parsvnath deveopers ltd--market out performer

Parsvnath Developers Ltd.

 

Q3 FY08 Result Update

 

Key Data

 

 CMP

Rs 201

 Date

March 27th 2008

 Sector

Real Estate

 Face Value

Rs.10  

 BSE Code

532780

 52 Week H/L

Rs 598/ 170

 Market Cap

Rs 3718 Cr

 

Investment Rationale

 

Extensive Land Reserves at low cost

Parsvnath Developers Ltd. (PDL) conducts its activities in 49 cities across 17 states in India The company has 210 mn. sq. ft. of land reserves, of which around 200 mn. sq. ft. (approximately 95 percent) are fully paid and have clear titles. For the balance 10 mn. sq. ft. around Rs700cr - Rs800cr of balance payment is to be made to various government authorities. The company's average land cost is around Rs195 per sq. ft. The company is being conservative in acquiring additional land. It is focusing on its strategy of execution and sale of existing land reserves. It prefers to acquire additional land only when they are available at reasonable prices.

 

Robust Business Model- PDL has de-risked its portfolio by diversifying across various cities and verticals:

 

  • Residential: PDL's business model focuses on the development of large integrated townships (38% of land bank) where the average cost of houses range below Rs 40-50 lakhs. Residential demand is largely intact with funding arrangements in place and corporate demand for houses is also high in this segment. In the Tier 2 / Tier 3 cities and the Delhi region, where the company has a major portion of its land bank, the demand exceeds supply.In the event of a slowdown due to economic factors, PDL expects demand drivers to be affected for high value properties, i.e. above Rs40-50 lakhs. It can be seen that PDL is playing safe and has a conservative model.
  • Retail: In the metro regions, demand matches supply, while only in outskirts there could be a problem of excess supply. PDL has all of its properties in the city regions making it a safe play.
  • Commercial: Demand in this segment is strong. The introduction of REITs is likely to have a positive impact on this segment.
  • DMRC- Earnings would also be supported with rentals from Delhi Metro, which are expected to start from early FY09. The company expects the annual rentals from Delhi Metro to reach Rs 325 crore by FY11.

Superior Execution abilities- Execution is one of the biggest challenges faced by realty companies. PDL plans to complete development of its total existing land bank of 210 mn. sq. ft. in the next 3-5 years. This may pose an execution risk in terms of raising adequate working capital and rising construction costs. We expect the company to meet this risk through its pre-selling model and in-house construction activities. Parsvnath has a policy of pre-selling approximately 30-40 percent of its projects which helps the company to meet its cash flow requirements for projects under development. Currently, the company has sold 35 mn. sq. ft. of its 76 mn. sq. ft. area under development. Its in-house construction activities help in keeping construction costs under control and deliver projects on time.

 

Realizations Outlook

For all future sells, PDL expects the selling price on an average to be around Rs3200 to Rs3500 per sq. ft. (Rs3000 in worst case scenario). The company's average land cost is around Rs195 per sq. ft. The company expects the total construction cost (including land cost), to be around Rs1400 to Rs1500 per sq. ft. after including the impact of hikes. Given that the average construction cost stays within Rs1500 per sq. ft., the comfort level is higher even in the worst case scenario.

 

  Key Developments

In line with its foray into the hospitality sector, Parsvnath Developers Ltd has announced a joint venture between its subsidiary Parsvnath Hotels Ltd (PHL) and Royal Orchid Hotels Ltd (ROHL) to develop and manage hotels across the country. While PHL would hold majority stake of 70 per cent, ROHL would have 30 per cent stake in the joint venture. Royal Orchid Hotels would manage the hotels even as the joint venture company would own and develop these projects. The joint venture firm would operate under the name ‘Parsvnath Royal Orchid Hotels'.

 

Financial Performance

Consolidated net sales of the company grew 56 percent from Rs298.2 crore to Rs.465.3 crore in Q3 FY08 compared with the previous year. EBITDA margin (incl oi) went up from 30.6 percent to 37.5 percent and as a result net profit grew 109 percent to Rs112.6 crore from Rs.53.9 crore compared to Q307.

 

Valuations

Based on its TTM (December 07) earnings, PDL is quoting at P/E multiple of 8.3x at CMP of Rs.201. M Cap/ Sq. Ft stand at Rs177


  

Industry Scenario

 

Indian real estate market is still at a nascent stage. It is expected to grow to a $50 bn industry by the year 2010, therefore even though it has gone up rapidly in past year there is still potential for massive upside in the coming years. We believe we are witnessing a structural bull run in the India real estate market owing to the well documented factors such as India being the second fastest growing economy, expanding service sector, rising purchasing power, faster urbanization, increasing Impact of IT/ITES and organized retail and improving regulatory framework.

 

Demand Drivers: 

 

Growth in Residential Segment: The  residential sector is expected to continue  to  demonstrate  robust growth  over  the next five years, assisted by the  rising  penetration  of housing  finance  and favorable tax incentives. The amount spent on new middle and higher income housing was Rs.1.72 trillion in fiscal 2005 and is expected  to grow further at a CAGR of 18.6 percent over the  subsequent  five years to Rs.4.03 trillion in fiscal 2010.

 

IT/ITES growth: The phenomenal growth in the IT/ITES sector including BPO/Call centers is expected to continue and generate additional employment which will result in increased demand for commercial space. Based on the manpower/  workspace requirement  in the IT/ITES sector, the growth in this sector is likely  to translate into construction investments of Rs.148 billion (118 mn sq. ft.) by 2007-08 as compared with investments of Rs.74 billion (61 million sq. ft.) in the last 3 years.

 

Retail Demand: The Real Estate development in the retail segment has been growing rapidly.  The increase in disposable incomes, demographic changes (such as the increasing number of working women who spend more, the rising number of nuclear families and higher income levels within the urban population), the change in the perception for branded products, the growth in retail malls, the entry of international players and the availability of easy finance will drive growth in the organized retail segment. It is expected that the boom in the retail sector will result in construction investments of Rs.112 billion over the next five years.

 

Multiplex Growth: Another growth booster for Real Estate activities is the growing demand for multiplex cinemas. Multiplexes typically have 250-400 seats per screen as against 800-1000 seats in a single screen theater which gives multiplex owners   additional flexibility, enabling them to   optimize   capacity utilization. The Indian cinema industry is expected to reach approximately Rs.153 billion by 2010, contributing 25 percent to India's entertainment industry.

 

SEZ: Special Economic Zones are geographically defined  enclaves  established for  the  purpose  of  promoting  exports and  are  deemed  to  be  foreign territories  for  purposes of Indian custom controls, duties  and  tariffs. There are three main types of SEZs, namely, Integrated SEZs, which may consist of a number of industries; Services SEZs, which may operate across a range of defined services; and Sector specific SEZs, which focus on one particular industry line. SEZs, by virtue of their size, are expected to be a significant new source of Real Estate demand.

 

Hospitality Industry: The hospitality sector in India is witnessing robust growth, supported by India's growing economy as well as increased business travel and global tourism.  Furthermore,  the  increase in  disposable  income  among  Indian workers  coupled with rapidly changing lifestyles has increased demand  for quality  hotels  and  resorts  across the country,  it  is  estimated  that investments  in  the  hotel industry will aggregate  approximately Rs.90 billion over the next five years.

 

Developments and Impact 

 

·         Parsvnath Developers has announced the start of construction of 'Parsvnath Preston' a high-end group housing residential project, in Sonepat, Haryana. The expected realization from the project is over Rs 500 crore in next 3 years including this financial year. The project is spread over a saleable area of 2.2 million sq. ft. Parsvnath Preston is a part of Parsvnath City, a township project from Parsvnath which will also have School, Health care facilities, shopping mall, club etc, the project is just 17km far from Delhi border, making it well connected from the National Capital region

 

·         In line with its foray into the hospitality sector, Parsvnath Developers Ltd has announced a joint venture between its subsidiary Parsvnath Hotels Ltd (PHL) and Royal Orchid Hotels Ltd (ROHL) to develop and manage hotels across the country. While PHL would hold majority stake of 70 per cent, ROHL would have 30 per cent stake in the joint venture. Royal Orchid Hotels would manage the hotels even as the joint venture company would own and develop these projects. The joint venture firm would operate under the name ‘Parsvnath Royal Orchid Hotels'. Under the agreement, Parsvnath Royal Orchid Hotels proposes to develop 10 hotel projects in next five years across India, categorized into four 5-star, four 4-star and two 3-star hotels, resorts and serviced apartments. The construction on these hotels would involve an investment of over Rs 500 crore spread over the period of three to five years. There would be at least 1000 rooms would be built under this joint venture.

 

·         Parsvnath Developers has launched the first of its kind mega mall cum multiplex, Parsvnath Eleganza in Dehradun. The company will invest Rs 40 crore in developing the complex. Parsvnath Eleganza is the first such mall-cum-multiplex being developed in the city. Located at prime location of Rajpur Road, the mall comes with an added advantage of a 4-screen multiplex within the complex, which gives another reason to visit the complex. Having a saleable area of 1.5 lakhs square feet, the mall is spread over four floors, will be fully air-conditioned and will have 100% power back-up at all times.

 

·         Parsvnath Developers' subsidiary Parsvnath Hotels Ltd, has signed a memorandum of understanding with Fortune Park Hotels Ltd (FPHL), a wholly owned subsidiary of ITC Ltd, to manage 50 hotels across India in the next three to five years. Parsvnath Hotels Ltd (PHL) plans to pump in about Rs 2,500 crore in these hotel projects. The strategic tie-up would have 20 five-stars, 20 four-stars and 10 three-stars and budget hotels. Under the agreement, PHL would own and develop the hotels and FPHL would manage them. The hotels would run under the brand name of Fortune Select, Fortune Park, Fortune Inn and Fortune Faith. More than 4,000 rooms would be constructed under these brands for various categories. Fortune Select would have at least 100 rooms, Fortune Park would have 75 or more rooms and other brands would have over 50 rooms.

 

Financials                                                                                                     

 (Rs. Crore)

Particular

 Q3 08

 Q3 07

 % Chng

9 month ended Dec 07

9 month ended Dec 06

 % Chng

 FY07

Net Sales

465.3

298.2

56.0

1,269.5

836.4

51.8

1,510.3

Other Income

31.8

8.2

287.6

54.8

12.3

344.3

24.2

Total Income

497.1

306.4

62.2

1,324.3

848.7

56.0

1,534.5

Total Expenditure

310.4

212.6

46.0

819.7

618.8

32.5

1,092.9

a) Construction Cost

289.4

200.1

44.6

764.3

582.0

31.3

1,037.4

As % of Sales

62.2

67.1

(7.3)

60.2

69.6

(13.5)

68.7

b) Employee Cost

9.7

6.7

46.1

26.8

13.2

103.4

21.8

As % of Sales

2.1

2.2

(6.4)

2.1

1.6

34.0

1.4

c)  Other expenses

11.3

5.9

92.8

28.6

23.7

20.9

33.7

As % of Sales

2.4

2.0

23.6

2.3

2.8

(20.4)

2.2

EBDITA ( Excl OI)

154.9

85.6

81.0

449.8

217.6

106.7

417.4

EBDITA ( Incl OI)

186.7

93.8

99.1

504.6

230.0

119.4

441.6

 Interest

8.3

8.8

(5.1)

21.3

13.9

53.4

19.3

Gross Profit

178.3

85.0

109.8

483.3

216.1

123.7

422.3

Depreciation

6.2

3.8

62.0

15.6

9.2

70.1

14.3

Profit before tax

172.2

81.2

112.1

467.7

206.9

126.0

408.0

Provision for tax

59.6

27.3

118.2

150.2

67.6

122.3

98.1

Current Tax

55.4

25.5

117.1

146.6

66.5

120.5

100.8

Prior adjustment

2.4

2.6

 

2.4

2.6

 

 

Deferred Tax

1.8

(1.0)

(278.9)

0.8

(1.9)

(141.4)

(3.2)

FBT

0.1

0.2

(56.7)

0.4

0.3

34.0

0.4

Net Profit (PAT)

112.6

53.9

109.0

317.5

139.3

127.9

309.9

EPS

6.1

3.3

 

17.2

9.1

 

18.2

 

Important Ratios

 

Particulars

Q3 08

Q3 07

9 month ended Dec 07

9 month ended Dec 06

FY07

Total exp/Income

62.5

69.4

61.9

72.9

71.2

Total Exp/Net Sales

66.7

71.3

64.6

74.0

72.4

EBDITAM ( Excl OI)

33.3

28.7

35.4

26.0

27.6

EBDITAM ( Incl OI)

37.5

30.6

38.1

27.1

28.8

Interest / Sales

1.8

2.9

1.7

1.7

1.3

Gross Profit Margin

38.3

28.5

38.1

25.8

28.0

Tax/PBT

32.1

31.4

31.4

32.1

24.7

Net Profit Margin

24.2

18.1

25.0

16.7

19.3

 

Financial Performance

 

Consolidated net sales of the company grew 56 percent from Rs298.2 crore to Rs.465.3 crore in Q3 FY08 compared with the previous year. EBITDA margin (incl oi) went up from 30.6 percent to 37.5 percent and as a result net profit grew 109 percent to Rs112.6 crore from Rs.53.9 crore compared to Q307.

 

Valuations

 

Based on its TTM (December 07) earnings, PDL is quoting at P/E multiple of 8.3x at CMP of Rs.201. M Cap/ Sq. Ft stand at Rs177

 

Concerns & our views on them

 

Possibility of construction costs rising- Any increment in company's construction costs would impact the company's profitability. We have therefore factored an increment in construction costs with respect to raw material costs in our estimates.

 

Softening of prices- PDL believes that the demand is largely intact in its major markets and the prices on an average would remain in the Rs3200-Rs3500 range and Rs3000 in the worst case scenario. Given that the average construction cost stays within Rs1500 per sq. ft., the comfort level is higher even in the worst case scenario.

 

Timely execution of projects- PDL has presold approximately 35 mn. sq. ft. of its 76 mn. sq. ft. area under development. This enables timely availability of cash flows to meet working capital requirements. Moreover, PDL has an in-house construction team to keep costs in check and to deliver projects on time

 

Growth- The growth for the company in the coming years is likely to be fueled by the following factors:

 

·         Expanding Footprints- The Company want to increase its presence to 20 states and 250 cities across India Its strategy is to enter untapped tier II and III duties thereby having the first mover advantage in terms of availability of land at low cost and availability of skilled manpower and resources. Rapidly increasing purchasing power and shifting of IT/ITES Company to smaller cities to cut cost is fueling demand for real estate in these cities.

·         Leverage DMRC experience- Parsvnath has an agreement with DMRC for development of space at 13 stations and then leasing out developed space to retail tenants for 12-30 years. With the expansion of Metro Rail in Delhi and NCR region and development of Metro Rail in other major cities like Hydrabad, Chennai, Bangalore the company can leverage its experience of DMRC and bid for such projects. The company has also bagged contacts from BEST to develop a modern bus terminal and shopping malls at Kurla and Mahim bus stations in Mumbai. 

 

Relative Valuations

 

Particulars

PDL

PPL

Unitech

Sobha Developers

Sales(Rs cr)

1669.2

509.3

3869.9

1305.7

PAT(Rs cr)

450.0

172.3

1658.7

220.0

PAT margins (%)

27.0

33.8

42.9

16.8

EPS(Rs)

24.4

8.1

10.2

30.0

P/E(x)

8.3

27.9

27.5

19.6

Land Bank(mn sq ft)

210.0

116.0

646.0

156.0

Mkt. Cap.(Rs Cr)

3718.0

4803.3

45714.9

4298.5

Mkt. Cap/sq ft(Rs)

177.0

414.1

707.7

275.5

 

Note:    1. Figures are based on TTM (December 07) earnings

         

On M Cap/ Sq.ft basis PDL is attractively valued in comparison to Puravankara, Unitech and Sobha, therefore leaving more upside potential in stock price. On P/E multiple also, the stock is cheapest amongst peers. Looking at the attractiveness of the realty sector, strong revenue growth and diversified business model of PDL, we envision a bright prospect lies ahead for PDL. We recommend investors to buy for long term.

 

Technicals

 

Last Price

 

201.13

13   day EMA 

 

205

50   day EMA

 

268

200 day EMA 

 

335

 

The stock is moving upwards. The support for the stock exists at around 191 levels. The MACD indicator for the stock is moving upwards in negative zone. Investors can buy the stock at declines.

 

Recommendation & Investment View

 

Recommendation : Market Out Performer

 

Investment View :  Buy
 
Source: KR Choksey