Prajay Engineers Syndicate: BUY

Investors with a 2-3 year perspective can consider buying the stock of Prajay Engineers Syndicate. Land holdings acquired at low cost and projects in hand that could translate into higher revenues, superior return on equity and attractive valuations make this stock a preferred investment among the middle-rung real estate companies. At the current market price, the stock trades at eight times its expected earnings for FY 2008, assuming full conversion of its foreign currency convertible bonds into equity.

 

Prajay has made steady progress in its business, starting out as a low-cost housing developer and transforming into a builder of premium houses. It has traditionally enjoyed high operating profit margins (OPMs) on the back of high demand and a low cost land bank mostly in Hyderabad. After foraying into premium segments, the company now benefits from healthy volumes as well as high returns from its projects. This is reflected in the company's OPMs jumping from about 31 per cent in 2004-05 to 47 per cent in 2006-07.

 

The residential segment, especially in Hyderabad, has traditionally accounted for most of the company's revenues. Prajay has, however, diversified to foray into the commercial, retail and hospitality segments, which now account for about 28 per cent of its current developable area. Most of these projects are in Hyderabad, indicating that the company prefers to contain risk by treading on familiar ground. For its venture into the hospitality segment, Prajay has chosen its locations well. For instance, its five-star hotel near the Shamshabad International airport can be expected to have robust occupancy, given the air traffic growth in Hyderabad and that the old airport would no longer function after the new one becomes operational by mid-2008.

 

Prajay has a comfortable land bank of 850 acres, mostly in Andhra Pradesh and hopes to develop 32 million square feet of saleable area over the next five years. This does appear challenging, as it is nearly four times the size of projects executed so far. However, the company's familiarity with the region, its joint venture with the Malaysia-based realty player Sunway Group and comfortable financials after raising funds through FCCBs in 2006, allay concerns about execution risks. The stock may not be able to enjoy the premium valuations enjoyed by the more geographically diversified real estate players. The good growth prospects and consistency in financial performance, aided by an improving home loan interest rate scenario, suggest that the stock could have good potential.