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Stellar quarter; power spin-off to unlock value
Indiabulls Real Estate’s (IBREL) Q2FY11 results were significantly ahead of our and
street estimates with a QoQ revenue/PAT growth of 75%/100%. Operating
performance too was strong, marked by a) new sales of Rs 31bn (IBREL’s total sales
stood at Rs 17bn before Q2FY11), b) new leases of 0.11msf and c) progress in
execution as reflected by higher revenues (up 75% QoQ, 2165% YoY) and higher
customer advances (up ~Rs 2.1bn). Moreover, the company’s plan to spin off
Indiabulls Power (IBPOW) will convert it into a pure real estate play. This may further
help unlock value for IBREL’s shareholders as the CMP does not reflect the full value of
investment, in our view. This apart, a series of events over the past 3-4 months seems
to have addressed all major concerns for the company. Key developments include: a)
deployment of cash via mill land purchase (project launched as well), b) visible
progress in execution, c) better visibility (improving disclosures), and d) improved
operating performance. Maintain BUY
Results beat estimates: IBREL reported a 75% QoQ growth in revenue (+59% vs.
RCML estimates) and a 100% growth in PAT (+34% vs. RCML) with an EBITDA
margin of 27% (12.6% in Q1FY11, 20% RCML). The stellar performance mainly
stemmed from POCM revenue recognition (as new projects hit the POCM threshold).
The company also witnessed strong sales with 1.84msf sold for Rs 31bn (largely IPIT’s
properties wherein IBREL owns 45%) and 0.11msf of new leases. Execution progress
in real estate projects was also visible as IBREL started offering possession for its
Ahmedabad project (0.08msf completed in Sept ’10).
Strong operating performance: IBREL sold 1.8msf worth Rs 31bn during Q2FY11 as
against its total sales (till Q2FY11) of Rs 17bn. Higher sales were partly reflected in the
balance sheet via higher current liabilities of Rs 2.1bn (customer advances). The
company also purchased 126 acres of land during the quarter: 50 acres each in
Panvel and Nashik and 25 acres together in Gurgaon and Chennai.
Power restructuring to unlock value: The management plans to segregate the power
business (IBPOW) from IBREL. Based on the current shareholding, the ratio works out
to 3:1 (i.e. 3 shares of IBPOW for 1 share held in IBREL). We value IBREL’s investment
in power business at Rs 36bn (or Rs 90 per IBREL share) based on its current price.
IBPOW is currently trading at 1.4x FY11 P/B as against 3.9x for Lanco (FY11 ROE
23.6%), 2.1x for R Power (FY11 ROE 7.7%) and 4x for Adani Power (FY11 ROE
21.9%). The restructuring will convert IBREL into a pure real estate play. This may
help unlock value for shareholders, as we believe that the current market price does
not reflect the full value of this investment.
All seems well; BUY: Operating performance has been better than expectations.
Moreover, the power business spin-off may further help unlock value for its
shareholders. Maintain BUY.
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