Prozone Intu Properties: Potential Multibagger

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PROZONE INTU PROPERTIES (PIP), formerly known as Prozone Capital Shopping Centres Limited (PCSC)  was demerged from Provogue on 10th Feb, 2012, and was listed on stock exchange on 12th Sept, 2012, is a joint venture between Provogue (India) and Intu Properties (UK), formerly known as Capital Shopping Centres (UK) in which Intu Properties holds 32.38% stake. Intu Properties invested Rs 202 crore for 25% stake (via FDI Account) in FY07 valuing this company at Rs 808 cr then (Current Market cap of entire company is just 250 odd crore)

Intu Properties (UK) is one of the largest real estate company of UK which is owning & managing close to 8 billion Pounds of assets, Its strategy is to focus on large mixed development (Built-Lease & Built-Sell model) thus facilitates creation of debt-free assets and generating annuity income.

 They are set up to create, develop and manage regional shopping centres and associated mixed-use developments Pan-India. The company currently has shopping centres in operation and under construction, residential projects and commercial units for sale



Business Strategy –

 To develop large scale Land Parcels for Mixed Use development.
 75% of the Land to be developed as Residential & Commercial – Build & Sell model
 25% of the Land to be developed as Retail – Build & Lease Model
 The Company follows this model so as the Cash Flows from Build & Sell portfolio facilitate the Build & lease model, Thus resulting into Debt Free Annuity Assets.

Residential Projects ‐ Strategy

 The Company invests and develops the entire Clubhouse and Site Infrastructure for the project upfront before the Launch of the Project.The Clubhouse features all the Modern amenities and is spread across 4‐5 acres of Land. It provides credibility to the business as all the Amenities are developed Upfront and also all the project permissions are in place, thus accelerates the sale of the project, resulting into better cash flows.

The company spends around Rs. 14 ‐15 cr on this upfront Infrastructure as it is cash rich and not levered. Also since it has economies of scale the cost is apportioned across large no of units resulting into cost effective way.  Due to this, the Company emerges as the strongest and the most credible player in the region. Eg, In Nagpur, Company has received an over whelming response is compared to the best players in the region such as Tata Realty, Mahindra & Godrej Properties.



As per the company, it owns six land banks located in Aurangabad, Nagpur, Indore, Coimbatore, Jaipur and Mysore  comprising of a total of atleast 169.55 acres . As can be seen from the list of cities, these are mostly Tier-II and Tier-3 cities and the plans of the company is to develop regional shopping centres along with residential and commercial properties surrounding the retail properties. The company’s flagship retail property “Prozone Mall” at Aurangabad has been operating since October 2010 and the rest of the projects are getting implemented.

 

PIP a turnaround story. 

PIP has 17.79 million Sq Ft of land bank (entire land bank is paid up) with only 1.2 million developed till dateand more than 16.5 mn sq ft yet to be monetized.

Out of total 17.79 mn sq ft, 2 mn would be used for Retail, 7.6 mn sq ft for residential and 0.4 mn sq ft for commercial with the balance 8 mn sq ft for future expansion.

Company is almost debt free and will be able to monetize its huge saleable land bank over the next few years to come, which gives vision for long term investments.

 The company has strong balance sheet with net debt at less than 15 cr on a consolidated basis. The total debt for the company is around 152.2 cr, of which PIPs share is 93.6 cr (61.5% share). The company has cash and cash equivalent to the tune of 80 Cr at the parent level making the company relatively debt free.

The company intends to utilize the cash flow from the residential projects to facilitate the construction of the retail malls.

The company will have strong free cash flows this year as the company has delivered the commercial PTC Phase 1 and Saral Bazaar in FY14. Also, strong annuity income by FY16-17, as the company will have 3 operational malls in Aurangabad, Coimbatore and Nagpur with an estimated total annuity income of more than Rs 100 Cr.

The company is estimated to have more than Rs 1000 Cr of cash & Cash Receivables by FY16 due to the launch of 4 residential projects (Nagpur, Indore, Coimbatore and Jaipur) and commencement of 3 retail Malls. (Aurangabad, Nagpur & Coimbatore)

If we take conservative value of entire land bank, which is fully paid up and nowadays such land parcels are difficult to acquire as these are huge single land parcel, which comes close to 2000 cr, out of which stake of PIP is 61.5% that comes to around Rs 1250 Cr, which is 5 times its current market cap, plus annuity income from retail space which will increase every year, the stock is trading at Market cap of JUST 250 CR and is a screaming buy for the conservative target of RS 84 in next 24 months, adding scarcity premium as its one of the listed company which is partly held by foreign partner, which is into high growth consumption theme of tier 2 and tier 3 cities with retail malls business alongwith Commercial complexes, which has high demand from IT/BPO space as cheap availability of manpower, plus company is into Affordability Housing residential project, where company first creates the infrastructure and ameneties before opening of bookings.

Some Back of the envelop calculation :

Company plans to develop 17 million sq ft in next 6 years, imagine if the company earns most conservative profit of just Rs 1500 per sq ft as it is fully paid land bank, (only construction cost of 1200 per sq ft and other cost + taxes another 800 rs expense per sq ft, where as selling price is between 3500 to 4000 per sq ft super built up this is conservative estimate as total current value of land bank is Rs 2000 cr, so company must earn atleast 3000 crore after developing it, else company is better off selling entire land bank at current price of Rs 2000 cr), than total Profit in the next 6 years could be Rs 1500 x 1.7 Cr sq ft = 2550 Crore of profit, which is 10 times of current market cap. Just imagine the potential this company has to earn.

We are yet to calculate lease income which will accrue year after year on 4.5 million sq ft of retail space, If Rs 50 / sq ft lease rental is received per month, than 50 x 12 x 45 lakh sq ft = 270 cr per year, yes its mind boggling lease rental income of Rs 270 cr per year, which alone will give EPS of Rs 18 per year, add that with Profit earned over Rs 2500 cr in next six year, that will give EPS of close to 30 per year.

That means company has potential to earn EPS of Rs 50 per year, and is available at Rs 20 only? Just because it is small cap, under researched and hidden gem.

 India is close to finalising rules on REITs. As the new government fast tracks this project, it is likely that Prozone Capital can form a REIT for its commercial properties. This will be a source of additional value unlocking. I must mention here that there is no indication from the company on this. We just believe that this is one possibility.

Once the company’s lease model shopping complexes are operational, there will be a steady cash inflow. Besides this, sale of residential and commercial projects will result in bulk cash inflows. The company is just setting up for bigger things to come in the future.

I believe that this is the best time to buy Prozone Capital as the company’s management expects to be in profits in this financial year and the management has a positive tone when they say – “We are on the right track and we are turning green in coming financial year we look forward to surprise you on the positive side.”

Saurashtra Cemenet: A Turnaround Story & High Potential Multibagger

New Long term Investors, Please read think Link

Most of the economic sectors are deeply awaiting a cut in the interest rates and some policy amendments in the near future. Infrastructure and Real estate is among them. Any positive development in this sector should surely help the Cement Industry. With the Cement Industry being in focus in this bull run, Saurashtra Cement Ltd is a turnaround story.

                                                               

Saurashtra Cement Limited (SCL) is the flag ship company of The Mehta Group, formed in 1956. SCL is one of the leading players in the Indian cement industry, manufacturing Portland Pozzolana Cement (PPC), Ordinary Portland Cement (OPC) and Sulphate Resisting Portland Cement (SRPC). 

SCL markets cement under the brand name "HATHI CEMENT".

SCL's plant at Ranavav, located in Gujarat state has a capacity of 1.5 MTPA. The plant is a modern energy efficient dry process plant comparable to international standards and makes use of latest machinery sourced from reputed international companies. The plant offers locational advantages because of its proximity to the Porbandar and Veraval/Okha ports, rail net work and is close to highways. SCL thus has competitive access to the domestic markets and also to the large export markets in the Africa, Middle East countries, Sri Lanka etc. by the economical sea route.

SCL's modernization implemented in the recent years has paid results. State-of-the-art equipment and control systems installed have led to capacity enhancement. The new captive power plant which can be operated with different fuels like coal, pet coke & lignite has improved the overall performance by way improved reliability, consistency, better cost control and improvement in quality and lower emission levels.




What Went wrong ?

​The earthquake in Gujarat (April 2006), high power costs, setting up of additional capacities by Sanghi Inds and the consequent price war to capture market share resulted in SCL and most Gujarat cement players going into red in 2007-2008. While setting up of Thermal power plant of 25 MW helped control power costs, competitive scenario has eased a bit over the last few quarters. In the process the debt situation of SCL worsened, and the interest payments shot up. Further SCL also could not pay sales tax, electricity duty etc to the state Govt in time. As part of one time settlement with the Gujarat Govt, SCL was asked to deposit Rs70 cr with Gujarat State Financial Services Ltd in 2008. In the interim SCL had two accounting years stretching into 18 months and 15 months respectively (June 2007 to Dec 2008 and Jan 2009 to Mar 2010). To come over these difficulties and fund the thermal power plant (costing Rs125 cr) SCL had raised Rs26 cr by way of convertible debentures from Mauritius Debt Management Ltd (converted into equity shares in Aug 2007 @ Rs35 each – resulting in a stake of 14.55% held by them). In addition an amount of Rs5.12 cr was raised from International Debt Management (IDM) by way of 13% optionally convertible cumulative preference shares (which are now not convertible) and Rs 208 cr loans from IDM.

Why the turnaround Story:
The company had been consecutively posting losses in the preceding years and was declared a Sick Industrial Company by the BIFR due to which the stock was beaten down but consequently the net worth of the company became positive again, it is no more a Sick Industrial Company as can be inferred from the latest annual report of the company. If we have a look at the performance of the company in the past one year, there is a drastic improvement.



As we all know, Q'2 and begining of Q3 is the weakest quarters for any cement company due to the rainy season. The cement prices fall due to low demand from the construction industry as generally no one prefers to contruct during the rains.
Hence, QoQ, the Sales and earnings dipped, mainly due to the monsoon season during which demand was subdued.

The company delivered extraordinary results for Q'1 2014-15 generating an EPS of Rs. 3.02 which is about 80% of the EPS of Rs. 3.86 which it delivered for the entire financial year 2013-14.

After talking to the Management, the management said that this expansion project which started with high hopes had to be stopped in between in the year 2005 due to inadequate funding. It was kept on hold in hopes of receiving finance from various sources but due to the poor performance of the company, the project was finally abandoned. The company has since then been writing off the amount in parts from Capital WIP, the cost of the project as Impairment.

The management further said that no further impairment will be done in Q'2, Q'3 or Q'4 2014-15 and depreciation expense will now normalize to 3-5 crores per quarter as it has always been. This can be seen in Q'2 2014-15 below where it came down to 3.31 crore





99.3% of promoter’s stake has been pledged to IDM as collateral for loans obtained from them. Most of these loans have been repaid by the company as we can see from the amount of reduction in long term borrowings of the company and the company shall become debt free very soon. Hence, these pledged shares do not pose any risk as the company is easily able to cater to the interest payments and repayment of principal amount as evident from the huge cash reserves of the company

If we analyse the Q'2 Balance Sheet, we find that:

• Debt has reduced significantly from Rs 38 crores to Rs 11 crores.
• Cash balance has increased from Rs 40 crores to Rs 43 crores. 
• The debt equity ratio has improved to 0.21:1 from 1.03:1 which is very favorable.
• The debt service coverage ratio has improved drastically from 0.33 to 1.31 ensuring the company is easily fulfilling it's commitments.
• The interest service coverage ratio has improved from 1.58 to 12.86 which is very positive.

Key Points

1. The company has been constantly reducing its debt. During the year 2013-14, the company reduced it's debt by Rs 76 crores from 114 crores to Rs 38 crores. The company in 2014-15 has already reduced it further by Rs 27 crores to just Rs. 11 crores. The management also said that the company will become debt free by 31st March, 2015.
2.  The company's vision is to increase it's capacity from 1.5 MTPA to atleast 2 MTPA in the coming years. This reflects the optimism and the growth vision of the company. 
3. The company operates its own captive Thermal Power Plant of 25 MW with multiple fuel options which caters to all of the electricity needs of the company. The company operates it's own Captive jetty at Porbandar Port which can berth ships up to 37,000 DWT; with a loading capability of 20,000 Ts, equipped with two cement silos and fully mechanized loading facilities. This helps the company in tapping the states of Maharashtra, Kerela etc. in the domestic market as well as Sri Lanka and Middle East Countries in the overseas market as is visible in the Annual report of the company.
4. The promoter holding is 64.46% which is highly positive. The management is highly optimistic about the performance in the company in the coming quarters.
5. The price range i.e. Rs 40-45 at which the stock is currently trading makes it highly undervalued and thus a value buy at this level. 

Clients:

The Management also said there are in talks to cater to upcoming smart cities in the state of Gujrat.

With the stable political scenario and the sustained development strategies the need of infrastructure facilities and the housing needs ofthe population will enhance the consumption of cement further in the country. The long-term future of the cement industry is optimistic and positive.

After discussion with the management in the AGM, the management informed that the bad times are over for the company and the company has recovered completely which can be reflected in the latest financials of the company and in the time to come, the company is likely to do exceedingly well. 

On this estimation, the stock is currently available at P/E levels of 4.2 whereas companies in this sector are generally quoting at P/E levels of 20-30. Hence, as can be inferred, at these levels the stock has the capacity to become a multibagger in the coming months.