Search Now

Recommendations

Saturday, February 24, 2007

KR Choksey - Parsvnath Developers Ltd


Investment Rationale

Diversified Portfolio: PDL has a diversified business model in terms of development projects, client profile and geographical spread. In addition to integrated township, residential complexes, DMRC projects, PDL is keen to undertake projects for developing hotels, SEZ's and IT Parks.

Sustainable revenue growth: In 9MFY07, PDL reported robust net sales growth of 105.8%. Company is now intends to undertake projects for the development of hotels, IT parks and integrated townships. We expect the good revenue growth from all these initiatives by the company.

Real estate boom: Indian real estate market is growing at a rapid pace on the back of improved real estate prices and sustained demand from end users as well as investors. High economic growth, favorable demographic and socio-economic factors have led to a sharp rise in demand for housing and commercial real estate. Huge investments are lined up in infrastructure, IT/ITES sector and SEZ's leads to real estate boom.

Focus on non-metro cities: Company main focus area is non metro cities in India. With an increase of economic activities in non-metro cities in India will result to increase in demand for real estate projects in those cities and towns. In FY06, 99.6% of revenues came from non-metro cities.

Key Developments

Company has established their presence in 45 cities and 16 states across India. Going ahead, PDL is aggressively expanding their developing base by entering new verticals such as SEZ, hospitality business and retail space.

Financial Performance

Net sales up by 106% due to diverse revenue stream

For 9Months'FY07, PLD has reported net sales of Rs. 836 crore as compared to Rs. 406 crore, an increase of 105.8 percent. PDL has completed several projects in last 9 months resulted to increase in net sales of company, which mainly includes housing projects, hotels, integrated township projects etc.

Valuations

The annualized FY07 EPS of Rs10.1 discounts the current market price by 28.3x respectively. While it may seem expensive, we believe that such a business cannot be valued on the basis of the P/E multiple or other such conventional valuation methods. We value this company on the basis of there present land bank, long term revenue visibility from the projects, an established brand name and above all the positive potential of the infrastructure segment in the country. We recommend a Strong Buy recommendation to investors.


Industry Scenario

Indian real estate market is growing at a rapid pace on the back of improved real estate prices and sustained demand from end users as well as investors. High economic growth, favorable demographic and socio-economic factors have led to a sharp rise in demand for housing and commercial real estate. We estimate India to experience a demand supply gap of 17.9mn housing units by 2010. This apart, commercial real estate demand is expected to be around 350mn sq ft out of which IT/ITES and organized retailing sector should contribute around 300mn sq ft. Sensing this huge opportunity, the market has seen increased interest following the FDI relaxation and government's SEZ policy.

Demand Drivers:

IT/ITES growth : India is an emerging leading hub of IT and ITES/BPO activities, these sectors will continue to be the main drivers of suburban office demand. The IT and ITES sectors accounted for 80% of the 25m sqf of office space absorbed in 2005. Estimated requirement is about 50-70m sqf from the IT and ITES sectors over the next two to three years. As noted, the suburban fringe of the main cities has emerged as the primary growth market for offices, with 75% of office development in these areas. This sub-sector will continue to be fuelled by a 30% + annual growth forecast for the IT and ITES sectors.

SEZ: The government created SEZs to promote global trade and greenfield development. These zones, regarded as foreign territory for the purpose of duties and taxes, operate outside the domain of custom authorities and provide businesses located within their borders with exemption from customs duty on imported and exported goods and services. Favorable government policies and fiscal incentives have lured corporates to develop SEZs. 150 proposals have received formal approval, while 117 other proposals have received in principle approvals.

FDI Inflow: Key sectors have been in the radar of FDI like IT, telecoms, electronics, pharmaceuticals, automobiles and financial sectors. While growth has been strong, nonetheless FDI is still well below its full potential, and low by global standards, estimated at less than 1% of GDP (compared to 2.4% in China and 1.8% in Brazil ). However FDI flows are far behind those entering China. In 2005, China experienced US$60.6bn of FDI in flows versus India 's US$5.3bn. The government has opted for a gradual opening of the sector to foreign players by relaxing norms for single brand outlets and through the cash and carry model.

REIT's : REITs aim to provide stable, sustainable cash flows from primarily rental property. Globally a huge portion of real estate investment is routed through the Real Estate Investment Trusts (REIT). These essentially act as mutual funds to garner public money for investing in real estate assets and typically have a 5-6 year time horizon. The institutional real estate investment universe for such funds at end December 2004 was to the tune of US$5.9tn. We have witnessed a sluggish growth in REIT industry. With the huge investments lined up in the India Real Estate market helps to attract the investors.

Developments and Impact

¨ In Q3FY07, company issued 3.32 crore shares through an IPO, this has resulted in the post issue share capital of Rs 184.69 crore.

¨ Company has established their presence in 45 cities and 16 states across India. Going ahead, PDL is aggressively expanding their developing base by entering new verticals such as SEZ, hospitality business and retail space.

¨ In Q3FY07, company has also acquired land with developable area of 14.09 million sq ft of land. PDL now has a total land bank of 122.41 million sq ft of developable area to be developed at a total cost of approximately Rs 16,000 crore (including cost of land, construction and development).

¨ PDL has scaled up its projects and entered into concession agreements to develop shopping malls on 11 stations owned by Delhi Metro Rail Corporation on a BOT basis. The company has already executed 5 of these projects and they are expected to yield rental income for a period of either 12 to 30 years These malls also include strong brands like Big Bazaar, Spencers, McDonalds, Pizza Hut Levi's, Reebok, Adidas, Archies, Koutons, etc. as anchors.


inancial Analysis

Net sales up by 106% due to diverse revenue stream

For 9Months'FY07, PLD has reported net sales of Rs. 836 crore as compared to Rs. 406 crore, an increase of 105.8 percent. PDL has completed several projects in last 9 months resulted to increase in net sales of company, which mainly includes housing projects, hotels, integrated township projects etc.

Expansion of Operating Margins

During 9 months Fy07, operating profit jumped 140.2 percent to Rs 230 crore as compared to Rs 96 crore in 9 months FY06. The growth has largely been driven by buoyancy in the real estate activities in India as well as infrastructure development. Operating margins for Q3FY07 grew to 30.6% as compared to 23% (9mFY06). In FY06, EBITDA margins fell by 153 basis points to 22.4 per cent and it was mainly due to higher selling and administration expenses incurred during the year.

Net profit at Rs 139 crores for 9MFY07

In 9MFY07, company witnessed the sharp increase in the Net profit by 102.8 percent to Rs 139 from Rs 69 crores. The Interest cost and depreciation charges were at Rs 14 crores and at Rs 9 crores respectively. We have calculated the EPS on restated equity of 184.69 crore. The EPS for Q3FY07 was Rs 2.9 and Rs 7.5 for 9MFY07 as against Rs 3.7 in 9MFY06.

Valuations

At CMP of Rs. 288, Parsvnath Developers is quoting at P/E multiple of 28.3x based on its ttm basis. The stock currently quotes at EV/EBITDA of 44.0x and Mcap to sales of 4.7x. The company is expected to grow on account of diversified revenue stream, aggressive land acquisition plans and strong revenue growth. We believe PDL can command premium to other real estate companies with more stability in earnings and leadership position in North India. We recommend a Strong Buy on the stock

Risks: The risks that could hinder the earnings growth of Parsvnath Developers in time to come are as under:

  • PDL's future growth is highly influenced by various macroeconomic factors. Today various tax benefits are available for real estate developers. Any change in tax policy in recent budget could affect the earnings of PDL.
  • PDL main focus is in to Tier two to Tier three cities. PDL faces stiff competition from various organized and unorganized players in market. It will be very difficult for PDL to procure new projects and could adverse impact on future earnings of company.
  • PDL has entered in various DMRC projects. Any termination of project may lead to adverse impact on earnings.

Growth: The growth for the company in the coming years is likely to be fueled by the following factors:

· Parsvnath Developers has a diversified portfolio with projects varying from residential complexes to commercial/shopping centers, multiplexes, from metro malls at DMRC stations to Hotels and IT Parks, and integrated townships. These projects are also well-diversified and spread across India in 45 cities and 16 states.

· PDL has scaled up its projects and entered into concession agreements to develop shopping malls on 11 stations owned by Delhi Metro Rail Corporation on a BOT basis. These projects would secure the future earnings of the company.


Currently PDL has a land bank of 122.4 mn sq. ft. whereas the comparable peer, Unitech Limited has a land bank of four times its size. Margin at PAT level of PDL is better at 16.7% in comparison to any other real estate developer.

PDL operates in a highly exciting real estate space, it is available at cheap price as compared to peer companies like 'Unitech' and 'Mahindra Gesco'. Looking at the fanciness for the realty sector, strong revenue growth and diversified business model of PDL, we envision a bright prospect lies ahead for PDL. We recommend investors to buy for long term.

Technicals

Last Price: 285.80

13 day EMA 316.30

50 day EMA 344.01

200 day EMA 227.15

The stock is at downwards . The support for the stock exists at around 276 levels. The MACD indicator for the stock is moving sideways in negative zone. Investors can buy the stock at declines

Recommendation & Investment View

Recommendation : Market Out Performer

Investment View : Strong Buy