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Cash-flow Positive

Most real estate companies are laden with debt, but Penisula Land has been increasing its free cash flows…

Peninsula Land Ltd. is an Ashok Piramal group company. This real estate company has significant presence in varied asset classes. It is known for its concept-based architecture in the commercial, retail and residential sectors. The company has shopping malls under the Crossroads brand, commercial complexes and IT parks under the Peninsula brand, and luxury residential condominiums under the Ashok brand. Some of the major projects carried out by the company so far include Crossroads, CR2, Peninsula Corporate Park, Peninsula Technopark, Peninsula Business Park, Ashok Towers and Ashok Gardens. Peninsula’s other ventures include Peninsula Realty Fund, a real estate-focused venture capital fund, and Peninsula Facility, which provides building management solutions to corporate, retail and residential complexes.

Strengths
Strong player. Peninsula Land is a strong player in Mumbai. It is expanding its urban development portfolio and consolidating its presence in Greater Mumbai and suburbs of the city.
Diversifying its business. It has been a Mumbai-focused real-estate development company with a significant presence in the upscale South Mumbai market. However, of late it has moved into other cities like Nashik, Pune, Goa and Hyderabad.
The company has also diversified into other real-estate segments such as special economic zones (SEZs), IT parks, and townships.
Sound business strategy. In the residential segment, Peninsula Land’s strategy has primarily been to go for outright sale. On the other hand, it has a flexible approach in the commercial segment where it chooses either to sell or to lease, depending on the market outlook. Moreover, it undertakes smaller projects and only selectively bids for large ones. In addition, it also undertakes re-development projects in Mumbai.
Self-financed projects. All the land parcels that the company acquires are through 100 per cent equity or through internal accruals. Its projects are self-financed and a substantial portion of the project cost is obtained by pre-selling at various stages of construction.
The company is also known for being the first to develop a world-class mall in India and for commercially developing mill land in Mumbai.

Growth opportunities
Acquiring new land bank. During FY11, it spent Rs 600 crore on acquiring the land for new projects for which it has to pay another Rs 300 crore. It acquired 10 new projects, of which three are in Mumbai, two in Alibuag, two in Pune, one in Thane, one in Bangalore, and one in Lonavala. According to a recent report by Prabhudas Liladhar, the company now has around 6.2 million sq. ft. in the pipeline over the short- to medium-term, which it will either launch or commence construction on within this fiscal.
Residential segment. Total demand within the residential segment is estimated to reach 7.5 million units by 2013. After declining during 2008-09, residential demand has seen a revival with the economy reviving. The sharp recovery in the residential vertical implies that consumers have regained the confidence to make big-ticket purchases. The company plans to enhance its presence in this segment and aims to take full advantage of the opportunities that arise in the coming years.
Commercial segment. While the residential vertical has shown a strong recovery, recovery in other real estate verticals such as commercial and retail has lagged behind. However, some signs of recovery are now visible in the commercial segment. Rentals have stabilised, especially in the central parts of major cities, and may even rise in the latter half of 2011. In the suburbs, however, rentals are not rising due to oversupply.
This segment is a major focus area for Peninsula Land and will continue to be an important part of its development portfolio. The company is prepared to take full advantage of demand and plans to grow its presence significantly in this segment.
Retail. The sharp recovery in the residential vertical implies that consumers have regained the confidence to make high-value purchases. This bodes well for the retail vertical, which is highly dependent on consumer spending and consumer confidence. The company is observing this space closely and plans to make a big foray at an opportune time.

Concerns
Heavily dependent on Mumbai. As mentioned above, the company is largely Mumbai-focused and this may pose some risks. Fall in prices in the region due to oversupply, increase in construction cost, or any adverse government policy decision could impact its valuation. However, as mentioned, it is now moving into other cities as well.
Rising input costs. Both steel and cement prices have been rising over the past three-four years, albeit with a lot of volatility. The cost of steel is up 16 per cent since August 2010 while that of cement is up 20 per cent since then. Steel and cement together constitute around 25 to 40 per cent of construction cost. So far developers have managed to protect their margins by raising prices, but this may no longer be possible in future as transaction volumes have slowed down in most cities.
According to analysts at Citi, however, the worst might be over as far as input price pressures are concerned. In the medium term, they expect the price of cement to remain flat and that of steel to decline marginally on a year-on-year basis.
Development risk. Developing properties presents a number of execution risks due to various factors, such as obtaining required government permissions, weather, labour conditions, escalating costs and material shortages. Other concerns related to the company are rising interest rates on home loans and slowdown in the real estate market.

Financials
Strong balance sheet. The company has been able to maintain a low debt-to-equity ratio, which currently stands at 0.51 times (in FY11). Over a period of three years (FY09-11), it has registered a compounded annual growth rate (CAGR) of 16 per cent in total income and 23.7 per cent in profit after tax. During this period, its return on capital employed (RoCE) and return on net worth (RoNW) averaged 18.4 per cent and 20.1 per cent respectively.
Healthy cash flows. Free cash flow currently stands at Rs 346.21 crore. Its free cash flow has grown at a CAGR of 10.5 per cent over the past five years. The company had cash and bank balance of Rs 502.49 crore in FY11. This leaves Peninsula Land well positioned to carry out its expansion plans.
Decent liquidity ratios. The company had an inventory turnover ratio of 1.9 times (in FY11) as compared to the industry average (for 22 real estate companies) of 1.7. It is the ratio which shows how many times a company’s inventory is sold and replaced over a period (cost of goods sold/average inventory). Peninsula scores marginally above the industry average.
The inventory days of the company, a measure which represents how fast the company turns raw material into cash, stands at 182.9, much better than the industry average of 311.

Valuation
The company’s stock is trading at a price-to-earnings (P/E) ratio of 8.4 which is below its five-year median P/E of 9.3 times. The company’s earnings per share (EPS) has grown at a five-year CAGR of 30.7 per cent, which translates into a price-to-earnings to growth (PEG) ratio of 0.3 times.
The stock is currently trading at a price to book value (P/BV) of 1.37. This is lower than its five-year median P/BV of 1.9. During the last fiscal, the company was slow in launching projects and it also lacked inventory that it could sell. However, analysts at Prabhudas Liladhar expect the company to fare better in FY12, as it has acquired a substantial number of new projects. The brokerage house does not expect launches to take place at a rapid pace on account of the long approval process, but nonetheless expect a significant improvement over last year.
The company has a strong balance sheet and is attractively valued. But one needs to factor in the cyclical nature and risks attached to the real estate sector before investing.