Kolte-Patil is perhaps Pune’s most formidable real estate developer. Now the company has its eye set on Mumbai and Bangalore.
Kolte-Patil is perhaps Pune’s most formidable real estate developer. It is also the first real estate company to announce a dividend policy 15-25 percent of its Profit After Tax (PAT). Now the company has its eye set on Mumbai and Bangalore.
Explaining the rationale behind entering these new cities Sujay Kalele, Group CEO, Kolte Patil said that the company is highly deleveraged, has hardly any debts and is a cash surplus company, giving them an advantage of trying new markets.
Also expansion in these new cities will help the company in margin expansion from 35 percent to atleast 40-45 percent.
Below is the verbatim transcript of Kalele’s interview with Prime Property
Q: Your FY13 guidance for launches was 2.5 million square feet and the top-line guidance was Rs 600 crore. It became pretty clear after Q3 that you were going to meet that guidance, but going forward in the New Year what is the launch pipeline looking like?
A: We plan to maintain the run rate pretty much what we have been doing for the last two years or so. Hopefully this year Bangalore will also catch up. For the last financial year we were able to do only one project launch there because of approval delays, but hopefully this financial year we will have far more contribution from Bangalore coming in. We are very hopeful of our Mumbai foray fructifying now, because it was mid last financial year that we decided to setup our base here, so that should also fructify this year.
Q: Will the company enter new geographies?
A: Not for this financial year. We plan to consolidate our presence in these three markets which we feel offer very decent traction. We still have some headroom left for expansion in these markets. Internally we have set ourselves a benchmark of anywhere between 15-20 percent of the market share before we look at any new geography. We achieved that benchmark in this financial year in Pune. We are hoping to replicate it in the next 24 months in Bangalore. Obviously Bombay remains a very large market where we cannot have that. Other than these three markets at least for this financial year we do not have any plans of going into fourth market although we keep on evaluating opportunities and everything, but for this financial year these three are the focus areas.
Q: Can you explain to me why is it that you are entering the Mumbai market at a time sales are down, the city’s property market is so subdued, why now?
A: If you look at the contrary viewpoint to what you just mentioned for a newcomer any market in such a position always offers the opportunities. We are highly deleveraged as a firm. There is hardly any debt on our balance sheet. We are net surplus cash company, so that offers us good opportunities to write cheques. When a market has undergone structural change like what we have seen in Bombay where Development Control Rules have changed, some of the policies were cancelled, new policies have taken. So that has resulted in some sort of churn in the market. These kind of opportunities for a new entrant are available.
Q: We have discussed the timing of the Mumbai foray, but can you explain me the rationale behind that?
A: One of the reasons of entering Bombay is margin expansion. We hope that there will be incrementally better margins than what we see in Pune. So if we are doing about 35 percent EBITDA as of now in all our Pune, Bangalore projects we feel it should give us at least 40-45 percent margins.
Q: Which are regions in Mumbai do you really want to be in?
A: We are not specific to any location. We are looking at evaluating deals in places like South Bombay, Walkeshwar, central Bombay like Lower Parel and other locations, Bandra, some of the other eastern and western suburbs of Malad, Mulund, Borivali and some of the other MMRDA regions like Panvel, we are very positive about. We are not very specific to any particular location. As long as we feel the deal that is getting offered to us throws good value and is promising and it fits in our internal criteria we are pretty location agnostic.
Q: Can you give me an idea at what kind of prices you will sell apartments in Mumbai?
A: If it is MMR region like Thane or Panvel we would typically look at anywhere from Rs 40 lakh to Rs 75 lakh. The closer you come to the main city, for example, if you are looking at Andheri or some of those markets or Chembur and all of that then we will typically look at maybe about Rs 1.5-4 crore each apartment. If we are looking at some of the closer suburbs of Bandra then we will be looking at about Rs 8-10 crore each. The moment you get onto the main island then you would be looking at anywhere from Rs 10-25 crore each apartment.
Q: During the downturn, the company had this idea to exit commercial real estate, the exposure was cut down from 50 percent to 10 percent. Are you now looking to re-enter commercial real estate?
A: Not at least for the next 12 months. We are very eagerly watching the space on commercial side. More than the demand really, what we are tracking is the supply because, as you rightly said, we have done some analysis internally and figured out that the amount of supply that had committed post down turn was sufficient for absorption over five-seven years. So we feel we are still into the fifth year of absorption. Our re-entry into the commercial is maybe at least 12-18 months away.
Q: Now, let’s talk about your home market which is of course Pune. How exactly are you reading that market, what are your plans for the city?
A: Pune has been growing very steadily for almost two decades and more now that we are in existence and we are very bullish on market going forward also. We hope to launch about 2.5-3 million square feet new projects across the city of Pune. Obviously, new lands are also on the anvil as and when those deals fructify. Couple of years back, we took a completely different decision to cater to the luxury end of the market. We introduced brand 24K which has completely revolutionise the luxury segment in that city where today we have apartment ticket sizes ranging from Rs 2.5 crore to Rs 8 crore each apartment size. There is plan of extending that brand to Bangalore now and capitalise on luxury demand that is there. Both the cities have been doing very well and we are very happy that we have grown from 5 percent market share to about 16 percent market share in the city of Pune and hope that we build and maintain that lead that we have generated.
Q: Pune is also now been seen as a luxury market. Developers coming up with thematic homes, niche products, branded homes like what we are seeing in the case of Trump Towers. Do you have any such plans?
A: That’s where our 24K brand is trying to address and trying to create living experience, global standards really. That’s a market that we are looking at aggressively expanding. We are delivering our first 24K project in this particular quarter. We have received phenomenal response. That project is 90 percent sold out, almost ready now and the end product there is selling at a 70 percent premium to the neighbouring product. So that’s a segment that we are slowly entering into and we will move fast on that.
Q: Put that in perspective for us. What kind of a price appreciation are you really talking about?
A: This project was launched at Rs 3,750 per square feet. Today, the project is selling for about Rs 7,000 per square feet in 2.5 years time.
Q: Let’s talk about the third market you will be operating in which is of course Bangalore. What exactly are you planning?
A: We launched one project in October last year in Kannur Road. We received very good response. Actually we had to stop sales because we follow a construction linked sales model. So sales were running ahead of time. So we had to stop it. We are just restarting it. We have just received approvals for about a million a half square feet at Hennur Road which we hope to launch in coming months. There is another 24K project in the pipeline on Hosur Road which will be very good and will again set up benchmark as far as luxury living in Bangalore goes. Then there are smaller projects on Richmond Road, Koramangala that we hope to launch.
Q: The promoter holding is already less than 75 percent so there is no compulsion on the promoters or even the company to dilute any of its stakes. Are there any fund raising plans on the anvil?
A: As you rightly said, there are no plans of funding at the corporate level. At the SPV level, we keep on evaluating opportunities if and when we get the right partners. We prefer only an equity model, all our historical private equity deals also have been pure equity. So it is also a definition of the market as to what the players are ready to give us in the market. So to answer that, we are looking at SPV level fund raising but nothing in the near future that I can see.
Q: Are any of your existing equity investors pressing on you for an exit?
A: Nothing. All our business plans are well ahead. Some of our projects have already entered the finishing stage. In some of the projects, our private equity investors have already got the capital back with decent returns. The other returns are following. So there is no pressure to exit at all.
Kolte-Patil stock price
On October 31, 2014, at 10:35 hrs Kolte-Patil Developers was quoting at Rs 190.70, up Rs 3.25, or 1.73 percent. The 52-week high of the share was Rs 198.00 and the 52-week low was Rs 70.90.
The company's trailing 12-month (TTM) EPS was at Rs 5.18 per share as per the quarter ended September 2014. The stock's price-to-earnings (P/E) ratio was 36.81. The latest book value of the company is Rs 99.56 per share. At current value, the price-to-book value of the company is 1.92.
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