Arvind SmartSpaces: Up 133% in 1 year, B&K sees more upside in the stock – here’s why

Arvind SmartSpaces has given stellar returns to its investors in the recent times, surging 133 percent returns in the last 1 year and 92 percent in 2024 YTD. Brokerage house B&K Securities sees more upside ahead for the stock on the back of strong financial performance and a robust growth outlook.

The brokerage has initiated coverage on the stock with ‘buy’ call and a target price of ₹1,050, implying an upside of 27 percent.

"Arvind SmartSpaces Ltd. (ASL), with a parentage of Arvind Ltd. (demerged in FY16), is smartly creating its niche space in real estate space with a strong brand recall, quality product and timely execution. ASL’s asset light business model with good blend of shorter cycle horizontal projects and higher share of JV/JDA in the portfolio mix enables a faster project turnaround (robust OCF generation) and higher return ratios. The company has demonstrated strong scale-up with bookings growth of 43% CAGR in FY17-24," said the brokerage.

Further, it is well placed to deliver robust 38-43% CAGR growth in bookings and collections over FY24-26E with strong launch pipeline, availability of growth capital to scale-up and geographical diversification, it added.

Stock Price Trend

The stock rose 5 percent in intra-day deals today, July 26, to hit its new high of ₹826.45, extending gains for the third straight session. It has now soared 181 percent from its 52-week low of ₹294.10, hit on September 18, 2023.

It jumped 9.3 percent in the previous session, July 25 and 2.6 percent on July 24. Overall in July, the stock has risen nearly 16 percent following a 10 percent gain in June. However, the stock shed 13.7 percent in May. Prior to that, the stock had given positive returns in the first 4 months of the current calendar year, rallying 24.5 percent in January, 15.2 percent in February, 13 percent in March and 6 percent in April.

Investment Rationale

Growth catalyst in place to deliver 40%+ CAGR in bookings: ASL has demonstrated impressive growth in its bookings, achieving a compound annual growth rate (CAGR) of 43% to reach ₹11.1 billion during FY17-24. This trend is expected to continue, with projected bookings reaching ₹22.7 billion during FY24-26, said the brokerage. The company’s robust growth is driven by several factors, including a strong pipeline of projects, the availability of growth capital, solid brand recall, exposure to new markets, and a unique business model that sets it apart in the industry. B&K expects a 43% CAGR growth in bookings to ₹22.7 bn during FY24-26E.

Growth capital provides opportunity to add ₹100 bn of pipeline: The availability of growth capital is a significant advantage for ASL. The company is expected to generate around ₹8 billion in operating cash flow for FY25/26, has an unutilised fund of ₹6 billion in the H-CARE platform, and has the potential to raise ₹3-4 billion in debt due to its current net cash position, noted the brokerage. This results in deployable funds of over ₹18 billion, providing ASL with the ability to add a project pipeline worth approximately ₹100 billion without overstretching its balance sheet, it stated.

Well positioned business model driving efficient use of capital: As per the brokerage, ASL’s business model is particularly well-suited for driving efficient use of capital. The company maintains a balanced portfolio of horizontal projects (shorter cycle) and vertical projects (medium cycle), covering over 75 million square feet. Furthermore, ASL has a high share of Joint Ventures (JV) and Joint Development Agreements (JDA) in its project mix, with 84% of volume and 67% of value, which allows for faster project turnaround and more efficient capital use.

Step up in pace of project additions improves launch visibility: The brokerage further pointed out that ASL has significantly enhanced its project additions, achieving a cumulative Gross Development Value (GDV) of ₹51 billion during FY22-24, which improves visibility for future launches. The company has diversified its portfolio by entering new micro-markets like Surat and is likely to expand into the Mumbai Metropolitan Region (MMR) in the coming quarters. In FY24, ASL launched four projects and expects to launch at least six to eight projects in FY25, with several more in active discussions, it informed.

Geographical expansion into newer markets: B&K stated that ASL's geographical expansion into newer markets is a key growth driver. The company has established strong brand recognition in the Ahmedabad and Bengaluru markets, rapidly increasing its presence in these regions' housing markets. Recently, ASL entered the Surat market with a significant deal and is exploring opportunities in the MMR region. This expansion strategy not only supports sustainable growth at a higher rate but also mitigates concentration risk through better diversification. B&K anticipates that 20% of ASL's project mix will shift towards MMR in the coming years.

Valuations

Given ASL’s asset light business model with consistent robust growth in pre-sales, strong collection visibility and faster project turnaround (robust OCF generation), the brokerage believes proforma earnings-based valuation would capture the real value of the company.

Proforma earnings are based on the assumption of pre-sales in FY26 (robust project launch pipeline, expected 43% CAGR over FY24-26E) and the embedded margin on those pre-sales (EBITDA margin of 27%). B&K has assigned an EV/EBITDA of 8x (other leading listed players are trading at much higher valuation; the 8x EV/EBITDA multiple is assigned keeping in mind ASL’s business model which focuses on faster asset churn and there is a possibility for commanding even a premium multiple depending on future scale-up) on FY26E.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.