Building A Success Story

Puravankara Ltd (PPL) is one of the outperforming stocks in the realty sector. The stock has soared over 260 per cent in the last one year. In this report, we try to dig deeper into the success of PPL and decode its future prospects. 

COMPANY OVERVIEW: 

Puravankara is among the largest developers in South India. Established in 1975, the company has over 43 years of experience in property development, real estate and construction. The company has established a considerable presence in the real estate sector in metropolitan cities of Bengaluru, Mangaluru, Kochi, Chennai, Coimbatore, Hyderabad, Pune, as also overseas in Colombo and Dubai. PPL also has sales and marketing offices in the United Arab Emirates and Saudi Arabia. 

The company's operations span all aspects of real estate development, from the identification and acquisition of land and obtaining approvals to the design, planning and execution and marketing the projects. The company is also engaged in provision of interior services, including maintenance tips related to kitchen, wardrobes, crockery as well as wall cladding, false flooring, texture painting and other home interior services. 

PPL’s luxury and premium real estate projects are branded under the ‘Purva’ brand and their premium affordable housing projects under the ‘Provident’ brand. The company also undertakes independent interior projects, be it a standalone house, apartments in residential complexes or homes in a gated community. PPL has established itself as a brand which gives them a competitive advantage to achieve higher sales volume momentum, premium sales prices and rentals or secure land in prime locations. 

INDUSTRY OVERVIEW: 

The opportunities in the Indian real estate market are expected to touch $180 billion by 2020. The Indian real estate sector is poised to grow at a rate of 30 per cent over the next decade. Also, it is currently the fourth largest sector in the country in terms of FDI inflows. It comprises four important sectors – housing, retail, hospitality and commercial. The housing sector itself contributes about 6 per cent to the country’s GDP. 

Indian real estate ecosystem is undergoing a paradigm shift. The FY2017 was a good year in terms of policy and reforms. The government has enacted several legislations, such as Real Estate Regulatory Act 2016 (RERA), Goods and Services Tax (GST), and Benami Transaction Prohibition (Amendment) Act 2016, to bring transparency in the real estate sector and boost the confidence of buyers, investors and developers. The organised real estate players are expected to benefit significantly from these momentous changes. RERA will be a game changer, especially in the residential home segment. It is expected to ensure greater professionalism, better governance and regulation in the real estate sector. Improved governance and prudent capital management are expected to create a more conducive investment environment. 

PPL has taken steps to gain from the changes in the industry. The company has diversified geographically and has increased its non-South projects by expanding into the western markets (Pune, Mumbai and Goa). PPL has also diversified from the residential into the commercial realty segment. Due to the diversity of the project locations in major southern and western Indian cities, the company could generate sustainable cash flows and earnings throughout the project life cycle. These fund inflows were used in timely capital repayments, re-deployed in the business or distributed as surplus to its shareholders. 

The company has been focusing on debt optimisation to strengthen its balance sheet. Puravankara sold 19 acre land parcel in Hyderabad for Rs475 crore (which it had bought for Rs403 crore in 2007-08) to pharma company Hetero Group as part of the strategy to monetise assets and reduce debt. 

The company has also rolled out the Credit Linked Subsidy Scheme (CLSS ) across the brands and markets, for which it received encouraging response. PPL plans to provide cost-effective financing to ensure complete solutions for all customer needs. The company has strategically allocated resources into the Puravankara and Provident realty brands covering the luxury and affordable premium housing segments. 

The sales of 1.53 million sq. ft. in 2016-17 for Purvankara Limited on a standalone basis, represented a 64 per cent growth over the previous year. Notably, the average realisation was higher by 7 per cent at Rs5897 per sq. ft. in 2016-17. 

PPL has chalked out a plan to launch 14 new construction projects in the next 12 to 15 months entailing an investment of about Rs3,200 crore over the next five years. Betting big on affordable housing, which has got infrastructure status in this year's budget, the company will launch six new projects under its low-cost housing brand 'Provident' and the rest under the premium 'Puravankara' brand by the end of next year. The projects will comprise about 15 million sq. ft. of developable area and nearly 15,000 housing units. 

The company’s strong brand equity, strategic project location and timely construction makes it possible to generate significant sales traction leading to consistent fund inflows. PPL also invests rigorously in its capital allocations. The company prudently manages the portfolio that makes it possible to deepen the presence in Bengaluru and also in the fast-growing western Indian markets of Mumbai, Pune and Goa. 

On the financial front, Puravankara recorded a 17.5 per cent decrease in its revenue to Rs246.06 crore in Q2FY18, as against Rs298.50 crore in Q2FY17. The company’s PBDT too declined by 25.52 per cent to Rs52.84 crore in the second quarter of FY18, as compared to Rs70.95 crore in the second quarter of FY17. The company’s net profit decreased from Rs70.95 crore in Q2FY17 to Rs52.84 crore in Q2FY18. 

On an annual basis, the company posted a 0.71 per cent decrease in its revenue to Rs976.47 crore in FY17 from Rs983.49 crore in FY16. However, the PBDT of the company increased by about 21 per cent to Rs127.54 crore in FY17, as against a negative PBDT of Rs105.17 crore in FY16. The profit after tax of the company also showed a substantial improvement, rising by about 23 per cent to Rs100.51 crore in FY17 as compared to Rs77.49 crore in FY16. 

On the valuation front , the company maintained a PE ratio of 29.25x, as against its peers Sunteck Realty (39.52x) and Sobha (28.03x). The company’s return on equity (ROE) and return on capital employed (ROCE) stood at 5.14 per cent and 10.26 per cent, respectively. 

The company has been maintaining a healthy dividend payout of 31.70 per cent. However, the company has a low interest coverage ratio. Also, the company has delivered a nominal growth of 11.56 per cent over the last five years.

Nevertheless, considering the positive sentiment in the real estate sector, company’s strong brand equity, strategic project location and plans to invest over Rs3200 Crore in 14 new projects, the stock is expected to do well. We recommend our reader-investors to HOLD the stock.