ashiana housing dec 10

8/8/2019 Ashiana Housing Dec 10

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Ashiana Housing

Equity Research Presentation

(BSE: 523716) Target Price: Rs. 279 by Dec 2012Prepared on Dec 3 2010 ([email protected])


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Ashiana Housing (BSE: 523716) Target Price:Rs. 279 by Dec 2012 Prepared by:M N on Dec 3 2010

Intrinsic Value (from DCF Analysis): Rs. 279Current Price: Rs. 160 ($1 = Rs. 46)Margin of Safety: 75%Shares: 1.87 Cr (1Cr = 10 million, 1 Lakh = 100,000)

Market Capitalization: Rs. 302 Cr (Rs. 1 Cr = $217,400)Book Value/Share: Rs. 6552 Week Range: Rs. 96 - Rs. 192P/E: 7.6, P/B: 2.48, P/S: 2.42PEG: 0.16, D/E: 0.06, ROE: 34%EPS: Rs. 19, Net Profit Margin: 33%Div & Yield: Rs. 2.8(1.75%)Current Ratio: 1.95, Quick Ratio: 0.58

Headquarters: Kolkata, WB, IndiaRisk: Low (due to high MOS)Rating: BUY

BUSINESS

Ashiana Housing (BSE: 523716) is a mid sized real estate company well known in India. It has a track recordspanning more than 25 years during which they have developed over 92 Lakhs sq ft of area and concrete plans to buildsimilar amount in the next 5 years. It manages group housing complexes for over 18 years with 4000 units under themanagement. It has projects spanning across the country and primarily deals with Retirement Resorts, Group Housing,Hotels, Retail and Facility Management. Ashiana Housing provides differentiated products and services to IndianMiddle class and is a well known name in the industry. It has in house construction capability and follow direct salesapproach. It is supposed to be the pioneer in Retirement Housing in India. Key promoters of this group are O P Gupta,B P Gupta and R K Modi, group of engineers who started real estate development in Bihar back in 1979. Earlier knownas Ashiana Housing & Finance India Ltd (AHFIL) company was incorporated on 25th June, 1986 in Calcutta.


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RISKSRisks include chances of higher lending rates for housing in the country which will lead to reduction in demandfor the real estate market.Barriers to entry are very less but still requires considerable expertise in this domain and lot of capital to enter thehousing building arena.

Business model is not unique as is the case with any other housing developer but operates and finishes highquality projects on time so good rapport among customers.There are regulatory environment issues which create uncertainties for service tax and VAT. The present state ofregulation and tax structure for the real estate sector is quite complex which may create issues in the future.Stock is listed on only one exchange which may sometime results in low liquidity.

FINANCIAL HIGHLIGHTSThere are regulatory environment issues which create uncertainties for service tax and VAT. The present stateof regulation and tax structure for the real estate sector is quite complex which may create issues in the future.Stock is listed on only one exchange which may sometime results in low liquidity.Revenue (2009-10) : Rs.121 Cr (POC Method); Operating Expenditure: Rs. 74.1 Cr (Depreciation using SLM)EBITDA: Rs. 46.9 Cr; Profit After Tax: Rs. 36.7 CrReturn on Average Net Worth: 33%; With a D/E of 0.06, company is Virtually Debt Free.Expected Operating Profits from Ongoing projects (2012- 13) : Rs. 188 Cr.Consistent earnings model for the last decade and expect better growth rates.Average Realization in just Rs. 2100/ sq ft which is low and fits under the affordable housing section.

Ashiana Housing has better than average profit margin, 32% growth rate in sales and free cash flow over last few years.Despite the 12 months downturn in the Indian economy, net profit margin increased by 2% over the last fiscal year andhas shown consistent quarter over quarter earnings. If present profit margins can be maintained it may keep growing atthis pace which will increase economic moat for this company. Firm ranks very high in terms of profitability and otherfinancial ratios when compared to its competitors. Company has out performed the market and its peer realty stocksover last 6 months.


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FUTURE OUTLOOK OF ASHIANA HOUSING

Ashiana Housing has several key projects in its pipeline, some of them are mentionedhere:

Rangoli Gardens in Jaipur: 25 Lakhs sq ft area project with Mangalam Group withan expected realisation of Rs. 500 Cr in the next few years.Retirement Resort in Lavasa (Pune): 30 Lakhs sq ft with 7 Lakhs sq ft saleablearea.

Company has a pipeline of 70 Lakhs sq ft (17 Lakhs sq ft sold till Mar 2010) in 8 keyprojects across five cities with a diverse mix of projects in terms of sq ft and types likevillas, low rise and high rise.

Over 71 Lakhs Sq Ft of area is under development. Ashiana Housing is set to grow

with good pace in the future with the Indian economy now picking up.


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ASHIANA HOUSINGS OPERATIONS


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Ashiana Housing Operations Features

Over 92.2 Lakhs sq ft delivered till date with a record high area constructed of 10 Lakhs sq ft in the fiscal year 2009-10.Consistent growth in Equivalent Area Constructed (EAC) in the last decade with a CAGR of 38% over last 4 years.Future bookings growing with an expected execution capacity to 20 Lakhs sq ft per year by 2012.Profit After Taxes ~ Rs. 37 Cr, High operating profit margin of 39% .

Firm has 80% of its workers in skilled category in the construction department.Well experienced in selecting key locations and scouts for land where the cost of land is less than 20% of the total cost.Distinguish feature from other market players is that it is focused on execution rather than land banking and have adirect sale model to its end user rather than going through broker.Ashiana Housing has low construction cost as it has inside construction capability which also allows for best qualitycontrol. Company targets only Tier 2 and Tier 3 cities for development.Ashiana Housing is a customer centric and investor friendly company with a conservative approach towards expandingwithout debt. Pioneer in Retirement Housing in India.It focuses more on building quality lifestyle housing in India for middle class segment focus.

Company has wide variety of diversified projects in Delhi (NCR), Rajasthan, Maharashtra, Jharkhand.History of over 25 years in Retirement Resorts, Group Housing, Hotels, Retail, Facility Management.Overall good business model with above average profit margins, low cost of capital and higher growth rates for thecompany provides optimistic outlook in the future.

ECONOMIC MOATSAshiana has constructive growth, increased ROIC, ROE and its economic moat was maintained even during the currentdownturn and reflects lot of future potential.Ashiana Housing mainly focuses on Tier 2/3 cities due to conservative approach to acquire land at a cheaper rate.

Intangibles (Brand Name): Ashiana Housing is a well known reputed business house among the Indian consumers whichfocuses on development of community and not just creating another house.Pioneer in senior citizen housings and resort development. Senior citizen housing concept is new in India but AshianaHousing has entered this market early and will take benefit of this phenomenon.Forbes rated Ashiana Housing under 200 best under a Billion Dollar companies of Asia which shows that it passed boththe qualitative and quantitative standards to get into the list.


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MANAGEMENT EFFECTIVENESS AND CORPORATE GOVERNANCE

Experienced and highly educated managers run this company. Fair dealings is key with this group.Management is very conservative and easy going on leverage and debt.Professional culture and good academic background of its managers and over 30 years of experience helped in

facing the downturn effectively.Low dividend policies are suitable seeing the higher future growth prospects.Management is focused on transparency while operating and keep investors interest first.Management is very conservative about the growth using low cost land for development and conducts lot ofmarket research before launching its projects.Managing and maintaining group housing complexes for over 18 years of 4000 units.

STRENGTHS OF ASHIANA HOUSING

The company over the years has achieved the competitive strength in the following areas:

Quality of its Construction.Access to skilled labour.Strong and efficient project management and delivery model.Ability to construct innovative structures.Qualified and experienced management team.

Ability to identify emerging trends in customer requirements.Standardisation and documentation of internal processes.Wide networking of in:house marketing team.

The basic needs of every human being are food, shelter and clothes.The problem of food and clothes are alreadysolved to some extent by modern methods and improved technology. Therefore,the order of priority now would beshelter, food and clothes.


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PROCESS OF BUSINESS

The company is mainly engaged in real estate development which includes location identification, site selection,land acquisition, planning, construction activity & marketing. The business process contains the following stages:

Location shortlisting & Site/Land identificationPrice negotiation with vendorLegal due diligenceExecution of development agreement/POA/Sale DeedSelection of ArchitectsApproval of Drawings & Statutory clearancesSelection and appointment of various agenciesProject planning & monitoring

Project marketing and Handing overINDIAN URBAN SECTOR GROWTH SCENARIO AND HOUSING INDUSTRY OUTLOOK

Real Estate market is expected to grow at a healthy rate in India where GDP (PPP) of the country is going tosurpass Japan in 2011.Organized real estate market here has a share of


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ASHIANA HOUSING'S VALUATION

For this study, 2-Stage aggregate free cash flow model has been used, which is growing over38%, even if we take a conservative growth rate of 25% for the next 5 yrs & 20% for the 5 yrs

thereafter, ourintrinsic value calculation ofRs.

279

shows a MOS of75%.

If we take Earnings Multiples approach, company during growth period have traded over 13times current earnings.Taking a range gives us a valuation of Rs. 247 to Rs. 304 market value for multiple of 13X and16X respectively.Value we get from DCF Model approach ofRs. 279 lies well in b/n the Earnings Multiple(13X- 16X) range of Rs. 247 - Rs. 304.

The main reason for the low valuation is, it is not involved in high profile takeovers and highgrowth at the cost of leverage. But if one is looking to invest for long term, one can get betterthan market returns.Company has significantly outperformed the market index over a period of last many years.Comparing the present P/E and P/B ratio to its historic average and competitors, reflects thatthe company is trading at a lower multiple.Company is not debt ridden and doesnt plan to take excessive debt in the near future.

NAV is based on assets, debt to equity = 0.02 (virtually debt free).Credit Rating and Information Services of India Limited (CRISIL) has provided good rating toAshiana Housing.


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VALUATION METHOD

Method used here is 2 Stage Discount cash flow valuation with an aim to find the intrinsic value of Ashiana Housingbased on the present cash flow, growth and risk. Assuming the life of the assets, here 20 years,To estimate Free cashflows, and Discount rate (r) to apply to get the present value.

Free cash flow = Cash from operating activities Capital ExpenditureFuture Free cash flow growth based on past revenue growth rate of Ashiana Housing from 2007- 08 (Rs. 6.92 Cr) to2009 - 10 (Rs. 11.92 Cr) ~ 38%.Taking a conservative approach due to rising lending rates and expecting a modest free cash flow growth of:Year 1- 5, growth rate 25%, Year 6-10, growth rate 20%.Perpetuity value (Year 11- 20) = FCFn+1/(r-gn),FCFn+1 = FCFn * (1+ gn )/(r- gn), where n = 10 years

Perpetuity Growth (gn) = growth of Indian economy in future (Historic avg. of Indian economy last decade 8%)

Cost of Equity (COE) = r = Risk free rate + Beta* Risk premium

Ashiana Housing has a good credit rating from CRISIL, so enjoys lower credit cost.Risk free rate = 7.5 % (Average Indian Government Bond Yield for 10 Year Notes Rate)

Beta = 1.5 for Ashiana Housing; Risk premium = 5% (Average Indian Historic implied equity risk premium)Therefore COE (r) = 7.5% + 1.5 * 5% = 15%

Free cash flow (year 1-20) =Free cash flow (year 1- 5) at 25% + Free cash flow (year 6- 10) at 20% + Perpetuity value (Year 11- 20)

All the three values discounted at COE. Net value = DCF Estimate (Rs. 281) + Present (Cash-Debt) (Rs. -2)Using the above values and steps Ashiana Housings Per share value is coming out to be Rs. 279.This value is based on discounted free cash flow analysis.Present value of Rs. 160 (as of Dec 3, 2010) shows a margin of safety of 75%.


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DCF Analysis Sheet


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VALUATION CRITERION SCREEN

Valuation of a company primarily involves earnings, growth rate and cost of capitalPrice = Earnings/(Cost of capital - growth rate) (Rs. 19/(.15-.08) =Rs. 272)Sales & Earnings Growth (last 5yrs) > 15%, Low PEG Ratio, High Earnings/PBV Ratio

Return on Retained Earnings > 15%; Initial Rate of Return > 20%Market Capital close to Book value, Return On Equity > 20%, Return On Asset > 15%,Return On Invested Capital > 15%, Earnings Yield > 15%, Current Ratio > 2, Debt/Equity < 1Present P/E < 0.75 * Historical P/E (Average of last 5 years)Inventory turnover, Insider share buy back

Ashiana Housing qualifies well on the above mentioned criterion. It also qualifies the Hurdle Rate > 2 * Long TermGovt. bond yield (7.5%) of 15% as the expected value from DCF of Rs. 297 in 2 years provides us a ROR of 32%.

Book Value of Ashiana Housing is on continuous rise which will ensure that the intrinsic value of Rs. 279 will bereached soon.

FINAL CHECKLIST

Business: Understandable, Economic moat, Growth potential, No Catastrophic Risk.Customers: Stickiness to the company, Loyalty.Suppliers: Relationship with the company.Management: Integrity, Efficiency, Ownership.Board of Directors: Background of the members.Financial: ROE, ROIC and other ratios, Capital Structure.Value: Earnings vs. Value, Margin Of Safety.

Ashiana Housing also does fairly well on the above mentioned Final Checklist Parameters.


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Recommendation for Ashiana Housing: BUY Target Price: Rs. 279 by Dec 2012

Considering the Margin Of Safety of 75%, present price/share of this company at Rs. 160 (Dec3, 2010) seems cheap and undervalued by a considerable margin to it's Intrinsic Value of Rs.279.Historic CAGR of the company shows lot of potential in the future prospects of this company.Sound and able management will lead the company through good and adverse scenario asproven by last year profit margins and record construction of 10 Lakhs sq ft area. Healthypipeline of projects will ensure further growth.Future plans to grow constructively without taking too much debt is in line with shareholders

interest to maximize returns on invested capital.Long term growth prospects for established builders are very optimistic, given the presentinventory and backlog for the industry, Ashiana Housing is well positioned to take advantageof this opportunity.Conservative approach of management towards leverage and low cost land to construction costratio will lead the business towards constructive growth and maintain profit margins in theupcoming inflationary environment.

Good rating from CRISIL and brand name of Ashiana Housing makes it easy to raise capital atlower cost of equity.Given the present urbanization scene, demand in the housing is bound to grow up.Real Estate experts have already made optimistic views about the sector in whole which willhelp in the profitability of the group.

In both good and adverse circumstances, Ashiana Housing is poised to do fairly well.Disclaimer: This Report is for information purpose only and express our views about the company, not an offer to buy or sell.Risks involved in investing is not suitable for all kinds of investors. Seek professional advice if this research is suitable for you.

ashiana housing dec 10

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