Puravankara Projects

Shareholders can continue to stay invested in Puravankara Projects. For a mid-tier realty player, the company has done well to stay away from the debt trap that many of its peers were caught in, not too long ago. Puravankara has also been prudent in not launching any new projects over the past year under the parent company and has, instead, made a successful entry into mid-income housing through its subsidiary.

Premium valuations

Improvement in units sold in the March quarter over the preceding quarter did not hwoever reflect in any sequential improvement in sales, as revenues typically flow with a lag. The company performance on this score is similar to peers and slightly below the performance of larger developers which witnessed a sequential improvement in revenues even as early as the March quarter.

Given this background, Puravankara’s price-earnings multiple of about 15 times its likely per share earnings for FY-10 (at the current market price of Rs 97) appears steep compared with even larger players.

A clear sign of revival in the sale of projects in the parent company and subsequent successful launches through the subsidiary could be tangible reasons for premium valuations. Any steep decline of 15-20 per cent in the price could be a good opportunity to accumulate the stock. Investors may have to hold the stock with a two-three year perspective to fully benefit from a real-estate demand revival as well as a possible value unlocking from its subsidiary, Provident Housing & Infrastructure, once its execution record is established.
Affordable housing

Puravankara’s antidote to beat the realty slump appears to have come in the form of Provident Housing’s first project in Chennai. This subsidiary was fashioned to cater exclusively to the mid-income housing needs, ranging from Rs 10-20 lakh.

Unlike other developers which launched affordable housing after the slowdown set in and which may well rollback this strategy on a revival, Puravankara is likely to carry on with this business through its subsidiary.

This, over the long term, may provide the group with a good business mix between premium and affordable housing — that may combine better realisations with high volumes.

The project launches under this subsidiary clearly appeared well-timed to revive the group’s slumping sales. In March 2009, Provident Housing launched the first phase of the total 2.23 million sq ft (over 2100 units) of saleable area, selling 518 units within weeks; prompting it to launch the second phase as well.

These units, expected to be completed in two years, could well be the launch pad for the group to replicate similar projects in Bangalore and Hyderabad and later in other cities . However, it may be too early to ascribe a value to this fully-owned subsidiary, for two reasons: One, it has so far proven successful in only one city. Two, the newly-formed subsidiary, although an off-shoot of Puravankara, is yet to pave itself a track record in the affordable housing segment, in which the parent’s experience too is limited.
Residential focus helps

The parent company’s focus on residential projects has helped; unlike many developers which had to shelve plans or even abandon partly constructed commercial/retailing projects as a result of the slowdown, Puravankara went ahead with its execution as over 95 per cent of it was residential.

The company, did not have to divert/lock up capital on planned and then deferred projects. This could also be one of the reasons for the company managing the liquidity crunch better than a few others.

Hence, with perhaps a superior execution rate, the company may have more properties readily available for sale than its peers when a clear revival happens.

Recent trends suggest that projects nearing completion receive a premium from customers . The company had recently stated that it has completed on an average 60 per cent of construction in projects across its spectrum. The company has 8.4 million sq ft of saleable area under development across four cities. It plans to refrain from taking any new projects, until the completion of the above.

While the Bangalore real-estate market has shown marginal signs of revival ahead of other cities (barring Mumbai), much of the volume growth appears to have been a result of deep discounts.

While it is not clear if Puravankara resorted to this strategy, the company’s operating profit margins took a hit over the December and March quarters. OPMs dwindled to the 20 per cent levels from 35 per cent a year ago.

While relief from decline raw material costs may be visible in the June quarter, revival in volumes may hold the key to profitability. Puravankara’s revenue for the year-ended March 2009 of Rs 445 crore and net profits of Rs 144 crore are unlikely to see much growth in FY-10 as an improvement in demand is likely only by end-2010.

via BL