Ashiana Housing - Banking on Tier II and III towns!

(Dhwanil Desai) #21

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 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.

(Anil Raika) #22

One of the very good company in Real Estate Industry, having a very good Brand Value, I have visited there Jaipur site RANGLOI GARDEN and the Lavasa Project, very good constructions, there Website is very User friendly, as soon as we start the website, helps pop ups from the call centre. The sales executive are very well trained, The Managment is very conservative and transparent and are very reliable. One of the problem at this time is , they do not ready lands for the projects to be launched, but this is temproary problem.

One of my Top pick.

(Rajesh Kumar) #23

I fully agree with analysis of Ashiana’s business model.

The problem is Real estate industry. It is a commodity, and most probably it is close to its peak as of now. In real terms prices are correcting at many places, and likely to correct at others. Inventory level is rising in almost all markets. It may result in lower sales realization for Ashiana leading to lower profit. In that case present PE of 3.5 may be pretty high.

(T Anil Kumar) #24

Hi Dhwanil

I fully agree is Ashiana is one of the rare gems available at attractive prices. All the positives are pretty much covered on this thread, so no need to go it anymore.

One of the negatives (apart from usual concerns on lumpy quarterly results, concentration of interest in Jaipur and Bhiwani)

  1. Disclosure on partnership firm are not detailed enough compared to their disclosure standards. Ideally as they are in control, they should beconsolidatingeach and every partnership firm in their accounts. But they consolidate some, and some they continue to show under investment (see sch 12 of consolidated accounts). This posed some problem. Now if there are any debt in the partnership firm, one can never be sure.

Disc: I am invested in the stock.

(Ayush Mittal) #25

Hi Dhwanil,

Yes, Ashiana Housing is one of the best cos in terms of quality of promoters, corporate governance, transparency etc. I was lucky to have come across this co very early, thanks to Gaurav Sud. I have also met Varun (CFO) and it was fantastic to hear out his long term vision and clarity in thought process. Infact other unique point about this co is - they do all the sellings directly to the customer (no brokers involved) and usually most of their projects sell at a premium as compared to competitors in the same area.

They also have a fantastic reputation of completing most of their projects on or before time.

The stock hasn’t performed well due to the accounting policy change (which is a good thing for long run) and gives us anopportunityto accumulate :slight_smile:


(narendra ) #26

Can somebody point me to the latest quarter conference call transcript

(narendra ) #27

Q2 – COnfcall Transcript

(narendra ) #28

sorry this seems to be of last year.

(narendra ) #29

Here it is

(narendra ) #30

more than 8 % jump in share price with more than average volume.Also price on NSE and BSE is consistent ( often I observed that because of low volumes , price is different on NSE and BSE) .Any specific news or going up along with all the shares.

(Manish kumar) #31


As per Ashiana Balance sheet :

The pre-development stage of any project takes a year on would have done had we invested in land. It also helps us an average and the development period is of around four in managing our capital better and in mitigating financial to six years depending upon the location, type and size of risks due to the diversification over multiple projects
the project. So, maintaining five to seven years of land given the same capital. If we look at the net worth of the inventory at every point in time ensures smooth company, it has grown 22 times in last ten years from execution of the planned growth while at the same time 11.06 crores as on March 31, 2002 to 239.64 crores not blocking too much capital in land bank. Optimum as on March 31, 2012 without any dilution of equity or
land inventory allows efficient utilization of available leveraging balance sheet.

What i can understand from the statement is rather then maintaing a land pool they try to buy land on project basis.

Doesnt following Inventory approach risky if the price of land increased suddenly and doest it affect the margin over a period of time as the land price increased and other company able to use land from their land pool.

(shanid) #32

New CRISIL report on Ashiana housing.

Approval for bhiwadi project is a big positive.

Fundamental grade - 4 / 5

Valuation grade - 5 / 5

Fair value - 303


Shanid V H

(Ayush Mittal) #33

Wonderful to see the way the stock has got re-rated. Just shows why timing is futile in stock markets when one has a good stock idea.

(saurabh shankar) #34


I think the company has gone into a positive feedback loop.

  1. When all builders were delaying projects, Ashiana consistently delivered its projects on time. This has led banks to offer complete disbursalâs of home loans at starting of a project.

  2. This means that the customer has to pay lower interest if he takes loan in this manner. Also, this reputation advantage leads to them charge a higher per square feet rate ( even after discounts)

  3. The above 2 lead to more customers,more customer referrals ( referral sales are a big number here) and quicker offtake of its projects.

For the company the complete Home Loan disbursal upfront ensures that they continue to enjoy significant amount of float.



PS- Discl. I hold hence views may be biased

(Ayush Mittal) #35

@Saurabh: I think everything has started going in favor of the co…they are getting one approval after another and the bookings are at all time high

(saurabh shankar) #36

Hi Ayush,

Yes, and i still think it has not overvalued…will try and post a detailed cash flow estimation soon.


(Akshay Jain) #37

Thought the price may not go anywhere after they changed the accounting policy. I think the mgmt said that it would take a couple of years before the numbers show up…Just shows that guessing temporary stock direction or timing never works…Happy to be holding on


(manish) #38

I read some news about mr Chidambram proposing additional tax on buyers and sellers of property. Can anyone clarify what effect it will have on real estate market.


(Manish Vachhani) #39


TDS will be cut by the buyer on the sell value of the property and will deposit the same to the income tax dept. The seller will have to claim back the TDS from the income tax dept if eligible for it. So the seller has to declare the property transaction to the income tax dept to avail the claim. This way the money laundering/black money market is trapped. No effect on the genuine real estate market, but majority of property transactions has some amount of black money involved and hence negative over short term but once industry gets used to it, nothing wrong on the long run.Bigger projects operators normally go for all white transactions and hence I feel, no majoreffect for Ashiana.

(saurabh shankar) #40

March Shareholding pattern out:

HSBC via Jwalamukhi Investments has taken around 1.24% share and Ashish Kacholia founder of lucky securities has taken 1.02% stake in the company.