Ashiana Housing

Equity Research Presentation

(BSE: 523716) Target Price: Rs. 279 by Dec 2012

Prepared on Dec 3 2010 (Century.Partners03@gmail.com)
Ashiana Housing (BSE: 523716) Target Price:Rs. 279 by Dec 2012 Prepared by:M N on Dec 3 2010
Intrinsic Value (from DCF Analysis): Rs. 279
Current Price: Rs. 160 ($1 = Rs. 46)
Margin of Safety: 75%
Shares: 1.87 Cr (1Cr = 10 million, 1 Lakh = 100,000)
Market Capitalization: Rs. 302 Cr (Rs. 1 Cr = $217,400)
Book Value/Share: Rs. 65
52 Week Range: Rs. 96 - Rs. 192
P/E: 7.6, P/B: 2.48, P/S: 2.42
PEG: 0.16, D/E: 0.06, ROE: 34%
EPS: Rs. 19, Net Profit Margin: 33%
Div & Yield: Rs. 2.8(1.75%)
Current Ratio: 1.95, Quick Ratio: 0.58
Headquarters: Kolkata, WB, India
Risk: Low (due to high MOS)
Rating: BUY
BUSINESS
Ashiana Housing (BSE: 523716) is a mid sized real estate company well known in India. It has a track record
spanning more than 25 years during which they have developed over 92 Lakhs sq ft of area and concrete plans to build
similar amount in the next 5 years. It manages group housing complexes for over 18 years with 4000 units under the
management. It has projects spanning across the country and primarily deals with Retirement Resorts, Group Housing,
Hotels, Retail and Facility Management. Ashiana Housing provides differentiated products and services to Indian
Middle class and is a well known name in the industry. It has in house construction capability and follow direct sales
approach. It is supposed to be the pioneer in Retirement Housing in India. Key promoters of this group are O P Gupta,
B P Gupta and R K Modi, group of engineers who started real estate development in Bihar back in 1979. Earlier known
as Ashiana Housing & Finance India Ltd (AHFIL) company was incorporated on 25th June, 1986 in Calcutta.
 RISKS
Risks include chances of higher lending rates for housing in the country which will lead to reduction in demand
for the real estate market.
Barriers to entry are very less but still requires considerable expertise in this domain and lot of capital to enter the
housing building arena.
Business model is not unique as is the case with any other housing developer but operates and finishes high
quality projects on time so good rapport among customers.
There are regulatory environment issues which create uncertainties for service tax and VAT. The present state of
regulation and tax structure for the real estate sector is quite complex which may create issues in the future.
Stock is listed on only one exchange which may sometime results in low liquidity.
FINANCIAL HIGHLIGHTS
There are regulatory environment issues which create uncertainties for service tax and VAT. The present state
of regulation and tax structure for the real estate sector is quite complex which may create issues in the future.
Stock is listed on only one exchange which may sometime results in low liquidity.
Revenue (2009-10) : Rs.121 Cr (POC Method); Operating Expenditure: Rs. 74.1 Cr (Depreciation using SLM)
EBITDA: Rs. 46.9 Cr; Profit After Tax: Rs. 36.7 Cr
Return on Average Net Worth: 33%; With a D/E of 0.06, company is Virtually Debt Free.
Expected Operating Profits from Ongoing projects (2012- 13) : Rs. 188 Cr.
Consistent earnings model for the last decade and expect better growth rates.
Average Realization in just Rs. 2100/ sq ft which is low and fits under the affordable housing section.

Ashiana Housing has better than average profit margin, 32% growth rate in sales and free cash flow over last few years.
Despite the 12 months downturn in the Indian economy, net profit margin increased by 2% over the last fiscal year and
has shown consistent quarter over quarter earnings. If present profit margins can be maintained it may keep growing at
this pace which will increase economic moat for this company. Firm ranks very high in terms of profitability and other
financial ratios when compared to it’s competitors. Company has out performed the market and it’s peer realty stocks
over last 6 months.
 FUTURE OUTLOOK OF ASHIANA HOUSING

Ashiana Housing has several key projects in it’s pipeline, some of them are mentioned
here:

Rangoli Gardens in Jaipur: 25 Lakhs sq ft area project with Mangalam Group with
an expected realisation of Rs. 500 Cr in the next few years.
Retirement Resort in Lavasa (Pune): 30 Lakhs sq ft with 7 Lakhs sq ft saleable
area.

Company has a pipeline of 70 Lakhs sq ft (17 Lakhs sq ft sold till Mar 2010) in 8 key
projects across five cities with a diverse mix of projects in terms of sq ft and types like
villas, low rise and high rise.

Over 71 Lakhs Sq Ft of area is under development. Ashiana Housing is set to grow

with good pace in the future with the Indian economy now picking up.
ASHIANA HOUSING’S OPERATIONS
Ashiana Housing Operations Features

Over 92.2 Lakhs sq ft delivered till date with a record high area constructed of 10 Lakhs sq ft in the fiscal year 2009-10.
Consistent growth in Equivalent Area Constructed (EAC) in the last decade with a CAGR of 38% over last 4 years.
Future bookings growing with an expected execution capacity to 20 Lakhs sq ft per year by 2012.
Profit After Taxes ~ Rs. 37 Cr, High operating profit margin of 39% .
Firm has 80% of its workers in skilled category in the construction department.
Well experienced in selecting key locations and scouts for land where the cost of land is less than 20% of the total cost.
Distinguish feature from other market players is that it is focused on execution rather than land banking and have a
direct sale model to its end user rather than going through broker.
Ashiana Housing has low construction cost as it has inside construction capability which also allows for best quality
control. Company targets only Tier 2 and Tier 3 cities for development.
Ashiana Housing is a customer centric and investor friendly company with a conservative approach towards expanding
without debt. Pioneer in Retirement Housing in India.
It focuses more on building quality lifestyle housing in India for middle class segment focus.
Company has wide variety of diversified projects in Delhi (NCR), Rajasthan, Maharashtra, Jharkhand.
History of over 25 years in Retirement Resorts, Group Housing, Hotels, Retail, Facility Management.
Overall good business model with above average profit margins, low cost of capital and higher growth rates for the
company provides optimistic outlook in the future.

ECONOMIC MOATS
Ashiana has constructive growth, increased ROIC, ROE and it’s economic moat was maintained even during the current
downturn and reflects lot of future potential.
Ashiana Housing mainly focuses on Tier 2/3 cities due to conservative approach to acquire land at a cheaper rate.
Intangibles (Brand Name): Ashiana Housing is a well known reputed business house among the Indian consumers which
focuses on development of community and not just creating another house.
Pioneer in senior citizen housings and resort development. Senior citizen housing concept is new in India but Ashiana
Housing has entered this market early and will take benefit of this phenomenon.
Forbes rated Ashiana Housing under 200 best under a Billion Dollar companies of Asia which shows that it passed both
the qualitative and quantitative standards to get into the list.
 MANAGEMENT EFFECTIVENESS AND CORPORATE GOVERNANCE
Experienced and highly educated managers run this company. Fair dealings is key with this group.
Management is very conservative and easy going on leverage and debt.
Professional culture and good academic background of its managers and over 30 years of experience helped in
facing the downturn effectively.
Low dividend policies are suitable seeing the higher future growth prospects.
Management is focused on transparency while operating and keep investors interest first.
Management is very conservative about the growth using low cost land for development and conducts lot of
market research before launching it’s projects.
Managing and maintaining group housing complexes for over 18 years of 4000 units.

STRENGTH’S OF ASHIANA HOUSING

The company over the years has achieved the competitive strength in the following areas:

Quality of its Construction.

Access to skilled labour.
Strong and efficient project management and delivery model.
Ability to construct innovative structures.
Qualified and experienced management team.
Ability to identify emerging trends in customer requirements.
Standardisation and documentation of internal processes.
Wide networking of in:house marketing team.

The basic needs of every human being are food, shelter and clothes.The problem of food and clothes are already
solved to some extent by modern methods and improved technology. Therefore,the order of priority now would be
shelter, food and clothes.
 PROCESS OF BUSINESS

The company is mainly engaged in real estate development which includes location identification, site selection,
land acquisition, planning, construction activity & marketing. The business process contains the following stages:
Location shortlisting & Site/Land identification
Price negotiation with vendor
Legal due diligence
Execution of development agreement/POA/Sale Deed
Selection of Architects
Approval of Drawings & Statutory clearances
Selection and appointment of various agencies
Project planning & monitoring
Project marketing and Handing over
INDIAN URBAN SECTOR GROWTH SCENARIO AND HOUSING INDUSTRY OUTLOOK

Real Estate market is expected to grow at a healthy rate in India where GDP (PPP) of the country is going to
surpass Japan in 2011.
Organized real estate market here has a share of <4% of India’s GDP, this share is bound to rise in the future.
In 2011, the GDP is expected to grow close to double digits and is going to grow at that pace for the next 5
years, that will lead many middle class people to afford housing with growing demand of residence.
Middle class household in India is expected to go up from 32 million in 2008 to 150 million in 2030.
The average age of a new homeowner in India now is only 31 years compared to 45 years a decade ago.
Urban population is set to add 250 million people in the next 15 yrs, 4 times growth compared to last 3
decades.
To keep up pace with urbanisation, Indian Government plans to build 400 kilo meters of metros each year and
to construct 20,000 kilometers of road lanes.
Increase in the number of people coming to middle class category and Urbanisation will lead to growth in real
estate sector.
 ASHIANA HOUSING'S VALUATION

For this study, 2-Stage aggregate free cash flow model has been used, which is growing over
38%, even if we take a conservative growth rate of 25% for the next 5 yrs & 20% for the 5 yrs
thereafter, our intrinsic value calculation of Rs. 279 shows a MOS of 75%.
If we take Earnings Multiples approach, company during growth period have traded over 13
times current earnings.
Taking a range gives us a valuation of Rs. 247 to Rs. 304 market value for multiple of 13X and
16X respectively.
Value we get from DCF Model approach of Rs. 279 lies well in b/n the Earnings Multiple
(13X- 16X) range of Rs. 247 - Rs. 304.
The main reason for the low valuation is, it is not involved in high profile takeovers and high
growth at the cost of leverage. But if one is looking to invest for long term, one can get better
than market returns.
Company has significantly outperformed the market index over a period of last many years.
Comparing the present P/E and P/B ratio to it’s historic average and competitors, reflects that
the company is trading at a lower multiple.
Company is not debt ridden and doesn’t plan to take excessive debt in the near future.
NAV is based on assets, debt to equity = 0.02 (virtually debt free).
Credit Rating and Information Services of India Limited (CRISIL) has provided good rating to
Ashiana Housing.
 VALUATION METHOD
Method used here is 2 Stage Discount cash flow valuation with an aim to find the intrinsic value of Ashiana Housing
based on the present cash flow, growth and risk. Assuming the life of the assets, here 20 years,To estimate Free cash
flows, and Discount rate (r) to apply to get the present value.
Free cash flow = Cash from operating activities – Capital Expenditure
Future Free cash flow growth based on past revenue growth rate of Ashiana Housing from 2007- 08 (Rs. 6.92 Cr) to
2009 - 10 (Rs. 11.92 Cr) ~ 38%.
Taking a conservative approach due to rising lending rates and expecting a modest free cash flow growth of:
Year 1- 5, growth rate – 25%, Year 6-10, growth rate – 20%.
Perpetuity value (Year 11- 20) = FCFn+1/(r-gn), FCFn+1 = FCFn * (1+ gn )/(r- gn), where n = 10 years

Perpetuity Growth (gn) = growth of Indian economy in future (Historic avg. of Indian economy last decade – 8%)
Cost of Equity (COE) = r = Risk free rate + Beta* Risk premium

Ashiana Housing has a good credit rating from CRISIL, so enjoys lower credit cost.
Risk free rate = 7.5 % (Average Indian Government Bond Yield for 10 Year Notes Rate)
Beta = 1.5 for Ashiana Housing; Risk premium = 5% (Average Indian Historic implied equity risk premium)
Therefore COE (r) = 7.5% + 1.5 * 5% = 15%

Free cash flow (year 1-20) =

Free cash flow (year 1- 5) at 25% + Free cash flow (year 6- 10) at 20% + Perpetuity value (Year 11- 20)
All the three values discounted at COE. Net value = DCF Estimate (Rs. 281) + Present (Cash-Debt) (Rs. -2)
Using the above values and steps Ashiana Housing’s Per share value is coming out to be Rs. 279.
This value is based on discounted free cash flow analysis.
Present value of Rs. 160 (as of Dec 3, 2010) shows a margin of safety of 75%.
DCF Analysis Sheet
 VALUATION CRITERION SCREEN
Valuation of a company primarily involves earnings, growth rate and cost of capital
Price = Earnings/(Cost of capital - growth rate) (Rs. 19/(.15-.08) = Rs. 272)
Sales & Earnings Growth (last 5yrs) > 15%, Low PEG Ratio, High Earnings/PBV Ratio
Return on Retained Earnings > 15%; Initial Rate of Return > 20%
Market Capital close to Book value, Return On Equity > 20%, Return On Asset > 15%,
Return On Invested Capital > 15%, Earnings Yield > 15%, Current Ratio > 2, Debt/Equity < 1
Present P/E < 0.75 * Historical P/E (Average of last 5 years)
Inventory turnover, Insider share buy back

Ashiana Housing qualifies well on the above mentioned criterion. It also qualifies the Hurdle Rate > 2 * Long Term
Govt. bond yield (7.5%) of 15% as the expected value from DCF of Rs. 297 in 2 years provides us a ROR of 32%.
Book Value of Ashiana Housing is on continuous rise which will ensure that the intrinsic value of Rs. 279 will be
reached soon.

FINAL CHECKLIST
Business: Understandable, Economic moat, Growth potential, No Catastrophic Risk.
Customers: Stickiness to the company, Loyalty.
Suppliers: Relationship with the company.
Management: Integrity, Efficiency, Ownership.
Board of Directors: Background of the members.
Financial: ROE, ROIC and other ratios, Capital Structure.
Value: Earnings vs. Value, Margin Of Safety.

Ashiana Housing also does fairly well on the above mentioned Final Checklist Parameters.
 Recommendation for Ashiana Housing: BUY Target Price: Rs. 279 by Dec 2012

Considering the Margin Of Safety of 75%, present price/share of this company at Rs. 160 (Dec
3, 2010) seems cheap and undervalued by a considerable margin to it's Intrinsic Value of Rs.
279.
Historic CAGR of the company shows lot of potential in the future prospects of this company.
Sound and able management will lead the company through good and adverse scenario as
proven by last year profit margins and record construction of 10 Lakhs sq ft area. Healthy
pipeline of projects will ensure further growth.
Future plans to grow constructively without taking too much debt is in line with shareholders
interest to maximize returns on invested capital.
Long term growth prospects for established builders are very optimistic, given the present
inventory and backlog for the industry, Ashiana Housing is well positioned to take advantage
of this opportunity.
Conservative approach of management towards leverage and low cost land to construction cost
ratio will lead the business towards constructive growth and maintain profit margins in the
upcoming inflationary environment.
Good rating from CRISIL and brand name of Ashiana Housing makes it easy to raise capital at
lower cost of equity.
Given the present urbanization scene, demand in the housing is bound to grow up.
Real Estate experts have already made optimistic views about the sector in whole which will
help in the profitability of the group.

In both good and adverse circumstances, Ashiana Housing is poised to do fairly well.
Disclaimer: This Report is for information purpose only and express our views about the company, not an offer to buy or sell.
Risks involved in investing is not suitable for all kinds of investors. Seek professional advice if this research is suitable for you.