Revenues from the SEZs and a strong balance sheet should leave the firm with funds to expand.
Mahindra Lifespace Developers, the 51 per cent subsidiary of Mahindra & Mahindra, is banking on its two special economic zones (SEZs) at Chennai and Jaipur and residential projects to ensure robust growth over the next three years. Unlike other realty players, the company’s low leverage and healthy cash balances have helped it expand its SEZs and complete residential projects.
According to Arun Nanda, vice chairman, while residential projects are expected to contribute to sales significantly in FY11, in the short-to-medium term, the SEZ business would form the major chunk of revenues for the company.
SEZs are a success
Except for the Sri Lanka SEZ, which is on the backburner for the moment, the company’s other SEZs at Pune, Thane, Jaipur and Chennai are at various stages of development.
While Chennai and Jaipur are operational, the company is planning to start the construction of its Biotech SEZ at Thane in this fiscal whereas land acquisition for the Pune SEZ will start post elections. It is the strong performance of its Jaipur and Chennai SEZs that helped the company record a 48 per cent y-o-y growth in consolidated revenues for FY09.
Residential push in Chennai
The company has invested about Rs 500 crore so far in developing the Chennai SEZ. While the industrial phase is complete, the company will be launching its residential projects (comprising villas and apartments) by June this year. Thanks to the success of this SEZ, the company has plans to build another industrial park in Chennai for the manufacturing sector.
The Chennai SEZ registered a turnover of Rs 100 crore in FY09 as compared to Rs 20 crore in the previous year with a pre-tax profit of about Rs 40 crore. The company wants to develop its land bank comprising 300 acres of residential land, 45 acres of commercial land and 100 acres of industrial land in this area.
Finance hub in Jaipur
In the first year of operations, the company has reported net profits of Rs 5.13 crore on revenues of Rs 80 crore as against a loss of Rs 79 lakh on an income of Rs 3.92 crore in the previous year.
The company believes that the choice of location (freight corridor), lack of competition and availability of quality manpower has helped it to sell the project to corporates. In addition to the SEZ, the company is marketing the project as a financial services hub with banks such as SBI (which is planning to set up its North India financial processing centre) and ICICI. By the end of 2009-10, it expects to complete about 50 per cent of the 2,000 acre project where it has so far invested Rs 450 crore.
Nanda believes that revenues from the Jaipur SEZ would be higher in the current fiscal as sales to customers such as SBI were not booked in the last fiscal and the approval for the light engineering and handicraft segments of the SEZ was received in March this year.
Few takers for housing
While the slowdown has had an impact on the offtake of units at the company’s SEZ, the impact is more visible in the residential segment. While the company had earlier targeted projects totaling 6.21 million square feet over FY09-11, it is currently constructing projects over an area of 2.2 million square feet. Recently, it launched the second phase of Eminente, a premium housing project in Mumbai with price discounts of up to 10 per cent.
Due to the slowdown in the realty sector, the company has held back some projects over the last six months. Nanda believes that there will be an improvement in the situation after October. The tilt in revenues in favour of SEZs and the slowdown in residential projects means that the share of revenues from the residential segment are down to 48 per cent in FY09 from 87 per cent in FY08. Going ahead, the ramp up in revenues for this segment will largely be driven by the residential projects that the company is undertaking within the SEZ in Chennai.
Cash in hand
The company expects to meet the funding requirement for the new 1,000 acre industrial park at Chennai and the 3,000 acre multiproduct SEZ at Pune from the cash on its books (Rs 163 crore as on March 31, 2009) and internal accruals.
The total investment planned in the current fiscal in Chennai is about Rs 150 crore, while the total investment in procuring and developing the 1,000 acre project is about Rs 500 crore. The company expects its debt to equity to be at 1-1.5 in FY10 and has indicated that it will not strech it beyond the 1.5x level.
Play it cautiously
While consolidated revenues have seen robust growth in FY09 on the back of higher sales from Chennai and Jaipur SEZs, net profits were down 29 per cent to Rs 46 crore in FY09 as the previous year’s numbers included proceeds from the stake sale in Knight Frank and its property in the World Trade Centre.
The move to set up a second Chennai project and its successful ramp-up of its Jaipur SEZ should help double revenues in the next two years. While the low leverge and healthy cash position have helped it weather the slowdown, the key risk for the company is a further slowdown in the manufacturing or IT sectors that bring in the bulk of its SEZ revenues.
At Rs 169, the stock trades at 9.39 times FY10 estimated earnings of Rs 18. Motilal Oswal estimates the sum-of-parts-valuation at Rs 518 a share.
