The Ashiana Housing Lecture

I had sent this to my BFBV students on 23 September when the stock was quoting at Rs 204 on a pre-split (5 for 1) basis.

Unfortunately, the lecture could not take place as scheduled on 27 September. It is now scheduled to take place on 31 December. Note: I am long Ashiana Housing and hence you should assume I am positively biased in its favor.

53 thoughts on “The Ashiana Housing Lecture

  1. Hi Prof. Bakshi,

    I am sure students of your class will benefit immensely through interaction with Mr. Varun Gupta! To say that Ashiana is “different breed” of a real estate company would be an understatement! They have turned the whole model of “land bank” followed by all major real estate companies upside down by adopting a new approach of “manufacturing” real estate where they treat land as RM inventory. I have been thoroughly impressed with this company not only because of the differentiated business model but also because of the courage to do right things. Accounting change on revenue recognition is a case in point. In the interest of presenting a more accurate picture to the shareholders, they changed their accounting policy even if it was not required at all by regulation and it was sure to hurt them in the short term as such! The quality of discussion and disclosure in AR is top notch. Ashiana has very calibrated and niche approach to real estate development. As an investor, the best part was valuation! Such a company available at 4-5 P/E just couple of years ago was a steal.

    It will be interesting to learn more about various issues through questions you have carved out for Ashiana management. By any chance, are you likely to post summary/transcript of interaction with Mr. Gupta? If it is possible, it will be of much help.

    Best Regards
    Dhwanil Desai

    • Hello Dhwanil.
      Does it really matter treating land as RM inventory, WIP or FG inventory? As long as the valuation is correct, whats the point of it?
      Secondly, as long as the receipts from their sales are uncertain, only contract completion method makes sense. Any other categorization would be surely wrong enough not to justify the P&L. So, what they’ve done doesn’t seem too much out of the world.

  2. anil1820 says:

    Most important question which I am unable to answer myself is “What will be the impact of decline in land prices”. Its not just for Ashiana, but how do you evaluate a company which operates in a sector like real estate, which I fear is in bubble territory in many markets. Same thing goes for companies like Cera which might be severely impacted by any slowdown in real estate sector.

    • Decline in land prices is a problem for companies which have large inventory of land. For companies like Ashiana, where land is treated as a “raw material” and consequently where a project’s lifespan is just a few years, a drop in land prices would be, on a net basis, beneficial, in my view. That’s because low prices mean higher affordability and that translates into increased demand.

      While thinking about companies like Ashiana, long term investors should ask four key questions: (1) how likely is it that demand for good quality but affordable housing will keep growing over the next few decades”; (2) how profitable will be this growth?; (3) how difficult would it be for the company to scale up its operations to meet the demands without making major mistakes in execution and risk management; and (4) whether all this growth could be financed with customer float and minor amounts of debt, without any significant need for issuing new shares for cash?

      In my view, a drop in land prices is not one the key factors to worry about in the case of this particular company.

  3. Jazz says:

    Sir, Do you think land acquisition bill will negatively impact Ashiana housing as you have limited stock of raw material (land) ie 4-5 years which is bound to get expensive going forward, will they manage to pass on price hikes to their customers ?
    If not wont it severely affect their margins ?
    Will they have to change their business model of Land as a Raw Material to Land Bank model -thus reducing the balance sheet moat going forward ?

  4. Hi Sir,

    The investor presentation on company’s website mentions one of the risk mitigation strategies as “Get into Joint Venture models, with regulatory approvals being the responsibility of the partner”? If possible could you ask to Ashiana to elaborate on this during your Q & A session with the management. And how does Ashiana go about choosing its JV partners?
    Also if they could throw some light on the changing regulatory environment with respect to real estate industry for eg.”Real Estate Regulation and Development Bill 2013″ and other regulations and its impact on Ashiana and how would Ashiana be prepared to tackle such changes?


  5. Akshay Jain says:

    Hi Sir

    Do you think the business model of Godrej Properties is similar to that of Ashiana? Both seem to follow the lean JV model, focus on low cost housing, have a great brand name in the space with decent management. Also doesn’t Godrej have a national brand name which could enable deeper market penetration, making it easier for it to scale as compared to Ashiana (which may find it relatively harder to replicate its success in new markets)

    • If Godrej properties was really asset light, then

      1. why would its inventories be 158% of book net worth (as of Sept 2013)? In the case of Ashiana that ratio was 84%.
      2. why would it have debt of Rs 700 cr (as of Sept 2013) while Ashiana was debt-free?
      3. Why would it have raised new equity capital of Rs 878 cr since FY 2010, while Ashiana hasn’t diluted equity for a long time?

      • Akshay Jain says:

        Sir I think the answer to the 3 questions lies in one big difference between the companies.
        Ashiana is moving ahead in a conservative & incremental manner, taking on as much as comfortable without having to stretch its balance sheet at all (in fact analysts have criticized the company for being extremely risk averse). In my opinion, this strategy looks to be safe and sensible, given its position as a niche player in specific markets.
        On the other hand a national player like Godrej believes that some optimal debt will help it take advantage of the current situation. To quote Adi Godrej “At present, many developers and land owners are under liquidity pressure, providing the company with a strong opportunity to add new projects at attractive terms. We believe we are a marketing company and our business model allows us to proceed with minimal capital and maximum speed. We feel it is sensible to take advantage of this dislocated market” . The approach of the two companies, especially in terms of speed looks to be completely different resulting in GPL overshooting with its debt and inventory.
        The stable has been a wealth creator in the past with Godrej Consumer and Godrej Industries. So when Adi Godrej says “Godrej Properties will be the fastest growing company of the group”, is it sensible to assume that the strategy could make sense for the company?? Finally yes, Godrej Properties does own 15% of its land bank (dont know about Ashiana), so it may not be as asset light

        • The fundamental economics of a real estate business is very different from that of branded consumer business so I won’t read too much into what happened in Godrej Consumer etc.

          I don’t like mixing up of conventional interest bearing debt and real estate. In the past, I have only invested in debt-free real estate companies and have done quite well in them. So, I have a natural bias towards debt-free real estate companies.🙂

          I love Ashiana’s risk aversion expressed in many ways, one of which is its debt-free balance sheet. Besides, when you have well-deserved goodwill in the market (based on established track record in delivering quality projects on time and within cost) which gives you access to interest free money from your customers (float!), why would you need debt?

          • Akshay Jain says:

            Absolutely sir, makes sense….But how is this goodwill (which turns into demand and pricing power) transferable to other states ?? I believe most of its business comes from Bhiwadi, jaipur, jodhpur, neemrana all in Rajasthan. How does it scale, wont it have to start by creating a reputation from scratch in other states where no ones heard of Ashiana?? Isnt real estate a sector in which size begets size, winner takes all kind of thing??? Wont something national have a large advantage over something local??

            • Akshay, a reputational advantage is key to the superior profitability of Ashiana in many ways. It’s excellent reputation of delivering quality housing at affordable prices within promised time creates a goodwill which enables the company to charge higher prices than other developers who don’t have this advantage. High referral bookings rate means low marketing costs. Ability to collect cash upfront at zero rate of interest provides cheap finance in the form of float. Moreover, the very little time taken by the company as compared to its competitors in launching a project and selling it also reflects this reputational advantage.

              Good (and bad) reputations have a tendency to travel quite fast. This is especially true now than was the case many years ago when we did not have cheap mobile phones and internet.

              Ashiana has projects outside the regions you mentioned. They have ongoing projects in Lavassa and Jamshedpur and have future projects planned for Kolkata and Halol in Gujarat. I will ask the appropriate questions from Varun if the reputational advantages I mentioned above, have also been attached to these projects. If they have, then those four points should also exist in these projects.

              As for scalability, given the rapid urbanization being experienced in the country (which is a very long term trend) and the very small current size of Ashiana, I have little worries on this front. The key risk is not scalability. It’s execution, in my view.

          • Dear Sir,
            I think Kolte-Patil Developers also operates on same logic, instead of taking debts they prefer PE investor with no guaranteed returns.
            Last few quarters Kolte-Patil is showing good growth in Net Profit amid better realisation per unit. I feel Kolte-Patil is investor friendly as they pay regular dividend with good dividend payout ratio which is far better than industry.

  6. Only 1 question if students can ask Varun on my behalf.

    How is Ashiana going to scale with time w.r.t the Land bank declared ?

    Disclosure: I am Ashiana Shareholder since 2006.

  7. Sir how does the following concerns affect this kind of business:
    1. Unpredictable earnings
    2. A much local brand. How much people will relate to it outside Bhiwadi belt
    3. High operating leverage i.e. one project can polarize the earnings hugely

    …..and many thanks to you Sir for all your teachings.

    • Earnings are not unpredictable in my view. The reported earnings may look volatile because the company has shifted to a more conservative, cash flow based model of revenue recognition. See my reply to Akshay’s comments on local brand angle. As for high operating leverage, I think you mean dependence on one project. Actually, their dependence on one project is going down as they expand, as is their dependence on one region. In any case, even if the company chose to be a specialist in just one area (north India), that wouldn’t bother me because I can handle the diversification risk at the portfolio level…

  8. explorer71 says:

    My question is not about Ashiana (which seems like a sound company overall, from a pure investor standpoint), but about whether real estate investing is ethical investing – and I mean more the underlying real estate than the companies who build it.

    We live with 1.2 billion of our brothers and sisters, a large % of which are poor and can never afford a 1bhk flat on ownership basis. They live in slums and shanties because they have meager earnings due to the huge income inequality we have. We have limited land where to build houses. A lot of our land which needs to be preserved for agriculture and natural resources and nature’s services is already swallowed by real estate and industry.

    At the same time, the rich among us build their own versions of Antillas while the middle and upper-middle class looks at real estate as “investment” and speculation. This props up demand artificially and builders have a field day. To add to this, a lot of black money finds its way to real estate sector. Because of our huge population and the above factors, real estate rates almost never truly fall, and it allows you to ask questions like “how likely is it that demand for good quality but affordable housing will keep growing over the next few decades”. Of course demand will be up, and prices will not fall.

    All that happens is our poor brothers and sisters, our maids, our drivers, the farmer who sends us food, are all “priced out” of owning a simple home and they continue to live in ghettos. The question is can we restrain our animal instincts of investment (even if its value investing) so that we can do our bit in bringing back equality. I wish ethical issues like this also get discussed in investment classes. I have been living in one of the “red hot” real estate markets in the country and have the resources to invest in real estate, but have refrained from doing so, due to the above moral issues.

    • India has its versions of Antillas and anthills.

      I couldn’t agree more with you on inflated real estate prices. They should come down to enable more people who are moving into cities to be able to afford a roof under their head. If anything, companies like Ashiana Housing which don’t hoard land and which quickly build and deliver, add to the supply of homes and if you need one thing to bring home prices down, its higher supply. I believe that Ashiana’s business model is more pro-social than those of other developers. India needs more Ashiana-type companies, not less.

      Having said that, as a citizen, and as an investor, I also feel that there is a case for Competition Commission to investigate collusion amongst real estate developers. If there is a cartel, and if it’s broken, that will be good for future Indian home owners. And it will be good for long term investors in Ashiana Housing type of companies.

  9. surya kanth says:

    Hi Sir,
    Ashiana Housing is an excellent business. I have seen it almost 1 year back. And Affordable Housing is a trending industry with long-term scope. I have seen those accounting changes and fell in love. But I am not convinced that Market can give it 25-30 PE and sustain for a long period of time. Because if it is not for a 40 or 50% return or more there are many quality companies in India like Hdfc bank or indusind or Page industries or Gruh finance or Lupin or Dabur or HUL or Emami which can generate 20-25% return for a long period. I would like to pay up for quality and sleep well.
    I am more convinced with service business or the retail business of Cera or Kajaria ceramics more than Real-estate companies.

  10. Manav Vijay says:

    Respected Prof,

    Being an investor in Ashiana since 2005, I have understood following things:
    1. It is possible to run an unethical business ethically.
    2. Howsoever small you are, being consistent over a long period bring rewards.

    Having interacted with the mgmt a number of times in last many years, their humbleness and humility has only grown bigger, just like their business. It seems that they are not in a hurry to prove anything to anybody.


  11. Manav, you raised an important point which has much to do with a mental model called Gresham’s Law. Check it out ('s_law).

    Do bad practices really drive out the good?

    Not always. See how Warren Buffett behaves while running Berkshire’s insurance operations— when competitors foolishly lower prices, which over time would prove to be unremunerative, he refuses to go along. He is quite happy to cede market share to his overaggressive competitors, who, by pricing insurance policies too low, are taking on grave risks, but they don’t know that yet, or worse, they know it but don’t care because of perverse incentives in place. He knows a time will come when the competitors will lose money and reputation and when that happens, he is ready to do business— on his terms.

    Another company whose management I admire is that of Hawkins Cookers— who, I believe, stood up for its principles against the odds— and won.

    Reputational advantage is a source of moat in many businesses and surely in the insurance and the real estate business. Ashiana’s management did not follow the practices of its peers in the industry. They did not take money from customers for a given project and divert it for buying land in auctions. They did not make tall promises to their customers just to get their money. They did not over-leverage their balance sheet. They moved towards one of the most honest accounting systems despite short term pain, something almost no one is willing to do.

    Over time, while their peers lost reputation and money, Ashiana earned both. The stock market too took notice.

    • surya kanth says:

      Hi Sir,
      That’s a wonderful point: Reputational advantage.
      I have one mental model which I want to share. but before that I always remember what my uncle used to say: ‘You never understood an investment until you know how and why the market values it the way it is.’ He is a real estate business man. Hardcore-down-to-earth-type uncle he is. What i do is I just try to figure out how the market values it. So my biggest curiosity was once why DHFL sells at 5 PE and GRUH finance sells at 28 PE. I am 22 then and 23 now. and The curiosity brought a lot of change in the way I look at investments. The point here is I prepared a bit small incomplete list of ideas to separate gold from copper. Here you go. Hope m not wrong anywhere…
      1. MARKET always pays for growth. Mostly sales growth in the case of small caps and EPS growth in case of mid or large caps.
      2. Market pays for reputation or Management Pedigree.
      3. Market pays for turnarounds.
      4. Market pays for strong unique brands.
      5. Market pays for high dividend payout.
      6. I somehow believe that Markets dont look at financials other than EPS growth. Even Infosys could not maintain 25 PE even with its high ROE once its growth came down.
      7. Sectoral competition and growth is more important than individual company. All sectoral charecteristics are very important. I remember there was a time when NBFC’s were believed to be devils. But today market has a more flexible view.
      8. Consumption stocks are many times always better than Investment stocks. Service based businesses are better than Manufacturing stocks.
      9. Ultimately EPS growth coupled with ROE growth is the recipe for higher returns.
      10. This is a question: What do you think should be an investor’s compounded returns if I should match Buffett, In Indian market? Buffett makes 22% return in American Market.
      Most of My friends in IIM bangalore say that 15-20% is a good return But with Savings account rate at 10% I think anything above 30% is good.

  12. Balaji G R says:

    Dear Sir,

    Thanks for a Excellent work. I have 2 question on Ashiana Housing.

    1 : What are long term drivers which will Improve ROE in this type of Business ?

    2 : I had happened to read the conference call transcript and found in one of the question on who owns Ashiana Brand ? Can you share your perspective ?

    Thanks once again.

    • What’s the ROCE of this company? To answer that question, I would make the following suggestions:

      1. Ignore reported earnings and focus on operating cash flows;
      2. Focus on operating cash flows from ongoing projects. The company discloses that in its annual report (see page 45 page FY13 Annual Report) and quarterly presentations. In its annual report, the company writes:

      “As initiated last year, we prepared the modified statement of cash flows which is different from cash flow statement as per AS-3 this year as well. This statement reflects the pre-tax operating cash flows generated from ongoing projects by the company. It also indicates funds deployed in new land acquisition which will create pipeline of projects for the company.”

      Compare the Modified Cash Flow Statement with the Cash Flow Statement prepared under Indian accounting standards.

      Compare pre-tax operating cash flows from ongoing projects on an annualized basis (after adjusting for money used to purchase land just to maintain the current unit volume of business) with the capital employed in the business to estimate ROCE (or ROE as there is no net debt).

      The correct way to value this firm, in my view, is by first valuing its operating cash flow stream from ongoing projects (after adjusting for money used to purchase land just to maintain the current unit volume of business) and only then to think about the value of growth.

      Assume that the pipeline of future projects ensures that new projects will replace completed ones so that operating cash flow from ongoing projects does not decline (or grow). Then, what is the value of the operating cash flow stream from ongoing projects alone and how does that compare with the company’s current market value?

      As for your other, very good question about brand (there are two Ashiana brands), I will ask Varun.

      • surya kanth says:

        Hi Sir,
        I think Market values Ashiana Housing based on the projects it is currently handling. As far as I can understand Market may not understand its revenues or cashflows.

      • Balaji G R says:

        Thanks Sir.

        Total cost of Land comes to Rs 27 Crs ( Revenue from Ongoing Project 80 Crs * 25% of the Avg Realization Price and Added 7.5 Crs sale of land .)

        Operating Cash flow post deduction of Land cost = 56 Crs.

        Total Share Holder Equity : 266.55

        ROE : 21% .

        Should i need to add the Revenue of Partnership to account for Land cost .

        Thanks once again .

        • Jazz says:

          Avg Capital Employed 165crs.
          Annualized PreTax op cash flows = 100crs
          ROCE = 60%

          Sir, what advantage the referral bookings bring on to Ashiana and how much a wannabe competitor might have to spend to copy this model from Ashiana ?

  13. sir , I have also owned this one ,so my views are biased also , few things impressed me much – seen personally there quality of construction in 2002 when they were small company and originated in bhiwadi -and there was no need to do so as there not much competition in that industrial belt but still the quality was good , their accounting policy changes , their prompt notification for write offs to several projects due to any forseen circumstances ,
    but only one thing which hold me much back for taking big exposure is the future growth potential -measn if tomorrow real estate revert back to mean -even these guys will be impacted in a way for sale prices and margins

  14. hardik501 says:

    Sir, what I would like to know is how do you evaluate between two real estate companies – Ashiana and Oberoi Realty. Both are debt free. Both focus on a specific segment. Both are opportunistic in their land acquisition and both are geographically less diversified as compared to their competitors. While Oberoi focuses on only high end real estate, Ashiana focuses on affordable housing. Oberoi for its part has very high profit margins and return on capital while Ashiana has lower margins but still excellent returns on capital. Plus just noticed that Martin Whitman’s fund started accumulating Oberoi after their first acquisition that was Piramal Ent. Any thoughts about both the companies? Thank you.

    • I love Oberoi’s cap structure. As mentioned in one of the earlier comments, I only like real estate companies with fortress-like balance sheets and Oberoi is one of them.

      So why did I prefer Ashiana over Oberoi? The key (but not the only) reasons:

      First, Ashiana’s customer is “aam admi” (relatively speaking) as compared to a customer of Oberoi.🙂 Seriously, in terms of demand for affordable housing vs. high-end housing, I felt that the former is likely to be more resilient.

      Second, Oberoi is also a much bigger company than Ashiana and I like small companies. They can grow faster. They are also relatively cheaper, usually.

      Third, Ashiana is right next door (I live in Delhi) so there is a kind of a “home bias” here.

      But these limitations of mine need not apply to you or to Third Avenue!

      • hardik501 says:

        I absolutely agree with your assessment. One of the things that I cannot answer on Oberoi Realty is that in case of a slow down in the real estate sector, would it benefit the company as it can acquire land at cheaper rates or will the company be left with a lot of unsold inventory in an already over saturated market for luxury homes? JLL for eg just came out with a report saying that Oberoi’s key market Mumbai has 48 months of unsold inventory. That is a lot of houses even after considering the softened sales no.!! On the other hand I see that Martin Whitman is the sort of person who goes against the established notion and invests in such real estate companies operating in overheated property markets such as China and Hong Kong and now India suggesting that these companies are selling at a discount to easily calculable book value. But I don’t see how it was easy for him or his Fund to find the book value of the inventory of land for Oberoi. Can you shed some light on his view? Thank you Sir.

  15. Rohan Pinto says:

    Hi Professor,

    Many thanks for the case on Ashiana Housing, Firstly the promoters inspire confidence with their dealings, under promise and over deliver has worked really well for the company to build trust with its customers. Also the Transparency and accountability of management gives solace to us minority shareholders of being treated fairly.

    The Management seeks projects with an IRR of 30%, if we had to do a back of the envelope calculation for 2013,

    Cost of constructing high rises – Rs. 1300 / sqft
    Admin and Advt charges – Rs. 200 / sqft
    Land cost not exceeding 25% of total cost,

    so Total cost – (1300+200)/0.75 = Rs. 2000 /sqft

    With Average Realisation – Rs. 2,700 /sqft

    Gross profit per sq ft = 2700 – 2000 = Rs. 700

    So thats an impressive return , this coupled with the advances from customers (low cost float) magnifies their returns.

    Also just wanted to highlight the land prices in Jaipur region (proxy for non metros) as an example,

    We see housing price index showing just about 8% appreciation since 2007, so for a considerable period of time we would have demand for affordable housing
    i.e as Varun describes the segment of Rs. 15-60 Lakhs. here as incomes rise, we could still see demand as property prices would be about 5x target segment income, so there is revenue visibility.

    Finally with the Strong Balance sheet, the company has Optionality under its belt to weather and even triumph any drastic fall in the property prices as they would have opportunities to buy more land under lucrative terms over a period of time.

    how to assess the Regulatory hurdles is something which has stumped me but the company’s plans of expanding to 10 cities from current presence in 7 and their recognition of this regulatory risk is a good thing.

    Appreciate you sharing a wonderful case with us , once again drives home the point of investing in Compounding machines for wealth creation.


  16. explorer71 says:

    The company may be debt-free but they form all these JVs for projects and the JVs are free to take on debt. Their JV for a Gurgaon project just raised Rs. 180 cr, most of which is in debt. See

  17. poteredi says:

    1. Black money – how should investor account for the invisibles? Do u think they would be making all deals by cheque?

    2. Sales process – builders stack flats in family/friends’ names, and release them as mkts rises. This may not appear on balance sheet, but this is the juice of making money in realestate ..How do u account for it? How can u know if the sales r to real owners? How can u ever find out what they are stacking in their personal names? Do they use subvention schemes or 80:20 schemes for sales?

    3. Not owing land/JV – if they act as developers in JV, what happens if final customer halts final possession payment (very common in real estate) – in which can they cant book sales, and their receivables zoom. (possession is slowing in markets and non of the investors/buyers have seen falling markets for last decade🙂

    4. Many such situations r unforeseen in recent public memory. Cash on books is agaisnt any prolonged downfalls – as refered in q1 concall by management. Should one take cash on face value? Why is dividend payout low?

    5. Who bears costs of escalating prices in case of JV and stalled projects?

    6. Related party transactions – seems to be having leakages in related firms. How should one chk that……@Page79/80, in investments they have negative equity. How should one account for that?

    7. Utility of brand? – to give an anology, Unitech is well known for non-delivery and shabby construction. Still it gets sold like hot cake. …..In current booming realestate mkt, there isnt any good or bad apple – its deprival supereaction of the buyers🙂

  18. Dear Sir,

    I think here the challenge is the EAC as compared to Bookings (Supply is the challenge). In order to construct more, it has to focus on improving the productivity of laborers. It will also have to invest in better Equipments,materials and become innovative in increasing the pace of constructions without affecting the quality. If you find this point valid, do let me know if there is mitigation for the same?


    • Anish, the key value driver for this business, which already earns a high ROE is scalability, not efficiency improvements. This is not a business with huge economies of scale. When you are doing projects all over the country, there is not much buying power you can have over purchase of cement for example because cement, like most other building materials is a local product. Having said that, the company has claimed significant productivity improvement in at least one of its presentations. See, for example, slide 24 of July 2013 presentation in which it is claimed that the labor productively increased by 34% in the previous 2 years.

  19. Dear Sir

    I agree with you that the sustainability of the business over the next 20-30 years will depend on scalability (The ability to launch more and more projects by identifying hubs where affordable housing is lucrative) but the funding of land inventory to support scalability will depend on internal cash flow generations (Customers at the max can pay 15%-20% of advances at the launch of the project). So the existing businesses will fund the future projects. Assuming that the demand for affordable houses keep ever growing because of the favorable economics, in order to get the remaining 80-85% of the house value, Ashiana will have to complete the projects faster. As an investor, what you would want is that the cash flow from existing projects grow at 15-20% which completely depends on the pace at which the workers finish the construction once the project is started (This is assuming that there is not much time lag between the completion of construction and the time in which the customers pay the remaining money). It would be a good reason to believe that Ashiana has profitable customers because people are ambitious, working in a good job, want a place of their own, nuclear family culture increasing. Also, having a house of own would be their ambition. So they are waiting for the house to get completed fast and get the keys in their hand. But, in my opinion if EAC today is 12 Lac sq ft then in the next year it has to increase by 15-20% so the cashflows will grow proportionally. Scalability will lead to more land and launch of more projects which will lead to more advances from customers. But that is not value given. Most of the value is given when construction is completed. But imagine that they lag in EAC but lead in EAB. This will lead to unsatisfied customers. This could lead to decline in goodwill. Some of regulatory factors are not in control. But once the first stone is laid, there has to be continuous improvement in EAC.

    Sorry in case I am wrong and all over the place.


    • For the company to grow without losing reputation, clearly, booking and construction have to keep pace with each other. That’s the first point.

      Secondly, constructions follows bookings. The company does not rely on bank debt to construct. Customers pay money to the company for that.

      Third, as the company grows it will have multiple projects at different stages at any given point in time. This means cash flows from projects which are nearing completion will be available to fund the acquisition of land for the next project. If, for example, they have 30 projects evenly spread out then there will always be cash inflows from some projects which are now complete to fund the startup phase of new projects. This will reduce variability/volatility.

      Growth will drive efficiency in cash flows IF they can execute well. And part of good execution includes productivity improvements.

      • Dear Sir,

        So if we were to value the company on the basis of growth in Pre-tax operating cash flows then it has to be after investment into Land inventory. My reasoning here is that every 1 Re invested into Land will give cashflows only once and not perpetual (Like Plant and Machinery which can give cash flow over long periods of time after investment into maintenance capex). This reminds of a case similar to Eros International, where the company is recording more than 500 crores at Pre-tax level but investment back into production is more than 500 crores. So this kind of company has to be penalized on valuation because the growth capex is as good as maintenance capex (Since the assets throw out cash only once). Infact, I get a feeling that Eros valuation is only that of the dividends. It is almost certain that Ashiana will not be able to increase dividends much higher. As an investor, dividends would be much higher for a company that is generating 70 crores from it’s existing projects. Imagine a company like Thomas Cook, which is generating 100 crores at Pre-tax level. If this is invested into new businesses, that business will be permanent cash flow generator for Thomas Cook (For eg Ikya). So the growth is visible about how 100 crores will become 200 crores and compound further. The difference here is that Ashiana’s allocation into land (Major Value driver) will throw cash once while Thomas Cook’s allocation into Ikya will throw cash perpetually. So if you were to look at the original cash flow statement and not modified cash flow statement, the average Pre-tax operating cash flow is 20 crores. This is actually what can be allocated for growth and not the cash before investment into land inventory.

        Sorry, in case I am completely wrong. Please do guide me.


        • Agreed. The value of the earning stream from current projects can be obtained by discounting pre-tax operating cash flows using a pretax discount rate or post tax operating cash flows using a post tax discount rate. To that one must add the value of the pipeline. “Pipeline” here includes not just announced pipeline of projects but also projects that can be reasonably expected to be announced by the company over the years.

          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.

    • surya kanth says:

      Very Nice Point Anish. It was a lovely way to distinguish business and how the market should see it. Will never forget it.

  20. manishmnsp says:

    good to know the analysis of the company and all the interesting metrics and valuations by all of the above participants , however I am not a student of BFBV , and cant get into much details of Valuations . Quoting Buffett ” Price is what you pay Value is what you get ” . You gave the lecture on Market Price of 204 ( adj after split of 1:5 it will be Rs 40 ) now that the stock is trading roughly at 72 what should an investor do ? I am reminded of Charlie Munger ” its better to buy a wonderful business at a fair price , than to buy a fair business at a wonderful price .” i personally feel i should go with MUnger . but is this Price a fair one ?

  21. […] had earlier blogged about Ashiana Housing and this lecture on 21 December, […]

  22. Pranav Singh says:

    Dear Sir, Thanks a ton for posting the interview video!

    I am not sure if EAC excludes the construction for the share of the JV partners. Now, a large part of bookings are in projects in Jaipur and Jodhpur where Ashiana does not have 100% stake. In case I have missed it, can you tell me where can I get the Ashiana’s expected share of bookings/construction to estimate their future cash flows.

  23. urvija shah says:

    Really nice analyis. Request you to kindly upload the lecture sir. Thanks a lot.

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