The Real Estate Legacy! Is it worth your penny?

Recently, Global markets has seen one of the worst bear market beginning in the year 2020 where trillions of wealth got vanished and not just wealth, millions of people have lost their lives as well. Indian markets have witnessed the same where businesses had to shut down their factories, plants or services. Even the richest man of India, Mukesh Ambani's wealth tanks 28% in the early days of March 2020 when the country saw a free fall in the stock market. Public and even the foreign investors started taking out big chunks from the market.

But here's an interesting thing, it is said that "The Magnitude of Bull Market after a Crash like this is the biggest." And I believe, you all will agree to this since we had seen how Nifty50 went from 8,745 levels in March 2020 to all time high of 15,860 almost doubled. Also, India has seen the record high jump in number of Demat accounts in FY21 which means that more and more people are now initiating their investment journey. Remember, when the Lockdown 1.0 was lifted, we have seen a huge jump in few of the sectors such as Auto, Real Estate, Quick Service Restaurant etc. Now that Lockdown 2.0 has been lifted, Real Estate sector is one such sector on which I've my eyes on. I believe the real estate sector will see a strong demand after lockdown is completely lifted from remaining parts of India.

In my previous articles, we have seen how important it is to ignore the noises that goes around the stock market and focus on the quality scripts that are trading at discount. Since I've already stated my personal bias over Real Estate sector, today we will be analyzing one of my favorite picks from this sector on various parameters and see if it's worth the bet?

Eldeco Housing & Industries Limited

The Eldeco Group has been at the forefront of Real Estate development since 1985. The Group has already handed over 175 projects spanning large-format integrated townships, high-rise condominiums, industrial estates, malls and office buildings. Apart from Lucknow, Kanpur, Agra, Greater Noida, Noida and Gurgaon, the Group is developing projects in Panipat, Sonepat, Ludhiana, Jhansi, Bareilly, Panchkula, Neemrana and Jalandhar. The unique 1200-acre state-of-the-art Eldeco Sidcul Industrial Park at Sitarganj, Uttarakhand, is Eldeco's flagship project in the industrial sector. The Group has two main entities :

Eldeco Housing and Industries Ltd. (EHIL):

Incorporated in 1985, EHIL has been, for over 3 decades, the market leader in Lucknow- UP's capital and fastest-growing city. EHIL is listed on the Bombay Stock Exchange and has an uninterrupted dividend paying record since inception.

Eldeco Infrastructure and Properties Ltd. (EIPL):

Incorporated in the year 2000 to undertake projects in the Delhi NCR region, EIPL in recent years has seen rapid growth in other regions as well. EIPL is a closely held unlisted company that also acts as the promoting company for many project-specific special purpose companies.

Now that we have understand the business overview. It's time to test the company over certain parameters.

1.?????Low Market Float

The term market float simply means the number of shares a company has issued to the public that are available to trade or either invest. It is an important number for investors because it indicates how many shares are actually available to be bought and sold by the general investing public. Also, you’ll appreciate the rationale behind investors looking for low market float. The rationale behind this is nothing but there is an inverse correlation between the size of a company's float and the volatility of the stock's price. This makes sense when you think about it, as the greater the number of shares available for trade, the less volatility the stock will experience because the harder it will be for a smaller number of shares to move the price.

You'll be amazed to see that the market float or the number of equity share available to the public is 19,66,600 (Face Value = Rs.10 per share, so 19666000/10) or 0.196 crore only. Out of this, 54.8% shares are held by the promoters of the company i.e. only 45.2% (8,88,903) of total shares are available to trade in market. But what does this imply? You'll appreciate the fact that in order to make forecast or valuations, we all need make few assumptions. So how I can value something without assuming, so it's time to put our horse of imagination to work. Promoters are usually the one's that believe the most in their companies. So let's put this here as well, if promoters believe in their company, they won't sell their stake so only 45.2 % shares held by general public is left for trading. Now it is well known that investors who invest in companies usually do not sell their holdings until the holdings reach its fair value. So, the investors will not sell their holdings whereas desperate buyers will take the price higher and higher.

Let's have a broader look at the Profit and Loss summary of last 11 years. Now we will be looking at the most important components that helps in determining the efficiency of business operations of EHIL.

2.?????Sales

This the most basic yet most powerful component of any business. No business in the world can survive without making sales. If we look at the sales growth of this company - 14% CAGR for 10 years & 24% for Trailing Twelve Months. The company is clearly making a strong sales when compared to industry leaders DLF & Godrej Properties showing negative growth rates.

3.?????Operating Profit Margin

Operating profit margin or widely known as Return on Sales. Return on sales basically means how much profit a company earns after deducting all the operating expenses. Higher the margin, better the efficiency of operations. EHIL clearly depicts the year on year growing operating margins which means the company is able to make the most return out of their sales. When comapred with industry leaders, EHIL outperforms the leaders clearly, 42% margin as on 2021.

4.?????Earning Per Share (EPS)

Earning per share (EPS) simply means out of company's total earnings, how much earning is attributable to each shareholder. Higher EPS are usually seen a positive component as it is calculated from Net Profit. EHIL clearly beats the industry leaders and other players in the industry. From a EPS of 41.49 to 275.50 today, EHIL is able to make the most for their shareholders whereas other players are not able to maintain the EPS.

5.?????Dividend Payout Ratio

Dividend payout ratio simply means how much company pays as dividend out of their net profit. Payment of dividends is actually debatable since few investors are in the favor of receiving dividend whereas others are in the favor of company reinvesting them, but we will leave it on you. Coming back here, EHIL is able to maintain a decent payout ratio which means that you'll not only enjoy capital appreciation but also price appreciation.

6.?????Zero Debt Company

Being a debt free company, it means that the company has no obligations towards payment of interest or debt and they are a cash rich firm. And whatever they earn after tax deduction, is available to equity shareholders. Also, in the times of economic slowdown, many a debt-heavy firms profits witness a dip owing to declining sales and payments of fixed interest and if the slowdown stays for a longer period these firms can go bankrupt. On the other hand, the debt free companies do not have certain obligations. Thus, they have greater chances of surviving even if the slowdown stays longer.

The only disadvantage for debt free companies would be heavy tax as there is no deduction of interest in comparison to that of companies having debt.

7.?????Low PE - High Earnings

Now this has been a widely known fact and every new investor know to buy companies having low PE. But still when it comes to applying, people tend to overlook this component since they do not realize how this can effect their chances of wealth creation. But as an investor, have we ever tried to actually analyze the reason behind low PE. Since PE ratio is outcome of Price per share divided by Earning per share. You'll appreciate a simple mathematical logic that we overlook, if the numerator keeps on decreasing and the denominator is constant the outcome will be lower, in this case if Price is decreasing and the earning is constant the PE is low which can be seen every now and then since market discounts every information. But if the denominator decreases at a faster rate then it may seen as positive sign because of low PE but it says a lot about the earning quality of the company.

So, in case of Low PE, we should always look for the reason behind Low PE. If PE is low due to the price of the stock then we can consider the stock from investment point of view but in case it is due to low earnings then you should always avoid that stock. Now let’s quickly apply the same and check.

The current PE stands at 10.06. Now if we look at the EPS chart for 5 years, the median PE came out to be 7.8. In 2017, when the EPS for the company was 115.68 and the stock was trading in the range of 600-670. Taking average as 635, the PE came out to be 5.48 (can be seen in charts we are close to the value). In 2019, when the EPS for the company was 123.31 and the stock was trading in the range of 1500-1625. Taking average as 1560, the PE came out to be 12.65. Now in 2021, when the EPS was 275.70 and the stock was trading in the range of 1885-2055. Taking average as 1970, the PE came out to be 7.15 which is below the median. So it is evident as we have seen above the company is able to make sustainable earnings year over year and the fluctuation in the PE is due to price and not earnings.

Also, if we look at the current PE of 10.06 and compare it with peers, it can be seen how much value is yet to be unlocked.

8.?????Graham Value

Benjamin Graham the father of value investing has given a special number to calculate the intrinsic value. The Graham number is a figure that measures a stock's fundamental value by taking into account the company's earnings per share and book value per share. The Graham number is the upper bound of the price range that a defensive investor should pay for the stock. According to the theory, any stock price below the Graham number is considered undervalued and thus worth investing in. The formula is as follows:

So, the Graham Value comes out to be 2891.70 which is already broken recently since this stock has made a new 52 week high above 3000. But still as of today it is yet to reach this intrinsic value which will be the fair value for defensive investors.

9.?????Altman Z Score

The Altman Z-score is the output of a credit-strength test that gauges a publicly-traded company's likelihood of bankruptcy.

The Altman Z-Score for Eldeco Housing and Industries Limited is 3.97 which is fairly decent in case of Real Estate companies.

10.?????Piotroski Score

Piotroski score is a discrete score between 0-9 that reflects nine criteria used to determine the strength of a firm's financial position. The Piotroski score is used to determine the best value stocks, with nine being the best and zero being the worst. Aspects are focused on the company’s accounting results in recent time periods (years). For every criterion met , one point is awarded; otherwise, no points are awarded. The points are then added up to determine the best value stocks. If a company has a score of 8 or 9, it is considered a good value. If the score adds up to between 0-2 points, the stock is considered weak.

The Piotroski Score comes out to be 8.00 which is considered to be a good score and it also means that the firm is financially strong and is a value stock for sure.

11.?????Intrinsic Value

Intrinsic value simply means what worth an asset carries. In simpler words, intrinsic value tells an investor what value does an asset holds in actual. If the current price of the asset is greater than intrinsic value then it means the asset class is overvalued which means that It is not worth what an investor is risking that is his wealth whereas if current market price is less than intrinsic value it means that the asset class is undervalued and it is worth taking risk.

If you look at the intrinsic value of the stock then you’ll be amazed to see that it carries an intrinsic value of Rs.?6,406?per share! Can you imagine a stock worth Rs. 6,406 is available at a such a cheap price of just Rs. 2,768.?What are you thoughts now, is it worth your penny?

Conclusion

So that was a brief analysis of Eldeco Housing & Industries Limited on certain parameters and for the readers out their you can take this as a base for your analysis on Eldeco. In my opinion, the stock looks undervalued and as per the annual reports of the company, the group is trying to move out of Lucknow and is currently eyeing on the projects in other parts of India, recently near Jewar which can become a huge success after the Jewar Airport development. Also, I believe the next smart city after Gurgaon, it will be Noida or Greater Noida and the company is looking out to expand their projects across Uttar Pradesh majorly in Noida.

This was my opinion on the stock and it is meant for educational purpose only. Would love to hear your comments! Kindly do share your feedback???.