Why is Parsvnath Developers going slow Down on hospitality projects?

Parsvnath Developers share price movement

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Parsvnath Developers


Q1 results not satisfactory

Parsvnath Developers, operating in real estate segment, has not produced satisfactory results for the quarter ended 30.06.11 compared to the quarter ended 31.03.11. Revenue dropped from Rs.198 crore to Rs.182 crore. Revenue for the whole year 2010-11 was at Rs.741 crore. Net profit marginally increased from Rs.19.48 crore to Rs.20.51 crore. Net profit for the year 2010-11 was at Rs.75 crore. Operating profit margin increased from 22.65% to 26.60%. Net profit margin increased from 9.83% to 11.24%. The shares of Parsvnath Developers are traded in the stock markets at Rs.75.85 now (08.11.11). The highest price of the shares in the last one year was at Rs.82.25 (20.10.11) and the lowest price was at Rs.25.10 (11.02.11). The share price is close to its yearly high now.

Raising of capital

The company’s Board has approved a proposal to raise money upto Rs.2000 crore in the next one year through issue of preferential shares or through Qualified Institutional Placement. The company will use the proceeds to settle its debt and bring down its debt equity ratio. The company has a huge debt of around Rs.1200 crore now. By the end of the current fiscal year 2010-11, Parsvnath Developers wants to lower this level to below Rs.1000 crore. The company’s cost of borrowing has increased by around 1.25% in the last year. This was because of the raising of interest rate by the Reserve Bank of India in order to combat inflation in the economy. India is having a high interest regime now. Many companies are exploring the possibility of raising debt abroad where the interest rates are lower as compared to India. Average interest rate in India for the companies is around 14% p.a.

More than 50 projects on hand

Parsvnath Developers allotted 1.90 crore shares to institutional investors and raised around Rs.270 crore through preferential share route. The company is focussing on residential projects now. It is going slow on hotel projects. The company expects three hotel properties in Mohali, Shirdi and Lucknow to become operational next year. It has roped in ITC for these hotel projects. The three hotels will have more than 260 rooms put together. Mohali will be a Five Star Hotel and the remaining two hotels at Lucknow and Shirdi will be a Four Star Hotel and a Three Star Hotel respectively. There is a shortage of hotel rooms in these places and the company’s properties will create a good demand. The company is having mostly residential projects on hand. It is trying to complete 80 million square feet of space it is developing across more than 50 projects. Pradeep Jain is the Chairman of the company.

Tie-up with ITC and Royal Orchids

Parsvnath Developers tied up with two hotel chains namely Royal Orchid Hotels and Fortune Park Hotels (a subsidiary of ITC) to operate and manage its proposed properties. Fortune Park Hotels was supposed to operate and manage 50 hotels developed by the company’s hospitality arm Parsvnath Hotels Ltd. But this was before three years when the real estate property boom was at its peak in India. Now the real estate market is witnessing a downturn and the company is not pursuing its earlier plans aggressively. Now the company has scaled down the figure from 50 hotels to 15 hotels. The hospitality special purpose vehicle (SPV) entered into with Royal Orchid Hotels is still operational but the company has not acquired any land under it. Of course, without acquiring any land, the company cannot go ahead with the project. For all practical purposes, this project is also made to sleep or hibernate.

Q2 also not satisfactory

The company’s net profit in Q2 ended 30.09.11 has fallen by 42% to Rs.29 crore as compared to the corresponding period of the previous year. But when compared to Q1, the net profit has improved from Rs.20 crore to Rs.29 crore. Total revenue of the company increased by 28.8% to Rs.254.9 crore from Rs.197.9 crore in the corresponding period of the previous year. Compared to Q1, revenue has improved. The company feels that demand has increased, but at the same time cost has also increased. For the past few quarters, the company is executing the existing projects on hand rather than to go for new projects.

Promoters pledge their shares

The Chairman of the company Pradeep Jain purchased 14.5 lakh shares of the company for Rs.7.9 crore from the stock market. But at the same time, the promoters have also pledged 2.57% stake. Pradeep Kumar Jain & Sons is the promoter group company of Parsvnath Developers. The promoter group company pledged 3730000 shares or 0.8% stake on 27.04.11. The Chairman Pradeep Kumar Jain also pledged 7460000 shares amounting to 1.71% stake on the same day.

Mega land deal with Railways

Parsvnath Developers clinched a mega land deal with the Railways last year. In November last year, Parsvnath Developers emerged as the highest bidder for developing the prime plot spread over 38 acres of land in an auction. Parsvnath Developers offered to pay Rs.1615.5 crore to acquire the land for development. The land is located in an important area Sarai Rohilla in New Delhi. Parsvnath Developers roped in Red Fort Capital as partners in this prestigious project. The amount has to be paid to Railways spread over next four years in instalments periodically. The company has already paid 2% of the amount at the time of bidding and another instalment amounting to rs.340 crore in March this year. Parsvnath Developers will be having a majority stake in the proposed project. Out of the total of 5.5 million square feet of area, the developer is to build and hand over to the railways 0.5 million square feet for housing and other facilities. Around 4.5 million square feet will be premium luxury housing and the remaining for office and commercial space.

Do not enter into the share now

The shares of Parsvnath Developers, at the current price of Rs.75, do not get a buy recommendation because of the following factors:

  • The company’s share price is close to its highest in the last one year
  • There is a possibility of a further decline in the share price to below Rs.40
  • The company is going slow in its hospitality sector construction business
  • Real estate market is not booming now.

The company’s results are inconsistent

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