Lancor - Riding the recovery in Chennai Real Estate

Stock Opportunities
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Dear All,

Housing related stocks (Cera, Astral, Repco, etc.) are in flavor yet real estate developers have been struggling for some time now.

Since the market is generally overvalued, I was looking at real estate sector after a long time trying to make sense of which companies can survive the real estate recession and ride the growth wave as and when growth re-emerges. Of course, a healthy balance sheet is critical for this.

Chennai is one market which has seen green shoots of recovery in real estate sector. More on this can be read here:

Digging a little further, I came across a relatively unknown Smallcap, which seems to have a good brand image in Chennai Real estate market and has prestigious projects in sought after locations. This company is LANCOR HOLDINGS, market cap of 170cr.

The company has recently celebrated its 30th anniversary and announced foray into affordable housing segment, apart from the premium housing segment which it has already been catering to. More can be read here—> - Lancor eyes newer locations - The Hindu

The company has a NEWS section on the website with a lot of recent articles which seem very promising prima facie. Flats for Sale in Sholinganallur | Duplex Apartments for Sale in Keelkattalai | Lancor Holdings

Key Financials:

Financials FY15 (FY14): in crores

A few key highlights:

  • The company recently said in one of its BSE filings that it has a potential of construction of 8,00,000 sq ft of built up area, with an estimated turnover of Rs 400 crores at a margin of 25 per cent from a land that it has acquired. (FY 2015 turnover was 150cr)

The company has recently become pretty active in acquiring lands and has announced new projects. Looking at the clean management (received “the Highest transparency” award at The CNBC CREDAI Awaaz Real Estate Awards 2009.) and high quality/timely construction, I believe this can be a good story to ride on.

The P/B mutilple of 1.1x and PE ratio of 11x (9x on 2015 earnings) looks pretty low risk to me. Also, the company has been recently talking bout Senior Housing in their annual report; this segment has seen a big growth recently (See Ashiana Housing). If the company is able to deliver, the stock can shoot up significantly from these levels.

Disclosure: Recently took a tracking position.

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Notes:

The company derives a major part of income from renting out commercial real estate. According to 2014 Annual report, 13.3cr was rental income, 8cr PBIT from rental business.
Chennai commercial real estate is expected to see good growth in commercial rentals in 2015-2016, see here http://www.joneslanglasalleblog.com/realestatecompass/real-estate/2015/04/best-time-for-commercial-property-investment/

This indicates two things:

  1. At a commercial rental yield of 10%, the property value comes to around 133cr (Current enterprise value is 343cr) @ 170cr Mcap; Hence, the construction business is being valued at around 210cr. of enterprise value.
  2. The company has an assured 8cr PBIT annually
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I feel that the stress on real estate sector is increasing.
Most of the companies are posting poor results / drop in margin .
The sales booking fig are also not very exciting.
The cost of property is pretty high. Recently Raghuram Rajan commented that developers should reduce prices to clear the inventory and increase demand. However, i feel same is unlikely as the profit margins of the developers are already in single digit and there is not much room for reduction of prices.
So next option is increase in the purchasing power of buyers. That can happen with rising economy , increase in wages etc. I think it may take couple of years.

Will check AR of Lancor and comment.

Disc - Was invested in Kolte Patil. have exited from same. I may be wrong in my analysis.

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Manish, you have indeed echoed the market sentiment and I definelty agree with you. However, there can be pockets of good performance even in a recession hit sector.

What drew my attention to Lancor was:

  1. Clean management, no fccbs or equity dilution since years!
  2. Very good divided payments track record
  3. Company acquiring land and announcing projects aggressively while the real estate sector generally is carrying high unsold inventory
  4. Prudent debt management
  5. Last but not the least, trading at discount in a generally highly overvalued market

Anyway, let’s see if the company’s aggression reflects in the ensuing quarterly results.

Regards,
Sushil

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@sushil86 Some questions. Pls note all the facts are taken from AR 2014. Here is the link to it.

  1. AR 2014 has a section on foreign currency transactions. Lancor had an outgo of 3 Cr. Although the amount is small, I am surprised to see a real estate developer have a forex outgo. Any idea what this is about?

  2. In one of your posts you have assumed a commercial rental yield of 10%. Isn’t that too high? Here is a report by realty portal MagicBricks about the highest rental yield locations in India. A part of Bangalore tops the list with a yield of 5.42%. Chennai is nowhere on the list. So assuming a 5% yield, a rental income of 13 Cr implies that the property value is 260 Cr!! However on page 58 of the FY 14 AR, the company has given a breakup of assets by segments. Under ‘Property Rental’ assets listed are of about Rs 44.9 Cr (Down from 55 Cr in FY13). What is this number? I failed to understand this.

  3. In the contingent liabilities section, there is a contingent liability of 63 Cr due to a litigation related to its commercial project “Menon Eternity”. Its most likely due to this case. Click on the link to know more. Do you have more information on this case? This is particularly significant because there is no provision provided for this contingent liability.

  4. In a press release dated 5th March 2015 (link), the Company chairman is quoted about thier project Kiruba Cirrus.

This year, it is hoping to garner good revenue through the premium house project Kiruba Cirrus in south Chennai, which has been completed now. It has 65 apartments. Each apartment ranges between 1724 sq ft and 2670 sq ft, and is priced in the range of Rs.2-3 crore. “It has a potential to fetch about Rs.80 crore revenue,” said R.V.Shekar, Chairman of the company.

Can our VP friends in Chennai update on the status of this project? 65 apartments should be sold within this year. If so, this project alone should contribute to more than 50% of FY 15 revenues.

  1. Can you share the link to the BSE filing where the company has talked about potential contruction of 8 lakh sq. feet.?

  2. In one of your posts you have mentioned that Lancor has talked about venturing into Senior Housing in their annual report. I did not find any mention in the FY14 AR, which is the latest one available. Correct me if I am wrong.

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You have got to give credit to this company for transparency. For each project they have a dedicated web page which has monthly photo updates and also availability by apartment. Although for some projects it is not regularly updated.

Here is the availability chart for the projects mentioned in the FY 2014 AR:

  1. ‘The Central Park Lake Front’. Link (96 out of 136 booked)

  2. Corner Stone Link (20 out of 24 booked)

  3. Sonnet Square Not available. This is listed under ‘completed projects’, unlike other projects. So assuming sold out.

  4. Kirruba Cirrus - Not available. Could be a technical glitch.

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One detail I missed out on was - Why did the company not pay dividend last year (FY 15)? Its not as if the company performed poorly, infact the company performed better than the previous year (Sales 150 Cr v/s 136 Cr). Unless there has been a change of policy from the management. Need to dig more on this issue.

Also for a company which maintains such a high level of transparency for its customers, it is surprising to know that there is no investor relations contact mentioned on their website.

Disclosure: Not invested, should have mentioned earlier :persevere:

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@fabregas Very good analysis!

Let me look into each of these aspects and get back to you in 1-2 days. I am sure with some participation from other VP members, we can crack all the points.

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Regarding the commercial rental yield of 10%, I was trying to be on the conservative side. Please also note that commercial yields are MUCH higher than residential yield, the link you shared, talks about residential segment.

Also, I checked the following article which says “The rental yield for commercial property is usually 8-11%”

http://www.joneslanglasalleblog.com/realestatecompass/real-estate/2015/04/best-time-for-commercial-property-investment/

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Ok. My bad. 10% rental yield is a fair assumption.

Just realized that “Menon Eternity” is the only completed commercial property that Lancor has. This should be the sole contributor to the 13 Cr annual rental income I think. “Menon Eternity” is also the subject of 63 Cr contingent liability. Not sure how the outcome of the litigation will affect this rental income.

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At present Valuation, looks like a good bet - transparent, not highly leveraged and good track record.

Would appreciate help to answer my query:

  1. What is their land bank and where it is spread?
  2. Their reputation and brand name in Chennai

Thanks !!

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Is anybody still tracking it

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They have finished inventory in Chennai which they are trying to liquidate. But bit puzzled by their plans to expand in affordable housing when their existing inventory is still not liquidated.