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Tuesday, September 9, 2008

Mahindra Lifespace Developers - Stock update

Mahindra Lifespace Developers
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs828
Current market price: Rs454

Annual report review

Key points
On a consolidated basis, Mahindra Lifespace Developers (MLD) reported a healthy financial performance during FY2008. The company’s top line grew by 6.8% to Rs231.1 crore during the year. The operating profit margin (OPM) expanded by 14.1 percentage points to 28.3% on account of an improvement in the OPM on a standalone basis (22.1% in FY2008 v/s 13% in FY2007) and on account of improved margins of Mahindra World City Developers Chennai subsidiary. The improved OPM coupled with higher other income of Rs33.5 crore in FY2008 on account of sale of investments compared to other income of Rs7.6 crore in FY2007 led to a 2.7x jump in the bottom line to Rs66.4 crore during the year.
The development of special economic zones (SEZs) at Chennai and Jaipur are well on track. In the Chennai SEZ, the company has leased or committed to lease the entire processing area. In the Jaipur SEZ, the company has acquired 2,600 acre of land at the end of Q1FY2009.
The debt to equity remained at a comfortable level of 0.3x, inspite of an increase in the debt level to Rs285.5 crore in FY2008 from Rs48.1 crore in FY2007. During the year, the company received proceeds from QIP issue aggregating to Rs40.8 crore (90% of the issue price of Rs526 per share for 8.61 lakh shares, as the remaining 10% was received in advance in FY2007).
The working capital requirement of the company increased significantly during the year on account of an increase in the inventory. The significant increase in the inventory was on account of land purchased for the Jaipur SEZ in our view. The company purchased 1,500 acre land for the Jaipur SEZ in FY2008. Till date, the company has acquired approximately 2,600 acre for the Jaipur SEZ and the remaining 400 acre is expected to be acquired in FY2009.
In terms of return ratios, the company’s return on capital employed (RoCE) and return on net worth (RoNW) improved by 340 basis points and 440 basis points to 9.4% and 8.2% respectively on account of a significant improvement in the OPM and an increase in leverage (for return on equity [ROE]). As the company has made investments in land acquisition, the RoCE and the ROE are expected to improve in the coming years.
Though the management forsees minor correction during the next year or two, it believes that the premium residential properties and the large-format integrated development in industrial parks would continue to perform well. MLD will continue to focus on residential properties in FY2009. The company also sees huge opportunities in developing integrated infrastructure in industrial parks and expects to formalise and start implementing new projects in this area in FY2009. Thus, the management has an optimistic outlook for FY2009.
We have revised our earnings estimate for FY2009 downward by 12.7% and for FY2010 by 8% on account of reduced other income. The company reported profit on sale of investments aggregating to Rs10 crore in FY2008. Going forward, we are considering interest income on cash and cash equivalent. We continue to value the stock using the sum-of-the-parts (SOTP) valuation and maintain our price target at Rs828.

At the current market price, the stock trades at 0.6x its NAV, 19.3x FY2009 earnings estimate and 8.2x FY2010 earnings estimate.

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