What the renowned American humanist, humourist, satirist, lecturer and writer had stated once is being religiously followed by most realty firms in India today.
Pallavi Pengonda and Sunder Subramaniam
“Buy land, they are not making it anymore” — Mark Twain
What the renowned American humanist, humourist, satirist, lecturer and writer had stated once is being religiously followed by most realty firms in India today.
Restricted land supply, along with robust demand, has resulted in an impressive appreciation in property prices in the last few years, especially in the metros. Demand for real estate is mainly led by financial services firms, the entertainment industry and IT/ITES, while rising per capita income and higher population has boosted demand for the residential sector.
It is believed that 80% of the current real estate development in Mumbai, the financial capital of India, is in the residential sector. Thus, one player who is well positioned to capitalise on the strong demand is the Mumbai-based real estate developer Akruti City.
Business
Over a period of time Akruti has built a huge bank of lands through slum rehabilitation development and has acquired land via public-private partnership (PPP) projects, outright purchases and joint ventures.
Since 1989, the company has developed around 5 million sq ft and plans to develop another 3.7 million sq ft saleable area under SRS and 7.2 million sq ft under non-SRS. It also plans to develop SEZs of 21.7 million sq ft and 43.5 million sq ft township.
Akruti has a powerful presence in slum rehabilitation development and has rehabilitated almost 10,000 slums in Mumbai. This gives the company access to properties in prime locations such as Mayanagar in Worli, Jogeshwari, Andheri, Tulsiwadi, Mount Mary in Bandra at a very low cost.
Akruti’s land cost in these areas is restricted to the cost of rehabilitation, which rests anywhere between Rs 1,200-1,700 per sq ft. This offers a profit guarantee as the land cost in these areas lies in the range of Rs 30,000-45,000 per sq ft.
Investment Rationale
Akruti has historically been more focused on the slum rehabilitation business and has an experience of more than two decades in the same. Akruti intends to de-risk its business model by acquiring land in the outskirts of Mumbai in areas like Uran, Khalapur and Panvel.
The proposed Navi Mumbai airport, Rewas Port and Mumbai trans-harbour link is expected to boost demand in these regions. Considering this, the company plans to develop three township projects (1,000 acres each) over a span of 7-8 years having an expected saleable area of 43.5 million sq ft.
The company also aims to develop five SEZ projects - three in a joint venture with private landowners in Pune and DLF, one in Mulund in association with DLF and a biotech SEZ in Baroda. Collectively, the area of the five SEZs 45 million sq ft, wherein Akruti’s share is likely to be 21.7 million sq ft.
Akruti is also one of the strong contenders for the rehabilitation of Dharavi, one of the largest slums in Asia with an area of 535 million sq ft, a major share of which belongs to industrial units. The Dharavi area will be split into five different sectors and each developer will develop one sector. The allotment of Dharavi rehabilitation augurs well for Akruti in terms of earnings visibility in future.
Concerns
Akruti is primarily a Mumbai-based developer and most of its new properties are lined up in the western region. This means any fall in property prices in this region could have an adverse impact on Akruti’s financials. Also, rehabilitation projects involve long gestation periods. This can be largely attributed to the fact that Akruti would require to fulfil a lot of formalities in regard with the rehabilitation.
Valuation
With impressive earnings visibility going forward, the stock has the potential to appreciate by around 40-50%. As per analysts interaction, the consolidated valuation of the projects work over Rs 106 billion. Investors can take a bet on this stock with a time horizon of 8-12 months.
Disclaimer: The authors do not hold any shares in the company.
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