Challenging the changes INITIATING COVERAGE

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1 Challenging the changes INITIATING COVERAGE Industry Real Estate Mr Kiran Chappar Company Secretary Puravanakra Project Limited (O) / Stock metrics Bloomberg code Reuters code BSE Group PVKP IN PPRO.BO BSE Code NSE Code B PURVA Face Value Rs 5 Market Data Market Cap (Rs mn) WeekHigh/Low /64.00 Sensex Nifty 4917 Average volume Shareholding Pattern : FIIs, 6.44 DIIs, 1.12 Research Analyst Denil Savla denil.savla@inventuregrowth.com Anshuman Jain igslresearch@inventuregrowth.com Ext 581,579,582 May 26 th, 2010 Public, 2.48 Promoters, I N V E N T U R E. Current Price Rs.86 Target Price Rs Potential Upside 48.17% Puravankara Projects Limited (PPL) PPL is engaged in construction of residential and commercial complexes. It enjoys sufficient market share in southern part of India covering Bangalore, Chennai, Cochin, Etc with Land Bank of 125 million Sqft spread around southern part. PPL revenue portfolio has changed from the luxury housing to mixture of Luxury, Provident and entry level housing due to huge potential in the provident & entry level housing in India. Company is also expanding the footprint in nearby countries like Sri Lanka. Company has EBIDTA Margins of 33% and PAT margins of 28% which is inline with its industry peers. PPL has shifted its focus towards turnover from its previous strategy of higher margins. EBIDTA Margins to squeeze but EBIDTA would increase: The company is now focusing on provident & entry level housing where the margins are lower. However they would be playing on turnover thereby increasing the operating net revenue. Valuation We have valued the company on SOTP basis. For arriving at the fair value of its core business & land bank are valued individually. Its real estate business is valued at 1.5x of FY12E book value that comes around Rs 104 whereas land value is valued on NAV which comes around Rs to arrive price target of Rs an upside of 48.17%. At Current level, we are recommending BUY ratings on this stock. (Rs in Millions) Year Ended March FY09 FY10 FY11E FY12E Net Sales Growth (%) EBIDTA Growth (%) PAT Growth (%) Book Value Price to Book Value EBIDTA Margins (%) Net Profit Margins (%) EPS ROE (%) EV/EBIDTA (x) PE Source: IGSL Research 1

2 TABLE OF CONTENT Sr. No. Particulars Page No. 1 Investment Rationale 3 2 Company Background 6 3 Subsidiaries & Verticals 7 4 Price Target Derivation 8 5 Industry Outlook 10 7 Concerns 12 8 Financial Charts 13 9 Profit & Loss Account Analysis Balance sheet Analysis Cash flow Ratios Peer Group Analysis 17 2

3 Investment Rationale Launching of 18 million Sqft with the mixture of 12 mn Sqft & 6 mn Sqft under Puravankara & Provident housing respectively. 75% of work has been completed and 63% of the total area under development is sold. Launching of 18 million SQFT in next two quarter In next two quarters the company plans to launch 18 million sqft including 12 million sqft under Puravankara brand and another 6 million sqft under Provident Housing. Expecting the growth in real estate as well as the overwhelming respond from the Provident Housing inspires the company to go for aggressive launching. Construction activity in full swing with sales support Of the total million sqft under development about million sqft is under Puravankara and remaining under Provident Housing. Puravankara is planning to launch 12 mn sq. ft of real estate in FY2011E. 4 mn sq. ft in Chennai, 4 mn sq. ft in Bangalore and 4 mn sq. ft in Kochi. As far as projects under Puravankara brand, the company has achieved a completion of 75% and sold about 63% of the area which is under development. During the quarter ended March 2010 about 3 projects have been completed/ delivered and move out. One new project has kicked in. Similarly the company sold 70% of the area launched under Provident Housing with completion percentage standing at 18%. 55% of the launched Wellworth project has already been sold out. Huge land bank with low cost of Acquisition The current land bank stands at million sqft. The company's land bank augmentation in the FY10, were largely in the cities of Chennai and Bangalore. This land has been acquired over the period of time reducing the cost of acquisition. The average cost of land is Rs 100/sqft under Puravankara Projects standalone whereas for Provident Housing will be around Rs 150/sqft - Rs 165/ sqft. However, the company is looking for joint developer as far as acquiring land for its newer provident housing projects. Entering aggressively in low budget housing The company is aggressively working on its provident housing projects. Two projects are in full swing and company is about to launch 6 million sqft in next two quarters whereas 40 million sq. ft. of area will be developed under Provident Housing in next 2 years. The company is also thinking of coming with an IPO of Provident Housing in next 1.5 to 2 years time. 3

4 JV with Homex to provide housing in the range of Rs 0.8 mn to Rs 1.5 mn Recovery in IT to boost housing as well as commercial demand Rise in demand by NRIs to own second home and also for investment purpose.. Announces JV with Homex for low-cost housing product Puravankara has entered into an agreement with Mexico-based Homex India Pvt. Ltd to form a joint venture company for lowcost housing projects. Puravankara intends to benefit from its access to technology which will help in expediting the delivery of affordable and low-cost housing projects. With entry into low-cost housing, Puravankara now has a diverse product offering for different customer segments like Puravankara developing projects in the price range Rs mn, Provident provides housing in the range of Rs mn and JV with Homex will provide homes in the range of Rs mn. Recovery in IT sector should propel volume recovery in South India Real estate sector in the southern India is on an all time high. It is expected that the industry will grow at a rate of 30% in the next few years due to the recovery in IT sector. The various cities in this region like Bangalore, Chennai, Kochi, Vizag and Hyderabad are witnessing high growth in this sector. These cities have also attracted large sums of investments from NRIs, in residential and commercial projects. Large housing companies have also entered into partnerships and joint ventures with Indian realty developers. Residential real estate Cities in different states of southern India are also seeing a phenomenal rise in residential property prices owing to an increase in demand. This increased demand can be attributed to the rising working population. With higher incomes and loan Facilities provided by various banks, it has become easier to buy a house. Another reason that has contributed to the rise in prices is the high demand by NRIs. Ultra modern residential projects like condominiums, apartments and villas are coming up in different cities. Since these properties offer a high rate of return, it has now become an ideal investment option for NRIs with surplus money. In fact, the property sector in India is Rs crore industry and the new reported investment is in addition to this amount. This expected additional investment is a three-fold increase over that of the corresponding period of

5 70% of provident housing projects is sold whereas only 18% of the construction is completed. Encouraging response to affordable housing projects Puravankara has received encouraging response to its first two affordable projects of Provident Housing. The first two projects have a total of 5,534 homes, covering an area of 5.7 mn sq. ft (Cosmo City, Chennai 2.2 mn sq. ft and Welworth City in Bangalore 3.5 mn sq. ft, which also includes over 0.2 mn sq. ft of retail space). The price range of homes in these two projects is between Rs1.5 mn and Rs2 mn. Management has indicated that the sale has been encouraging and these projects marginally contributed to revenues in 3QFY10. They have sold 67% in Cosmos City and construction is in full swing. They have also sold 30% in Welworth City and excavation work has started at the site. These projects will start contributing meaningfully to revenues in the next 2-3 quarters. Provident intends to expand its business to other cities and has already tied in 27 acres of land in Coimbatore to launch a 1.5 mn sq. ft housing project. Other land deals which have not been concluded include a 55-acre joint development agreement in Bangalore and 140 acres in Hyderabad. Puravankara is also acquiring 61 acres in Mysore for a Provident Housing project where it has already made 33% of the payment. Most of the JDAs are being signed where the partner gets a 14-20% share in the project. We believe there will be a significant ramp-up of revenues in FY2011E as execution picks up. Reduction in construction cost will improve the margins Provident has given the contract to BL Kashyap for a fixed cost of Rs950/sq. ft and with land cost in the range of Rs /sq. ft; the project will earn net margins of 20-25%. Earlier the construction cost was Rs 1200/ Sqft. Increasing leverage but still far below the industry average Puravankara s D/E has increased over the past two years from 0.50x to 0.54x which is still far below the industry. The company is still in the position to increase its leverage further in case if there is any need of finance. 5

6 Company Background The Puravankara Group was established in 1975, in response to the growing needs for quality housing and commercial space in the metropolitan cities in India. Since then, the group has grown to be one of the leading real estate developers of the country, serving the needs of the discerning clientele. The Puravankara group with over 33 years of excellence in the upper end of the housing sector across various regions of the country has projects in Bangolore, Chennai, Kochi, Coimbatore, Hyderabad, Mysore and Colombo. The group also has a presence in Dubai and business representative in the United Kingdom and the United States. With a land bank of over 125 mn sq ft, the group has above 20 million sq ft of residential and commercial space currently under construction. Included in this are on-going residential projects amounting to million sq ft which comprise of 7800 homes. JV with Keppel Land of Singapore Puravankara has the distinction of being the first to obtain FDI in the Indian real-estate industry through its joint venture with Singapore based Keppel Land Limited, the property arm of the 54% government owned conglomerate, Keppel Corporation Limited. The joint venture company, Keppel Puravankara Development Private Limited, has on-going housing projects in two cities in India. With a large and experienced team of engineers and technicians the Group has a unique in-house project management capability. This together with a host of India's leading architects provides the organization with an experience, capability and expertise unmatched in the Indian real-estate industry. Development activities range from modern designer apartments, through ultra modern and multi-functional integrated bungalow complexes, to plush and very functional commercial complexes. India s first resident s privileges program, Purva Privileges, was launched in 2004.Purva Privileges entitles all Puravankara home owners to an attractive referral program, concierge services and a host of special offers. 6

7 Subsidiaries of the company Name of the Entity Country of Incorporation Share holding Overseas Subsidiary Companies Puravankara Lanka Holding Pvt Ltd Sri Lanka 100% Puravankara Projects Lanka Pvt Ltd Sri Lanka 100% Purva Corporation Indian Subsidiary Companies Prudential Housing and Infrastructure Development Limited British Virgin Islands 100% India 100% Centurions Housing & Const Pvt Ltd India 100% Melmont Construction Private Ltd India 100% Purva Marine Properties Private Ltd India 100% Nile Developers Private Ltd India 100% Vaigai Developers Private Ltd India 100% Starworth Infrastructure Ltd India 100% Provident Housing Ltd India 100% Associate Companies Keppel Puravankara Development Pvt Ltd India 49% Propmart Technologies Ltd India 32.83% Keppel Magus Development Pvt Ltd India 36.26% Homex India Pvt. Ltd India Source: Company Entering into affordable housing in order to target more individuals. Existing Verticals: Segments Growth Drivers Tie up Change in customers Housing preference from normal homes to leisure homes Targeting the middle class Provident people group by providing Keppel Land Housing Flats at reasonable rates of Singapore Affordable Housing Commercial Source: IGSL Research Targeting lower income group individual which consists of around 70% of the population As of now commercial portfolio is 3% of total revenue and expected to contribute 25% in next 5 years Homex Housing India Pvt. Ltd 7

8 Price Target Derivation: Value of land is Rs180 per Sqft. For arriving at the fair value of its core business, we have valued the core business on 1.5x FY12E P\BV and its land bank separately. Business Valuation Value (Rs Value Per Method Mn) Share (Rs) Residential P/BV Commercial Land Bank Market Value Total Value SOTP Net Value Source: IGSL Research We have not value the commercial projects... Current PPL 975 of its revenue comes from residential project whereas only 3% comes from commercial. It also has land bank of 125 mn Sqft under its own name. Therefore, we have taken only residential projects & land bank value. Commercial value has been assumed as Zero due to non disclosure of any figures by management. At CMP of Rs 87 per share, PPL is trading at 1.23x of FY10 book value. Considering the currents developments and potential of PPL we have valued PPL at 1.5x of FY12E Book value. As far as land bank is concerned we have valued the land at Rs 180/ Sqft on conservative basis and the cost of acquisition is Rs 100/ Sqft. We have also discount the total value at 20% taking the risk factor and the volatility in the economy. Key Assumption 1. We have kept prices constant until FY10 and thereafter increased these at a CAGR of 5%. 2. We have not factored in reinvestment of profits into new land parcels and the upside potential from that. 3. We have taken in consideration of various project that are under construction to be completed in 5 yrs 4. We have not considered further development and plans of the company. The valuation is purely on current plans of the company. 8

9 Real Estate Industry Overview: The worst is over and the sector is progressively recovering led by the growth in residential segment MW Source: IGSL Research Supply Demand Fundamentals of the real estate sector are improving as seen by better liquidity and improved demand in the residential segment. Enhanced affordability, lower mortgage rates and better job security have helped revive demand for homes. The worst seems to be over and the sector is progressively recovering led by the residential segment. Key signs of improvement include: 1) Attractively priced new launches in the residential segment have seen good bookings with some projects being sold out within a few days of launch 2) Improved balance sheets of developers through infusion of funds from QIPs and sale of non strategic assets. While the residential segment is witnessing a recovery in demand, the office and retail segments are still sluggish and will take some time to recover as the economy gradually gets back on track. Last year s slowdown has caused several developers to rethink their strategies: 1) Focus has shifted to affordable/mid-income housing from luxury housing; 2) In commercial projects, several developers are moving to 'sale model' to manage liquidity rather than leasing space. Some developers are also converting commercial projects into residential, where possible; 3) Developers are exiting low visibility large township projects and are instead targeting strategically located land parcels in and around key cities; 4) Developers are delaying SEZ projects, especially IT SEZs, because of poor demand. Key triggers for the real estate sector going forward are: 1) Continued improvement in residential demand. The festive season will be an important indicator of this; 2) Increase in property prices; 3) Pick-up in construction activity; 4) Recovery in the office space segment. 9

10 Better affordability and increased job security have helped revive home demand Property prices have declined upto 25-30% from peak levels Revival in residential demand After seeing a sharp slowdown in demand in 2HCY08, residential demand began picking up from March-April 2009 on the back of better affordability and increased job security. Improved affordability has been a function of lower property prices, smaller apartment sizes and lower interest rates. Several new projects launched since March- April 2009, have seen good demand with many of the projects being sold out within a few days of launch. Increase in residential prices from 2005 to Jul 2008 City % Increase NCR 61% Mumbai Metropolian Region 121% Bangalore 69% Chennail 145% Hyderabad 63% Kolkata 100% Pune 96% Kochi 54% Chandigrah 108% Ahmedabad 116% Source: CRISIL Residential prices have declined substantially Property prices rose rapidly from 2005 to early 2008 and became a deterrent for home buyers resulting in a sharp slowdown in the residential demand. However, since 2HCY08, property prices began correcting and have declined up to 25 30% from their peak levels. This has helped bring back demand in the residential segment. Bangalore INR/Sqft Price Change Q2 CY09 3 Mths 1 Yr Banjara Hills % -11% Jubilee Hills % -15% Madhapur, Gachibowli % -10% Kukatpally % -9% Lavelle Road, Richmond Road % -23% Marathalli, Whitefield % -27% Sarjapur Road, Outer Ring Road % -25% Koramangala % -20% Hebbal, Yelahanka % -3% 10

11 Lower mortgage rates INR/Sqft Price Change Chennai Q2 CY09 3 Mths 1 Yr Boat Club % Nungambakkam % Velachery % OMR % Home loan rates saw a steady increase in the last two years, till December 2008, with HDFC's floating rates increasing from 9% in December 2006 to 11.75% in November However, with he reduction in the repo rate from 9% to 4.75%, banks and housing finance companies too have educed home loan rates substantially since December With steady revival in the economy, job security is growing Better job security In 2008, in addition to high property prices and interest rates, possibility of job losses and payouts deterred customers from buying homes. Given lack of clarity on jobs and income levels, home buyers held back purchases. With improvement in the economic environment since April 2009 people have better visibility of their income levels and this has helped bring back demand in the residential segment. According to a survey conducted by Hewitt Associates, only 6% of 137 surveyed companies reduced salaries and 16% (mainly in the financial services and IT/ITES sector) have a salary freeze. Further, only 5% of the companies are considering layoffs in FY10. Land deals are back With demand fading and developers facing a cash crunch for most part of FY09, land deals had dried up and in fact several developers began evaluating options to sell excess and non-strategic land parcels in an effort to improve cash flows and reduce debt. With signs of revival in demand, developers are once again eyeing land acquisitions but this time selectively with greater discretion. While in the past 2 to 3 years developers were focused on acquiring land/bidding for large township and SEZ projects, the focus seems to have now shifted to strategically located land parcels in and around large cities. In addition, there are several land assets/redevelopment projects that are expected to be put on the block. 11

12 Change in developers' strategy Increase in property prices going forward is likely to be measured and cautious Focus on affordable housing In the golden period of Indian real estate from 2005 to 2008, developers were largely concentrating on luxury residential projects. However, with rising property prices and home loan rates and large ticket sizes, residential property became out of reach for the large majority of homebuyers. With affordability adversely impacted, residential demand saw a significant slowdown. To bring back demand, developers shifted focus from luxury to affordable housing with the objective of reducing the overall cost of homes. This was achieved by launching new projects where in addition to lower prices per sq. ft., developers also offered smaller sized homes. Price increase a key catalyst going forward After successfully reviving residential demand through new launches at low price points, developers are now tempted to increase prices. Residential prices are beginning to firm up with developers increasing prices in select projects. While residential prices seem to have bottomed out and could begin to move upwards from here, increase in property prices going forward is likely to be measured and cautious so as not to dampen demand. Concerns Slow down in completion of projects Real estate project faces huge list of government formalities. Delay in such formalities may slow down the execution and may affect the revenue of the company. Failure of the acceptance of the product by targeted customer PPL has been developing and concentrating more on provident housing which is targeting middle level income group. The houses are in range of Rs 2 million to Rs 2.5 million. The customer is reluctant to change its location due to various social, psychological factors, etc. 12

13 EBITDA & PAT margins to come down. The company is entering into low cost housing segment where the margins are low as compare to its previous segment FY08 FY09 FY10 FY11E FY12E EBIDTA % PAT % D/E ratio to come down further. The company already enjoys low debt equity ratio as compare to its peers. It can further Debt Equity FY08 FY09 FY10E FY11E FY12E Peers Comparison of EBIDTA% & PAT% % 80% 60% 40% 20% 0% Sobha DLF Unitech Parsvanath Anantraj Inds Puravankara EBIDTA % PAT % 13

14 Profit & Loss Statement Rs Mn Particulars FY08 FY09 FY10 FY11E FY12E Net Sales % Growth Construction Expenses % Sales Selling Expenses % Sales General & Admin Expenses % Sales Total Expenditure % Growth EBIDTA % Growth Other Income Gross Profit % Growth Depreciation % of Avg. Block EBIT % Growth Interest EBT Total Tax EAT Source: IGSL Research 14

15 Balance Sheet Rs Mn FY08 FY09 FY10E FY11E FY12E Sources of Funds Share Capital Reserves & Surplus Total Shareholders Fund Secured Loans Unsecured Loans Total Debt Total Liabilities Application of Funds Gross Block Less: Accumulated Depreciation Net Block Properties held for development Investments Inventories Sundry Debtors Cash & Bank Balance Loans & Advances Properties under development Properties held for sale Total Current Assets Less: Current Liabilities & Provisions Net Current Assets Total Assets Cash Flow Rs Mn Particulars FY08 FY09 FY10E FY11E FY12E Profit before Tax & Extraordinary Items Add: Depreciation Add: Interest (net) Add: Others (Profit)/Loss share in Associates Op. Profit before Working Capital Changes Changes IN WC Cash Generated from/(used in) Operations Direct Tax Paid Cash Flow From Operating Activities Cash Used in Investing Activities Net Cash Used in Financing Activities Dividend Paid Interest Paid Net Inc/(Dec) in Cash and Cash Equivalent Cash and Cash Equivalents at Beginning of the year Cash and Cash Equivalents at End of the year Source: IGSL Research 15

16 Ratio Analysis Turnover Ratios FY08 FY09 FY10 FY11E FY12E Net sales to total assets Net sales to Fixed assets Net sales to net working capital Net Working Capital Days Net sales to inventory Net sales to debtors Liquidity ratios Current ratio Inventory Days Valuation Ratios (x) PE EPS P/BV EV/EBIDTA EV/SALES Market Cap/Sales Return Ratios (%) ROCE ROE Margins (%) EBIDTA EBIT PAT Growth (%) Sales EBIDTA PAT Source IGSL Research 16

17 Peer Group Analysis PE (x) EPS P/BV FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E Sobha DLF Unitech Parsvanath Anant Raj Inds Puravankara Rs Mn Sobha DLF Unitech Parsvanath Anantraj Ind Puravankara Q4 FY10 Net Sales Operating Profit PAT Operating Profit Margins 25% 50% 46% 26% 90% 32% PAT Margins 14% 20% 25% 10% 75% 36% FY10 Net Sales Operating Profit PAT Operating Profit Margins 23% 52% 48% 35% 90% 36% PAT Margins 12% 23% 28% 17% 79% 30% EPS (Rs) Valuations CMP Market Cap P/E Key Ratios Debt/Equity Interest / EBIT Total Asset/Turnover Working Capital /Turnover Per Share Data FV week high week low Change from 52 week high (%) Change from 52 week low (%) Source: IGSL Research 17

18 For any queries please feel free to contact our Institutional Research Team Names Designation Id. Contact Number Nagji Rita CMD - - SALES Ravinder Kasliwal Head Institutional Sales ravinder.kasliwal@inveturegrowth.com /66 Dealing Vinit Rita Institutional Dealer vinit.rita@inventuregrowth.com /66 Rashda Ainapore Institutional Dealer rashda.ainapore@inventuregrowth.com /66 Puja Shah Institutional Dealer puja.shah@inventuregrowth.com /66 Research Denil Savla Research Analyst denil.savla@inventuregrowth.com * 581 Sheetal Nirmal Research Analyst sheetal.nirmal@inventuregorwth.com * 628 Pankti Shah Research Analyst pankti.shah@inventuregrowth.com * 583 Divya Kant Research Analyst divya.kant@inventuregrowth.com * 582 Anshuman Jain Research Analyst anshuman.jain@inventuregrowth.com * 579 Sanjeev Haria Research Analyst sanjeev.haria@inventuregrowth.com Sibayan Banerjee Technical Analyst sibayan.banerjee@inventuregrowth.com Ashok Patel Technical Analyst ashok.patel@inventuregrowth.com Madhu Patel Technical Analyst madhu.patel@inventuregrowth.com Disclaimer This Document has been prepared by Inventure Growth & Securities Ltd. The information, analysis and estimates contained herein are based on Inventure s assessment and have been obtained from sources believed to be reliable. Neither Inventure Growth & Securities Ltd nor any of its employees or associates accepts any liability whatsoever direct or indirect that may arise from the use of information herein and shall not be responsible for its completeness and accuracy. It is not an offer to sell or a solicitation to buy securities. This document is for circulation only Visit us at Please send your Feed Back to igslresearch@inventuregrowth.com Inventure Growth & Securities Ltd Corporate Office: - Viraj Tower, 2 nd Floor, Near Landmark, Western Express Highway, Andheri (East), Mumbai Tel.: , Fax: