Vascon Engineers Ltd


(Bheeshma Sanghani, PhD) #1

Vascon is small EPC and Real Estate company based out of Pune. It has several marquee projects in Pune that are well known for their building quality in real estate circles. It has constructed the beautiful Suzlon One Earth building near Magarpatta, Pune.

It is more of an EPC company rather than a real estate developer in the traditional sense of the word. All along ( until recently ), the real estate division contained a small number of employees ( 7 to be precise ).

It also has a business in which it is a majority shareholder called GMP Technical Solutions which contributed to a majority of its revenues in 2017 ( 52% ). GMP is into the business of clean room partitioning systems and has two divisions – manufacturing and services. The Services division was sold recently for 18cr in a slump sale with the management opting to focus on the manufacturing division and bagged its first order from Tata Steel for Doors recently ((https://www.bseindia.com/xml-data/corpfiling/AttachHis/3747b82a-f4d4-4c6e-9a54-27ea21845d7d.pdf)

Following is the Revenue breakup of all the three revenue streams over the years

Division 2017 2016 2015
EPC 40% 47% 37%
Real Estate 7% 12% 25%
GMP 53% 41% 38%

It announced its foray into affordable value homes with the launch of Goodlife in Katvi, Talegaon on 10th May. It holds a fully paid landbank of 30.9 million sqft of which 16.2 million square feet is Vascons share distributed as follows.

image

Out of this 30.9 million sqft 2.45 million is currently under development (excluding Katvi which is recently launched). Out of this 2.45 million under development 2.16 million is sold out which brings the total sellout ratio to 88%.
As can be seen clearly, there is not much additional revenue recognition that is pending from the current portfolio which brings me to the current land bank which is as follows :-

image

The Thane parcel clearly accounts for a Lions share and the management has no plans to monetize it as of now so we can exclude it from the calculations.

The Thane parcel was the subject and central to the deal that was recently called off between Lodha and Vascon but Vascon wanted to monetize Pune first while Vascon wanted to do Thane. There was a difference of opinion and the deal did not progress as expected leading to a steep fall in Vascons share price.

The Aurangabad parcel is something they are looking to dispose of as it forms a part of the non core assets that they are selling so that will happen when it does. Thus, there is visibility of 7 million sqft Vascon share that they intend to monetize going forward in the affordable housing space.
Applying a Realization of Rs 2500 psf gives us an asset value of 1750Cr and the TEV is 837 cr

As far as the EPC portfolio goes, it has been seeing resurgence in the business lately.
It has been awarded of total of new third party orders of 670.53 crores in the past 9 months ( including the latest one of 70.53 cr from PWD Chennai on 15/5/2018)

The EPC portfolio is the mainstay of the company and it has an order book as on Feb-2018 (excluding the new orders) of 668 cr Third party orders and 233 cr of internal orders

What has changed?

The business hit a peak in 2011 and post that the EPC , Real Estate business faced a lot of headwinds due to a general slowdown in the market. The company had taken on debt at an expensive cost which it has been paying down. It also diversified at its peak into the Hospitality business by picking up stake in some hotel properties. As a result it accumulated a bunch of non - operating assets related to its overall business. Vascon like all other developers was into premium projects and it launched Windermere in 2011-2012 at Punes most expensive location, Koregaon Park. Windermere recently got its completion certificate but it’s far from being sold.

The governments affordable housing push has however opened up a new business plan and it now finds itself uniquely placed as an EPC player with a fully paid for land bank in Pune and other areas. Thus it focus has changed to value homes in the sub 25L segment. Unlike mumbai which is landlocked , Pune is not - so one can expand on all sides. Pune real estate is still relatively affordable and it also offers decent job opportunities . It is my opinion that within Maharashtra, Pune has all the necessary conditions to do affordable housing.

It is selling off its non-operating assets ( like the GMP services division, Hospitality stake, Mumbai office) and has netted 87 cr in 9MFY18 and also plans to realize another 100 cr going forward. This is in addition to 100 cr generated through a rights issue which was mostly used to pay its Debt and finance ongoing projects as follows :

image

The big change however has come in the real estate division where employee strength has improved from 7 employees to 50 employees. Clearly, they are on a hiring spree and it is now headed by Rajesh Mhatre ( ex Lodha ) - https://www.linkedin.com/in/rajesh-mhatre-41b5763/

RISKS

  1. Constructing Value homes is a low margin business and getting the product right is critical
  2. There is a greater risk of collection delinquencies due to the nature of the clientele
  3. The working capital requirements are high
  4. The EPC business is cyclical in nature
  5. There is a small default on the books with respect of dues to Saraswat Bank
  6. The debt cost is high compared to other companies
  7. High amount of Contingent liabilities
  8. Related party transactions

Do let me know if you find further red flags or concerns

The investor presentation contains a lot of additional details - https://www.bseindia.com/xml-data/corpfiling/AttachHis/2f27d447-1924-4892-8b5e-c01a891a9f18.pdf

Disc- Have taken a starting position.


(Bheeshma Sanghani, PhD) #2

Good set of results from Vascon Engineers led by strong revenue growth in both the EPC as well as the Real estate business on a yearly basis. The finance cost has moderated from 32 cr to 25 cr in FY18. At a consolidated level receivables have also come down from 224 to 205 cr.

Best
Bheeshma


(Akbar Khan) #3

Couple of concerns at first look:
It is making losses at Operating level in consolidated reports.
Has gone for dilution in the past via rights issue.


(Bheeshma Sanghani, PhD) #4

Hi Akbar

Your concerns are correct. The co has been making losses at an operating level and even in the current qtr has reported an operating loss. The growth in profits has been driven mostly by selling their non core assets as outlined earlier. However the operating losses have reduced quite a bit from the last qtr.

image

Also mentioned earlier, the co also had gone for a rights issue and 60% of the funds raised were used to pare its debt which has moderated. Equity dilution has been a concern and is a risk but the mgt in its commentary has mentioned no further dilution so it remains to be seen.

The main thesis is the change in the prevailing business climate and renewed focus on its real estate division coupled with debt reduction. If you see its employee cost of 76-77 cr has remained constant in fy18 and also fy17 which forms 14-15% of its fy18 topline. With growth in topline, as revenue recognition happens, one should see some operating leverage kick in and the company moving into a postive zone at the operating level.


(Akbar Khan) #5

Logically with increase in employees (7 to 100) there should be an increase in employee expenses as well. Isn’t it? Are the employees just being reallocated from EPC to RE?
The profitability of EPC was much better than of RE. A higher focus on RE will just make matters worse.

The high Other expenses is another point to consider.

If we are considering a better scenario, what has changed? RE rates have increased? or Construction costs have reduced?


(Bheeshma Sanghani, PhD) #6

Hi Akbar,

Thanks for pointing that out. I have been tracking Vascon for sometime now and the change has really happened in 2017 when the managements view about the business started looking up. My ground checks indicated that they ramped up hiring from Jan 2017 onwards around the time of the lodha deal which eventually got called off. Here is a chart of the employee costs over the last 5 years

image

The kind of real estate development that Vascon was focusing on earlier was very different. It was all high end apartments with high ticket values. Their EPC business allowed them to hire people who were also used to oversee construction of their own branded developments. The slowdown however in EPC broadsided them because their employee investments were very high in anticipation of a growing business and they were left with all these employees and limited work. This fact is mentioned in their Q3 concall where the management say that we have a lot of un-utilized bandwidth.

The volume based RE that they are focused on now is basically to utilize this excess employee capacity where basically they have to sell fast and build faster. The sudden change in the EPC and real estate business climate has allowed them to be in this sweet spot.

How the margins pan out in value homes is something i will ask in the concall for sure. I will also try and find out the breakup of the other expenses and get a sense on that.


(Akash Padhiyar) #7

Good news…

http://equitybulls.com/admin/news2006/news_det.asp?id=230645

Disc: taken position


(Bheeshma Sanghani, PhD) #8

There have been a good number of projects lauunched in the value housing segment in pune with good response. This would be vascons first and is an important landmark as its amongst the first developers in pune to take the plunge in a big way. The bigger milestone ofc would be thane but thats some years into the future. Its a good start though and indicates that the mgt is walking the talk and not merely providing lip service. This would also ease some of the debt burden. Lets see how that pans out. Sometimes developers get excited with sucessfull launches and do crazy things. Its a key monitorable going ahead.


(hrfacebuk) #9

Ground checks also suggest that:

  1. Internally the plan is to finish the project in 18 months (in all 1100 units project ranging from Rs.5000-Rs.5200 per sq. ft.)
  2. Response to 2 bhk was very good because of which they opened Phase C sales as well earlier than planned. Phase C consists of 1 and 2 BHK.
  3. 1RK has had soft response and hence plans for this (Phase B) may be re-visited. Say maybe convert it into 1 or 2 bhk as well and relaunch, etc.,.
  4. Have usual HFC tie-ups but one of them is IIFL as well which kind of also gives home loans without income proof but obviously at higher interest rates.
  5. EMI starts after possession.
  6. Other Talegaon land parcel development maybe launched in Diwali (also was said in concall earlier). This land belongs to Weikfield with whom they already have very good relationship and the project maybe for 3000 units.

Note: Please take above information with pinch of salt as some info above maybe subject to change in future.

Cheers.

Discl: Tracking. Not invested yet. Above is not a recommendation to buy/sell. I am not a research analyst. Please do your own due diligence and consult and investment advisor.


(Bheeshma Sanghani, PhD) #10

Good set of results from Vascon at a standalone level. Due to Ind AS 115, profit numbers for Real Estate are depressed but without IndAS the numbers are good. There has been a sharp recovery in the EPC division revenue , which has grown by ~20%. The PAT has remained flat due to IndAS impact but without there is a significant improvement of 158%.

Item Q1-19 Q1-18 2018 Growth
Revenue 9800 8558 35941 14.5%
COGS 6967 6281 24945 .
Gross Profit 2833 2277 10996 .
Gross Margin 29% 27% 31% .
Operating Expenses 8950 7668 32112 .
Operating Profit 850 890 3829 -4.5%
OPM 8.7% 10.4% 10.7% .
. . . . .
Finance 517 575 1936 .
Depreciation 184 167 752 .
Tax . . . .
PAT 149 148 1141 0.7%
PAT ( if % completion had been followed ) 382 148 . 158.1%
EPS (if % completion had been followed ) 0.22 0.09 . 144.4%
. . . . .
. . . . .
EPC ( Revenue) 8350 6969 24855 19.8%
Real Estate (Revenue) 1038 1169 8680 -11.2%
. . . . .
EPC 1876 829 5079 126.3%
Real Estate -203 466 1266 -143.6%
Interest -517 -575 . -10.1%
Unallocable exp-inc -1007 -572 . 76.0%
PAT 149 148 . .

Best
Bheeshma


(Sandokan) #11

The investor presentation, which is available here: https://www.bseindia.com/xml-data/corpfiling/AttachLive/37771673-b8f1-4eff-96c2-9bd373ab8d2c.pdf gives information about the order book, which appears healthy. They had already appointed personnel to focus on real estate business, which seems to be a positive move. The company claims ability to execute 8msqft per annum, but are currently executing only around 3 msqft per annum. Does this present a deficit or an opportunity? The management appears to be good, but will value views from contributors. .

Thanks and regards
Sandeep
Disc: Limited initial investment


(Bheeshma Sanghani, PhD) #12

Hi @Sandokan

Their order book consists of two projects from godrej properties which to my knowledge is very stringent when it comes to appointing contractors. Construction cos are clearly in an upcycle and enjoy tremendous profitability during an upcycle compared to pure real estate developers. Vascon is both however their real estate business is very small compared to their construction business and in recent times with the slowdown it had been non existent.

Of late, they have been ramping up their real estate vertical and their project in talegaon has met with tremendous success.

The return ratios in residential real estate hover around 10-12% even in very well managed firms while in commercial real eatate the return ratios are far greater at 20%-25%. However the market size for commercial real estate to residential real eatate is typically split in the ratio of 20:80.

So going forward how it manages product mix should be a moniterable. I am not sure about the the returns in affordable housing thus far but they should be higher due to volume and faster sales. I am expected them to be in the region of 18%.

As the co participates in the contruction upcycle and ramps up its real estate division - it could be a good evolving business to track.

Best
Bheeshma
Disc - invested


(Sandokan) #13

Hello Bheeshma.

Thank you very much for the message. Greatly appreciated.

Regards

Sandeep


(Sandokan) #14

Kotak has given reco for Vascon:

Full report is here: http://www.kotaksecurities.com/pdf/dmb/MorningInsight20082018pz.pdf

Just for your info pl. If not in order, please advise. Thanks

Regards
Sandeep
Disc: Limited initial investment


(Bheeshma Sanghani, PhD) #15

Flattish results from Vascon. While topline has improved by 28% at a half yearly level ( without IndAS 115) , Half yearly EBITDA more or less remains flat between 16-17 cr. Half yearly margins have also reduced, however H2 margins are generally higher compared to H1 due to the nature of the business.

Notes from the con call

  1. They plan to replace the high cost debt of Windemere with a more manageable one @ 14.25% and take some 35cr construction loan for Goodlife - ( https://www.vascon.com/download/views/prefill/investors/corporateupdates/2018/Outcome%20of%20Board%20Meeting%202018-09-17.pdf )

  2. Mgt highlighted that NBFC problems have led to cancellations of Goodlife as Loans could not be sanctioned by NBFCs. So now they are trying to seek partnerships with Public sector banks who are not very aggressive when it comes to extending offers and schemes to customers unlike NBFCs. They are rethinking the Affordable Housing strategy in light of the NBFC liquidity issues

  3. Launch calendar includes Q4 launch of Coimbatore

  4. EPC demand is robust and contractors also willing to work with private players as payment is assured. Due to RERA , developers have to work out of an escrow account leading to stability in payment cycle.

  5. No major movement in sale of non core assets. As and when that happens , money will be used retire long term debt. Significant unsold inventory in Windemere where construction is over and they are awaiting OC. Each unit there costs about 15cr. So any sale will result in significant cash flows. They have 45% share here.

  6. EPC growth is constrained due to Bank Guarantee limits. They are working to increase that so that they can participate more.

  7. No plans for Thane land

  8. Tata steel order will start getting executed from Q3/Q4 and trial runs have began

Best
Bheeshma
Disc - invested


(Bheeshma Sanghani, PhD) #16

Announcement regarding sale of some non-core assets - amounting to ~50 cr. Hopefully some of it will be used to retire a portion of debt.

Best
Bheeshma
Disc - invested - forms 5% of portfolio and is currently the only real estate developer in portfolio.


(Bheeshma Sanghani, PhD) #17

Good amount of info on the ongoing uncertainty concerning liquidity at vascon and ofc discounted in the stock price. The monetizing of non core assets is the main bottleneck and also the main source of uncertainty as highlighted in the report. The recent transactions regarding sale of 50cr worth of non core assets are all good steps.

Best
Bheeshma


(Sandokan) #18

Vascon Engineers Ltdhas informed BSE that the meeting of the Board of Directors of the Company is scheduled on 18/01/2019 ,inter alia, to consider and approve issuance of unlisted Non-Convertible Debentures on Private Placement Basis, pursuant to Regulation 29 of Securities Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015

https://www.bseindia.com/corporates/anndet_new.aspx?newsid=c82a81df-cbee-417a-aca1-e34d7d125d9e