# How to Value Ashiana Housing

How to Value Ashiana housing ?

Prof Bakshi has beautifully explained this in one of the comments on his blog, I am reproducing it below for you to read and think.

The approach I like is to

take the pre-tax operating cash flowsand thendeduct(as you’ve mentioned) the amount of money that would needed to be spent from these cash flows, for the acquisition of land for future projects. Here, I would reduce only that part of land purchase cost which is in lieu of EAC. In capex terms that we are more familiar with, this would be analogous tomaintenance capexi.e. the amount of capex a company needs to do to maintain its current unit volume and not to grow beyond that. So maintenance capex in manufacturing companies is analogous to the amount ofmoney Ashiana needs to spend on land every year just to maintain the current level of EAC. That cost should be deducted from annual pre-tax operating cash flow. Theresulting number would represent the amount of pre-tax owner earnings that the business generates without counting any growth.You can then estimate the present value of that owner earnings stream and compare it with the current market value of the firm to estimate what you’re paying for future growth potential.When I did that, I found that not only was I not paying anything for growth, I was buying at a negative-growth implied market valuation. So, in effect, I was picking up a lottery ticket for nothing (or rather got paid for it). I leave it to you to figure out if that statement still holds true or not.

Now Lets us try and put some maths to above statements,

The good thing with Ashiana Housing is that there disclosures are very good in Annual reports so ones doesn’t need to go external resources for most of the data we need, A look last 5 years data will give us below

Now it’s time to make some assumptions as we need to find how much Ashiana housing spends on acquiring land. We have to rely on management for this, In previous con calls management have indicated that there pre-tax margins are in range of 25-30% so we will take 25% the lower end for our calculations.

Also in past management has indicated that almost 10-12% of money is spent on acquiring land, Rohit Poddar of Poddar developers has also given similar percentages in the con call for Poddar developers in August 2015 which is affordable housing developer as well.

With above two assumptions we can know __estimate the present value of that owner earnings stream and compare it with the current market value of the firm__

So unlike Prof Bakshi, one is not getting the value of growth for free or negative at today’s m-cap.

Is this value of growth too high or low with respect to future earnings power of franchise ? This is a matter for another post 😉

Disclosure – No Trades in last 30 days, Invested in Ashiana Housing, Don’t take this post as a recommendation to buy or sell , this is truly for information and discussion purpose.

I am certainly a noob here. Let me know if i missed something.

Calculation of I = D*B/100 i.e) 1934*16/100 that comes to 300 odd crores. I assume you did E*C/100 which comes out to 38 crores.

Secondly, if the current cost of land to finish existing projects is 242 Crores. To acquire the same amount of land i.e) to maintain current EAC, I would assume it would cost similar amount. Not 38 crores.

I also concur with Sahil Shah on the Raw Material Math. I feel it will be a double deduction, if we subtract land cost again.

I may be completely wrong with my math, but still wanted to share. Correct me,

For calculation of I = (E*B)/100 has been taken

Cost of land given is Rs 242 per sq feet, cost of land for average EAC of 16 lac sq feet then comes out to be 38 crores.

Even I am confused about the double deduction of cost of land, as it is already considered as raw material.

Modified CF statement has factored in all cash flows for launched projects – whether it is customer advances, or land inventory. If land is the raw material, there is no ‘maintenance capex’ (assuming land to be a non-depreciating asset). We then would not need to reduce from the OCF an amount to replenish the land supply to arrive at the owner FCF.

Would the modified operating cash flow be a number which is more akin to owner free cash flow?

So assuming no growth, and using the average of the past 5 years, the OCF (per AR15) is 85cr-90cr. Dividing this by AAA yield of 8%, gives 1050cr odd.

Thoughts?

Nice analysis.

1. Paying 2 times “value of growth” v/s “pv of FCF to owner” is very expensive.

2. Why formula ‘I’ should have a denominator as ‘100’.

Thanks Kamal

For 1 – Expensive and cheap is relative

For 2 – To convert figure to INR Crore

Hi,

I feel that land is a raw material for any construction company. Your thoughts?

I agree

First of all, very interesting thought process and a great post.

I was thinking about this in a slightly different way. 75% of cost towards the project and 12.5% towards maintaining the land bank forever, meant that 12.5% was what was left for the owner. Last couple of years, the avg. realization has been INR 3000 / sq.ft and 12.5% is INR 375/Sq. ft that I can get after retaining the earning power at the same rate (no growth) If EAC continues at 2 million Sq. Ft (last 2 years avg.), it will result in 75 Cr of Profit left for the owner. 75 / 0.08 (pre-tax AAA yield) will result in INR 937 Cr for the company. As you rightly pointed out, whether this incremental growth (1200-937 Cr) is worth paying or not depends on assumptions for long term realization rates, long term growth rates in EAC and profit margin%’s.

Thanks Bala for your comments

Beautifully explained, Vivek..I did read Professor Bakshi’s comment , but I never could piece together how to get the value of present owner earnings. Need to upgrade my thinking process to match yours:)

Thanks Nishanth

Hey,

Many thanks for wonderful article. Valuing ashiana is tough nut to crack and you did a great job here. Can you share what do you mean by EAC and also in calculation I got lost over “cost to acquire land equivalent to average EAC”. Can you please explain that part again.

Regards,

Thanks Vikash for your comments – EAC is Equivalent area constructed, This basically is the amount of land developed by company every year. Now to calculate how much Ashiana had to spend to acquire land for EAC I inverted the problem. First I calculated their pre tax cost per square foot and then took 12.5 % of that as cost of acquire land. Let me know if this is still unclear

Interesting analysis.

I have 2 questions:

1. This is the fair value of the company (sort of intrinsic value) – if the company demonstrates no growth in EAC. Is that the correct way to infer “PV of FCF to Owner”

2. Do you think looking at the average of 5 years is the correct means to calculate versus say using a combination of last 5 years average and latest year data. Averages may be helpful if there is regression to mean. In the case of average realisation – I don’t see that happening as they have been increasing consistently

Disc: Invested in Ashiana; have been adding in the last 30 days

Thanks,

For 1 – You are correct

For 2 – One should run this analysis with various scenarios as IV is not fixed number, I just showed one example using average

Thanks Vivek, understood.

Looking forward to your analysis on valuation if the company is able to grow its EAC

Dear Vivek,

Nice analysis as always.

But the problem with this post is that it is incomplete..

The real story starts only when we try to factor in the value of growth…

moreover a graham-type-investor may only look for free lottery tickets, a Munger-type-investor must be willing to pay up (though not over-pay) if the quality of business and management is first class

Dear Ankit – I stopped without a conclusion cause what looks cheap to me can look v expensive to someone else and vice versa