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Real-estate gems

Amidst the sorrows of the real-estate sector, there are a handful of companies which have a better standing

During the real-estate boom just before the subprime-mortgage crisis, every real-estate company looked promising. But the aftershock of the bursting of the real-estate bubble was so severe that most of the companies in this sphere are still struggling to stay afloat today. There are more than hundred real-estate companies that are listed on the Indian bourses and are traded on daily basis. Few of them qualify to be labelled as fundamentally strong. Most of them are struggling with debt and huge interest burden, and are facing difficulties in executing their projects due to lack of demand.

Still there are a few names which have been able to make way through tough times. We wanted to find out the companies which have good capacity to pay interest and have margin of safety in terms of returns on investment and equity. To our surprise, we were able to get only six companies which satisfied basic fundamental parameters. The fact that there are only six such companies points at the current state of the sector. Our filters required a company to have a return on equity and a return on investment of more than 8 per cent (which is the risk-free return), the interest coverage ratio of more than two and the debt-to-equity ratio of less than 1.5.

Ashiana Housing
Ashiana Housing is a rare real-estate company that has very negligible debt on its books, with the debt-to-equity ratio of just 0.07. The company's non-aggressive and careful approach towards growing its business has been the reason for not only its survival but also its success. Project execution through in-house capabilities and operating on low-cost land have worked in the favour of the company. Keeping its promise on project deliveries has also created a trust factor in the market.

National Buildings Construction Corporation (NBCC)
NBCC is a government company with a unique advantage. It enjoys uninterrupted demand in an otherwise customer-scarce sector because its major customer is the government itself. NBCC never faces delay in payments, and, in fact, receives most of its payment in advance, which keeps it a debt-free company. The company is working on huge redevelopment projects in Delhi.

Mahindra Lifespace Developers
Mahindra Lifespace, an M&M subsidiary, is focusing on affordable low-cost houses. The company has been able to generate a healthy average return on investments of 13 per cent over the past five years. Last year the revenues sped up due its focus on budget housing, where the demand is still intact and where other big players not showing any interest.

Kolte Patil Developers
Kolte Patil Developers, a Pune-based real-estate developer has been operating for the last 25 years. The company is able to get huge advances from customers, letting it keep its debt-to-equity ratio at 0.42, which is among the lowest in the industry.

Sobha Developers
Sobha Developers is a South-India-based company with a construction experience of over 30 years. Barring FY15 the company has generated positive cash flow from operations every year since FY09, which we have not seen in the cases of other listed real-estate companies. One of the advantages that the company enjoys is its backward integration of operations, wherein it has integrated its interior division with owned woodworking factories, a glazing-and-metal-works factory, and a concrete-products factory.

Prestige Estate Projects
Prestige Estate Projects is also a South-India-based developer. It has been operating since 1986. The company enjoys the advantage of strategic locations in South India, timely completion and healthy cash flows. Prestige has developed landmark projects like Prestige Shantiniketan and UB City, which have given it a brand visibility.

Key Financials

Company NameCurrent RoE (%)Current RoCE (%)Debt to equityEBIT
(₹cr)
ICR*
Ashiana Housing11.5311.90.0750.9926.86
Kolte Patil Developers14.8421.950.42204.414.21
Mahindra Lifespace Developers20.7417.580.84472.429.19
NBCC22.5730.710433.0910.76
Prestige Estate Projects11.3412.771.06952.82.96
Sobha10.3313.680.85559.962.97
* Interest coverage ratio. Data based on trailing twelve months.

Note: The article is intended to give an insight into the sector. The stocks mentioned are not our recommendations.
Disclaimer: The analyst owns shares of Mahindra Lifespace Developers.