Parsvnath Developers Ltd. KR Choksey Stock Recommendations
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 poses 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
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