Property markets across the country are hit by tepid demand and there is a slowdown in new launches. Understandably, sales growth of listed developers has been lacklustre in many markets.

But there are exceptions. Inventory levels, while high in markets such as the National Capital Region and Mumbai, are stable in cities such as Pune. And Pune-based residential developer Kolte-Patil Developers (KPD) is among those that have shown strength. Sales booking of 2.85 million sq ft (msf) in 2014-15 is over 30 per cent more than the area in the year before. Booking value increased 46 per cent to ₹1,677 crore in the same period.

Investors have taken note. KPD’s share price has increased from ₹77 when we recommended the stock in January 2014 to ₹181. Investor interest was also boosted by the company’s plans to foray into the Mumbai market which will help increase and diversify its revenue streams. The company has a steady launch pipeline, sufficient land bank and a strong balance sheet to support its growth plans.

The stock is however, not cheap after the run-up. It trades at 22 times its 2014-15 earnings per share, much higher than its five-year historical multiple of below six times. It is also at a premium to peers such as Brigade Enterprises which trades at 18 times 2014-15 earnings.

The positives may already be priced in and there are no near-term triggers. Shareholders can remain invested but avoid fresh purchases in the stock given its sharp rally.

Growth prospects

KPD’s revenue and profits may get a boost in 2015-16, with three projects likely to hit revenue recognition threshold.

Additionally, the slew of new projects planned should continue to aid sales growth. In these new projects, construction is already in progress even before the launch and this is helping sales.

The management indicated that the company saw good sales — about 50,000 sq ft a month at its Ivy Estate Phase-II project in Pune — as customers are reassured by the substantial work already completed.

Also, thanks to the company’s focus on mid-income homes and the strength in Pune’s property market, its long-term prospects appear good. KPD plans to launch seven million sq ft spread over six projects during 2015-16 — four in Pune and one each in Mumbai and Bengaluru, primarily in the mid-income segment.

In 2016-17, the company plans to launch 10 million sq ft in cities including Mumbai. Management also indicated that it plans to re-start commercial property development by next year. With occupancy and rental rates picking up in commercial property, this segment can aid profits.

Unlike most real estate developers with increasing debt burden, KPD has managed to keep its leverage levels low, at 0.1 to 0.3 times equity.

The company’s total debt has increased in the June 2015 quarter to ₹328 crore, up from ₹308 crore in March 2015. Debt may continue to increase as the company expands its operations; its Board has approved a net debt to equity ratio of 0.2-0.5 times.

Concerns remain

Despite the positives, there are concerns as the property market continues to be soft and the company may not be able to raise prices. Expansion plans in other cities may also see delays if demand and prices do not pick up.

Even with good sales momentum, KPD’s revenue for 2014-15 dipped 9 per cent year-on-year to ₹696 crore due to approval delays that impacted new launches. Operating profit fell in line with revenue, while margin was stable at around 29 per cent.

In 2015-16, revenue and margin should improve due to more income from fully-owned and high-margin projects.

Also, the company has unrecognised revenue — advances received from buyers — of around ₹1,400 crore; 50-60 per cent should translate to revenue in the current year when construction milestones are met.

Related Topics
comment COMMENT NOW