Puravankara: After 235% gain in last 1 year, Yes Securities sees another 86% upside in this realty stock – 5 reasons why

After an astounding 235 percent returns in the last 1 year, brokerage house Yes Securities sees another 86 percent upside in realty company Puravankara.

"Residential real estate has witnessed a strong uptick in the last 2-3 years wherein most Tier-I developers have witnessed quick monetisation of project launches. PURVA significantly benefited from the ongoing demand which helped it monetise completed inventory at a very good pace and helped generate a strong cash flow," said the brokerage.

The brokerage has initiated a ‘buy’ call on the stock with a target price of ₹452, indicating an upside of over 86 percent from its current market price of ₹242.60.

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Yes Securities initiated the rating on Puravankara Ltd (PURVA) based on the following factors: (1) Presales to grow at 20 percent CAGR over FY23-26E, (2) Debt and debt coverage well under control, (3) Strong execution track record over the decade, (4) Strong P&L (profit and loss) recognition expected in next 5-7 years, (5) Paradigm shift in focus following onboarding of new CEO.

Stock Price Trend

Given multibagger returns in the last 1 year, the stock has jumped over 32 percent in 2024 YTD with positive returns in 2 and negative in the remaining 2 of the 4 months this year so far. It rose 18 percent in April so far after a 12.13 percent decline in March and an 8.12 percent decline in February. Meanwhile, it rallied 39 percent in January this year.

Before declining in February, the stock had given positive returns for 10 straight months between April 2023 and January 2024. In this period, the stock soared 297.5 percent.

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The stock has also advanced almost 235 percent from its 52-week low of ₹72.50, hit on April 4, 2023, meanwhile, it is still 10 percent away from its 52-week high of ₹269.15, hit on January 30, 2024.

Investment Rationale

Presales to grow at 20 percent CAGR over FY23-26E: As per the brokerage, PURVA is poised to achieve significant presales totaling approximately 10.08 million square feet (msf) from Q4FY24 to FY26E, leveraging the available unsold area of 13.14 msf across ongoing projects, including those not yet open for sale. With 11.55 msf of projects currently under various stages of approval, anticipated for launch within the next 9-12 months, PURVA is expected to add incremental presales of 5.72 msf during the same period, it predicted. 

The company also aims to sell all projects in the pipeline within the next six years, comprising both ongoing and upcoming projects. Thus, the brokerage projects a robust 20 percent compound annual growth rate (CAGR) in presales from FY23 to FY26E. Considering a net discounted cash flow of approximately ₹6500 crore at a 13.5 percent weighted average cost of capital (WACC), Yes Sec has prudently spread its estimates over a six-year timeframe, accounting for potential upside risks to presales and cash flow projections.

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Controlled debt & debt coverage to boost growth: The brokerage pointed out that over the past few years, PURVA has demonstrated effective risk management strategies and a concerted effort to reduce debt levels. At the end of FY19, the net debt stood at ₹2,743 crore, which has significantly decreased to ₹1,741 crore as of Q3FY24. It's noteworthy that despite executing projects covering only 13 million square feet (msf) when the net debt was ₹2,743 crore, PURVA now manages 22 msf of projects while carrying a reduced debt burden, noted Yes Sec. 

This achievement has led to a remarkable drop in debt per square foot from ₹2,077 to ₹791 over the same period. Moreover, with a repayment plan in place, the company is set to retire ₹1,455 crore in debt over the next two years through normal business operations, it added. The brokerage anticipates that the net debt-to-equity ratio will further decline to 0.55x by FY26E from 1.29x in FY23, indicating a strengthening financial position for PURVA.

Strong execution track record over the decade: Being one of the top players from Bengaluru, PURVA was always mindful of its brand equity. It has an impeccable track record of delivering projects on time. Presales have grown by 18 percent over FY16-24, stated the brokerage. It further highlighted that in the last decade, many sector players were under tremendous pressure due to lower demand, higher developer commitments, soaring debt, and steady accumulation of completed inventory. However, PURVA was execution-focused which helped it protect its brand equity and sail through tough times. Since FY15, PURVA has commendably launched 30.5 msf till Q3FY24 and delivered 27.7 msf over the same span, it informed.

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Strong P&L recognition in next 5-7 years: PURVA is currently executing 26.37msf and plans to launch another 13.1msf in the next 6-12 months which will be recognised in the next 4-5 years in a phased manner, said the brokerage, adding that P&L will consequently witness strong profitability in next 7 years. As per its estimates, PURVA is expected to cumulatively recognise revenue of ₹26,150 crore and profit of ₹5,970 crore over the next 7 years. Given that most projects are on historical land bank margins, the firm is poised to move up from the 18-22 percent band to the 30-35 percent band on average, it projected. Yes also expects that strong profitability will improve the return on equity and capital employed.

Paradigm shift in focus under new CEO: Under Abhishek Kapoor’s 4-year tenure as CEO, the company has achieved a paradigm shift in operations. It has reduced debt by selling non-core land parcels and stronger risk assessment/mitigation has seen calibrated launches. PURVA has made it a norm to launch subsequent phases only after 65-70 percent sales of the current phase, which boosts cashflow recognition devoid of the burden of mounting debt, noted the brokerage.

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The brokerage believes that Puravankara is on the right track now and will achieve strong presales in the next 5-7 years resulting in a strong cashflow generation. Additionally, the company is expected to expand its operations in new geographies like MMR & Pune. Most importantly, with expanding execution, the company is expected to manage debt in a better way with net D/E coming down to 0.55x by FY26E on the back of a strong cashflow generation, highlighted the brokerage.

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.