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Geared up for burgeoning opportunities; execution key

We recently interacted with Mr Ashish Puravankara, Managing Director, and Mr Abhishek Kapoor, Executive Director & Chief Executive Officer of Puravankara Ltd to better understand the dynamics of India’s real estate market and the company’s plans, going forward. The management sees the fast-consolidating real estate market as an opportunity to reduce unsold inventory (and, consequently, debt) and simultaneously launch new projects. The company has all the right ingredients in place to scale up opportunistically: falling debt, declining cost of borrowing, reducing ready to move-in inventory, well-timed launches, monetisation of large paid-up land banks across cities, and a diversified presence across geographies and price points. Puravankara is also an established brand name, with 74 completed projects (c.42.67msf) across India over 4 decades of operations. However, the key monitorables will be execution of new launches, monetisation of commercial projects, and debt-reduction plans. The management’s outlook on residential demand remains positive and it has initiated price hikes of c.5-12% across projects to offset input cost inflation. Puravankara targets c.5msf (3.4msf in FY21) of annual sales volume. We do not have a rating on the stock.

* Diversified projects portfolio: Puravankara has three categories of products including i) Puravankara – premium residential and commercial development, ii) Provident – affordable housing and iii) Purva Land – plotted development. In terms of markets, it is largely present across Bangalore and has recently decided to re-enter the MMR market with multiple projects. It has also established Purva Land to better cater to the need for plotted development projects. (Exhibit 1)

* Platform with IFC in affordable housing: Further, in Dec’20, Puravankara received funding commitment from International Finance Corporation (IFC), a World Bank Group member, and one of its funds, IFC Emerging Asia Fund (EAF), totalling US$ 76 mn. Supplemented by the company’s own investment, the fund is deployed in four projects, two of which are planned in Kochi and Bengaluru with a saleable area of around 4.5 msf. Plan is to build 4,000 housing units in the next 5-7 years, with other projects to be identified by next year.

* Timely launches: Given the low inventory and high absorption scenario across Indian cities, Puravankara has accelerated plans to launch inventory (projects having c.14msf of area to be launched in phases over the next 6-9 months) and is also pursuing business development activities under the capital light JDA / JV model. These new launches will cover its home city of Bengaluru and Chennai, Kochi, Coimbatore and Mumbai. New projects are expected across ‘Puravankara’ - 5.06msf developable area, ‘Provident’ - 4.82msf, and ‘Purva Land’ - 3.77msf. It looks to target c.5msf (3.4msf in FY21) of annual sales volume. Non Bangalore projects account for 49% of ongoing projects and 45% of new launches. (Exhibit 6-8)

* Debt reduction and lowering cost of borrowing: Puravankara has been able to reduce its debt to INR 18.6bn (lowest in the last 5 years; 0.9x net debt to equity; INR 26.58bn as of 2QFY21) due to a combination of land sale to Godrej Fund Management (INR 6.85bn worth of land sale; INR 5.15bn received) and reduction in ready-to-move-in inventory (down to 0.43msf spread across 9 projects; 0.82msf as of 30Sep’20; lowest in 5 years). As a result, the cost of borrowing has also come down to 11.30% (12.00% as of 2QFY21); the target is to bring it down further to c.10% through refinancing. (Exhibit 13)

* Commercial monetisation on hold: Puravankara has c.6msf of commercial space of land available where design planning has already been concluded and it is in the process of getting approvals. However, construction is unlikely to start in the absence of Letter of Intent / pre-leasing commitment. Simultaneously, the management is also in discussions with private equity firms to explore possibilities of creating a platform.

* Land bank monetisation: The company has substantial paid-up land bank (64.42msf spread across cities; 50.88msf Puravankara group interest; largely Bangalore; Exhibit 2). Going forward, it has no plans of land banking and intends to turn around projects within 6-8 months of acquisition. (Exhibit 2)

* Long track record and established brand: Puravankara has been present in India’s real estate market for over 4 decades and has completed over 74 projects (42.67msf; Exhibit 2) primarily across Bangalore, Chennai, Hyderabad and Kochi.

* Internal transformation: Puravankara has recently focussed on collaborating with IBM to reinvent processes and lead technology based innovation. It plans to integrate SAP cloud environment to have a real-time visualisation of market fluctuations and, thus, create an intelligent workflow.

* Starworth Infrastructure and Construction Limited – construction solutions subsidiary: Puravankara has a design-build, civil and MEP subsidiary in Starworth Infrastructure and Construction Limited for a wide variety of real estate and infrastructure projects. It offers precast solutions from a factory in Bangalore and has an order book of INR 10bn (as of 30Sep’21) and is showing growth in third party clients.

* Execution the key: While Puravankara does have the basic tenets in place it needs to ramp up on launches and create higher operating surpluses. The key monitorables will be execution of new launches, monetisation of commercial projects, and debt-reduction plans. We do not have a rating on the stock.

* Management positive on residential sector: The management’s outlook on residential demand remains positive and is looking to accelerate launches on own land banks as well as looking for business development opportunities. It has initiated prices hikes of c.5-12% across projects to offset input cost inflation.

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