5. Low ready to move (RTM) inventory (i.e. already completed projects on sale/finished inventory). Impacts: Leverage Position & cash flows. If RTM is high you should see quick liquidation.
6. Geographical presence - Key micro markets of a state in which company operates. Geographical diversification is preferred. Impact: Difficult to create brand across the country and hence the co which is able to scale up in 2-4 states commands valuation premium.
7. debt service coverage ratio (co. Should be able to service interest and principal comfortably). Check interest payments + principal repayments against investments and CFO (after tax but before interest) generated.
8. Land bank inventory - old cheap available land leads to higher profits per unit/realization per unit. Land acquisition strategy i.e. in bad times/recession was management able to acquire land cheaply.
9. The construction cost per sq.ft. (materials and labor) generally remains stagnant for a very long period/ increases with inflation. So the real decrease in overall cost per sq.ft. comes by buying land cheap.
10 Difference b/w project launch, construction starting date & completion date. Lower difference means better execution. Check historical Execution & call few brokers to verify the same
11. IND AS 115 Vs old accounting standard. Impacts: Revenue CAGR & balance sheet ratios
12. Advances from customers on balance sheet (float being generated). Good builders who have timely execution reputation get good advances on project launch leading to reduction is working capital for the business.
14. Quality of bankers (get hold of any interview of banker on the management).
15. Be vigilant in analyzing land bank. THIS IS a TRICKY AREA. Land bank should be in the vicinity of 5-7 years of land development requirement. A higher land bank acquisition leads to low asset turnover->decline in ROE->low valuations and cash getting stuck in inventory. In downturn this hurts badly as CFO takes a hit while interest burdens remains the same.
16. Net Debt levels (Debt - excess cash - investments). Lower the better.
17. Some companies do project in partnerships/joint development agreements with other developers. If the stake is less than 50% they apply equity method of accounting hence only reporting profits of JV in P&L and not balance sheet items. Look closely on off balance sheet items.
18. Mode of selling - directly to customers or through brokers.
19 Credit Rating/fundamental grade for projects-Credit rating is also awarded to separate projects in real estate business 20 Legal issues mentioned in contingent liabilities section. It can be a major issue for real estate players due to land clearance,govt intervention etc.
21. After sales maintenance. A very very important point. even if a mishap happens after 8 years of completed construction it's the builder who is held responsible that destroys credibility and future project launches.
22. Very difficult to achieve economies of scale as profitability is dependent mostly on individual projects which are mostly local. A bigger scale does not equate to bigger margins like in manufacturing business.
23. IMPORTANCE OF TIMELY EXECUTION - Quick execution by builders leads to banks releasing full home loan upfront rather construction linked loan (In a construction linked loan only interest is repaid till complete disbursement). It is beneficial to both the builder and buyer. As builder gets higher float due to complete loan credited upfront and buyer is happy as he will be able to acquire property quickly and his EMI payments would also lead to principal deduction.
24. Forecasting revenue and Profits: There are two terms estimated land area and estimated sale-able area. Estimated land area is in acres whereas sale-able area is in lakhs sq. feet. Convert estimated land area to sale-able area (1 acre=43560 sq.ft.)
Multiply land area x 43560 sq. ft x FSI (floor square index)=saleable area
Est. revenue = Sale-able area x realization per sq. ft.
Est. Profits: Est. Revenue x historical PAT margins.
While calculating PAT margin please check MAT credit & any tax loss reversal/holiday
Some co.'s have tax holiday near expiry and hence PAT margins take a huge dip Some of this sale-able area will be under JV & as per JV accounting only profit of JV will be recorded directly in consolidated profit. Hence diff b/w estimated revenue & revenue reported by co.
25. Calculating future cash flows to be received Total sale-able area - area booked=area on which cash still to be received Expected Cash flow=Area to be sold x realization per sq.ft (check project completion guideline through Investor presentation/mgmt interview or AR)
26. Calculate area booked but cancelled as a % of area booked-"lower the better" How to calculate Total area booked of last 5 years (in Rs.) - Revenue recognized in last 5 years - area booked but yet to be delivered (in Rs.) - Revenue under JV = Booked but cancelled.
Check if a co is moving up value chain in terms of geography spread (from tier 3 city to tier 1) or from affordable housing to premium projects or from ground+3 to ground+15/20 etc Other income in terms of hospitality. Fees income in managing outsourcing contracts property maint.