Ashiana Housing meets all the criteria that a sensible long-term investor looks for in a stock.
First, it is backed by stock wizards like Prof. Sanjay Bakshi, Westbridge Capital and Ashish Kacholia, each of whom has a reputation for carefully screening a stock before entrusting it with their wealth.
Second, it has a proven track record of successful execution of real estate projects. Its projects generate a IRR of 30%+ and its ROE and ROCE is 25%+. The Company is literally debt-free.
Third, it is a small cap company with a market capitalisation of only Rs. 1300+ crore. Given, the scope for expansion in Tier II and Tier III cities, there is huge opportunity for growth.
On Friday, the stock plunged 10%. Even otherwise, the stock has been weak. One explanation for the fall/ weakness could be that it is a natural reaction to the steep run up that the stock has had in the recent past (27% in 3M & 250% YOY).
The other explanation is that investors are put-off by the lack-luster results that the company has delivered in the recent past. During FY12-14, Ashiana Housing reported negative 32.6% top-line CAGR. Even in Q1FY15, the Company reported consolidated revenues which were down 39.5% YOY.
However, the reason for the lack-luster quarterly performance is because the Company changed from the “Percentage Completion method” to the “Project Completion method”. The result of the change is the recognition of revenues and expenditure gets deferred till the project gets completed.
This aspect explained in eloquent terms in the Investors presentation:
“Reasons for low sales and loss after tax:
– As all the projects are now under contract completion method and the company had very limited deliveries in this quarter, hence revenue not recognized assuch.
-Upcoming quarters will improve as company expects deliveries in some projects. The full year profits are expected to see growth as compared to last year. However trend will remain volatile on a quarterly basis”
Taking a cue from this, the financial results can be dramatic in the year in which projects are completed and revenue recognized.
Daljeet Kohli has latched on to this fact in his “Initiating Coverage” report. He points out that 10 of the 11 ongoing projects will get completed (including phases for some of the projects) during Q2FY15-Q4FY16.
Daljeet has given full facts and figures of what the scenario will look like in FY15-16E. He says:
“FY15-16E to see strong earnings growth, huge swing over FY14:
AHL is likely to report ~149% top-line CAGR during FY14-16E (to ~ Rs 6.9 bn), on the back of 3 projects entirely getting completed (Tree House, Utsav and Anantara) and some phases of remaining 7 projects getting completed (Ashiana Town, Rangoli Gardens, Aangan, Gulmohar Gardens, Navrang, Vrinda Gardens, Dwarka and Umang). Given that AHL follows “Project completion a/c’ing method”, in-line with top-line recognition, costs related to projects would get recognized. We expect AHL to report ~248% EBITDA CAGR during FY14-16E (to ~ Rs 2.4 bn; EBITDA margins to expand from 17.8% in FY14 to 34.7% in FY16E). Such swing in margins could be reflection of (1) absorption of fixed costs and (2) changes in the inventory (as major chunk of inventory would get absorbed). Higher tax rate (in FY16E) would eat in to benefits of strong EBITDA growth. We expect AHL to report ~192% PAT CAGR during FY14-16E (to ~Rs 1.8 bn; PAT margins would expand from 19.8% in FY14 to 27.1% in FY16E).”
On this logic, Daljeet has recommended a Buy with a target price of Rs. 202, which translates to a return of about 35% from the CMP of Rs. 149.
Now, you have to take the difficult decision whether to follow Daljeet Kohli’s analysis and buy the stock or not.