Ansal Housing and Construction: Buy

Investors with a two-three year perspective can consider investing in the stock of Ansal Housing and Construction (Ansal Housing). Proven execution capabilities, a good number of ongoing projects and healthy financials suggest that the company's present earnings growth may sustain over the medium term.

However, being a small player in the realty market and a small-cap stock poses higher risks than those faced by larger players. Investors willing to take these risks can consider buying the stock in small lots (as the stock is prone to sharp surges and declines).

At the current market price of Rs 310 the stock trades at 10 times its trailing 12-month earnings on a standalone basis. We believe the price is at a steep discount, even after considering the lower premium enjoyed by regional players.

While the subsidiary businesses of hospitality and car sales and services are significant contributors to the consolidated revenues, they are yet to make much impact on the per share earnings. The consolidated picture may require attention if there is an accelerated growth in these businesses.

Focussed approach

Ansal Housing is a developer with predominant presence in Tier-II and Tier-III cities in North India. Unlike a number of players foraying into smaller cities after establishing a foothold in the bigger ones, Ansal had entered these markets very early in its business cycle, thus providing it with an edge in not only buying low cost land but also establishing its brand.

The company had completed projects in upcoming cities such as Ghaziabad and Greater Noida as early as 2002.

Ansal Housing has about 55 million sq feet of developable area, a majority of which is already under progress and a part of which may be booked by FY-09, lending visibility to medium-term revenues.

The projects in hand are well-diversified across residential and commercial buildings, malls, apartments and group housing. Over 50 per cent of the current land bank is ear marked for selling of plots. Plot development has traditionally constituted a high proportion of Ansal's revenues. The company has been successful in this strategy on account of three issues.

In smaller towns, there exists stronger demand for individual plots (which can be built into independent houses) than apartments. Two, selling of plots around the vicinity of a bigger project (that the company develops) provides scope for commanding better prices. Three, in projects such as integrated townships, selling plots typically frees cash flows that can be deployed for developing the township.

As there is little value-addition in plotted developments, the projects do not normally command high-profit margins. However, Ansal's OPM of 33 per cent in FY-07 suggest that it has managed high profitability mainly on account of low-cost land. That net profits have grown at a CAGR of 135 per cent over the last three years also suggests that the company has been a major beneficiary of a surge in land prices.

While we expect the OPMs to moderate as the company replenishes its land bank, a more active entry into the construction of various realty projects (as indicated by the current projects in hand) may provide some cushion to the profit margins.

Subsidiaries hold potential

Ansal's restaurants in Greater Noida and its car dealership venture with a Japanese company have witnessed healthy revenue growth over the last couple of years. The company's tie-up with Radisson Worldwide for restaurant chains across India and expansion of its car sales and service business if successful may warrant a look at the consolidated numbers.

Steep hike in the price of construction materials and equity expansion with delayed earnings growth are impending risks. The latter now appears insignificant going by the recent approvals received for preferential warrants.