Rights Offer. Mahindra lifespace developers -- grab the plot: Buy

The ₹300-crore rights issue of real estate firm Mahindra Lifespace Developers opened last Wednesday, April 12. The issue is open till April 26.

The rights shares are being issued to eligible shareholders in the ratio of one share for every four shares held.

The proceeds from the issue are to be used predominantly to repay the company’s debt.

The rights shares are being given at ₹292 per share against the current market price of ₹407.

Considering the current price of ₹407, the rights is at a discount of about 28 per cent. Even accounting for the expected decline in the stock price after the rights issue, the offer is at a good discount.

Unlike a year back, the current valuation of the stock seems reasonable; its price-to trailing 12-month earning multiple at 12.5 times is lower than the three-year average of 14 times.

Shareholderscan subscribe to the rights issue. The company, given its strong parentage and diversified geographical presence, is better placed than its peers to benefit from an upturn in the realty market. Also, it has lesser debt on its books and a robust land bank.

Mahindra Lifespace constructs and operates residential and commercial property complexes. Its commercial division includes integrated cities — Mahindra World City — in Chennai and Jaipur. In the last year, it has expanded its commercial portfolio in Chennai and through acquisition of land near Ahmedabad. More than 90 per cent of the company’s revenue and profit come from the residential business. It focusses on mid-premium residential houses.

The company is currently present in six cities — Mumbai, National Capital Region, Pune, Bengaluru, Chennai and Hyderabad, and is increasing its presence in Mumbai, Pune and Bengaluru.

Mahindra Lifespace has a strong pipeline with about 5.5 million square feet (msf) of residential space expected to come on stream over the next three to four years. This could help the company clock 1.5 msf of annual residential sales. .

Over the past year though, weak residential demand took a toll. Sales volumes were subdued for the nine months ended December 2016 at about 0.75 msf. The company had managed annual sales of 1.2 msf in financial year 2015-16 and 1.6 msf in the earlier year.

While demonetisation and the slowdown in the real estate sector have impacted sales in recent times, the company is expected to benefit from the implementation of the Real Estate Regulation Act (RERA) that should set in motion consolidation in the sector.

Also, Mahindra Lifespace should benefit from the government’s thrust to affordable housing. The company has affordable housing projects in Chennai and Mumbai.

Also, in tier 1 and 2 cities, premium housing demand is expected to pick up over the next two-three years.

For the nine months ended December 2016, the company’s revenue was down 3.3 per cent y-o-y to ₹435 crore. But it improved net profit by 96 per cent to ₹84 crore during the period. Strong performance by Mahindra World City Jaipur, where the current DTA (Domestic Tariff Area) is almost leased out, was a trigger. Moreover, lower project costs and its premium project (Vivante) in Mumbai reaching revenue recognition stage helped.

The debt-to-equity ratio, at about one time, is lower than many peers. As of December 2016, it had debt of about ₹1,700 crore. After the right issue, the debt-to-equity ratio should come down to 0.8 times.

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