Orbit Corporation

After sporting shaky balance-sheets a year ago, real-estate companies have utilised almost the whole of the past year to strengthen their balance-sheets and concentrate on reviving working capital flows. While volumes too have started trickling in, not many saw the projects translate into revenues on their books.

The Mumbai-based Orbit Corporation has been quick to fast-track execution of projects that had slowed down and generate better revenue growth than the others.

An improved balance-sheet, presence in the lucrative redevelopment Mumbai market and willingness to quickly shed stake in large projects to keep the cash clock ticking are key positives for Orbit Corporation. These factors are likely to aid the company achieve superior earnings growth over the next two years.

Investors with a high-risk appetite can consider exposure to the stock of Orbit Corporation with a two-year perspective. At the current market price of Rs 277, the stock discounts its likely per share earnings for FY-11 by 13 times.

While this valuation is not necessarily at a discount to key peers, the company's presence in high-end projects is likely to ensure that its demand scenario is affected only marginally by factors such as higher home loan interest rates, compared with most other players which are currently in the mid-sized housing segment.

Jump in revenues

For the quarter ended December 2009, Orbit's revenues trebled to Rs 150 crore over a year ago numbers, while net profits jumped 10-fold to Rs 32 crore. On a sequential basis too the company has been witnessing steady growth since the beginning of the current financial year.

While revenue typically flows from projects sold at an earlier stage, the December quarter also saw the company demonstrating strength in fresh sales. Sales volume of 1.72 lakh sq. ft. in the December quarter as against 0.62 lakh sq. ft. in September quarter suggests traction in volumes.

Fresh sales, though, appear to have come at lower realisations. Projects in Napean Sea Road/Worli and Lower Parel, for instance, have fetched an average rate of Rs 34,899 per sq. ft. (Rs 40,785 in September) and Rs 16345 per sq. ft. (Rs 17,278 per sq ft) respectively.

As these areas have not witnessed any correction, Orbit appears to be making a marginal cut in prices to accelerate volumes. We believe this could be a wise strategy as mid-sized companies such as Orbit may be better off kick-starting with higher volumes and revive working capital needs after a prolonged slowdown, rather than stay uncompromising on the margin front.

Advances received by the company at Rs 626 crore (up 16 per cent compared with last quarter) would provide the much-needed cash infusion for projects.

Even as property advances provided some funding, Orbit reduced its high debt levels that prevailed at the beginning of FY-10. Besides repayments made during the year, qualified institutional placement and conversion of warrants have also reduced debt-equity levels from over 1.3 times at the beginning of FY-10 to about 0.9 now.

Orbit's debtor levels though cause concern, having increased by close to 50 per cent from September to Rs 420 crore as of December. These debtors though do not appear over-due.

Cost over-runs in a couple of projects have also raised concerns. The overruns are also reflected in marginal operating profit margin erosion to about 28 per cent in the latest ended quarter, as against the over 35 per cent average. The company has stated that it has fully accounted for the cost overruns. Going forward, though, mild dip in the average realisations of fresh sales, once they come into books (revenue booked on at least 25 per cent completion of project), may also hurt OPMs marginally.

Divesting stake

Orbit has also been quick to identify projects that may be too large to handle on its own. In its 130-acre Mandwah project (along the coastline), where it plans upmarket gated townships, the company recently sold a part of its stake to IL&FS and had earlier issued convertible instruments to another private equity player.

Shedding stake in a project of this scale (with another 70 acres to be added) may be a necessary strategy to ensure too much capital does not get locked up and, at the same time, allow the project to leverage on its own.

Redevelopment

Orbit may need much equity to tap the redevelopment potential that Mumbai offers. As a good part of the company's projects come under the Mumbai redevelopment laws, they enjoy higher Floor Space Index (FSI), thus allowing the company to build more out of a given land, improving the internal rate of return.

Recent changes have resulted in increased FSI from 2.5 to 3 for redevelopment of buildings that came up between 1940 and 1960. While the immediate upside from this may not be significant, it only adds sheen to Orbit's redevelopment business.

According to estimates, at least 16,460 old buildings built in the above period are available for redevelopment.

via BL