Ashiana Housing – Post Moratorium – Valuation Analysis

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Ashiana Housing – Review After The Quarter by balajithinks, Beowulf Capital

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What happens when one of your top holdings loses close to 20% in a week. Full one-fifth of the market cap wipes out. Lots of investors likes to blog real-time when a security goes up 20%. Very few tend to write when it goes down.

Observation no. 1: Ashiana housing can be had 20% cheaper now than 10 days ago. Had to get that out of my system. The intrinsic value has come down a bit after a horrendous first quarter earnings. Net-net I paid a higher price than I could have this week. Since I was not expecting such a down quarter and Mr. Market’s reaction to it there was no way I could have anticipated this response.

Observation no. 2: Instead of blindly cost averaging down, like most investors would do. We are re-evaluating the intrinsic value with the additional information we have in hand.


Ashiana housing is one of the larger holdings we have in our portfolio. It is a business model we understand in the construction business. We do not really very well understand the business models of many other real-estate companies that count of large land banks as part of the valuation. We like the asset light model that Ashiana follows where they treat land as a raw material. Secondly, the company is developing a reputation with existing home owners by delivering good quality homes on-time and with good quality. It has almost become a competitive advantage for the company as 90% of the new sales are coming from referrals as per the latest from the company. Thirdly, the company seems to boast a decent management that is minority shareholder friendly.

Long term view:

In the long-run there are only a few questions that matter: a. Will the long term demand from affordable housing increase in India? The answer is overwhelming yes. b. Can Ashiana housing provide the best possible affordable housing to the growing population in India? Ashiana’s culture, execution record and processes seems to indicate that the company will survive long term and be one of the best providers of affordable housing c. Can the company scale up the execution and do so profitably? The current IRR of the projects that the company executes is north of 30%. The hurdle rate is high in our opinion. Even if it lowered to 25%, we think it is a very viable business model.

While executing currently, the company is building a network effect with huge portion of the housing units being booked upfront. This gives the company the advances required to complete the project and hand it over making the capital requirements very low. The higher the percentage of happy customers, more are the referrals for the next project. Ashiana seems to be on the right treadmill at this point. In a booming economy, real estate is all about location, location and location. In a down economy, it is all about reputation, reputation and reputation. Without reputation, capital requirements and cost of capital goes up very, very fast. Ashiana seems to be doing okay in this regard with 70% bookings on all ongoing projects.

So what happened this quarter?

  • The company has been constructing or executing at the rate of 0.5 million sq. ft per quarter. It has scaled up the operations to be able to execute around 2.5 million sq. ft a year. However, flat bookings are down to 0.16 million sq. ft this quarter and the company has slashed its guidance from 2.2 million sq. ft to 1.5 million sq. ft for the year (which is optimistic as per the company)
  • The year will be challenging from a cash flow perspective as the bookings have come down. However, given the advances already collected from customers, the company does not see much of a challenge to execution.
  • The company is seeing a decline of 25% in enquiries and 5-7% decline in site visits.
  • The company had previously indicated that it would deliver 1,800-2,000 units this fiscal and is maintaining the number. This will result in 1.5-2 Billion INR (after share of associates) for this year and the pipeline for next year deliveries also look robust.

When you take a step back, it looks like the real estate is going through what will be a significant draw down. A bubble in the real estate was expected and there has been some correction in the sector in the last couple of months but it does look like it is more in the early part of the innings rather an end of the draw down. Given that Ashiana housing caters mainly to tier II and III cities where the prices are a lot more reasonable compared to the tier I cities and Ashiana’s focus on non-Tier I cities does bode well for the company. However, one can expect collateral damage to the company as can be evidenced from the lower sales booking in the quarter. Perhaps, the argument of the tier II and III cities may not hold good as there is a draw down in the real estate.

Just like we were not able to predict this week’s draw down, we are equally inept at being predict when the real estate draw down will end. However, we are convinced that through the draw down process, the strong will get separated from the weak. We also firmly believe that Ashiana housing has the right ingredients to survive through this if the company continues to execute on existing projects.  Nothing about the company has changed that attracted us to the company in the first place, its execution, management, business models are intact.

However, given that we are hearing in the market about real-estate and the tight credit situation that many developers are facing, we are well aware of the opportunity cost that we are paying to to hold this scrip. We think it will even out but it will take quite a few years before we get paid for it. At this point, we are content to let Ashiana execute on the INR 338 crores worth of customer advances sitting on the balance sheet from the projects that the company is executing now. It has 6 million Sq. Ft of on-going projects which is close to 70% booked. This ensures that the company can sustain some amount of pain but it will be interesting to see when the trend reverses for the company.

Disclosure: Own Ashiana

Disclaimer: I am not a registered research analyst as prescribed by SEBI guidelines and any discussion about a particular investment idea shall not be construed as investment recommendation. This is simply articulation of my personal views. Readers shall do their own due diligence and/or seek advise from profession investment advisor before making an investment decision.

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