CMP – 345

Market Cap – 2,600cr

Industry – Real Estate

Business Overview

Kolte-Patil Developers Ltd (KPDL) is a leading real estate company with dominated presence in the Pune residential market. KPDL, incorporated in 1991, is headquartered in Pune, and 2007 was listed in the market.

KPDL is a trusted name with a reputation for high-quality standards, design uniqueness, corporate governance, transparency, and timely project delivery. KPDL constructed over 50 projects, including residential complexes, commercial complexes and IT parks covering a saleable area of around 25 million square feet (MSF) across Pune, Mumbai and Bengaluru.

Segment of the KOLTE PATIL

Kolte-Patil development limited is well diversified into Affordable, Mid-income, Township and luxury house.

1. Affordable house: – Affordable housing refers to affordable housing units for those below the average household income. In metro cities, if the unit’s price is ₹ 45 lakh or below and the carpet area of the house is 60 sq. meters or below, then the housing unit will qualify as an affordable house.

Affordable houses contribute 18% of total sales volume, i.e. 0.37 MSF. 

• Township: – Townships are similar to group housing because they offer a cluster of living spaces with amenities like schools, retail shops, good roads, gardens, etc., to the end-user. Generally, a township is built by giant corporations like Infosys, L&T, etc., to fulfil the residential needs of their employees.

Township contributed 33% of total sales volume, i.e. 0.68 MSF.

• Mid-income group: – MIG – 1, households are defined as households having an annual income between ₹ 6 lakh up to ₹ 12 Lakh and MIG – 2; households are defined as households having an annual income between ₹ 12 Lakh up to ₹ 18 Lakh.

Mid-Income contributed 28% of the total sales volume, i.e. 0.58 MSF.

• Luxury house: – The definition of a luxury home is different for different people. Features like interiors, facilities and amenities make any home luxurious. The price of a luxury house depends on the property values within the local area; buyers looking to snag a luxury property can pay anywhere from ₹ 4 crores or more.

Luxury/24k house contributed 13% of the total sales volume, i.e. 0.27 MSF.

• DMA: – A developer management agreement (DMA) is generally signed between a landowner or a local builder and a developer. These pacts work typically on a revenue-sharing basis, where the higher the development manager’s responsibility, the more is his share, and vice versa.

DMA segment contributed 8% of the total sales volume, i.e. 0.17 MSF.

1. Collection (₹ Cr.): –
2. Definition: – Collection are a financial indicator that measures a company ability to collect outstanding on schedule. The higher the collections, the intense the cash flow.
3. Reason to measure: – Collection provides an index of the company cash comfort in quantum terms.
4. Performance: – The Company reported collection of ₹ 1,128cr in FY20-21 following a substantial control on receivables leading to sustained liquidity.

• Sales (Million sq. ft.): –
• Definition: – Sales are influenced by the quantum of real estate sold in a financial year, indicating the project’s life cycle (unit handover).
• Reason to measure: – Sales provide an index of future revenue, collections and profit.
• Performance: – The Company reported 2.08 MSF of sales in FY20-21. The company made only 2 launches – Evara and Universe, because of the pandemic; it focused on inventory liquidation instead.

• Sales value (₹ Cr): –
• Definition: – Sales indicate the value of real estate sold in a financial year, indicating existing and prospective revenue (unit handover to the customers).
• Reason to measure: – sales by value provide an index of future revenue and profit.
• Performance: – The Company reported ₹ 1,201cr of sales in FY20-21 through the benefit of 2 launches and sustained inventory liquidation.

• Average selling price (₹): –
• Definition: – Average selling price (ASP) is arrived at by dividing the total sales value by the total area sold in sq. ft.
• Reason to measure: – it provides an index of future revenue, collection and profit.
• Performance: – Company reported an ASP of ₹ 5785 per sq. ft. in FY20-21, up 9% YOY through increased sales contribution from the Mumbai project.

• Net debt (₹ Cr.): –
• Reason to measure: – This number provides an accurate and fair picture of the company intrinsic liquidity.
• Performance: – Company net debt declined from ₹ 434cr in FY20 to ₹ 310cr in FY21.

Company Inflow and Outflow FY20-21

Industry Overview

The real estate sector in India is expected to reach US$ 1 trillion in market size by 2030, up from US$ 120 billion in 2017. Real Estate will represent 13% of India’s GDP by 2025.

Construction is the third-largest sector in terms of FDI inflow. FDI in the sector (including construction development and activities) stood at US$ 42.97 billion between April 2000 and September 2020. In January 2018, The Government allowed 100% FDI for township and settlement development projects.

Central Government aims to build 20 million affordable houses in urban areas across the country by FY2022, under the Ambitions Pradhan Mantri Awas Yojana (PMAY) scheme of the Union Ministry of Housing and Urban Affairs.

According to the economic times housing finance summit, about 3 houses are built per 1,000 people per year compared with the required construction rate of 5 houses per 1,000 population. The current housing shortage in urban areas is around 10 million units. An additional 25 million units of affordable housing are required by 2030 to meet the growth in the country’s urban population.

COVID-19 pandemic has resulted into work from home element, which impacted the new space commitments in the short term. 

Government initiatives

Government’s focus: – The Government has not amended or reduced its target of Smart Cities Mission and Affordable Housing Programs, with a provision of ₹ 6,450 Crore announced in the Union Budget 2020- 21. Therefore, the Government’s strong commitment and determination to develop the real estate sector is proven.

Additional deduction on interest: – The Government extended an additional deduction of ₹1.5 Lakh on affordable houses (up to ₹45 Lakh) for home loans till 31^st March 2022.

Reduction in GST: – The GST Council cut the tax rates from 12% to 5% on premium houses and 8% to 1% on affordable houses.

Compulsory registration: – Every real estate project (total area of over 500 sq. metres or more than eight apartments in one phase) must be registered with the RERA of its respective states. While applying for registration, promoters have to abide by the registration requirements (completion certificate or occupancy certificate) and provide detailed information on the project (land status, details of the promoter, approvals and schedule of completion.)

Residential real estate sector is poised for a multi-year upcycle opportunity given the low-interest decadal rates (interest rate decline from 10% to 7%), which has materially improved affordability and helped narrow the gap between rental yield and interest rates. Additionally, the Work-From-Home Scenario has influenced buying decisions and realized the importance of owning a home and additional space requirements.

Work-from-home deriving additional space requirement = up-gradation led demand

Pandemic has made people realize the importance of owning a home, which has influenced people’s buying decisions for an opportunity to buy homes. Additional space requirement given WFH scenario leads to upgradation and further housing demand.

Investment rational

RERA has resulted in the consolidation of the real estate industry and an increase in the market share of larger developers with long term presence and strong brand financial and execution capabilities, which are required to meet compliance requirements stipulated under RERA.

KPDL targets to scale up to 5 MSF of annual sales over FY23-24. Of this, 70% or 3.5 MSF will be in Pune, 20% or 1 MSF in Bengaluru, and 10% or 0.8 MSF in Mumbai. Also, it plans to scale up its operations in Bengaluru and Mumbai from more than 0.25 MSF to 1.5 MSF or 30% of targeted sales over the next 2-3 years.

KPDL has a further 26 MSF land bank (25.23 MSF), the company is also looking to add 10-12 MSF of a deal in its future project pipeline over the next 12-18 months.

KPDL is expected to deliver average realization at 10% CAGR to ₹ 7,000 per sq ft over the next 3 years. This will be driven by the launch of higher realization projects in Mumbai, commercial projects in Pune & 3 projects in Bengaluru. 

Current realization is 6,400 per sqft, last year same time realization was at 5,800 sqft. The growing trends in realization clearly showing higher penetration into Non Pune Markets.

KPDL was one of the first companies in its sector to recognize that the old order would no longer work. Instead, the company progressively disengaged from the erstwhile practice of building a land bank; the debt taken to build land assets were progressively pared. As a result, the company embarked on a journey to emerge relatively assets-light instead.

KPDL has followed an asset-light development model by strategically partnering with PE firms for large scale projects, which has helped the company de-risk execution and enabled front-ended construction financing. This strategy has ensured the sustenance of the KPDLs balance sheet strength.

Urbanization: India’s population is expected to be 1.52 Billion people by 2036, with a projected increase in the country’s urban clusters from 34.47% of the population in 2020 to 39% by 2036.

Q2FY22 witnessed a sharp sales recovery despite the March lockdowns in multiple parts of India due to the 2nd wave. Sales recovery of Q2FY22 vs Q2FY21 sales figures is ₹ 304cr vs ₹ 65cr, up 368% growth YOY; gross profit increased by 309% from Q2FY21 to Q2FY22.

Robust profitability in the wake of a virulent pandemic, the company’s profit in Q2FY21 is ₹ 22cr loss, although COVID this loss converted into profit in Q2FY2022 is ₹ 18cr.

Q2FY22 sales bookings value up 121% YoY from ₹194cr to ₹ 429cr and up 73% QoQ, bookings area up 92% YoY from 0.35 MSF to 0.67 MSF and 68% QoQ.

Realizations continue to improve YoY and QoQ due to increased contribution from the Mumbai portfolio. Q2 FY22 collections were up 86% YoY from ₹ 201cr to ₹ 378cr and 34% QoQ.

Improved momentum in sales, registrations, construction and CRM has resulted in this performance

KPDL offers products across price categories that are affordable, mid-income, township and luxury. Mid-income group (MIG) projects and townships contribute 61% of the company’s sales. Over the last four years, KPDL has increased its exposure to the affordable segment with Ivy Estate and three jewels launch. In addition, the company caters to the luxury segment through its 24K brands.

The Company’s Board of Directors appointed Yashvardhan Patil as the Group Chief Executive Officer from 12^th June 2021. Yashvardhan has been closely involved in all key areas of operations and the strategy of KPDL and has been an integral part of KPDL’s growth since he joined the company in 2012.

Risk

Interest rates: – An increase in interest rate will not only impact the discount rate for future cash flows. Still, it would also impact demand sentiment, which has improved due to the rise in affordability due to the interest rate decline.

High concentration to Pune market: – Pune market constitutes more than 90% of sales currently. Despite the ramp-up of other markets, Bangalore and Mumbai, a contribution from the Pune market is expected to remain at 70% in the medium term. Therefore, any change in demand outlook in Pune will materially impact KPDLs future growth outlook.

Raw material risk: – Raw materials such as cement, bricks, sand, among others, comprise a major portion of the cost in the construction industry, and variations in prices of these may lead to considerable losses, which may affect the top-line Mitigation: Though the business influenced by fluctuations in raw material prices, the company agreed upon a standard price for a specific period with vendors for major raw materials. Therefore, the company’s materials procurement strategy is adequately defined.

Financial

From FY19 to FY21, the company reduced its net debt from ₹ 807cr to ₹ 553cr and reduced its debt to equity ratio from 0.96 to 0.59 at FY19 to FY21.

The management has guided, it wont cross debt to equity of 1x in the next 3 years.

KOLTE PATIL has produced consistent CFO in last few years. Last 2 years average CFO has been in the range of 300-320 cr.

Against at market cap of 2,500 cr, KOLTE PATIL at a CFO of 300 cr is available at trailing 8x. The big boys in the sector is available at 30-35x Market Cap/CFO.    

Barring a COVID19 year, the company has consistently maintained more than a 20% operating profit margin over the last 5 years of cycle. 

ESTIMATES: By FY25, we expect Sales to double on back of strong launches and sales momentum. Revenues: 2,000 cr

EBIDTA: 450 cr

PAT: 300 cr

OCF: 500-550 cr

At 300 cr PAT, KOLTE PATIL is available at an extremely attractive 8x FY25 earnings. We expect a 10,000 cr market cap.

Recipe for a Multibagger

Next 3 years lauch & sales CAGR to be at 25%.

Attractive valuation, at 8x CFO.

Solid & Efficient Management.

Increasing penetration in Non-Pune markets (higher realization).

Land Bank for developments available for next 5-6 years.

Home Loans Interest rate at a decade low.