The management of Orbit Corporation had earlier indicated that the company would launch at least one project every quarter. The company had successfully done so for the last two quarters. In the last conference call after the announcement of the company’s Q3FY2010 results, the management had indicated the launch of five new projects and the first phase of the Mandwa project over the next three to six months.
However, in the current quarter, Orbit Corporation has not launched any project so far and will not do so until the next quarter. One of the primary reasons for this was that people were waiting for the Budget 2010-11 and hence any new launch prior to its announcement might not have evoked a very positive response. This delay would percolate to the next quarter and subsequently delay the launch of the other projects of the company. However, we had built in two new launches in this quarter in our model.
We expected two of the company’s projects—Orbit Residency at Andheri and Orbit Grand at Lower Parel—to reach the revenue recognition stage in this quarter (ie Q4FY2010). However, both the projects will not be able to reach the threshold limit of 25% and hence revenue from these projects will be recognised in the next fiscal.
In the budget 2010-11, a service tax of 10.3% has been proposed on under-construction properties. It will be levied on 33% of the total project cost, thereby taking the net effect on the property price to 3.3%. This 3.3% increase in property prices will not affect the volumes of Orbit Corporation as it caters to the high-income group people.
We are changing our valuation methodology from the price/earnings (P/E) basis to the net asset value (NAV) basis as the latter is more appropriate for valuing a real estate company. Further, we are lowering our earnings estimates for FY2010, FY2011 and FY2012 taking into account the delay in the new launches as well as the delay in revenue recognition from two of the company’s projects.
However, we are positive on the company given the fact the company operates in the key property market—Mumbai—and caters to the luxury segment where marginal price hikes do not affect the volume. Secondly, though the company saw a delay in the project launch in the current quarter but it has a strong project pipeline which provides strong revenue visibility for the quarters ahead. At the current market price, the stock trades at 12.9x FY2011 earning estimates. We revise our price target for Orbit Corporation to Rs340 from Rs393 and our new price target is based on the NAV methodology. We maintain our BUY recommendation on the stock.
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