Recommendation: Buy (again!)
CMP = Rs 249 (at the time of this recommendation)
Price target: Rs 808
Key points:
- The top line of Orbit Corporation grew by 28.8% yoy to Rs 81.8 crore in Q1FY2009. The bulk of the revenues (almost Rs 56 crore) were booked from Orbit WTC and around Rs 11 crore from Orbit Arya. Orbit had pre-sales revenues worth Rs 578.3 crore at the end of Q1FY2009 compared with Rs 644.8 crore at the end of Q4FY2008.
- The operating profit margin of Orbit declined to 40.5% during the quarter due to an increase in both its corporate expenses and its raw material cost. Consequently, the company's operating profit grew by 18.6% yoy to Rs 33.1 crore during the quarter. The company's effective tax rate stood at 32.2% in Q1FY2009 vs 23.6% in Q1FY2008, as none of its projects qualified for tax benefits under the section 80 IB during the quarter. The company has indicated that none of its projects is going to qualify for tax benefits in the future as well. Hence, going forward, the company is likely to pay tax at full rate.
- During Q1FY2009, the company's interest expenses grew at a lower rate than expected, as it capitalised the interest expenses on compulsorily convertible debentures worth Rs 200 crore raised for the Orbit Highcity project. The interest expenses on the project stood at Rs 8.27 crore during the quarter. Orbit's net income remained flat at Rs 18.2 crore during the quarter.
- In Q1FY2009, the company acquired an 85% stake in Ahinsa Buildtech Pvt Ltd at a cost of Rs 130 crore. The acquisition will give Orbit the right to develop the Orkay Mills project at Andheri in Mumbai. The average cost of land for this project works out to Rs 4,725 per sq ft. The company plans to develop the saleable area of 275,000 sq ft for mixed use.
- However, the capitalisation of the interest expenses for the Orbit Highcity project would also lead to a reduction in the interest expenses of Orbit because the project is not likely to start in the near term.
- At the current market price, valuation of this stock stood at 4.3x FY2009 earnings estimate and 3.1x FY2010 earnings estimates.
- I continue to maintain Buy recommendation on this stocj with a price target of Rs 808.
