Kolte Patil Developers Ltd (Mohnish Pabrai High-Conviction Portfolio Stock) Research Report By Edleweiss

Kolte Patil Developers Ltd. (KPDL) is a leading Maharashtra-based real estate company with consistent annual sales of >2msf over the last decade. It has an established presence in Pune, and looking to expand its presence in Bengaluru and Mumbai. With robust project pipeline of 4.5msf to be launched over the next 6-9 months, the company is set to report >3msf sales for the first time in its three-decade long history. Further, the company is aiming to expand its sales base to 5msf by FY23-24E and add deals worth 10-12msf over the next 12-18 months. Despite the aggressive deal additions, the company is expected to maintain its balance sheet resilience, led by potential net cash flows of INR2,000cr (post-tax, KPDL share) from ongoing/upcoming projects over the next 4-5 years. The valuation gap and upside potential from deal additions makes KPDL an attractive stock in the current real estate upcycle. We recommend a ‘BUY’ rating with NAV-based price target of INR 319 and 17% upside potential.

Improved affordability provides a multi-year upcycle opportunity for the sector

We believe residential real estate sector is poised for a multi-year upcycle opportunity given the decadal low interest rates which has materially improved affordability and helped narrow the gap between rental yield and interest rates. Additionally, realized importance of owning a home and additional space requirement given WFH scenario has influenced buying decisions. In our view, this bodes well for players like KPDL who has the execution capability and balance sheet strength to scale up their business to benefit from this upcycle opportunity.

Robust launch pipeline and prospective deal additions to fuel growth

After a consistent performance over a last decade, KPDL is now looking to expand its sales base. Plans are afoot to launch robust 4.5msf of projects over the next 6-9 months, which should lead to 10msf of saleable pipeline. Thus, we expect KPDL to report >3msf of sales in FY22E for the first time in its history. Further, KPDL is aiming to be among the top-5 residential real estate players in India over the next 2-3 years with annual sales of 5msf. As a result, the company is looking to add 10-12msf of projects over the next 12-18 months across markets. Also, its plans to scale up its operations in Bengaluru and Mumbai from >0.25msf to 1.5msf or 30% of targeted sales over the next 2-3 years.

Cash flow efficiencies and asset light strategy to retain balance sheet resilience

Since 2017, the company is extremely focused on cash flows. This has resulted in collections of INR 1,368cr (12% CAGR rise) and operating cash flows (OCF) of >INR 250cr in FY19-20. With strong cash flows, KPDL managed to give PE exits and further improved future cash flow potential through higher economic interest. KPDL’s cash flow strength should continue over the next 4-5 years thanks to potential net cash flows of INR 2,000cr from ongoing/upcoming projects over the next 4-5 years. Moreover, KPDL’s asset light strategy will limit initial cash outlays despite aggressive project additions. This would keep leverage below the target of 0.5x

Valuations attractive given potential cash flows and accretive deal additions

KPDL is expected to generate INR 3,800cr net cash flows from its ongoing, upcoming and future (land bank) projects over the next 8-10 years. On discounting, this derives a value of INR 2,900cr v/s current EV of INR 2,400cr. Further, project additions should lead to NAV accretion of INR 800-950cr or 100-120/share which is not built in our price target yet. We recommend a BUY rating with target price of INR 319 and potential upside of 17%.