Those who religiously follow Rakesh Jhunjhunwala would have bought shares of DB Realty after his buying was reported — 1.25 million shares at an average price of Rs 90.21 apiece totalling Rs 11.27 crore last Friday. And, why not? Although Jhunjhunwala hasn’t been heard talking about his investment in this stock, as a stock-picker, he is known for his early moves in picking up deep value stocks.
In DB Realty’s case, Jhunjhunwala has entered the stock at one-fifth its peak value (Rs 475 in September 2010). In a bid to understand what could have possibly excited one of India’s shrewdest investors, we looked at the company’s assets and financials. While our analysis suggests there is potential for gains, investors should note that there are risks as well in the form of the company’s ability to revive its financials as well as lack of clarity over legal issues pertaining to the promoters.
Valuable assets
Apart from the share price, DB Realty’s fundamentals reveal the possible reasons 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 six-seven per cent of it is in expensive South Mumbai.
| EXECUTION FALLS | |||||
| In Rs crore | FY10 | FY11 | FY12 | Q1’FY13 | % chg * |
| Sales | 951.2 | 1,268.4 | 590.8 | 84.9 | -61.7 |
| Operating profit | 394.6 | 413.0 | 123.0 | 7.7 | -83.4 |
| Interest | 72.6 | 65.4 | 7.1 | 1.2 | -69.6 |
| Adjusted net profit | 251.8 | 296.3 | 34.7 | -2.1 | PTL |
| Debt | 595.0 | 463.0 | 326.0 | - | - |
| Equity | 3,048.6 | 3,298.2 | 3,384.5 | - | - |
| RoE (%) | 13.6 | 9.3 | 1.2 | - | - |
| NPM (%) | 28.5 | 23.8 | 6.8 | - | - |
| RoE: Return on equity; NPM: Net profit margin; PTL: Profit to loss * Change is year-on-year Consolidated financials Source: Capitaline | |||||
The company trades at a market capitalisation of Rs 2,711 crore and has current assets of Rs 2,860 crore on a consolidated basis. Even if its current liability of Rs 1,317 crore and debt of Rs 326 crore are deducted, the stock trades at a little over two times 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 it adds up to Rs 2,711 crore, which is equal to DB Realty’s current market value. This also suggests that the market is not factoring in the potential upside of its current land bank.
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, what with a fall in sales from Rs 1,268 crore in FY11 to Rs 590 crore in FY12. However, its profitability is still good and sufficient for interest costs (see table).
Jhunjhunwala would typically invest in companies that over a period of time will deliver returns that would beat risk-free returns significantly. In other words, the stock should be giving returns far more than what would have been available had the same amount been invested in a safer instrument.
Extending this logic for DB Realty, the company has an equity base of Rs 3,384 crore. Under normal circumstances, the company has generated return on equity (RoE) equivalent to the bank rate or profits of around Rs 300-330 crore, which is 10 times higher than its profits in FY12 (an exceptional year).
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. Although the first quarter of 2012-13 has seen a sharp fall in the company’s revenues and profits, a trend that may persist in the near-term, there is hope of things looking up.
A complete makeover
While there is potential in the company, the big question is whether it will be able to convert its inventory into sales. The company has taken steps to address this issue and is aiming for a complete makeover. DB Realty has appointed a new advertising agency to re-energise its brand. It has also appointed a new chief executive officer 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 fresh funds into the company by issuing 37 million new warrants (estimated inflow of over Rs 250 crore). While the move would increase their stakes (post conversion to equity) to 67.6 per cent from 62.6 per cent currently, the funds will help kickstart the existing and new projects and help monetise its land bank.
Legal tangles
Meanwhile, as for the legal issues involving the promoters, there isn’t any clarity of it. But, analysts are of the view that even if the company goes in for liquidation in a worst case scenario, there is a 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.
