Solid foundations

In 2005, when Ajay Piramal's empire was split to allow sister-in-law Urvi Piramal to step out on her own with the group's textiles and real estate businesses in tow, it was an opportunity as well as a challenge for the wife of the late Ashok Piramal. An opportunity because property prices were zooming, company valuations were eye-popping and promoters were making money hand over fist. It was a challenge because Urvi was now on her own, after having sat on the boards of Ajay Piramal's companies for close to two decades.

Urvi might have been on her own, but she isn't alone. Her three sons, Harish, Rajeev and Nandan, are spearheading the Ashok Piramal Group's businesses, with Urvi playing the mentor and providing the vision. Whilst Harish looks after textiles and Nandan has forayed into entertainment, it's Rajeev who has been leading the real estate business, Peninsula Land Ltd. (PLL), from the front. And if there were any doubts about the abilities of the mother-son duo, the performance of PLL—during a period in which the real estate mania turned into a painful depression—is a perfect indicator that the Ashok Piramal Group is indeed in good hands.

Consider: For the year-ended March 2009, almost every realty major worth his land bank registered a spectacular fall in profits. The first half of 2009-10 wasn't too different. Net profits of industry bellwether DLF Ltd., for instance, tumbled by 41 per cent and 78 per cent last fiscal and in this year's first half, respectively. Unitech, which raised Rs 4,400 crore through equity issues in two tranches last year, is in the same boat, with its bottom line shrinking by 28 per cent and 57 per cent in those respective periods. Other newly-listed realty majors like Puravankara Projects, Parsvnath Developers and Sobha Developers also took a pounding.

If profits—as well as share prices, which are off by as much as 84 per cent from their peak—are under pressure, it's not just because of reduced demand and falling property prices. Many of these majors are hurting because of the huge debt on their balance sheets. DLF has a consolidated debt of almost Rs 16,000 crore while Unitech's debt has come down to around Rs 5,000 crore (after the two equity issues) from Rs 7,800 crore.

PLL, in sharp contrast, has managed to keep profit growth coming (see Bucking the Falling Trend). At the same time it has been conservative about debt, maintaining a healthy debt-equity ratio (D/E) of 0.3 (Rs 343 crore of debt as on March 31, 2009), as against the industry norm of 1-1.5. That's not bad at all for this textiles-turned-real estate major, which was reeling under a D/E of 29:1 in 2004.

So how did the 57-year-old Chairperson and the 33-year-old Vice Chairman of PLL pull it off? "Right from the outset we did not go for just land acquisition, but for profitable land acquisition," points out Urvi. Instead of buying large parcels of land and mindlessly creating land banks to boost valuations, PLL bought only so much land that it could develop and sell in 3-5 years.

Profitable acquisition also involves not buying in locations where prices are overheated—like in Mumbai, for instance, between 2006 and 2008. Rajeev, who has a Bachelor's Degree in Business Management from Baldwin Wallace College in Cleveland, US, emphasises another plank of the de-risking strategy: Sell projects in the early stages of construction—even if real estate prices are on the rise—to generate cash that can be ploughed back.

For instance, PLL pre-sold one of the buildings in Peninsula Business Park (Central Mumbai ) to Alok Industries for Rs 1,100 crore and another in Peninsula Technopark (Mumbai suburbs) to the Essar Group for Rs 1,200 crore. "I told my staff to focus on the timely delivery of ongoing projects to keep the company going," says the junior Piramal.

Those challenging times —along with the fact that PLL didn't have to invest in land to get started—have stood Urvi in good stead. Her knowledge of the Mumbai real estate market and of the damage mounting debt can do has also come to PLL's rescue. That the Piramals have leaned heavily on a competent management team also works in PLL's favour. Rajesh Jaggi, Managing Director, PLL, explains the benefits of Rajeev's obsession with completing projects on time. For one, this helped the company get good deals from equipment suppliers and other contractors.

"We were able to get the best work at lower costs," says Jaggi, who has been with the group for 11 years. This lead to a virtuous cycle with timely availability of people and equipment hastening the speed of work.

Result: All of PLL's Mumbai projects will be ready on time. Its 1.26 million square feet Peninsula Business Park is expected to be completed by October 2010 and Peninsula Technopark—with area of 8,79,000 square feet—by December 2010. Two residential projects— Ashok Gardens and Ashok Towers— are complete and ready for occupancy. From all these projects, PLL expects cash flows in excess of Rs 1,000 crore over the next 12-18 months, which will help fund other projects.

Clearly, PLL has to move out of Mumbai to keep growth coming as well as to reduce risk; It has identified cities like Pune, Nasik, Hyderabad and the state of Goa. The company has acquired land in these cities and plans to build residential townships. The plan is to develop around 14 million square feet of residential properties over the next 4-5 years outside Mumbai. But the mantra of caution hasn't been done away with. "PLL is very conservative in taking up projects based on an internal rate of return (IRR). If they do not get the correct IRR they do not go for the projects," says Jigar Shah, Head of Research, Kim Eng Securities India. IRR is the annualised compounded return rate that can be earned on the invested capital.

These projects, outside Mumbai, will be funded from the Rs 1,000 crore that will be generated in the months ahead along with Rs 170 crore already in the kitty. A low D/E ratio also allows PLL to leverage if the need be. Also, there's a real estate fund floated by PLL that has unutilised cash of Rs 125 crore. Jaggi says the fund is planning to raise more money in 2010. Some portions of the commercial properties will also be leased out, opening up another revenue stream—currently, rentals contribute just Rs 15 crore to PLL's Rs 600-crore revenues.

Doubts hover over three special economic zones (SEZs) in Goa, with developable area of 12.5 million square feet, courtesy of an uncertainty on SEZ policy. But PLL isn't too concerned as the investment of Rs 100 crore can be written off without creating a huge hole in the bottom line. Over time, the Piramals want to make PLL an integrated real estate company that will also manage properties (what is known as facility management) and have an asset management company.

Though, both these business are operational, their contribution is minuscule today. With the solid foundations that have been put in place, PLL can now look ahead to its next phase of growth.

WHAT THE PIRAMALS DID DIFFERENTLY

• Acquired land for immediate development rather than focus on building a land bank.
• Pre-sold projects at various stages—and not just at completion— to generate cash flows.
• Maintained a healthy mix of commercial and residential property (currently, it is 54:46).
• Never allowed debt-equity ratio to climb over 0.5.
• Steered clear of land purchases in overheated markets like Mumbai.