CRISIL assigns fundamental grade 2/5 to Nitesh Estates

Source: Moneycontrol.com

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CRISIL Research has assigned a CRISIL IER fundamental grade of '2/5' to Nitesh Estates Ltd (Nitesh). The grade indicates that the company's fundamentals are 'Moderate' relative to other listed equity securities in India. CRISIL Research has assigned a valuation grade of 5/5, indicating that the market price has 'strong upside' from the current levels. Our one-year fair value of the stock is Rs 27 per share. It is currently trading at Rs 14. The grades are not a recommendation to buy, sell or hold the graded instrument, or a comment on the graded instrument's future market price or its suitability for a particular investor.

Nitesh, an upcoming real estate developer in Bengaluru, has built its brand in the residential segment over a short span of time based on quality product offerings. It is expected to benefit from steady growth in the Bengaluru market driven by the progressive IT/ITeS industry and relatively higher affordability compared to other geographies such as national capital region (NCR) and Mumbai metropolitan region (MMR). The company's joint development model with land owners has worked in its favour limited capital outlay, efficient utilisation of funds and access to city-centric projects. The company's ability to attract strategic partners at the company and project levels is also encouraging.

However, Nitesh's limited track record of delivering 1.2 mn sq.ft. of residential space till date vis-à-vis Bengaluru's larger players' 10-15 mn sq.ft. has tempered the grade. Further, Nitesh's foray into the longgestation hospitality and retail segments, though would lead to regular cash flows once operational, is exposed to execution and marketing challenges. Since ~50% of the total capital is currently deployed in retail and hospitality projects, Nitesh's return ratios are expected to remain under pressure as returns in these projects are back-ended. High dependency on the promoter and centralised decision making have also diluted the grade.

Financial outlook
CRISIL Research expects Nitesh's revenues to treble to Rs 4,249 mn in FY14. EBITDA margin is expected to improve significantly to 15.5% in FY13 and 20.2% in FY14 from negative 5.1% in FY12 as revenue recognition scales up; fixed costs are anticipated to be absorbed. CRISIL Research expects PAT of Rs 229 mn in FY13 and Rs 434 mn in FY14. RoCE is expected to improve to 11.9% in FY14 from negative 1.4% in FY12.

Valuation (the current market price has strong upside)
CRISIL Research has used the sum-of-the-parts method to value Nitesh and arrived at a fair value of Rs 27 per share. The residential projects have been valued by the net asset value method, and the retail and commercial projects by the capitalisation method. The hospitality project has been valued on an EV/room basis.

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