 "Sweet spot for consumers")
At a time when nobody on the markets is putting even his loose change on real estate stocks, the one company that has got me to alter my bias is Puravankara Limited.
The business is considered commodity (buildings, more buildings and even more buildings), most real estate companies do not enjoy attractive annuity rental incomes (Prestige is an exception), the business is cash-intensive, most balance sheets are opaque about finished inventories and postponed revenues, and incomes so lumpy that the analyst used to extrapolating quarter-based numbers needs to bank on inside information.
So what's got me excited about Puravankara?
This is how its model is beginning to work. Earlier, Puravankara marketed apartments, used cash proceeds to build, handed apartments years later and collected the rest of the cash. The problem with this conventional approach was that usually what was marketed initially was never enough to completely fund construction, as a result, the company inevitably needed to borrow high-cost working capital from commercial banks. Since it needed to keep growing to sustain shareholder appetite, it needed to increasingly borrow until there came a point when the company (as others in its sector) was being run more for bankers than shareholders.
A year ago, Puravankara said 'enough'. The company resolved to de-leverage without de-growth; its reinvented business model would raise as much cash upfront as would be needed to complete the entire construction within the shortest tenure of launch.
Puravankara recognised that the catch lay in identifying that sweet spot at which the largest number of customers would be willing to buy apartments. So, it. reversed a long standing paradigm. It innovated a quasi-book building scheme (like they do for initial public offerings ) which empowered prospective customers to engage in a price discovery (within a band) at which they would be willing to buy. You would think this would be stupid because customers would opt for the lowest price. Look at the result. During the last financial year, three projects were financed through this game-changing route. This has helped bring revenues in faster (often closing launches within a couple of weeks) enough for the company to complete projects without a rupee of corresponding debt. This self-financing model has already begun to shrink Puravankara's balance sheet from Rs 1,785 crore on March 31, 2013, to Rs 1,695 crore as on March 31, 2014, and a projected Rs 1,100 crore as on March 31, 2015, even as it grew (and grows) the amount of built-up area. Besides, this is expected to strengthen the company' return on equity (RoE) by 600 basis points to around 14 per cent in a couple of years.
Higher revenues, lower debt and smaller balance sheet are music to my eyes. Since I have no access to information on project launches, estimated revenues and projected profits, all I will say is that if this innovation can be extended across each Puravankara project, we could well be seeing a re-rating of the company's stock on the markets.
The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where markets are not headed
The business is considered commodity (buildings, more buildings and even more buildings), most real estate companies do not enjoy attractive annuity rental incomes (Prestige is an exception), the business is cash-intensive, most balance sheets are opaque about finished inventories and postponed revenues, and incomes so lumpy that the analyst used to extrapolating quarter-based numbers needs to bank on inside information.
So what's got me excited about Puravankara?
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This: The company, probably liberating itself from the yoke of more-cash-for-growth, is headed for what could prove to be a model for the industry.
This is how its model is beginning to work. Earlier, Puravankara marketed apartments, used cash proceeds to build, handed apartments years later and collected the rest of the cash. The problem with this conventional approach was that usually what was marketed initially was never enough to completely fund construction, as a result, the company inevitably needed to borrow high-cost working capital from commercial banks. Since it needed to keep growing to sustain shareholder appetite, it needed to increasingly borrow until there came a point when the company (as others in its sector) was being run more for bankers than shareholders.
A year ago, Puravankara said 'enough'. The company resolved to de-leverage without de-growth; its reinvented business model would raise as much cash upfront as would be needed to complete the entire construction within the shortest tenure of launch.
Puravankara recognised that the catch lay in identifying that sweet spot at which the largest number of customers would be willing to buy apartments. So, it. reversed a long standing paradigm. It innovated a quasi-book building scheme (like they do for initial public offerings ) which empowered prospective customers to engage in a price discovery (within a band) at which they would be willing to buy. You would think this would be stupid because customers would opt for the lowest price. Look at the result. During the last financial year, three projects were financed through this game-changing route. This has helped bring revenues in faster (often closing launches within a couple of weeks) enough for the company to complete projects without a rupee of corresponding debt. This self-financing model has already begun to shrink Puravankara's balance sheet from Rs 1,785 crore on March 31, 2013, to Rs 1,695 crore as on March 31, 2014, and a projected Rs 1,100 crore as on March 31, 2015, even as it grew (and grows) the amount of built-up area. Besides, this is expected to strengthen the company' return on equity (RoE) by 600 basis points to around 14 per cent in a couple of years.
Higher revenues, lower debt and smaller balance sheet are music to my eyes. Since I have no access to information on project launches, estimated revenues and projected profits, all I will say is that if this innovation can be extended across each Puravankara project, we could well be seeing a re-rating of the company's stock on the markets.
The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where markets are not headed