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Unlocking the growth potential

Accelerated BD activity and healthy balance sheet to sustain growth momentum

* A regional leader…: Kolte Patil Developers Ltd. (KPDL) is one of the leading real estate developers in Pune, with a growing presence in the Mumbai Metropolitan Region (MMR) and Bengaluru markets. In over three decades of its presence, KPDL has delivered more than 26msf of projects, with another 43msf in the pipeline at various stages (ongoing/upcoming/future).

* …with steady performance and healthy balance sheet: During FY12-21, KPDL’s presales bookings remained stagnant at INR12-13b, with occasional spikes in certain years. While company’s debt-averse strategy (net debt-to-equity <0.5x) constrained its growth, KPDL’s emphasis on execution and cash flows ensured that balance sheet further strengthened to a net cash position as of Dec’23.

* Strong pipeline/balance sheet headroom to propel growth: Improved demand momentum, regulatory breakthroughs in MMR with respect to society redevelopment projects, and strategic changes to its township project led to a 36% CAGR in pre-sales during FY21-23. The company now has a robust project pipeline and ample balance sheet capacity to target new projects and maintain growth. It aims to achieve a presales CAGR of 25% in the medium term.

* Profitability and cash flows – the key focus areas: KPDL’s past track record indicates that future growth will be underpinned by profitability and cash flows. Based on the NPV method, we arrive at a value of INR700, indicating a 34% upside potential. We initiate coverage on the stock with a BUY rating.

* Key risks: 1) inability to add new projects as intended, and 2) slowdown in demand.

Delivers 36% pre-sales CAGR over FY21-23 following a stagnant decade

During FY12-21, KPDL’s bookings remained stagnant at INR12-13b, with pre-sales volume sustaining at 2.0-2.5msf, barring a few good years (FY12/FY15/FY19). However, the emergence of multiple growth levers, such as: a) improved demand sentiment post-Covid, b) scale-up in launches of society redevelopment projects in MMR, and c) adoption of a multi-product strategy in its township project ‘Life Republic’ (that led to a higher contribution from Pune), resulted in a 36% pre-sales CAGR, reaching a record INR22b over FY21-23.

Priority launches to sustain the near-term growth momentum

As of Dec’23, KPDL has a project pipeline of 33msf that includes 3.5msf of ongoing inventory, 11.5msf of upcoming projects, and 18msf of future pipeline. At the onset of FY23, management guided for priority launches of 11msf over FY23-25, which increased to 19msf as of Dec’23. Of this, the company launched 7msf until Dec’23 leaving a balance of 11msf (GDV potential of INR90b) to be launched through remainder of FY24 and FY25. Hence, we expect KPDL to deliver a 22% CAGR in pre-sales over FY24-26 to INR45b. Targeted project additions over the next 6-9 months can enable the company to sustain a healthy ~30-35% CAGR over the next two years.

Robust cash flows and healthy balance sheet to entail intensified BD spends

Historically, KPDL has laid utmost focus on cash flows along with revenue growth, which resulted in a steady stream of post-tax OCF of INR4-5b over the last four years. With the scale-up in operations, we expect post-tax OCF to double to INR8b by FY26, leading to cumulative cash flows of INR18b through FY24-26. Further, the net cash position as of Dec’23 also provides comfort and ample headroom to capitalize on future growth opportunities. While the company has been vocal about its aggressive project addition strategy, it is finally taking shape as it has acquired ~6msf of projects with a revenue potential of INR54b (equally split between Pune and MMR) over the last 18 months, with an additional INR40b worth of projects to be acquired over next six-to-nine months. KPDL intends to keep the business development momentum intact for at least the next two years, aiming to spend INR5-6b annually to sustain growth. Investments on new projects will largely be executed through internal accruals, keeping the balance sheet position healthy with D/E ratio sustaining at 0.15x of equity.

Profitability to improve with a lag; expect KPDL to report 21% EBITDA CAGR over FY23-26

KPDL reported an average gross margin of ~40%, leading to an EBITDA margin of ~26% over a period of FY13-20. However, high commodity inflation during FY21-22 impacted the cost economics adversely, leading to a contraction in gross margin to ~28% over FY21-24. We expect gross margin to recover to 34% by FY26, as the impact of 9% CAGR in realization over FY21-23 will be realized in P&L with a lag. As a result, EBITDA margin is likely to improve to 17% in FY26 from 9% in FY24, leading to a 21% CAGR in EBITDA over FY23-26E. PAT margin is also likely to recover to 8% in FY26E, resulting in a PAT of INR1.6b and a RoE of 14%, similar to what the company clocked in FY18.

Valuation and view: Initiate coverage with a BUY rating and a TP of INR700

* After a decade of muted performance, KPDL is witnessing a strong growth in pre-sales as bookings reported 36% CAGR over FY21-23. Given its strong pipeline, we believe the company can maintain 25% CAGR in pre-sales at least for the next two years with further room for growth from new project additions.

* While sustainability of growth beyond that level depends on its ability to close new project additions, the pick-up in pace of BD activity in the last 18 months as well as strong balance sheet should enable KPDL to focus on project acquisitions. Its past track record of steady margins and cash flows also implies that growth will be underpinned by profitability and execution.

* We value the existing pipeline and targeted project additions of KPDL in FY24 based on an NPV basis to arrive at a fair value of INR700, indicating potential upside of 34%. We initiate coverage on the stock with a BUY rating.

* Key downside risks: 1) inability to add new projects as intended will hurt future growth; and 2) any slowdown in demand momentum will lead to a reduction in our pre-sales estimates and also a reduction in spending on new project additions.

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