Peninsula Land

Peninsula Land’s strong presence in the Mumbai realty market and increasing evidence of a revival in real-estate demand in this metro improves the earnings visibility for the company.

Its projects in centrally-located areas for which it acquired land/development rights from loss-making textile mills also provide the company with a lucrative portfolio. Timely fund-raising strategies made before the downturn, also ensured that the company manoeuvred its way through the liquidity crunch of 2008.

Investors with a two-year perspective can consider buying the stock of Peninsula Land. At the current market price of Rs 83 the stock trades at eight times its expected per share earnings for FY11. Its capital can expand after the planned qualified institutional placement. The earnings growth is however, likely to keep pace.

Peninsula Land nevertheless remains a risky bet given its regional concentration and distressed land deals with respect to mill land. For this reason, it may not be the right stock for a long-term portfolio of, say, five years or more.

Investors may, therefore, consider setting target returns and exit the stock if it meets their return expectations in the next couple of years.
Early mover into mills

Peninsula Land is a real-estate developer, part of the Ashok Piramal group, with exposure to commercial, residential and retail projects located predominantly in Mumbai.

The company, although mid-sized with revenue of about Rs 540 crore for FY-09, stands out in the realty listed space for some of its unique business strategies. Peninsula Land was among the earliest players to commercialise the textile mill lands in Mumbai.

While mill lands are often embroiled in litigation, Peninsula Land has been successful in either buying out stakes in such mills and consolidating them (Dawn Mills being a case in point), or purchasing development right of such land and entering into revenue sharing agreements (Swan Mills).

Being an early bird in the strategy to monetise mill land, Peninsula Land could procure land at low cost. It, therefore, managed to buy out land parcels through internal accruals or by raising equity and avoided excessive leveraging.

We view this as a discreet strategy as the recent downturn in real estate was a standing example of developers suffering from mounting debt as a result of borrowing for land purchase rather than for execution.

The company has also tapped effectively into its group companies’ land resources and developed them.
Strong sales

This strategy has left the company with two key residential projects in Parel, of which 95 per cent has been sold, although project completion is slotted for December 2009. Its commercial project, Techno Park, in Kurla, which has reached about 50 per cent completion, is already fully sold out.

These are indicators that the company has largely been managing its working capital through these sales; it does not appear to have faced the problem of sitting on built inventory.

However, massive space sold to a single customer is not always free of risk. In its Dawn Mills land, for instance, Peninsula would receive 50 per cent of its tower 1 (of 2 towers) revenue from a single customer, Alok Industries, over a three-year time frame ending December 2010.

While Alok Industries has made some payments, it has been trying to rope in private equity players to meet this commitment.

Such long-drawn large deals may distress Peninsula’s cash flows. Sales made on the above projects aided a 57 per cent growth in revenue in FY-09, at a time when most realty players witnessed a decline in sales.

Net profits, however, expanded by 13 per cent to Rs 163 crore, as a result of higher cost of development and higher staff expenses arising out compensation for voluntary retirement.

While the June quarter sales has remained flat compared to a year ago, operating profit margins have improved by over 2 percentage points to 32 per cent, perhaps as a result of a good part of the revenue coming from the residential space.

Going forward, 4.1 million square of projects under execution are expected to be completed over FY 10 and FY11, while 11.4 million sq ft of projects planned are expected to yield revenues over the next six years.

The projects in the pipeline are interestingly more diversified across other cities such as Nasik, Goa, Pune, Nagpur and Hyderabad.

As most of these are not too away from its primary market, Mumbai, the company may not suffer the risk of treading into unchartered territory.

via BL