Anant Raj Industries Ltd: On the way to becoming debt free

Anant Raj Industries Ltd (CMP: Rs.50.90), a Delhi based real estate company, launched its township project namely 'Anant Raj Estate' at sector 63A, Gurgaon in Haryana, a couple of months back. The township project comprises of luxury villas, plots, residential flats and independent floors. The project is located in the vicinity of planned high end development both in corporate and commercial sectors. This phase of project is spread over 100 acres. Anant Raj Industries is armed with one of the largest land banks in the region and is in the process of building an array of Special Economic Zones (SEZs), IT Parks, Hotels, Commercial Complexes, Malls, Residential / Service Apartment and other infrastructure projects. It was debt free till March 31, 2010. On 31st March 2011 or may be as of today the company has some debt in its books. 
Now, if you look at the news flows during the last few months, we would find that a number of marketmen, has given a buy call on the company, with a target price varying from Rs.83 to Rs.100. The CMP of the scrip is now Rs.50.90, while we have strong supports at Rs.49.50--50.30 ranges. Or in other words it should not go below Rs.49.50 on a closing basis, considering the positive news I am getting from the sources. Hence, if we speak about Chartical perspective, then we are in a situation, where the downside seems to be capped while on the upside it can give more than 50% return from the CMP. It is trading near its monthly low of Rs.45.05, which further caps the downside.

Speaking, fundamentally, we find that, the scrip has a book value of Rs.127.23, P/E of 13.76 (Industry P/E: 17.21), Market Cap of Rs.16502.04 Cr, which is almost half its enterprise value. 

Now let us see, which MFs invested in this company:

(i) Reliance Infrastructure Fund

(ii) Reliance Infrastructure Fund - Institutional Plan
(iii) Reliance Infrastructure Fund 

(iv) Reliance Infrastructure Fund - Institutional Plan

(v) Reliance Infrastructure Fund - Bonus

Now, if you look at the further data, you would find that Mr.Ashok Sarin, bought 34945 shares in NSE and 4111 in the BSE from the open market on 22nd May, 2012---the deal executed, through Pace Broking Services Ltd. Moreover, the promoters hold 61.96% of shares of the company, while the FIIs hold 20.33%. Besides this the private corporate bodies+Banks Fin. Inst. and Insurance hold 8.19% of the shares of the company--this leaves very less number of shares to be traded in the Bourses (or 90.48% of the shares are blocked). The general public holds only 5.91% of the shares of the company--this actually gives premium value to its share price. 

Now let us see what the brokerages and marketmen have said about this scrip during the last few months:

(i) One of them on 10th April, 2012, said that it can move to Rs.100. He says, "The company was debt free till March 31, 2010. On 31st March 2011 or may be as of today the company has debt of close to about Rs.1000 crore; but the company in FY11 has acquired about 218 acres of land for about Rs.830 crore, which will give them 13 million sq ft of developable or saleable area. So one can say that they are tangibly holding that debt with a good quality of land which has really in fact appreciated and if you see their net current assets which is to the extent of about Rs.2700 crore against the net worth of Rs 3400 crore. The company has been focusing more on the rental income. On the first 9 months of FY12 the rental income is close to about Rs.65-66 crore which was at Rs.76 crore for whole of FY11, which means they are retaining the properties in their books on which they are having the annuity income. He was expecting it to become debt free in the next 18 months. 

(ii) Prabhudas Lilladher is bullish on Anant Raj Industries and has recommended accumulate rating on the stock with a target of Rs 83 in its February 10, 2012 research report. According to them in the month of January 2012, the company launched a large township project in Sector 63A Gurgaon which comprises of Luxury Villas, Plots, Residential Flats and Independent Floors. This phase of the project is spread over 100 acres. The report says, that the company's project trajectory looks quite strong with the launch of this project as it expects it to drive sales over the next few quarters. Besides, a couple of other launches like Bhagwandas Road and Sonepat are also lined up. The brokerage firm expects the rentals to further strengthen to a run-rate of ~Rs.340 m by FY13 onwards on account of incremental revenues from the mall. The report says, "The company's NAV stands at Rs.150. On account of better visibility of project launches, we are reducing the discount to NAV from 50% to 45%, thereby, giving us a TP of Rs.83". 

Another Brokerage Firm, Angel Broking Ltd, has come up with its June quarterly earning estimates for real estate sector. According to the research firm, Mumbai real estate prices have increased significantly over the past few quarters, that too at a much faster rate than other key cities, and have been accompanied by falling absorptions. In our opinion, the increase in prices can be attributed to declining launches seen over the past few quarters, for which uncertainty due to development control regulation (DCR) in Mumbai and slow approval process has played an important role, thus leading to fewer launches. However, with new DCR rules in place, it expects launch activities to significantly improve over the coming quarters. Prices in Mumbai have rallied by 80% since the end of 2009, followed by Pune (30%) and Chennai (20%).
The brokerage house says, "For 1QFY2013, we expect residential volumes to report flat to moderate growth on a sequential basis on account of weak demand due to high interest rates and elevated property prices, especially in Mumbai and NCR. We are of the opinion that a 10-15% price cut in Mumbai can lead to significant demand revival in Mumbai. Revenue of real estate companies is expected to be largely driven by execution of existing projects, though execution delays remain a cause of concern. Inventory levels are expected to remain high in Mumbai and NCR".
Cost increase has been moderated:
Around 70% of the construction cost comprises material (steel and cement) and labor costs. Although cost overruns have been a cause of concern for real estate developers in the past, they seem to be moderating now. For instance, in 1QFY2013, cement price increased slightly to ~Rs 290/bag from ~Rs 270/bag in 1QFY2012; steel prices, on the other hand, remained more or less stable at Rs.42,886/tonne in 1QFY2013 vs. Rs.42,250/tonne in 1QFY2012.
The brokerage firm has come up with buy recommendations in the following counters:

(i) Mahindra Lifespace Developers Ltd

(ii) HDIL

(iii) DLF Ltd
(iv) Anant Raj Industries Ltd
Outlook and valuation:
India's Realty Index is currently ruling near its lifetime low seen in 2008. However, things are better than 2008 with respect to project visibility, cash flow, net debt-equity and growing disposable income. Further, refinancing of loans from the banking sector will give some respite to developers in the  falling volume scenario. Having said that, the absorption and not price appreciation will drive residential growth over the next few quarters. Amidst this scenario, new launches have been more rewarding for developers who have launched projects at a 10-15% discount to prevailing market rates. Further, high inventory is still hampering commercial recovery, especially in the office space with vacancy rates still elevated in key cities, but the Angel Broking does not expect the commercial space to deteriorate further, given the falling number of launches in the space. Although the situation is now much better than that in 2008, high debt levels, falling absorptions and high inventory remain a challenge for the sector.