Puravankara Projects: Buy

Expectations of a fall in interest rates and an up-tick in economic growth have been positive for cyclical sectors such as realty. The BSE Realty Index is up 38 per cent since its low in February 2014.

With the rally that captures the overall improvement in sentiment likely to be priced in, investors who want to bet on the property sector need to hunt for stocks of developers with specific business segment focus. One such theme is the continued demand for mid-price houses in stable markets such as southern India.

In this space, the Bangalore-based mid-segment home developer Puravankara Projects (Puravankara) is an option. The company has projects in Bangalore and Chennai, besides tier-2 markets such as Kochi and Coimbatore.

The price tag for its properties averages ₹5,000 per sq ft in the premium segment and ₹3,500 per sq ft in the mid-income segment.

Homes at these prices continue to be in demand; also, the buyers are typically sensitive to home loan interest rates. Hence, the segment would benefit when there is a respite in mortgage rates.

The Puravankara stock is also not expensive — the current price of ₹96 discounts its estimated 2014-15 earnings by 14 times. This is cheaper than its historical multiple of around 18 times in the last five years and is on par with peers such as Kolte-Patil Developers.

Still, the stock may be a risky buy currently, given that the company’s margins have been falling and it holds sizeable unsold inventory. So the stock is suitable only for investors with a high risk appetite and a horizon of two-three years.

Puravankara’s revenue grew 35 per cent and 42 per cent year-on-year in the first half of 2014-15 and September quarter respectively. Its premium segment recorded sales area and revenue growth of 30 per cent and 60 per cent respectively in the first half of 2014-15.

Also, while its completed projects sales dropped 30 per cent year-on-year, its ongoing projects sales remained robust. Average sale price per sq ft were up 11 per cent in the September quarter, compared with the same period last year, indicating optimism.

Sales in its mid-end business — under the brand name of Provident — were lacklustre with a 16 per cent and 9 per cent Y-o-Y drop in sales area and revenue respectively. Also, about 17 per cent of its completed projects remain as unsold inventory as of September 2014. But as interest rates fall, this price sensitive segment is likely to see better traction.

One lingering concern is that due to various promotions offered to improve sales, margins are stressed. Net margins declined to 3 per cent in the first half of 2014-15, down from 12 per cent in 2013-14. Puravankara’s margins could improve as the sales mix shifts to more high-end homes.

Puravankara is well positioned to benefit from a pick-up in demand. It has a strong launch pipeline in multiple cities in the next three-four quarters.

It has land assets with saleable area of around 90 million square feet (msf). The company has completed 47 residential projects so far and has 22.7 msf under development currently.

In spite of the market lull, the company launched 1.12 msf of new projects in the first half of this fiscal.

This has helped Puravanakara to collect ₹850 crore cash during the period.

Unlike in the past, the company generated surplus cash in the last two quarters.

Thanks to this, debt remained stable at around Rs 1,600 crore, even as it invested in land. Its debt-to-equity ratio has stayed under 0.7 times in the last few quarters.

The company’s cost of debt also dropped from 15 per cent a year ago to 13 per cent in the first half of 2014-15.