The Hindu Business Line : B. L. Kashyap and Sons: Hold

The company is relatively insulated from uncertainties in land development or correction in market price of land, which have affected construction stocks.

Investors can continue to hold the stock of B. L. Kashyap and Sons (Kashyap) with a two-year perspective. We had recommended investment in the company's initial public offer in February 2006 with a one-year perspective. Growth in numbers, a robust order-book and relatively lower risks compared to other real-estate players add clarity to the company's earnings prospects.

However, the current valuation does not offer an attractive entry point to the stock. Further, the company's foray into joint real-estate development through its fully-owned subsidiary has to pass the litmus test before the stock can command premium valuations. Investors holding the stock must watch this development.

At the current market price, the stock trades at 16 times its likely earnings for FY-08 on a standalone basis. Revenues from the company's furnishing and real-estate subsidiary are likely to be earnings-accretive on a consolidated basis from FY-08.

Unique play on real-estate

Kashyap undertakes construction contracts in the commercial, residential and industrial segments. In other words, it is a construction services provider to real-estate players and corporates. Thus, the company is relatively insulated from uncertainties involved in land development or correction in market price of land, which have affected construction stocks. In this respect, Kashyap is a play on the growth prospects for real estate minus some of the key risks to the sector. While a pure contractor's business does not offer attractive margins, Kashyap has managed to ramp up its operating profit margin (OPM) from less than 6 per cent in FY-04 to over 10 per cent in FY-06. The company's ability to undertake turnkey construction projects that include electrical and mechanical services has helped improve the OPM.

Kashyap's execution period for a good number of projects on hand is about 15 months. This is much less than than two-four years taken by real-estate projects to realise revenue (due to legal and other procedural compliances involved). Kashyap's order-book, as of December 2006, stood at Rs 1,350 crore, almost three times its FY-06 revenues. Over 65 per cent of the orders are from the commercial space with about 17 per cent from the residential segment. With clients such as IBM and Oberoi Hotels and the continuing robust demand for commercial space, the growth prospects for Kashyap appear bright.

Kashyap seeks to offer integrated construction services and as a step towards this, has used a part of its IPO proceeds to set up a fully-owned subsidiary which makes interiors such as wooden doors, frames and cabinets. This unit, expected to go on stream by April 2007, is likely to provide an edge over other civil construction players in terms of providing a one-stop solution, especially in the commercial space.

The other fully-owned subsidiary — Soul Space — is into real-estate development. This space carries the risks associated with land development. However, if the company is able to execute its plan of joint development with landowners, it may well mitigate the risks linked to procurement and holding of land. The company has already started two projects in Bikaner and Pune through joint ventures.

Risks

Uncertainties on cement supply and pricing may affect margins. Further, while the construction activity in the commercial and residential space is robust, any slowdown can affect order ramp-up for the company and profitability.

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