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Pursuing An Alternative Model

Ashiana Housing has avoided high debt burdens that have afflicted many bigger peers within the realty sector…

The BSE Realty Index has lost one-third of its value over the last 12 months. Most companies in the sector are reeling under debt servicing problems. Then there are some that do not have those worries — falling realisations, ballooning debt, scaling back of projects — which the industry biggies face.
Ashiana Housing is one such company. Ashiana is a paradox as far as real estate companies go. Not only is it profitable and debt free, its return on capital employed is a healthy 27.5 per cent for FY11. Its focus on non-metros has served the company well. And best of all, you can still buy the company at low valuations.

Strengths and opportunities
Healthy business model. Ashiana’s business model is unlike that of the typical real estate company. Where most listed players focus on building up a huge land bank, which they will eventually develop at a later date, Ashiana enters into a profit-sharing agreement with the land owner — an agreement where the land owner brings in his land and Ashiana develops and executes the project. Typically the profit-sharing ratio ranges from 50:50 to 60:40.
The superiority of this model lies in the fact that that it does away with the requirement of buying humungous swathes of land — a capital sucking operation. Many a leading real estate company (like DLF and Unitech) has been mired in debt-servicing problems as a result of expensive land acquisitions. As a result, land cost for Ashiana stands below 25 per cent of its total cost.
How do we know that this model is superior? Ashiana’s return on capital employed (RoCE) over the last 10 years stands at a healthy 33 per cent — a return many of its larger and more established peers would kill for.
Projects under development. Ashiana has a total saleable area of 71.11 lakh sq ft. Its two biggest projects, both in group housing, include Ashiana Rangoli in Jaipur (35 per cent of total saleable area) and Ashiana Angan in Bhiwadi (29 per cent). Its other housing projects are located in Jaipur, Jodhpur and Jamshedpur.
Around 65 per cent of the company’s total saleable area has already been launched, of which 30 lakh sq ft had been booked by the end of FY11. That leaves Ashiana with a land bank of 25 lakh sq ft to take to the market.
Revenue visibility. Ashiana constructed 10.74 lakh sq ft in FY11. The company has guided that it will construct 14 lakh sq ft in FY12 (40 per cent increase y-o-y). Given that it holds nearly twice as much in saleable area, execution risk seems minimal (Ashiana will not face the problem of land availability) and there is revenue visibility for at least the next year and a half.
Focus on non-metros. Ashiana has given the top metros of the country a complete miss. That is by design rather than by chance. Competing in cities like, say, Mumbai would not only mean more competition, it would also pit the company against those with greater resources at their disposal.
Another disadvantage of tier 1 cities is the wide fluctuation in real estate prices that they witness (again Mumbai tops in this regard). Price fluctuation is relatively limited in non metros. At Rs 2,055 per sq ft, average realisation for Ashiana was down less than a per cent (y-o-y) in FY11 as compared to Rs 2,071 per sq ft in the previous year.
The highest, 46 per cent, of Ashiana’s total saleable area is situated in Jaipur. Bhiwadi comes next at 29 per cent, followed by Lavasa (10 per cent), Jodhpur (7.6 per cent) and Jamshedpur (7 per cent).
Focus on retirement homes. Ashiana Housing does not want to be the average run-of-the-mill real estate developer. Though group housing dominates revenues (86 per cent of topline in FY11), Ashiana also focuses on the niche segment of retirement homes. These are old age homes with medical and recreational facilities. Ashiana focuses on deep-pocketed seniors whose immediate family is, say, abroad, or even those who don’t have dependants.
Retirement homes brought in 14 per cent of the company’s revenues in FY11 and accounted for 15 per cent of its total saleable area. Of the 10.75 lakh sq ft launched under this segment, 64 per cent has already been booked. Excluding the launches till FY11, the company has only 15 per cent of its total land bank (yet to be launched) that is slated to service this category.
Net debt free. Ashiana’s business model of entering into joint ventures and partnerships with land owners helps the company in more ways than one. Apart from affording the company an asset-light business model, it saves Ashiana the trouble of borrowing the huge amounts needed to outbid other players and purchase land at sky-high rates. Many companies that have fallen into the debt swamp have yet to pull themselves out of it. Ashiana has so far avoided those marshy lands. As a result, the company is net-debt free. Debt stood at only Rs 68 lakh at the end of FY11.

Weaknesses and threats
Lavasa overhang. Perhaps the biggest drag on Ashiana’s stock is the suspension of all development work in Lavasa, Pune — India’s first planned hill station post Independence — after the city developer (HCC) ran afoul of the Ministry of Environment and Forests. About 10 per cent of Ashiana’s total saleable area is located in Lavasa. The company is reportedly losing Rs 15-20 lakh per month in indirect costs.
Ashiana has 6 lakh sq ft of land that it can develop in Lavasa. At the current market rate of Rs 3,500 per sq ft that works out to about `210 crore of revenues in limbo. Note that Ashiana’s topline stood at Rs 148 crore for FY11.
With the firebrand Environment minister Jairam Ramesh out of the picture (Jairam was responsible for the suspension), it remains to be seen how the matter progresses from here for the hill city and for Ashiana.
Are future projects big enough? Another concern on the long-term horizon is the fact that around 60 per cent of the company’s saleable area is expected to be launched by CY12-13. The only big project that currently has revenue visibility beyond FY13 is the 25 lakh sq ft Rangoli Gardens (35 per cent of the current land bank) which is expected to be launched in phases up to FY16. Ashiana needs to announce more projects to soothe concerns regarding future revenue growth.
Will debt-equity ratio shoot up? Ashiana’s conservative management style has held it in good stead over the past decade. Over each of the last 10 years, the debt-equity ratio has not breached the 0.10:1 mark. Low debt enabled Ashiana to report an annualised earnings per share (EPS) growth of 22.5 per cent even through the difficult years of FY09-FY11. This is remarkable at a time when other players stumbled on their debt-servicing requirements and even put projects on hold for want of capital.
Ashiana’s distinct style of operation could come under a cloud now. The company has acquired a term loan of Rs 50 crore. That amount is significant enough to alter Ashiana’s makeup and hike its debt-equity ratio to 0.30:1 levels (Ashiana’s equity stands at Rs 175 crore). Whether the management will go in for more debt financing will determine its profitability and the distinct advantage it has so far enjoyed against its peers.
Macro concerns. The company is vulnerable to the headwinds that the entire sector faces — high interest rates, high commodity prices (steel and cement), and inflation.

Financials
Between FY09 and FY11 the company has reported annual revenue growth of 26 per cent. Over the last five years, it has grown its revenue at an annual rate of 30 per cent. Earnings per share has grown at a compounded annual rate of 50 per cent during the same period. That growth moderated to 23 per cent between FY09-FY11. When looked at between FY08-FY11 (FY08 was the peak of the boom for real estate companies just before the crash), Ashiana has just managed to hold on to its boom time (FY08) revenue and earnings per share levels. Revenue growth for FY11 came in at 24.88 per cent y-o-y while PAT (before extra-ordinary items) was up 20 per cent. EPS growth came in at 16 per cent (for FY11).

Valuation
Ashiana trades at 6.46 times its trailing 12-month earnings. Its valuation is relatively cheap compared to that of its peers, especially when you consider Ashiana’s superior returns on capital employed (RoCE), its debt-free position, and asset-light model. But since it is a small player, the stock has historically traded at a discount to larger peers. Over the last 10 years, the stock has traded at close to eight times its trailing 12-month earnings. Thus it is currently trading at a discount compared to its own historical levels.
In terms of P/B multiple, Ashiana trades at 1.52 times its FY11 book value — slightly above its 10-year average P/B multiple of 1.32. Considering the strides the company has made in the last decade (FY02 revenues stood at Rs 13.35 crore only, FY11 at Rs 131 crore) Ashiana’s days in the sun may have just begun. If Ashiana manages to maintain the same level of operational efficiency that it has displayed over the last couple of years, it may continue to reward shareholders who buy the stock with a long-term horizon of not less than three years.