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 flows and then deduct (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 to maintenance capex i.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 of money 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. The resulting 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.