The real estate firm is riding on positive consumer sentiments and a healthy balance-sheet to recover lost ground
Several research reports to have come out on the Indian real estate sector in the recent past have observed that the country’s southern states are more stable realty markets as demand for residential real estate in this region is driven by end-users who work and stay in cities such as Bangalore, Chennai and Kochi; unlike states in North India where speculative interest is high.
These cities have served as hubs for growth of the information technology industry (IT) in the country, fuelling the growth prospects of real estate firms such as Puravankara Projects Ltd.
The Bangalore-based company was growing rapidly during 2010-11, amid increasing exports of software services from India, but the downturn in the Indian economy that set in during FY2012 took a toll on the company’s financials.
Puravankara, which builds luxury and affordable homes mostly in India’s southern cities, was operating at an Ebitda (earnings before interest, tax, depreciation and amortisation) margin of as high as 61% in FY10. Increase in cement prices and a slowdown in the domestic economy saw its Ebitda margin steadily decline to 37% in 2013-14. Its net profit for the six months ended September 30 came down to R79 crore, a decline of 31% over the year earlier, despite a 35% year-on-year rise in revenues to R903 crore.
However, an imminent recovery in the Indian economy, coupled with anticipated decline in interest rates and softening inflation are expected to boost demand for housing and lead analysts to be optimistic about companies such as Puravankara.
A report by SBICAP Securities says that Puravankara is focused on improving its balance sheet strength amidst the improving environment. This, along with advantages like a well-located land bank, strong execution skills and sound corporate governance are likely to help the company improve its valuations, the report said.
In a bid to bring down debt and improve cash flows, Puravankara sold a 50% stake in an upcoming project in Kochi to another Bangalore-based real estate firm, Sobha Developers for R326 crore. Even through the slowdown in the economy it has managed to maintain a debt to equity ratio of 0.6-0.8, according to the SBICAP report. “Net debt has increased to R1,500 crore in FY14 (from R1,000 crore in FY11) due to increase in construction expenses as there is an increase in area under construction,” the report said.
With large Indian IT companies like Infosys and Tata Consultancy Services doing well and adding manpower, Puravankara may significantly benefit from further growth in India’s IT sector as 65% of its land assets are located in Bangalore, where most of these IT firms have large campuses. Apart from Bangalore, Kochi is another city whose residential real estate potential Puravankara is gearing up to tap.
“We look forward to FY15 with optimism in view of the changes on the ground, the heightened business sentiments and also the moderation of inflation. This augurs well for the real estate sector,” says Ashish Puravankara, joint managing director of Puravankara Projects.
Puravankara plans to launch 17.6 million square feet of new projects in the next 18 months with majority of it allotted under the brand Provident, which focuses on premium affordable housing.
On the back of these measures, SBICAP expects Puravankara’s profitability to increase annually by 21% between FY14 and FY17, driven by a 16% compounded annual growth in sales.