PM - You are right that Ashiana is not doing anything different. They are probably just following a right business model that one should adopt in real estate business. What sets them apart IN INDIA is that other real estate developers are unable to understand this very simple concept.
22.Risks banking- ** Shingâs Ashianaâs â asa inventory.For â
**PM - I live in HK and believe that the****reasons why Cheung Kong and other real estate developers flourished in HK are other ad beyond good operating model or land banking.**Land is tightly controlled by the government unlike India and it is in governments’ interest to have inflated property prices. Check the recent budget of HK and the percentage revenuederivedout of real estate.
On competition - Have you pondered over why a developers in India never offer lower prices than competition even though if it sourced the land at cheaper prices? Offering lower prices is against its strategy of land banking.
On Buyers - Lets assume your theory that competition who bought land cheaper comes in with cheaper prices then lets focus on the customerpsychology. What are the factors of consideration when a customer buys a property? Is it just cheaper prices or something more?
Risks and benefits of land banking - Market goes up and you make a bounty. Market goes down you are out of the game unless you can game it, especially as you are leveraged. “You only know who is swimming naked when tides goes out”
Risks and benefits of not land banking - Market goes up, you buy land at a higher price and keep your margins. Business may slow down but you are able to stay afloat because you dont have leverage on the books. Markets will become sluggish due to high prices. Competition may have some cheaper land bank but also have leverage on the books, so they become desperate for cash flows. They are forced to sell the cheap land bank at even cheaper prices.
3). Free Cash Flow)-
PM - If a company is able to reinvest the profits into the business to generate superior returns, why would you want dividends (and also pay a clip of tax on those dividends)?
44). Sustainability model- **
PM - Business model may very well change and should change as and when the rates go down.
5). Management maturity)-
PM - Every single day we see senior/aged management who have seen multiple economic cycles destroy value in every possible way, so I’d not weigh too much on experience of economic cycles. However you may be right that Ashiana management may change gear and loose credibility. As an investor keep your eyes and ears open, and sell the stock at the first instance of management insanity.
The broader gist of my comment was that while Ashiana is a good business it is still a real estate business with all that it implies. As Buffett wrote in one of his letters â A horse that can count to 10 is a great horse not a great mathematician.â
Rather than the amount of land on its balance sheet and whether it calls it inventory or something else I think Ashianaâs differentiation is more its in-sourcing of key activities such as facilities management, construction and strong focus on customer service. This has allowed Ashiana to consistently deliver a good quality product on time and helped create a brand with some pricing power. In a more sophisticated market like Singapore for example, it is very difficult to create a brand based on such factors as virtually everyone delivers on time and without hassles. Pricing is purely dependent on location and amenities not on the developer.
Free Cash Flow is not about just distributing dividends. It is why companies exist in the first place. I struggle to value companies if they are unable to generate earnings that the owner can freely take out of the business. Real estate is inherently a tough business. One requires increasingly high levels of working capital to scale up, on top of that economies of scale are difficult to achieve as the game is mostly local and project based, bigger scale does not equate to bigger margins like in some manufacturing businesses. And of course there are property cycles to worry about… There is a reason why there isnât a single real estate company in the Dow Jones or the Sensex.
Ashiana however is in a sweet spot today and the market is valuing it as a consumer franchise at 10X book, unheard of for a real estate company anywhere in the world. Key to watch will be whether it can maintain similar margins and credit/risk profile as it scales up. This was the same test that GRUH Finance ( of course in an industry with much better economics) had to pass several years ago.
1. Land as inventory - So far so good that the strategy worked. Ashiana is not Google or Amazon to do something different. Doing what is right and which works and making money is important. Whether there are doing anything innovative, or not, is immaterial.
2. Risks of not land banking - This is why I like Ashiana to any other RE developer. Think of risks of land banking. After hoarding land and the market value goes down with you being leveraged should kill you. In fact, in one of the earning con calls, there was a question on mark to market gains and Varun clearly mentioned that Ashiana would not focus on that and if that happens anyway it is good.
The risks of not land banking is also mitigated as they are into senior living. Who does it in a big scale in India? Not even Ashiana. Opportunity and potential is immense. The nuances of senior living is somewhat not tied to RE or economic cycles. Got to see how many senior citizens are left in lurch by their child(ren). I live in Chennai and I feel this city needs developers like Ashiana. Paying for honest services even at a little premium rate is OK if your mind is free not thinking about the other services, regulatory/statutory approvals and amenities. I don't see why this should not do well in Chennai. Why speculate if they will do better in newer geographies?
Another thing that we need to look is that Ashiana is not that much into selling to individuals who want to "invest" and speculate by buying a unit and hoping to make a return at a later date. First time aspirational buy, senior living make it immune to market economics to certain extend. Further, the other services that Ashinana is into after the flat is handed over (security, plumbing, gardening and other misc. services) are high margin low risk means to rake in money. As in IT company parlance, mining existing clients is good for additional topline revenues. :D
3. Free Cash Flow: I don't think this is a business like MPS or CRISIL which has to distribute profits as they wouldn't need to hoard cash. I'll prefer to get an attractive ROIIC than receive dividends and the company paying our profits as DDT (it is set to increase with higher surcharges from next FY).
4. Scalability of low debt model: You are right. We need to monitor this. While we can't expect to continue this model as the company grows bigger, equity dilution when done right should not be an issue.
5. Management maturity: This is totally subjective and you are welcome to have your views. I like the promoters and have confidence in them. Unless we smell a rat, it is OK.
There is considerable visibility in earnings/cash flow for next 2 years with the on-going projects. Their land bank of 12-13million of saleable area provides enough visibility and predictability for next few years. Recent QIP and strong cash flows for next 2-3 years will enable them to buy 15-17million square feet of new land to replace the consumed land.
Valuations of Ashiana may be on higher side but it depends on your conviction about the company and its management. Good quality business and management are hard to find, especially in a business that still has ample room to grow.
Ashiana will have a very strong FY16 and FY17. Due to their accounting basis, they will start recognising revenues for the projects they have been constructing for last 3-4 years. According to latest annual report they are scheduled to deliver more than 2000 units in FY16. So roughly revenues of 625cr (avg. unit size of 1200sq.ft and realization of 2600/sq.ft) and PAT of approx. 150cr (at 25% margin). However some of the these projects are on JVA, so the profit portion for Ashiana maybe just over 100cr.
As per the management interview, they are also planning to launch projects of estimated 4.5million sq.fts this year, so looks like there is a strong pipeline for next 5-6 years.
There financial disclosures keep getting better. There is no other real estate company in India that is easier to understand than Ashiana. From this quarter (and latest annual report) they have also started disclosing the area that is recognised as revenue giving more clarity on their future earnings.
Economic sluggishness is a reality and we need to keep a watch on it. If we continue to see down trend in area booked and cash flows, then it will definitely hurt the company and its performance. However I feel that the long term fundamentals of Ashiana not only stays intact but is getting better. They are diversifying geographically with more number of projects and EAC. They continue to have healthy cash flows and focussed management.
They were able to sell 1.8m sq.fts in sluggish markets, then they will definitely ramp up sales when economic conditions improves. Being a debt free company will give them time to navigate the crisis much better than other real estate players.
I attended Analyst meet and What I figured out is the following.
Our experience of this meet has been wonderful. The management was very shareholder & analyst friendly. They haven’t dodge any question asked to them. We also asked some question to them before an event, in the event and after event.
And we can conclude that our parameters of company’s management ethics, transparency and integrity has it’s own standard and it raises no concern as per our investment philosophy.
We would like to highlight few points we observed in a meet.
• The management was very clear and focused about their future vision and objective of the company. They have not been focusing on quarterly performance of the company and guidance.
• The company has entered into partnership with other local firms mainly to carve out their own presence in local region. According to them, local partnerships help them to solve out land acquisition issues and they can focus on operational issue what they are best at like Construction, Project management, Direct Selling and Post Competition service.
• Their future plans and growth derivation seems visible in future very well.
• We observed few non-quantitative factors like body language of management, style and pattern of answering question, interaction with investor with pre and post meet and we found it very co-operative and transparent.
The only thing to worry is,
In the past, the amount of profits we have seen also consist of inventory gain the company earned due to increase in land prices. Now all those gains have been over and due to this reason we are seeing OPM squeezing in recent results.
I feel, this will impact the OPM in coming years and subsequently it will affect the ROCE.
I may be wrong in this observation. PLease correct me if I am wrong.
From the latest annual report, two other points worth noting
Company’s land at Milakpur Gujar, Bhiwadi, District Alwar (Rajasthan) admeasuring 15.02 hectares, appearing in these accounts at book value of 338.97 lakhs, is under acquisition, 12.834 hectares for residential purposes and 2.186 hectares for development of road, by the Government of Rajasthan. The Company has filed a Writ Petition before the Hon’ble High Court of Rajasthan against acquisition of land measuring 12.834 hectares challenging the entire acquisition proceeding. A compensation of 3873.12 lakhs has been declared by the Government which and interest thereon ` 1049.91 lakhs approx as at the close of the year shall be considered in the accounts on finality and receipt.
Unabsorbed MAT credit to be allowed in future years amounts to 2706.69 lakhs/- ( 2596.69 lakhs/-)
I am not able to understand when Ashiana is likely to report around 130-200 Cr in fy16(I feel 200 Cr pointed by Indian Nivesh looks a bit stretched). And the same would continue in fy17. This means 3x to 4x kind of PAT jump in an years time. So, theoretically, this is a very cheap stock from one year forward perspective. Not sure why is market not re-rating it further. I feel it is because of the recent sluggishness in the sales bookings as reported by management. What I am failing to understand is this slowness is going to impact Ashiana’s topline and PAT in 2 -3 years from now. So, is market right in discounting all the good stuff that this company is going to show in fy16 and fy17. Fail to understand this? Is there anything more than that?
I think for Ashiana, it is important to keep in mind that Management has indicated three parameters to judge its performance i.e. operating free cash flow, Area booked and area constructed. Even though, many in the market may still be looking at standard methods like P/E multiples (and hence the stock may look overvalued on that basis currently, and eventually may look undervalued post FY16 results), the majority seem to have taken cognizance of the management commentary and hence valuing it based on operating cash flow, area booked and area constructed.
Just a thought, Which question is more relevant for long term investors
" what is the right matrix for valuing the company" OR “what is the matrix on which the market will value the company”?
Speaking with Yash Ved and Pooja Paryani of IIFL, Varun Gupta says “We will develop 6 mn sq.ft. and possess 10-12mn sqft of additional saleable area for future projects.”
Brief us on your upcoming projects. What is the total area under development?
We plan to launch 3-4 residential projects this year. Currently, we are working on a senior living project in Chennai and the first phase of the project will be launched this year. We are also planning to launch Ashiana Aangan in Neemrana, but have not got approval yet.The company has a number of completed projects in residential segment. We will develop 6 mn sqft and we have 10-12mn sqft of additional saleable area for future projects.
Tell us about your agreement with Arihant for senior living project?
We have signed a revenue share development agreement with Arihant for a senior living project in Chennai that we are looking to launch with a saleable area of roughly about 1mn sq.ft.
What is so different about senior living projects as compared to regular housing?
A host of considerations are taken into account when we design houses for senior citizens. We take special care of three to four basic needs of the senior citizen keeping in mind their social requirements. To begin with the design is more senior friendly in terms of grab grills and anti-slip tiling, Emergency call system, LPG gas detectors, high level of security are the other common features. We also have dining facilities, doctor on call facility, and physiotherapist at site. In short, we take care of Constructive Engagement, Social Needs, Security and Overall wellness. Senior people who live in these specifically designed, maintained and serviced projects enjoy an improved quality of life and perhaps additional years of life on account of these happy and safe surroundings.
Are you looking at developing similar projects in other areas? We are planning to launch a project in Chennai once we get the necessary approvals. Our decision to launch such projects will also depend on the overall response and the size of the market in this segment. Moreover, the willingness of people to pay for such projects will also influence our decision. Overall, we remain very excited, particularly about the Chennai project, given the demographics in Chennai.
What is the price range of your projects?
We cater to the middle class as our overall project range is from Rs.20 lakhs to Rs. 70 lakhs.
Any plans to increase your land bank? We plan to double sales and land bank and invest Rs 1,100 crore in land over the next four years.