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)
posted by jagadish @ 7:54 AM
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