The Hindu Business Line : Prajay Engineers Syndicate: Buy

Prajay Engineers Syndicate's comfortable land bank, dominant positioning in Hyderabad, multiple projects under execution and superior returns on equity, lend visibility to its earnings growth. Investment with a two-year horizon can be considered in the stock.

At the current market price, the stock trades at nine times its expected earnings for FY-08.

This is assuming an expanded equity of Rs 39.7 crore after full conversion of foreign currency convertible bonds (FCCBs), and warrants and subject to the ongoing projects being completed on time.

A Hyderabad-based real-estate developer, Prajay has traditionally focussed on mass housing for the middle- and upper- middle-income segment.

The company has also forayed into the hospitality sector with a three-star hotel.

Changing business mix

While mass housing has been driving Prajay's business, the company has been altering its business mix to gradually shift to the premium housing segment.

The company appears to have followed the trend in other Tier-II cities such as Pune, where the growing income levels fuelled by the IT sector have increased the demand for premium housing.

Over the next four years, the company plans to develop 3.6 million sq. ft. of luxury residentials as against 2.2 million sq. ft of mass housing.

While volumes have driven the company's operating profit margins from 32 per cent to 42 per cent over the last fiscal (from FY-05 to FY-06), we expect this shift in business mix to lend further support to the margins, as luxury segments typically provide relatively better returns for a developer.

The company's foray into this segment has also been well received with a number of projects fully booked, post-offer. Apart from presence in the commercial and retail space on a smaller scale, Prajay's next expansion move appears to be in the hospitality sector which will be let out to operators.

Prajay has finalised plans for five-star hotels and is already running a three-star hotel in Hyderabad which is set for further expansion.If the primary real-estate segment continues to grow at the current pace, contribution to revenues from the hotel segment is unlikely to be significant. Nevertheless, it is likely to bring some steady revenue and propel the bottomline.

Ready land bank

Prajay had a comfortable 650 acres with development area of 18 million sq ft. This land is fully paid and, hence, has less uncertainty in terms of acquisition-related issues. While the magnitude of future plans seems massive in relation to its completed projects, the company appears to have a well-laid strategy. Two key issues — land bank and fund plans — appear to be in place. For one, it has steadily built its land bank to a comfortable position.

This is reflected in the inventory (land being the inventory) jump by five times over FY02-06. Second, over FY-05 and FY-06 the company has raised over Rs 300 crore through FCCBs and warrants. These funds have been raised on time to fund growth plans, especially in the hotel space.

Macro factors

Hyderabad has emerged as one of the best Tier-II cities in terms of being an IT/IT-enabled services outsourcing hub. This has led to soaring land values and demand for residential and commercial space in the city. Prajay has the advantage of being a `local player' with a comfortable land bank accumulated over time, thus averaging the cost. This may give the company an edge over bigger players from the North that are foraying into this city. Further, being an IT hub has also increased the air passenger traffic in Hyderabad, which is likely to translate into higher demand for hotel rooms.

Prajay's return on equity at 65 per cent in FY-06 is on a par with D. S. Kulkarni Developers, which has a superior return among players of similar size. Although Prajay is moving to Goa, Bhubaneswar and eyeing the Mangalore and Puducherry markets, its current projects are concentrated in and around Hyderabad, exposing them to risks of business concentration. Further, while the company is well-geared in terms of land and funds, its execution risks are high, given the scale at which it is ramping up business. From 4.5 million sq. ft of development done so far, the company is aiming at 18 million sq. ft in the next seven years. That the company has been ramping up manpower and treading known territory, lends confidence.

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