Shristi Inra- this Shrisit has any place for shareholder value?
Shristi Infra caught my attention during Mar-09 when there was huge insider buying in this stock- around 4% stake was bought by promoters from open market at avg price of 390. On intial QAD analysis I figured that is was very illiquid stock as the promoter own 49% and Opulent Venture Capital Trust (group realted co) owns another 46%, leaving just 5% free-float with public. As the stock price kept falling to current 250 levels another closer look was required. The Mcap of the co is 555 cr . Currently the only operational parts of the co are its construction biz and Durgapur city center.
Construction biz: 100% owned by the co. Sales of 85 cr, Ebitda of 17.5 cr, net debt of 48cr. This biz if valued at 40 cr mcap (17.5*5-48cr debt), it could support around 7% of the current market vauation (555cr mcap)
Bengal Shristi (49.78% JV)-
1)Durgapur city center project-500,000 sq.ft. commercial complex- operational.
2)Raniganj square- 560,000 sq. ft commercial complex- under construction.
3)Asansol Township- 6 million sq. ft township- under construction.
Bengal shristi has debt of 62 cr as of Mar-09. As one project only is operational the full value of bengal shristi can not be ascertained.
Vipani -retail mall in udaipur, Haldia international sports city, Krishnanagr centrum, 5 star hotel at Rajarhat, kolkata, vedic hotel cahins, commercial complex at agartala are the other projects of the co. All these are at different stages of implementation. Some of them are at planning stage, some are under construction.Majority of the projects are in westbengal.
These big ticket commercial projects have high implementation risks especially given most of them are initial stages of implementation and the current real estate market scenario. I am puzzled by the 555cr mcap of this co.
Why didn't this co take IPO route for listing, instead it got listed thru reverse merger with listed peerless finance? With current free float of just 5%, the stock is more prone to price manipulation.
Nirlon 2009 annual report highlights
-Macro risk 1:"The consistent growth in Real Estate for commercial space in Mumbai from the early part of this decade through the first half of 2008, led to the commencement of construction for a significant volume of commercial space in the city based on projected demand growth. The rapid decline in this demand from the second half of 2008, and the inability of developers to leave semi-finished projects incomplete, has led to an over supply of commercial Real Estate in the Mumbai suburbs."
"This holds true at Nirlon’s location in the Western suburbs and for the Goregaon area micro market. Thus, even if there is a consistent increase in demand, the ready availability of commercial space in the micro market is likely to keep rental rates depressed, at least through the first half of 2010. This could lead to lower licensee fee levels for the NKP development, and to that extent could affect projections and profitability."
Risk mitigant:"However, it may be noted that since the cost of land for the NKP Project as a proportion of project cost is, for all practical purposes, nil, the Company is likely to be less affected by lower rates than most projects, where the cost of land is usually the most significant cost."
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However this doesn`t completely set off the risk as co raised nearly 450cr debt for Phase I & II construction, for which repayment has already started from Aug-2009. Lower rentals /occupancy rates may cause delay in cash inflows which may lead to technical default (though not a serious thing in Indian real estate sector! Indian banks are more than willing to bailout real estate cos)
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"The majority of these license fees will be paid to HDFC to effect repayment of the construction loan for Phase 1. The commencement of license fees will allow this construction loan to be converted into a securitization loan, repayable in 108 months, at an appreciably lower interest rate than that which is presently charged to the Company."
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Questions to be answered:
-for 9yrs if MAJORITY rents go to HDFC, what will be the cash flows to the company look like?
-Is there a prepayment option? is the int rate fixed or floating?
-What could be the tenure of these leases? what kind of rent escalation clauses are there?
-Do they receive any interest free advance from tenants (under normal circumstance may be, but with this oversupply scenario I doubt!).
-What are the rentals like? (is it Rs 75/100/150 per sqft per month?)
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-Phase I is 85 to 95% occupied (not bad!)
-The 2008 annual report says 30% of phase II leasing was secured, but 2009 annual report is silent on the status of this licenses.????? (yeah tough times for Indian commercial real estate players)
-"Based on the successful marketing and commissioning of Phases 1 & 2,Phases 3 & 4 are scheduled to commence in 2010" (slow and steady! very good)
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Overall Nirlon appears to be good long term bet if the above questions have some favorable answers. At Rs 63 the margin of safety is less compared to Rs 40 at where there was a huge insider buying in this stock (3.2cr insider buying at avg price of 42 during May-Aug 2009)
