Arvind up on realty plans

Mon, 28 Jun 01:30 pm

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The benchmark Indian indices continued to trade range bound over the last two hours of trade. Stock in oil & gas and consumer durables are trading firm while stocks from the FMCG space are trading weak.

The BSE-Sensex is up by 108 points while NSE-Nifty is trading 37 points above the dotted line. BSE-Midcap index is up by 0.7% while BSE-Smallcap index is trading 0.6% above Friday’s closing. The rupee is trading at 46.20 to the US dollar.

Textile stocks are trading firm led by Welspun India and Arvind. As per a press release, Arvind has entered into a joint venture with B. Safal group to develop about 1 m sq feet of residential land at Khokhra, Ahmedabad. This land parcel is presently owned by Arvind and a third of this land will be developed by the JV. Further, B. Safal group will purchase one-third of the land from Arvind. In return the company will pay Arvind Rs 700 m for the land sale and the 50% JV.

Arvind is expected to realize abut Rs 2 bn from the sale of the land and the JV while retaining a third of the balance land. It seems that Arvind is looking to get in to realty in a focused manner. The company has recently floated a 100% subsidiary called Arvind Infrastructure Ltd which is engaged in real estate development. Arvind has about 600 acres of land in and around Ahmedabad and has applied for two township licenses under the state government’s new township policy.

Arvind had a debt to equity ratio of 1.4 times in FY09. In case the company uses the cash realized from this project and sale of land for the repayment of its debt, it would be a big positive for the company. However, in case the company invests this money in real estate, we believe that it would be a negative for the company as real estate is an equally high-leverage business.

Healthcare stocks are trading mixed with Aurobindo Pharma and Glaxosmithkline Pharma trading firm while Dr. Reddy's Lab and Cipla are trading weak. As per a leading financial daily, Piramal Healthcare is on its way to becoming one of world’s top five contract research and manufacturing services (CRAMS) companies over the next 3-5 years. From the proceeds of sale of its formulation business to Abbott, Piramal has built up a sizable war chest of Rs 120 bn after paying off taxes and debt. The company plans to use this to acquire niche global companies. While Piramal has been known for acquiring domestic companies, it recently acquired a sick Canadian medical device company to increase its global foot print. According to the chairman of Piramal, opportunities in CRAMS are huge given the imminent loss of sales from patent expiry and lack of block buster drugs in the pipeline for MNC drug companies. As these companies outsource their research and manufacturing, Piramal is likely to leverage India’s standing as a low cost destination. In fact, the company is aiming for revenues of US$ 1 bn from the CRAMS business in 3-5 years time.