| Summary of Contents STOCK IDEA Orbit Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,060
Current market price: Rs800 Moving in a unique Orbit Key points - Unique strategy to support long-term outlook: Orbit Corporation (Orbit) focuses on the redevelopment of old and dilapidated buildings in the central and southern parts of Mumbai. There are around 6,300 old and dilapidated buildings in these areas that can unleash approximately 56 million square feet (msf) of saleable area for the developers. With its unique and differentiated business model, Orbit would be one of the key beneficiaries of the huge redevelopment opportunities available in the city.
- Strong growth visibility: Orbit currently has 16 projects spanning 1.1msf under development. Moreover, the company has a project pipeline of 2.1msf. All these projects (the current as well as those in the pipeline) are located in the southern and central parts of Mumbai where there is a huge demand and supply mismatch for space. Consequently, we estimate Orbit's revenues would grow at a CAGR of 89.2% during the three-year period FY2007-10.
- Healthy cash flows and margins: Unlike most of its peers, Orbit would generate substantially large free cash flows over the next three years. This is largely due to its limited working capital requirements as the company is able to pre-sell a large part of its projects during the construction phase itself. Given the prime location of its projects, the margins are also quite healthy. The operating profit margins are expected to improve to 51% by FY2010, up from around 38.7% reported in FY2007. Consequently, the consolidated earnings are estimated to grow at a CAGR of 99.6% during FY2007-10.
- Attractive valuation: For Orbit's valuation, we believe the P/E multiple approach is better than the NAV approach. That's because the company has a unique business model focused on the redevelopment of projects where the size of the opportunity is huge. At the current market price of Rs800, the stock trades at P/E multiples of 14.8x and 10.4x based on the FY2008E and FY2009E EPS respectively. We recommend a Buy call on the stock with a price target of Rs1,060.
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