Strong backing of parent and the ability to shift focus to different regions to improve sales, are positives.

The listed realty space currently shows little promise given the tepid sales growth and declining earnings of real-estate companies. Yet, in this sector, there are select stocks such as Mahindra Lifespace Developers (Mahindra Lifespace) that offer a good entry point at this juncture. Sound balance-sheet, strong backing of parent and the ability to shift focus to different regions to improve sales, all buttress the growth prospects of the company.

Investors with a perspective of not less than three years can consider limited exposure to the stock of Mahindra Lifespace. At Rs 322, the stock trades at 10 times its expected consolidated per share earnings for FY-14.

This is at a discount to some of the currently favoured realty plays such as Oberoi Realty as well as Mahindra Lifespace’s own average price-earnings ratio of 20 times in the last three years.

We do not expect the stock to command its high historical valuation in the next year or so, as profit margin pressures may mute earnings growth.

The real-estate slowdown over the last few quarters in the National Capital Region and Mumbai affected players focussed in that region.

While Mahindra Lifespace too saw a dip in activity initially, it quickly ramped up in cities such as Pune, Nagpur, Hyderabad and Chennai. These cities witnessed robust offtake in residential units. Mahindra Lifespace was not new to the regions; it simply increased its activity there.

NCR and Mumbai now make up for only a fifth of the company’s saleable area of current and forthcoming projects with other cities accounting for the rest.

That said, lower presence in the super metros meant taking a hit on average realisations of units sold. From about Rs 5,000 a sq. ft in FY-11, realisations fell to Rs 4,900 in FY-12 and Rs 3,500 in the June quarter of FY-13. Any further marginal fall cannot be ruled out, as ongoing projects are tilted towards second-rung cities.

Still, Mahindra Lifespace may be able to contain a sharp fall in margins as long as it keeps its sales volumes going. Volumes improved somewhat from 0.13 million sq. ft in the March quarter to 0.16 million sq. ft in the three months ending June. Projects that were delayed by lack of approvals led to the slow uptick in volumes.

Over the next two-three years, we expect Mahindra Lifespace’s pipeline of projects of 6.48 million sq. ft., to keep volumes up. While there was some initial delay in receiving approvals, the company got environment clearance for its projects in Pune and Hyderabad and Chennai in the June quarter. These projects, which account for a chunk of the pipeline, should take off soon, lending visibility to revenue.

Diverse clients

Mahindra Lifespace has not had much difficulty selling its projects both in Mahindra World City (Chennai and Jaipur) as well as other projects.

While IT companies occupy around 50 per cent of the space in Mahindra World City (MWC) in Chennai, multinational manufacturing companies and apparel makers too inhabit a good chunk.

In FY-12, for instance, the company added Ingersoll Rand (US), Guangdong Greatoo (China) and American Axle Manufacturing in its Domestic Tariff Areas. In all, the Chennai MWC, with occupancy of 92 per cent, has emerged as a successful business model. Its MWC project in Jaipur, a joint venture with a Rajasthan Government undertaking is also a multi-product SEZ with emphasis on engineering. Given this mix, the company is unlikely to be hit by any slowdown in the IT space.

Financials

Mahindra Lifespace expanded its consolidated sales by a healthy 27 per cent annually over the last three years to Rs 701 crore in FY-12. Net profits expanded 21 per cent during this period to Rs 129 crore. After a tepid fourth quarter, Mahindra Lifespace bounced back in the first quarter of FY-13, helped by a divestment in its Ghatkopar project in Mumbai.

While the value of this sale is not known, it would likely have driven the 72 per cent increase in net profits in the June quarter over a year ago. EBITDA margins, excluding other income also shot up to 30 per cent in the latest quarter. But given the lower realisations, margins may settle in the 22-23 per cent range, as seen in March 2012 quarter.

With a debt-to-equity ratio of 0.4 times (consolidated), the company is also comfortably placed to fund its ongoing working capital requirements, even as it can use its reserves to top up the current land bank of 12 million sq. ft.

(This article was published on August 4, 2012)
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