Thursday, October 8, 2009


The specialist

Focused company entrenched in its local markets
We initiate coverage on Anant Raj (ARIL) with an Outperform rating and target price of Rs180 (30% upside). We believe that one of ARIL’s biggest strength is that it operates as a ‘local’ business. Nearly 90% of ARIL’s land bank is focused around the National Capital Region (NCR: in north India, around Delhi). This geography is at the forefront of the ongoing revival in the Indian real estate market. After going through a painful period in CY08, which saw a collapse in primary sales and exit by speculators, the NCR has seen a sharp revival in interest. Conversations with the management of three property companies and brokers suggest that the NCR has seen the smartest rebound in residential market volumes. Over 10m sqf of residential property was sold in project launches since March 2009. Meanwhile, enquiries for commercial space have seen initial signs of a pick-up.

Conservative management style – a rare characteristic
Land purchases by developers across India picked up sharply during 2006–08. Unlike many of its peers, ARIL resisted the temptation to add leverage and buy land at peak cycle valuations especially in new geographies where it had no expertise. In fact, ARIL sold assets (including land) and raised funds during that period. This ensured that it emerged from the 2008 downturn as one of few real estate companies with a net-cash balance sheet. ARIL was therefore able to continue its strategy of purchasing attractive land parcels at reasonable rates.
The company also holds a portfolio of yielding assets, which provides comfort on cash inflows (Rs2bn pa expected from FY12E).

Keys risks mitigated – valuation discount unwarranted

  • Attractive valuations: ARIL is trading at a 39% discount to NAV. This is notable given that most Indian property stocks trade at only 5–10% NAV discounts and modest premiums in some cases. This is primarily because of its concentrated land bank and exposure to the commercial and hospitality sectors.
  • Contrarian view on key sub-sectors: As discussed earlier, the focus on the NCR actually works in ARIL’s favour. We also believe the exposure to the commercial and hospitality sub-sectors (62% of NAV) is, in fact, a positive. Our channel checks indicate initial signs of a pick-up in hiring. We believe this is likely to drive demand for space 6–8 months from now. However what is priced into the street’s NAVs and stocks prices are the rent, occupancy and cap rate assumptions from December 2008. This, to us, is clearly conservative. We also expect hotel room rates and occupancy to stabilise in CY10. This view is based on Macquarie’s forecast of a broader economic recovery and reduced concerns of oversupply in this space. We therefore believe that ARIL deserves to trade at a 20% NAV discount – in line with our target NAV discount for its mid-cap peers.

Property outlook – NAV upgrade cycle is still in its infancy
ARIL should benefit from the NAV upgrade cycle, which we expect over the next 2–3 years. Our experience from past cycles in more developed markets (eg, Hong Kong) shows that NAVs can move up by 2–3x from the trough to peak cycle. In India, some drivers of upgrades are obvious. WACC of 15–16% and cap rates of 12–13% at bottom-cycle rents are clearly pessimistic, in our view.

To see full report: ANANT RAJ