Let me start with an admission! I have been ignoring this stock for some time now just because I suffered from what Charlie munger describes as “influence from mere association” bias. In simple terms it means a stereotype was created in my mind that all real estate stocks are low quality stocks marredwith accounting manipulations and shoddy business practices and hence one industry which I alwyas ignored. As I mentioned, Ashiania passed all the filters I had put for screening and wasflashing on theradar for many months along with some of the stock I created large positions in. Yet, to my mind, it was not even worth digging just because it was from real estate. Last week, I was trying to find undervallued companies by wonderful tool screener.in meeting strictest of standards in return ratios, leverage, growth andpitroski score consistently for 10 years. There too Ashiana popped up. I thought, it deserved at leastsome digging. As I started reading their AR, I was getting glued to what management had to say. They dissected their business model threadbare and what came out was very interesting.
Since then, I have tried to read their previous ARs and did quantitative analysis for 10 years story. On both the fronts it look excellent. My key takeaway from my digging is.
Differentiated and Asset Light model: I thinkasset light business modelhas been a key contrubutorto success for the Ashiana as they have ingrained mindset of “production” approach and hence land is always seen as raw material and final housing project as product. This is vastly different from “land bank” approach that is followed by all and sundry RE players like Unitech, DLF and many others. Just look at Asset turnover ratio of Unitech and DLF; It is0.11 and 0.19 for Unitech and DLFrespectively while that of Ashiana is 0.94. In many years from 2005-2008, it was in the range of 1.2-1.5 for Ashiana, clearly differeniating it from other RE players. I am a firm believer that highly assetintensive business models ultimately lead to medocre returns. Typically in RE business, margins are high but ROE is mediocre due to very high asset intensity. Ashiana has struck a good balance here by keeping decent asset turnover (Around 1)and very decent margins (30-37% in last 5 years) contributing towards ROE. Moreover, they have not yet leveraged balance sheet hence if they do moderate leveraging of B/S (which in my opinion isa smart strategy), returns will further move up.
Operating Cash Flow: I like companies that focus and maintain good operating cash flows, ideally moving in tandem with operating profits. And there are not many RE players who maintain this discipline. Again look at Unitech and DLF. Unitech, in last 8 years generated cumulativeoperating profit of 8407 crore while its cash flow from operations is abysmal -4500 (negative)crores! Stroy for DLF is , though slightly better, not encouraging. DLF, in last 8 years generated operating profit of 33000 crores and operating cash flow stood at paltry 4100 crores (at least positive!) i.e. 13% of operating profit. Compare that to Ashiana, it generated OP of 225 crores in last 10 years while, its operating cash flow is 165 crores i.e. 73% of operating profit. The result is, DLF/Unitech balance sheet is highly leveraged while that of Ashiana is hardly leveraged…
Focus on MIG Group: As I have been scouting for properties in Ahmedabad for buying a house, looking at the price points, I always wonder how can a salaried class person buy a decent home for living at these prices? A 2 BHK home in good area in Ahmedabad will cost one 50 lakhs i.e. one has to be willing to pay 40000 EMI every month. So one has to earn close to 80,000 -1,00,000 to support this. I am sure not many people who actually buy housefor dwelling can afford such a high price and hence there is huge unmet need for MIG housing. Most of the RE players always feel that there is only one direction in which RE prices will move and that is upwards! Surprisingly, Ashiana managementseems to bevery pragmatic on this aspect.Read what they have to say on real estate bubble and their pricing strategy
"The way land prices have moved up in the last decade, we do get a feeling that there is too much speculation in real estate. All this could indicate that a bubble may be building.
The way we work is that we take land as inventory and usually aim to hold only 5-7 years of cumulative developmental area as land area. Also one metric we track is that our property prices should not be more than 4-5 times the annual income of our target customers. In our case that metric is not breached and so we feel reasonably confident that our property prices are not becoming unaffordable to our target segment."
Now this surely sounds rational and makes lot of sense. I am sure, with this strategy, there will not be dearth of buyers for any of the project that they launch.
Conservative Accounting: Sounds like misnomer? I too was skeptical, but as I read explanation given upfront by the management about changing revenue recognition methodology from percentage of completion (POC)to contract completed, I am getting a feel that management is more concerned about financial statement reflecting conservative picture of asset/liabilities to the company and revenue/profit (read pg 15, AR FY 11-12).Management’s reasoning for making this changein revenue recognitionmethod because of adverse developement in"Lavasa" episode and how POC method did not reflect true liability to the company emanating from the project sounds very logical. Hence, I feel management is being conservative as completed contract method will mean more volatility in revenue and also short term disalignment in numbers, but management is willing to take a plunge to maitain financial statement as true and conservative reflection of the risk and rewards of the business.
Valuation: Currently company is available at market cap of 326 crores. Ashiana has current investments + cash of 96 crores. Out of this 4.3 crores of cash is pledged with the bank. Total debt is 10.5 crores. Thus total cash + current investment net of debt is 80 crores. This means net of cash + investments - debt,Ashiana is trading at 246 crores. In FY 12 company had NP of 70 crores. This means Ashiana is trading at 3.5 times FY 12 earning.
So, apparently company with differentiated business model, conservative accounting pratice, unleveraged balance sheet, scalable business model and large opportunity size, consistent historical growth in top line and bottom line (29% and 34% CAGR for 10 years), very high ROE (average 10 year ROE of 40%) available at trailing P/E of 3.5 looks like a steal indeed. One needs to wear skeptics hat and see why Ashiana is mispriced!
Views invited from fellow members and veterans.