Arihant Foundation and Housing Ltd. BUY CMP: Rs462
Chennai and its suburbs are fast turning into a hot spot for the IT/ITES sector. Skilled labour along with quality Grade A & B space is driving demand for real estate. Arihant Foundation and Housing Ltd (AFHL) with 2 IT Park projects and 15 residential projects in hand is well poised to benefit from the pick up in Chennai real estate demand. We expect the company to report 76% revenue and a 116% profit CAGR over F9/05-08 period respectively. We initiate coverage with a BUY rating and price target of
Rs602.
Most IT companies have started setting up shop in tier II cities due to the dwindling cost competitiveness in tier I cities. Chennai offers them with quality grade A & B real estate with abundant skilled manpower. We expect Chennai to fast grow into the next outsourcing destination in line with Hyderabad and Pune.
With 17 in hand projects, AFHL is well poised to benefit from the growth in the property boom in the Chennai market. 15 of the 17 projects are residential in and around the Central Business District (CBD) and Old Mahabalipuram road (OMR), while the remaining 2 are IT parks in the upcoming Ambattur and OMR
area.
The company is fast adding size and has planned two townships, one out of which is a 50:50 JV with a national developer. We view the company’s slow evolvement in bringing bigger projects in its fold as a positive sign towards revenue
sustainability. We estimate revenue CAGR of 76% over F9/05-F9/08.
Most old projects with low gross margins (GM) are expected to get completed in F9/06. New projects would improve GMs by 500bps in F6/07 to 37%, which is still 5-7% lower than current prevalent. This would aid a profit CAGR of 116% over F9/05-F9/08.
A major portion of the future revenues, 27% in F9/07 and 65% in F9/08 are expected to come from new projects, which are either recently commenced or would be launched in the next 8-12 months. Delays in launch and execution, could impact profitability and there by valuations.