Ashiana Housing - An Interesting Case

I know, I know.. The first question that you would pop is; what is a dude, who claims to be 'value-based', doing with a real-estate company! That’s a very fair question, considering the way most builders/real estate players around us operate. But Ashiana Housing is different! Also, it is important for a good investor not to have mind-blocks against companies or sectors. So let us study this company and decide whether there is any value in it.

Consider these facts:

• Unlike most other real estate players, Ashiana does not go bonkers over land bank. It keeps on maintaining land bank which would give it project visibility for the next 5-6 years, at any point of time. Further, it enters into agreements with existing land owners, thereby reducing initial capital requirement. As a result, the company is debt-free and yet has excellent revenue visibility.
• Ashiana commences a project only after detailed study and after getting visibility of customer advances. The management states that "we won't start a project where we feel we won't get customer advances". This reduces the working capital requirement too.
• Ashiana concentrates on Tier 2 and 3 towns. It enters any area only after proper study and also by establishing partnerships with local developers. As a result, it has built up excellent reputation and goodwill in towns like Bhiwadi, Jaipur and Jamshedpur, where it mainly operates. Better to be a biggish fish in a small pond huh?
• Ashiana has created a niche in the form of developing 'old age retirement homes' under the brand name 'Utsav'. It currently has two such schemes, one at Jaipur and the other one at Lavasa, Pune.
• Ashiana also maintains the projects that it develops, through its subsidiary Vatika Marketing. This ensures that the quality of its projects stays high even after completion/handing over.
• Ashiana's accounting policy also appears to be very conservative. The company accounts for sales on a percentage of completion method. (For more details, please refer to the annual report.)

The company appears to be good huh? Well a good company can become a good investment only at a good price and valuation! So now that we have seen some qualitative aspects about Ashiana, lets study the numbers:

Market cap is Rs.225 crores at CMP of Rs.125/-. (Just FYI, the stock had gone down below Rs.30 in Jan 09. And the price has gone up more than 3 times in the past 1 year. :-)  I am sure many of you will now be like "its gone up too much, let's wait for it to come down". As is commonly observed, this wait increases, as the stock falls, only to repent after it probably goes up again! Same old, same old!)
The company's financials are in good shape. In order to keep this post shorter, I am not providing a table of the financials. One can check out the financials of the company here.

Ashiana's ongoing projects:

The company has ongoing projects involving saleable area of about 68 lakh sq ft. The company has about 50 lakh sq ft additional land bank. Of the projects detailed above, Utsav - Jaipur and Pune are retirement resorts, Village Centre is a Hotel (100 rooms) cum retail centre owned by Ashiana while others are regular group housing schemes. Except Rangoli Garden, which was launched recently, the company is expected to complete all the other projects by the end of FY13. If we adjust the above total saleable areas as per Ashiana's share as well as a haircut for already constructed area, its about 30 lakh sq ft to be completed upto FY13. This gives excellent revenue visibility.
In one of its investor presentations, the management had claimed that they expect to recognise operating profits of Rs.225 crores upto the end of FY13 (Cumulative). That's equal to current market-cap! Let us see if this is possible.

• Ashiana's average realisation per sq ft for the December 09 quarter was Rs.2084/-, while average cost of construction was between Rs.1000-1100/-. That gives an operating profit margin of Rs.900/sq.ft. Let us take it as Rs.800/- to be conservative.
• As per Dec 09 management concall, the management's target is constructing 11 lakh sq ft in 2009-10, 13 lakh sq fr in 2010-11, 15 lakh sq.ft in 2011-12 and 18 lakh+ in 2012-13. (Not all this will be booked as sales immediately).
• Booking of total 30 lakh sq ft sales and consequently, Rs.240 cr (Rs.800x30 lakh) operating profit upto 2012-13 seems quite achievable. Impressive indeed. Like me, you also need to do some basic excel based calculations to arrive at likely profit numbers. Its quite simple.

There are of course, significant risks, but they are more macro in nature. The real estate sector itself could get hit due to:

1. Possible hike in interest rates, which discourages customer spending on real estate
2. Implementation of the proposed Direct Tax Code, where tax benefit for housing loans could be removed. This, i think, is a significant risk to the real estate sector.

One needs to keep these risks in mind. Though they are macro in nature (which means we will probably never be able to predict or time them), in my view, they are quite critical.

Ashiana Housing is expected to declare its FY10 results tomorrow (May 29, 2010). Although, in my view, this company's performance should not be seen on a quarterly basis since quarterly numbers could be quite lumpy. To sum up, I think Ashiana is a wonderful company, with ethical and conservative management which has expanded judiciously. The projects in hand as well as future plans of the company appear good and one should surely keep tabs on Ashiana Housing Ltd.

Cheers and happy investing!