One asset class where huge wealth creation has happened over last few years is real estate, where the maximum appreciation has happened in Tier 2 & 3 cities over the last 3-5 years. Yet real estate stocks haven’t performed well over last 3 years. The reason is the irrational exuberance the sector had witnessed during the 2007-08 boom. Most of the stocks are down 80-90% from 2008 highs. Lets rewind back to IT boom of 2000 and similar thing had happened but after the circle of extreme optimism and pessimism things came back to normal and genuine good companies were rewarded by the markets. We feel that real estate sector is also going through extreme pessimism and there could be selected winners going forward. One such stock idea might be – Ansal Property. They were one of the first to start the big township concept in these Tier 2 & 3 cities and going by the appreciation in land prices in these cities, they may be perfectly placed to reap the rewards going forward.
Ansal Property is one of the oldest and biggest builder of North India. Some of the landmark buildings constructed by the company are – Ansal Plaza, Ansal Bhawan, Statesman House etc. Following are the major projects being undertaken by the company:
- Sushant Golf City, Lucknow – 3530 acres of theme based township.
- Esencia, Gurgaon- Developable area of 220 Acres.
- Megapolis Dadri, Greater Noida – 2504 acres of township.
- Aquapolis – Ghaziabad (127 acres), Township in Mohali (309 acres), Sushant City – Meerut etc.
Being based out of Lucknow, we are able to see the huge positive response to their biggest project – Sushant Golf City. The selling prices have gone up dramatically by about 5-6 times over in this project over last 4-5 years and it has become a major success and investing option for people in Lucknow. When the project was launched 5-6 years back, it was on the outskirts of the city but now it is one of the most sought after project. If one goes through the company’s investor updates, one will notice that the company has been reporting robust sales and collection numbers over last one year. The numbers are not showing up in the reported profits as the delivery of flats, plots etc will happen over coming years and as per accounting standards, profits are recognized on percentage completion. Also, in the initial years, the company sells the inventory at marginal profits to make the project a success and the major profits/margins come in the later years.
At current price of Rs.32, the valuations seem very attractive and there seems to be a good margin of safety:
- Market Cap is only 510 Cr while the company’s Lucknow project would be worth 10,000 Cr+ as of today. The company has total land reserves of 11,000 acres giving a total developable area of 288 mn. sq ft.
- The Book Value is 100. The stock is trading at 1/3rd of its Book Value.
- The debt position seems quite manageable with debt to equity ratio at less than 0.90. The gross debt is at about 1,350 Cr and has been reducing gradually. The company has been trying to reduce debt and has pledged shares.
- During the year 2010, the company had done preferential placement to some good investors at Rs 82-85 /share.
- As the real estate sector is not transparent, it’s tough to get exact details and judge the real value. Many often the policies are not favorable to minority shareholders.
- There was a news item a month back that environmental issues has been raised at company’s Greater Noida township. It’s a major project for the company – covering an area of 2400 acre, in case there is some trouble, it may be a major negative for the company.
We look at this company as a dark horse wherein if nothing major negative happens for the company then this stock has the potential to be a multi-bagger over next 3 years. One needs to have patience for things to take shape. One may allocate 2-3% of portfolio at CMP and then accumulate this stock slowly in SIP mode.
Among other new ideas we are digging on are Mazda, Andhra Petro & Dynemic Products. Views invited.