Mahindra Lifespace Developer: Promising space - Buy

Falling interest rates on home loans can boost the prospects of many affordable housing developers. Mahindra Lifespace Developer (MLD), an integrated township and residential property builder, could be a key beneficiary. The company’s geographically diverse presence, established position in the growing affordable housing market, and good mix of residential and integrated business cities hold it in good stead.

Also, the company has an early mover advantage in the large format business cities segment, having acquired large tracts of land in Jaipur and Chennai.

The stock currently trades at seven times its trailing 12-month earnings. This is at a discount to other mid-sized developers such as Sobha Developers, Oberoi Realty and Godrej Properties that trade at 16-30 times.

A reason for the stock’s low valuation is the one-time boost in earnings during the April-June quarter of 2014-15 from a land sale. Adjusting for that, the stock’s current price of ₹467 discounts its trailing 12 months earnings per share by 17 times — at the low end of its peers’ valuation range.

MLD’s primary revenue comes from sale of residential property. The company has diversified its operations geographically across metros and smaller cities.

So far, it has developed over seven million sq ft (msf) of residential and commercial real estate in nine cities, including Delhi, Mumbai, Hyderabad and Pune.

Currently, 5.9 msf of residential real estate is under construction in five locations, including Bengaluru, Chennai and Nagpur.

In addition to middle income and luxury homes, the company has also launched affordable housing projects in Chennai and Mumbai.

These projects have seen good traction, with 300 homes sold within three months of launch. MLD also entered the weekend home segment in November 2014 with the launch of a project in Alibaugh near Mumbai. It has also been developing over 4,400 acres in large-format integrated business cities, such as Chennai and Jaipur, under the Mahindra World City brand.

These cities, developed with State industrial development agencies, have manufacturing and office spaces along with residential, hospitality and retail units. The company earns ongoing lease income from these properties.

As of March 2015, over 95 per cent and 44 per cent of the industrial area in Chennai and Jaipur respectively, were leased. Higher rentals for its Chennai space and new customers for its Jaipur space in the coming quarters will help revenue growth.

MLD has also lined up a strong pipeline of projects for the coming year. The company plans to launch 4.5 msf of projects; this includes the next phase in seven of its existing projects as well as three new projects.

MLD holds land banks of over 12 msf to support future project launches, primarily in Chennai. It also recently acquired land with saleable area of 0.32 msf under joint development in Mumbai. The company witnessed strong sales in the last two quarters and the management expects continuing sales traction.

MLD’s consolidated income for 2014-15 increased 54 per cent to ₹1,086 crore, compared with a year ago. Profit increased 133 per cent to ₹266 crore, compared to a year ago.

Income and profit were helped by sale of its Byculla land. Adjusting for that, y-o-y revenue growth was 9 per cent in 2014-15.

Operating margin was however, soft at 22 per cent in the March quarter of 2014-15, compared with around 31 per cent margin in the December quarter.

This was due to lower share of revenue from integrated cities, a high-margin segment. Margins have averaged 25 per cent in the past and may remain at these levels in the next year.

Total debt decreased to ₹1,238 crore in March 2015, from ₹1,336 crore in March 2014. Debt-to-equity decreased to 0.84 times from 1.12 times in the same period last year, helped by loan repayment post-land sales.

COMMENT NOW