B F Utilities Ltd

CMP: Rs.260.25

• The two cities, Mysore and Bangalore are developing economically on the lines of Mumbai-Pune, with excellent growth and synergies. The Mumbai Pune corridor is a highly industrialised affluent region, powered by an excellent Expressway. The 143 km BMIC distance is part of State Highway 17, and is a key connection from Bangalore to West Karnataka, North Kerala and north and west Tamil Nadu.
• The Bangalore Mysore corridor has tremendous development potential. It is also badly required, for the necessary growth of South Bangalore and Mysore, as well as potentially the entire corridor.
• Even though the B F Utilities Ltd financials are in negative for the December, 2012 quarter, the business is well managed, and the expectation is that if the pending land is handed over to B F Utilities in the next quarter, it may be possible for the management to complete the highway and a fair proportion of the townships by end 2013.
• On legal issues, it is likely that the GoK authorities have, under SC duress, no option but to handover the promised lands, and allow the BMIC executives to proceed on the infrastructure project. According to some reports available on the Internet: the current BJP government have not opposed it, unlike other governments.
• The current State highway has just two lanes each way and is quite congested with travel taking around 3-4 hours. Current data is about 1,00,000 vehicles take this route every day. This indicates that good demand/ potential exists for this new highway by itself. A ballpark estimate of 50% of this traffic attracted to the BMIC, paying a conservative Rs.100 each way indicates Rs.182 Cr annual revenue.
• Most good infra projects attract and stimulate growth. In addition the new townships as well as a new constructions planned will by themselves attract customers from Bangalore, and generate independent revenues and profits.
• Valuation of Real estate firms is difficult. The project has been valued in the past in a wide range, from as low as Rs.4000 – 15,000 Cr. But even this range is higher than current market cap of around Rs.981.24 Cr.
• Much of the value is dependent upon a successful handover of committed lands, followed by execution, commissioning, launch and success of sub-projects.
• But from a risk return perspective, the share has fallen almost 85% from its peak levels, which means the downside looks limited. On the up side, the peak has been more than  6 times the CMP, so there is a significant upside potential.
• The project is showing signs of overcoming teething hurdles and progressing on legal, land acquisition and financial closure aspects.
• The management believes in investing in road assets as soon as they have clear titles, as construction costs today are lesser than those in the future. So many sections are already operational and revenue generating.
• For the High Risk, High Gain investor, this investment can be looked at from a 2-year perspective for a gain of 200 – 300%. In the short term the scrip could move towards Rs.450--500 in the current days as the infrastructure stocks move up in anticipation of a rate cut by the RBI.