Anant Raj Industries – 2QFY2011 Result Update Angel Broking

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Anant Raj Industries – 2QFY2011 Result Update

Angel Broking maintains an Buy on Anant Raj Industries with a Target Price of Rs178.

Anant Raj Industries’ (ARIL) 2QFY2011 results were broadly in line with our

expectations. Top-line was driven by mid-income residential projects. PAT came in

at `48cr (up 4.8% qoq and down 32.6% yoy). During 1HFY2011, ARIL acquired

153 acres of land for a consideration of `564cr incurring net debt of `361cr.

Management intends to launch the Huaz Khas project in 4QFY2011, which will

be a key catalyst for the stock performance. We maintain a Buy on the stock.

Revenue driven by new residential launches: ARIL launched two residential

projects in the NCR - Kapashera (0.28mn sq. ft.) and Manesar (1mn sq. ft.) at

`5,000/sq. ft. and `2,900/sq. ft., respectively. Kapashera has been entirely sold

(112 flats) out, while ~50% (600 flats) of Manesar have been sold out so far.

During the quarter, ARIL booked `84cr revenues from Kapashera (`22cr) and

Manesar (`62cr), and `23cr from stake sale in one of its investments.

Margins impacted by change in accounting method, revenue mix: Historically,

ARIL revenues have been driven by land/FSI sale and rental income where it

booked revenues on net sales basis which excludes land cost. Consequently,

OPMs have been in the range of 85-95%, as it includes only employee and

administrative expenses. During 1QFY2011, ARIL changed its accounting method

from net sales to gross sales where expenses include land and construction cost.

Consequently, OPM came in at 47.2% (down 4,229 yoy and 780bp qoq). We

expect OPM to remain at these levels with increasing share of residential projects.

Investment Arguments

Land acquisition at discounted price

Almost all of ARIL's land bank (1,000 acres) is exclusively located in the NCR,

within 50km of Delhi, with approximately 525 acres in Delhi. This land bank has

been acquired at an historical average cost of `300/sq. ft., with recent transactions

by ARIL executed at `370/sq. ft., `450/sq. ft. and `130/sq. ft. in high-growth

areas such as Gurgaon, Manesar and Sonepat, respectively. ARIL's successful land

acquisition strategy is attributed to its acquisition through the allocation route from

DDA at significantly low prices compared to the prevailing rates and its focus on

being an NCR player, which helps in identifying areas with high economic

potential in Delhi.

Residential projects to drive near-term visibility

ARIL recently launched two residential projects in NCR - Kapashera (0.28mn sq. ft.)

and Manesar (1mn sq. ft.) for `5,000/sq. ft. and `2,900/sq. ft., respectively.

Management has indicated that the entire property of Kapashera and ~50% of

Manesar property have been sold out this far. The Manesar property was acquired

at `450/sq. ft. in 2009. ARIL intends to launch its premium residential project at

Hauz Khas, Delhi by end of FY2011. Management has guided for `500cr of

revenues in FY2011 from the residential segment. Further, we expect ARIL’s

Manesar and Kirti Nagar properties to reach peak occupancy levels in 6–9 months

as the leasing activity improves. The company will also have five hotels operational

by end of FY2011, with transfer of occupancy risk to third party in return of fixed

rentals. Consequently, we expect ARIL to report rental income of `184cr in FY2012

as compared to `49cr reported in FY2010.

Well-capitalised balance sheet

Post the recent land acquisitions (`600cr), ARIL's has a net debt balance of `300cr

(0.1x) from having net cash balance of `190cr in 1QFY2011. This augurs well for

the company even in a downturn and gives headroom to leverage at reasonable

costs for timely execution of projects. Further, the recent issuance of two crore

warrants to the promoters (`87/share) will strengthen its cash balance by `130cr

on conversion.

Outlook and Valuation: ARIL continues to be our top pick in the realty sector with

near-term revenue visibility to be driven by the residential projects coupled with

the commercial segment gaining traction. We maintain a Buy on the stock, with a

Target Price of `178, which is at 15% discount to our one-year forward NAV.

Outlook and Valuation

ARIL continues to be our top pick in the realty sector on account of having strong

balance sheet, generates approximately 54% of its GAV from office and retail

sectors which are witnessing strong traction and inexpensive valuation. We believe

that near-term revenue visibility will be driven by the residential projects. Further,

we expect rental income to grew 4x by FY2012 to `184cr as the Manesar and Kirti

Nagar properties are expected reach peak occupancy levels in another 6-9 months

coupled with five hotels getting operational by end FY2011, which will improve the

company’s rental visibility.

At current levels, the stock is trading at 1.1x FY2011E P/B and is available at 33%

discount to our one-year forward NAV, which gives a margin of safety given its

low-cost land bank situated at prime locations. We maintain a Buy on the stock,

with a Target Price of `178, which is at 15% discount to our one-year forward

NAV.