Looking at real returns

SMART TALK

First it was copper, then telecom and now real estate. A diversification strategy has enabled the Rs 200 crore Bhagyanagar India, the flagship company of Surana group to climb the growth ladder and report a 30 per cent CAGR in profitability in the last ten years.

The company now plans to focus on infrastructure projects such as hardware and software parks, special economic zones (SEZs), integrated townships, residential units, entertainment and hospitality projects, multiplexes and shopping malls.

Called Bhagyanagar Metals earlier, the company changed its name to represent its diversified interests. In an interaction with The Smart Investor, Bhagyanagar India's managing director Narendra Surana talks about the company's real estate ventures and its contribution to revenues.

The stock has given a return of over 146 per cent in just six months. At Rs 69.4, it trades at a price to earnings multiple of 8.9x and 7.1 for FY07E and FY08E respectively.

What attracted you to the real estate business?

Five years ago, the management found that the real estate/infrastructure business had tremendous potential for growth and it could become a source of revenue. We invested surplus liquidity available in real estate and infrastructure-related projects and sold them to make handsome profits.

The company now has a land bank in Hyderabad which includes a 12 acre plot at Uppal, 25 acres near Gachibowli and 6.5 acres near Shamshabad.

What opportunities does Hyderabad offer? Do you plan to move to other cities as well?

Hyderabad is turning into a major IT hub and offers a number of opportunities in commercial as well as residential space. We are also on the lookout for opportunities in other parts of the country.

Recently, we acquired 52 acres of land at Vepaguntta, Visakhapatnam from the AP Housing Board for developing an integrated township. We have a 51 per cent stake in the venture and our partner in the project is the Salarpuria Group of Bangalore.

We have also acquired around five acres of land in Lake Town, Kolkata through a special purpose vehicle (SPV) in which the company holds 36 per cent share.

What projects are you working on?

We are developing an IT park at Uppal with a built-up area of over two million square feet at a cost of Rs 450 crore and hopes to net a profit of Rs 130 crore. The returns from this project will contribute to our revenues from the current fiscal. We are developing another IT park at Gachibowli, Hyderabad with a built-up area of over 2.7 million square feet and at a project cost of Rs 484 crore.

This is expected to add Rs 210 crore to the bottomline and will improve our cash flows from FY09. Our Visakhapatnam project has a built-up area of over 4 million square feet, an expected project cost of Rs 385 crore and will contribute about Rs 97 crore to profits. We will see benefits from this project from 2010-11.

What are the growth estimates in the next few years? How much will real estate contribute to your sales and profitability?

We expect a CAGR of about 35 per cent and 48 per cent for sales and profit before tax (PBT) in FY06-FY10. The real estate business is expected to contribute 13 per cent and 49 per cent to sales and PBT respectively in 2006-07. By 2009-10, nearly half our total sales and three-fourths of our profits will come from the real estate business.

What are the prospects in the telecom business?

We manufacture jelly-filled telecom cables (JFTC), which are primarily used for laying telephone lines and in broadband services. We supply mainly to BSNL, MTNL and railways.

However this business is facing tough times due to the waning demand for JFTC due to threat from wireless telephony, and optical fibre cables. Our margins are also affected and we are projecting a lower contribution from this division.