Anant Raj Industries

Realty player Anant Raj Industries could be a prime beneficiary of the recovery in the real-estate market in the National Capital Region, including Delhi. This is especially so in view of the Common Wealth Games 2010 to be held there , .

A de-leveraged balance-sheet, comfortable cash position for execution of projects, focussed strategy of leasing assets and de-risked business model in segments such as hotels augur well for the company's earnings growth over the next couple of years.

Investors with a high-risk appetite can consider limited exposure to the stock of Anant Raj Industries with a two-year perspective.

At the current market price of Rs 132, the stock trades at 11 times its likely per share earnings for FY-11. High concentration in Delhi and the NCR areas, as well as in the commercial realty segment , are risk factors, which if handled well, could benefit the company.

Asset-heavy model

Anant Raj Industries follows an asset-heavy model, which means that the company owns a good part of what it builds and chooses to lease most of them.

Lease of prime commercial and retail space in Delhi and the rest of the NCR and other cities adjoining Delhi, occasional offloading of such assets owned through stake sale, apart from sale of residential properties, are the key sources of revenue for the company.

Anant Raj holds 982 acres of fully paid land bank . The land was procured at low cost and as and when the Delhi Development Authority made allocations. Anant Raj has traditionally focused on commercial space lease, with a good 55 per cent of its saleable area coming under this segment.

In its recent venture, it pre-leased 70 per cent of its IT SEZ in Manesar, a fast growing industrial town in Gurgaon . Nevertheless, the NCR region, as demonstrated in 2008, is prone to sharp spells of correction. That said, the region was also among the first to recover.

Besides, studies show that the NCR region stands second in the country in terms of demand for commercial space. While Anant Raj faces risk by concentrating its commercial projects in NCR, the region lends itself well for companies wanting to build a rental-yield revenue model. Going by the company's track record of handling office space leasing, the company may well continue to build on the lease model.

It has nevertheless, realised the need to diversify further and has about 33 per cent of its saleable area in the residential space. While it is developing a few mid-income housing projects in the outskirts, its flagship premium projects in the heart of Delhi, with capital values upwards of Rs 25,000 per sq. ft now, is likely to yield good returns. The company's cash-rich position and in-house construction do not leave much doubt on execution delays.

De-risked hotel segment

Anant Raj has an interesting business model in the hotel segment. In its two properties near the Delhi airport, for instance, it has transferred the occupancy risks to third-parties in return for fixed rental income over six years, with escalation clauses after three years.

Similarly, in its hotel property forming part of the Manesar IT Park, it has tied up with the Hilton group on a per sq. ft, basis (not based on occupancy), with escalation clauses every three years.

Transferring occupancy risks to third parties would provide steady revenue streams, which would otherwise be writ with the volatility faced by the hospitality industry.

Internal Accruals

With a net cash balance of Rs 550 crore, post its negligible debt, Anant Raj is certainly among the cash-rich realty companies, a rare feature in the industry. Apart from lease revenue, it resorts to occasional land/stake sale in projects, thus monetising its assets. This strategy comes in handy, especially during periods of fund crunch.

As a result, revenue flow tends to be lumpy when the company resorts to sale of property. The company's consolidated revenues have grown 56 per cent compounded annually over the last three years to Rs 251 crore in FY-09. Rental income close to doubled in the first half of FY-10 as more properties became operational.

The company's operating profit margin tends to vary as a result of its sale-cum-lease model and is as high as 90 per cent in quarters when expenses on construction are low, even as the steady lease income flows.

via BL