Those who religiously follow Rakesh Jhunjhunwala would have bought shares of DB Realty after his buying was reported. And, why not? As a stock-picker, Rakesh is known for his early entry in picking up deep value stocks. Rakesh entered the stock at one-fifth its peak value and only when private equity player Trinity Capital sold shares it to his firm Rare Enterprises after taking a 50 per cent loss to its investments.
Valuable assets
Apart from the share price, DB Realty’s fundamentals reveal the possible reason behind the purchase. The company currently trades at a value which is almost equal to the inventory in its books. Experts who are tuned in with the development also suggest that a part of the inventory must be sitting in the books at lower cost compared to its real value as projects have been delayed. DB Realty is estimated to have 100-105 million square feet of developable area and about 6-7 per cent of it is in expensive South Mumbai.
The company trades at a market capitalisation of Rs 2,500 crore and has current assets of Rs 2,854 crore. Even if we deduct its current liability of Rs 1,317 crore and debt of Rs 326 crore, the stock trades at twice its liquid assets. And this value does not include the value of fixed assets of Rs 446 crore, investments of Rs 1,005 crore and capital work in progress of Rs 43 crore. If these are included, DB Realty trades at 70 per cent of its total assets.
Unlike most real estate companies, which are struggling with high debt, DB Realty has a debt of only Rs 326 crore against equity of Rs 3,384 crore. Even if the debt of its subsidiaries is included, the debt to equity ratio may not cross 0.4 times, which is comfortable.
Earnings-based valuations
On the earnings side, prima facie the numbers do not look exciting enough, what with a fall in sales from Rs 1,268 crore in FY11 to Rs 590 crore in FY12. However, its profitability is good and provides for interest coverage of 18 times.
Rakesh Jhunjhunwala would invest in companies that will give good returns in future and beat interest rate significantly. In other words the company should be giving return far more than what would have been available had the same amount be invested in a safer instrument.
Extending this logic for DB Realty, the company has an equity base of Rs 3384 crore. Even on a worst case scenario the company is generating RoE equivalent to bank rate, it would still be reporting a profit of around Rs 300-330 crore, which is 10 times higher than the current profit. DB Realty has done much better than this ratio in the past.
Realty stocks are traded on the bourses at a price-earnings multiple of 18 times; and if the same is applied to DB Realty’s future earnings the value of the company could be much higher.
A complete makeover
There is little doubt about the potential in the company, but whether it will be able to convert its inventory into sale is the big question. The company has taken steps to address this issue and is going through a complete makeover. DB Realty has appointed a new advertising agency to re-energise its brand. It has appointed a new CEO and has set up a committee to fast track it project execution. It expects to get clearance for some of its projects and hopes to launch new projects this fiscal. Further, the promoters are contemplating pumping in more money into the company by issue of new warrants. Funds will be needed to kick start the existing and new projects which will help monetise its land bank.
Legal tangles
As for the legal issues involving the promoters, analysts are of the view that even if the company goes in for liquidation in a worst case scenario, there is lot of value that some of its assets can realise. And if it continues to operate, the valuation the company deserves will unfold in the coming years.
