Indiainfoline - Arihant Industries & Prajay Engineers (OLD)

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From Research Desk

Arihant Foundation & Housing Ltd. (Q1 F9/07 ). Result Update

Property demand in Chennai remained firm in the Oct-Dec quarter, helping AFHL book a 64% growth in revenues. The company currently has 5 on ongoing projects and has booked total sales of 0.19mn sqft during the quarter as against 0.16mn sq ft in the previous quarter. AFHL is currently carrying a Work-In-Progress inventory of Rs590mn, the sales for which should be converted over the next two quarters.

While the CBD, OMR and GST rd have seen stable to rising prices, other areas like Ambattur have not picked up as well as expected. As a result majority of the company’s projects are earning gross margin in the range of 35-40%. However, the commercial project at Ambatur (approximately 55% of revenues in Q1 F9/07) grossed around 22%, pulling down blended margin to 25.3%, a drop of 114bps over Q1 F9/07. However, we expect margin to look up from third quarter as high margin project contribution increases.

In line with the company’s guidance, it has started foraying outside Chennai. AFHL has added four new projects one each in Madurai (21 acres), Vijaywada (50 acres), Poonamali high rd (5 acres) and Mall + hotel (0.6mn sq ft) on the OMR rd. We have yet to factor in these new projects in our estimates, which are likely to contribute to revenues from F9/09.

We have delayed our project completion phase in some of AFHL’s projects (no guidance from the management). As a result we have revised our revenue growth downwards by 17% each for F9/07 and F9/08, while earnings have been revised downwards only 7% and 1% in the respective years. Lower revision in earnings is on account of lower tax rate.

From Research Desk - Arihant Foundation and Housing Ltd.

Arihant Foundation and Housing Ltd.

BUY

CMP: Rs520

Chennai and its suburbs are fast turning into a hot spot for the IT/ITES sector. Skilled labour along with quality Grade A & B space is driving demand for real estate. Arihant Foundation and Housing Ltd (AFHL) with 2 IT Park projects and 15 residential projects in hand is well poised to benefit from the pick up in Chennai real estate demand. We expect the company to report 76% revenue and a 116% profit CAGR over F9/05-08 period respectively. We initiate coverage with a BUY rating and price target of Rs602, implying a 64% upside.

Most IT companies have started setting up shop in tier II cities due to the dwindling cost competitiveness in tier I cities. Chennai offers them with quality grade A & B real estate with abundant skilled manpower. We expect Chennai to fast grow into the next outsourcing destination in line with Hyderabad and Pune.

With 17 in hand projects, AFHL is well poised to benefit from the growth in the property boom in the Chennai market. 15 of the 17 projects are residential in and around the Central Business District (CBD) and Old Mahabalipuram road (OMR), while the remaining 2 are IT parks in the upcoming Ambattur and OMR area.

The company is fast adding size and has planned two townships, one out of which is a 50:50 JV with a national developer. We view the company’s slow evolvement in bringing bigger projects in its fold as a positive sign towards revenue
sustainability. We estimate revenue CAGR of 76% over F9/05-F9/08.

Most old projects with low gross margins (GM) are expected to get completed in F9/06. New projects would improve GMs by 500bps in F6/07 to 37%, which is still 5-7% lower than current prevalent. This would aid a profit CAGR of 116% over F9/05-F9/08.

A major portion of the future revenues, 27% in F9/07 and 65% in F9/08 are expected to come from new projects, which are either recently commenced or would be launched in the next 8-12 months. Delays in launch and execution,
could impact profitability and there by valuations.