptick in the city’s property prices. After a prolonged spell of remaining flat or declining, the index inched up to 106 in the October-December 2012 period — crossing the 2007 index base value of 100.

Total inventory has been growing but demand has been growing faster. December 2012 data from Emkay Research show that current inventory in Bangalore can supply 4.8 quarters worth of demand, down from 7.2 quarters in March 2012. Better prices along with improving demand dynamics in its main market should bode well for Puravankara.

Puravankara has expanded beyond Bangalore and has ongoing projects in multiple locations mainly in South India.

STEADY PROJECT PIPELINE

About 27 per cent of its current construction (in terms of area) is in Chennai, Kochi and Coimbatore form 7 per cent each. The company also has projects in Kolkata, Hyderabad (commercial) and Mangalore.

Total saleable area of ongoing projects is 25.16 million sq ft, of which the company has sold 6.81 million sq ft till December 2012. The company estimates that its land bank of 84 million sq ft will support development for five years.

So far, 13.65 million sq ft of the 14.4 million sq ft of saleable area from completed projects has been sold. Sales visibility from ongoing projects and completed flats total 19 million sq ft, equivalent to four-five years of sales.

KEY RISKS

Puravankara’s gross debt was Rs 1,655 crore in December 2012, compared with Rs 1,349 crore in March 2012. Its debt-to-equity ratio of 0.83 times compares unfavourably to peers Prestige and Sobha (0.52 and 0.61 respectively). Interest coverage ratio has been falling and stands at a thin 1.87. This risk is likely to be reduced when debt is reduced using the proceeds from the IPP.

The cost of borrowing is around 15.5 per cent and interest expenses account for over 40 per cent of EBITDA (earnings before interest, tax, depreciation and amortisation). Paying down debt of over Rs 400 crore is EPS (earnings per share) positive, even with equity dilution. Any fall in interest rates would also help EPS by lowering the cost of borrowings.

Unlike the luxury segment, the mid-income market is price-sensitive and input cost escalations cuts into profitability.

Puravankara offered various promotional schemes to boost sales, leading to increase in receivables (41.7 per cent quarterly growth). Cash flow realisations in the upcoming quarters must be watched for weakness in bookings and collections.

FINANCIAL PERFORMANCE

Puravankara’s December quarter sales grew by 56.5 per cent, compared with a year ago. . The company’s nine-month sales were higher than the annual sales in 2011-2012. Net margins for FY13 are expected to be steady at 19 per cent. We expect margin improvement due to lower loan servicing costs.

The company’s cash flow from operations has been negative, mainly due to inventory growth and a reduction in short-term liabilities.