Monday, December 8, 2014

Can Bhartiya City Succeed Amidst Bangalore's Realty Woes?

Bhartiya International Ltd (BIL), closed today's trade in NSE at Rs. 412.05, down marginally. Having a market cap of just Rs. 464 crore, this leather goods exporter is clearly a small cap firm, but it is the co-promoter of Bhartiya City of Hebbal, Bangalore, an extraordinary project. The 125 acre, 20 million sq ft development is backed by PE funds like IL&FS Investment Managers and KKR. But with even higher profile realty companies like DLF and Unitech failing spectacularly in keeping their words to customers in similar large projects, can Bhartiya Group be any different? The beginning has indeed been good, but the risks are many, including oversupply in Hebbal, as well as this project being the Group's first realty venture. The crucial question now is whether Bhartiya Group can really execute Bhartiya City in full and in time in this uncertain and sluggish Bangalore realty market.

One of the most buzzing residential-cum-commercial projects in Bangalore, during the last couple of years, has been Bhartiya City. Promoted by the Gurgaon headquartered Bhartiya Group, a luxury leather goods exporter, this integrated mix-use township that includes malls, hotels, and even an IT SEZ, apart from thousands of apartments, is owned and executed by group company Bhartiya Urban Infrastructure & Land Development Company (BUILDCO).

The ownership of BUILDCO is shared by Bhartiya International Ltd, the group’s flagship leather exporting firm, holding 31.2% stake; Bhartiya Infrastructure, holding 46.8% stake; and IL&FS Investment Managers holding 22.1% stake.

Spanning 125 acres, and having 20 million sq feet of saleable or leasable area, Bhartiya City has a claim to be the largest such integrated development within any metropolitan limits anywhere in India.

But can Bhartiya Group really execute Bhartiya City in full and in time?

The beginning has indeed been good, as since the launch of its branded Nikoo Homes in 2012, Bhartiya Urban could sell nearly 2400 homes. The construction is also progressing at a fast pace, with IT SEZ nearly complete, and residential sections progressing well.

However, the all important question is whether this pace can be maintained by the Bhartiya Group, going forward in this long gestation project.

One clue for this comes from the performance of the listed Bhartiya International Ltd (BIL), which is the Group’s flagship leather business, and which owns a sizeable 31.2% stake in Bhartiya City.

Despite a 28X rally in its stock price since 2009 - from Rs. 16 to Rs. 445 - the market capitalization of BIL is only around Rs. 464 crore, which is clearly in small-cap territory.

Despite being in operation for the last 27 years, BIL’s equity is only Rs. 11 crore, its Networth is only Rs. 156 crore, and its Net Current Assets is only Rs. 217 crore.

Though BIL has a claim to be India’s largest exporter of leather apparel like jackets, and supplies to marquee global brands, its best ever annual sales was only Rs. 414 crore, recorded in FY‘14.

Its net profit margin came in at 3.50% in this past fiscal, to clock a net profit of Rs. 14.52 crore.

BIL is a reasonable small-cap business, but not an extraordinarily successful one. But the real estate project that it co-promotes is extraordinarily ambitious for BIL’s size and scale of operations.

Interview requests sent to Bhartiya Urban's Chairman Snehdeep Aggarwal, and Managing Director Arjun Aggarwal, for some clarifications for this story, were not replied to at the time of publishing.

According to a company-commissioned equity research report by CRISIL Research, Bhartiya Urban’s strategy is to utilize the incremental cash-flows from the residential projects in the execution of the capital-intensive commercial and office space projects. This has been till now possible as the residential project has been self-sustaining.

However, as CRISIL itself admits in its report, Bhartiya City’s locale of Hebbal, a buzzing micro-market of Bangalore is already plagued by oversupply and infrastructure bottlenecks.

This is of concern for Bhartiya City, as it has only launched and commenced a fraction of its intended master plan, and slowing demand for its residential units can seriously jeopardize the entire project.

Within the next two years, Bhartiya City’s plan is to launch 5600 more Nikoo Homes, and it remains to be seen whether it will sell as fast as the first releases.

One hint for this riddle comes from the current valuation of BUILDCO. More than a year back, BUILDCO bought back 3.4% of its own equity from IL&FS Investment Managers, valuing the firm at around Rs. 1470 crore.

Obviously, this value must have increased significantly during the past 12-15 months since that deal, which saw record bookings and fast construction, yet BIL which holds 31.2% stake in BUILDCO, apart from its core leather business, is struggling to mark a market cap that is significantly more than the worth of its 31.2% stake in BUILDCO that was worth Rs. 459 crore, 15 months back itself!

Clearly, the market is pricing in significant execution risks due to the current oversupply in Hebbal, as well as the fact that it is Bhartiya Group’s first realty foray. 

In fact, the projected or future value of Bhartiya City, say by FY’17 to FY’20, is much more huge than Rs. 1470 crore it was valued at 15 months back. This is due to its premier positioning in residential segment, as well as the huge lease rentals from commercial / office space possible in an IT hub like Bangalore.

Recent media reports suggest that Bhartiya Group is eyeing an asset base of $5 billion or Rs. 31,000 crore from Bhartiya City. That makes BIL's 31.2% stake in the integrated township worth a whopping Rs. 9672 crore, whereas BIL is now trading at a market cap of just Rs. 464 crore. 

This alone should make BIL stock one of the most undervalued scrips in Indian market now, and potentially a great multi-bagger within the next few years itself. But, as of now, despite the huge bullish sentiments, market is clearly not willing to pay that risk premium for BIL stock.

In its September 2014 report, which was company-commissioned, CRISIL Research has put a fair value of Rs. 376 for the stock, and the scrip is trading slightly above that level currently.

The BIL stock has never attracted any noted FIIs or DIIs, despite its 31.2% ownership in this high-profile realty project. That is, until recently, when Morgan Stanley picked up a nearly 3% stake in BIL stock for Rs. 13.35 crore.

But even the entry of this high-profile international equity investor has failed so far in rallying the scrip, as the market is seeing it as fully valued at current levels.

There is also the risk of BIL’s stake getting diluted if Bhartiya Urban finds the going tough and decides to raise further equity.

Recently, Bhartiya Urban has attracted a Rs. 400 crore structured debt infusion from KKR.

Will these entries change the fortunes of Bhartiya Group and Bhartiya City? 

The jury is still out on that crucial judgement, as even mightier players with similar backers and deeper pockets, like DLF and Unitech are finding it difficult to keep their words to customers, and survive in India’s realty market.

1 comment:

  1. God Bless Bhartiya City. Wish for many 1st time home buyers they turn truly 'City of Joy' & not 'City of Sorrow'.



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