Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indiabulls Real Estate
(IBREL IN)
Q3 FY11 is only the second quarter of revenue booking for
IBREL, which suggests earnings growth will remain robust
Our weak demand outlook for Mumbai and NCR suggest IBREL’s
volume growth will suffer, keeping valuations low
Downgrade to Neutral (V) and lower TP to INR140 from INR252
as we factor in downcycle valuations
Investment summary
We like IBREL’s land bank quality. Despite
being a late entrant, IBREL has quickly joined the
developer big leagues and we like its
management’s aggressive stance and
opportunistic attitude. IBREL’s strategy of
concentrating on city centres in large cities
reduces location risk, important for an
inexperienced developer with limited marketing
ability owing to lack of a strong brand.
However, regulatory risks relating to FSI
remain. We believe IBREL is exposed to the risk
of the Maharashtra State Government
withdrawing the higher Floor Space Index (FSI)
given in lieu of building public car parking space.
This could change the maths of the recent land
parcels bought by IBREL for INR22bn (c30% of
the market capitalization), which could turn out
not to be profitable with a base FSI of 1.33x or
2.5x, depending on the type of project.
High property prices in Mumbai will curtail
demand for IBREL’s high end projects. The
majority of IBREL’s large projects are centred
around Mumbai, a city on which we have a
negative view on demand and pricing. We believe
there is strong risk to fresh volume sales in
IBREL’s luxury residential projects in Mumbai.
We think this will be reflected in a greater NAV
discount for IBREL. Lack of execution history
and a weak business environment suggest
IBREL’s NAV discount could remain high. In
line with this, we have increased our target NAV
discount from 20% to 50%. At a 50% NAV
discount, IBREL will still be trading at a 20%
premium to its lowest downcycle valuation.
Key earnings forecast changes
We increase our revenue estimate for IBREL by
19% for FY11and lower it by 15% for FY12 to
factor in a longer execution time for some of its
residential projects that are under construction. We
have also introduced our FY13 revenue estimate
where we expect to see 25% y-o-y growth. While
our estimate for EBITDA margin rises 180bps for
FY11, we have decreased it by 30bps in FY12,
primarily due to revenue mix changes.
We have cut our other income estimates sharply (by
70-80%) to factor in cash utilization for its land
purchases (INR22bn) and power projects. Since
other income forms a major portion of the earnings,
our revised estimates have fallen by 25% for FY11
and 48% for FY12. We are 24% above consensus
for FY11 earnings and 30% below for FY12 and
48% below for FY13. We expect consensus earnings
estimates to continue to be volatile as FY11 is the
first year IBREL has booked revenue from projects
that are under construction.
Valuation
We value IBREL’s real estate business at INR181
per share using DCF of its real estate project cash
flows (WACC of 15.3%, risk free rate 7%, market
risk premium 5.5%, CoD 11%, CoE 15.2%) and the
power business at INR63 (current market price less
20% holding company discount). We value IBREL
at a 50% discount to NAV (from 20%), which is in
line with other large sector peers, though lower than
sector leader DLF (valued at 30% discount to NAV).
We believe the NAV discount is justified given the
company’s business positioning and execution track
record and the weakness in the Indian residential real
estate market.
Under our research model, the Neutral rating band
is 10ppt above and below the hurdle rate of 10.5%
for volatile India equities, or 0.5-20.5% above the
current share price. Our target price of INR140
implies a potential return of 9.9% (including
prospective dividend yield), which is within the
Neutral band. Thus we downgrade IBREL to
Neutral (V) from Overweight (V).
Risks
The key risks to our valuations are:
Lower-than-anticipated demand for
residential and commercial projects and a
sharper increase in interest rates, impacting
affordability and housing demand.
IBREL has recently started recognizing
revenues from its pre-sold projects. Therefore,
slower-than-expected execution of pre-sold
projects would lead to delayed cash flows.
Key upside risks include a sharp improvement
in residential sector demand and sustained
higher than expected new project launches.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Indiabulls Real Estate
(IBREL IN)
Q3 FY11 is only the second quarter of revenue booking for
IBREL, which suggests earnings growth will remain robust
Our weak demand outlook for Mumbai and NCR suggest IBREL’s
volume growth will suffer, keeping valuations low
Downgrade to Neutral (V) and lower TP to INR140 from INR252
as we factor in downcycle valuations
Investment summary
We like IBREL’s land bank quality. Despite
being a late entrant, IBREL has quickly joined the
developer big leagues and we like its
management’s aggressive stance and
opportunistic attitude. IBREL’s strategy of
concentrating on city centres in large cities
reduces location risk, important for an
inexperienced developer with limited marketing
ability owing to lack of a strong brand.
However, regulatory risks relating to FSI
remain. We believe IBREL is exposed to the risk
of the Maharashtra State Government
withdrawing the higher Floor Space Index (FSI)
given in lieu of building public car parking space.
This could change the maths of the recent land
parcels bought by IBREL for INR22bn (c30% of
the market capitalization), which could turn out
not to be profitable with a base FSI of 1.33x or
2.5x, depending on the type of project.
High property prices in Mumbai will curtail
demand for IBREL’s high end projects. The
majority of IBREL’s large projects are centred
around Mumbai, a city on which we have a
negative view on demand and pricing. We believe
there is strong risk to fresh volume sales in
IBREL’s luxury residential projects in Mumbai.
We think this will be reflected in a greater NAV
discount for IBREL. Lack of execution history
and a weak business environment suggest
IBREL’s NAV discount could remain high. In
line with this, we have increased our target NAV
discount from 20% to 50%. At a 50% NAV
discount, IBREL will still be trading at a 20%
premium to its lowest downcycle valuation.
Key earnings forecast changes
We increase our revenue estimate for IBREL by
19% for FY11and lower it by 15% for FY12 to
factor in a longer execution time for some of its
residential projects that are under construction. We
have also introduced our FY13 revenue estimate
where we expect to see 25% y-o-y growth. While
our estimate for EBITDA margin rises 180bps for
FY11, we have decreased it by 30bps in FY12,
primarily due to revenue mix changes.
We have cut our other income estimates sharply (by
70-80%) to factor in cash utilization for its land
purchases (INR22bn) and power projects. Since
other income forms a major portion of the earnings,
our revised estimates have fallen by 25% for FY11
and 48% for FY12. We are 24% above consensus
for FY11 earnings and 30% below for FY12 and
48% below for FY13. We expect consensus earnings
estimates to continue to be volatile as FY11 is the
first year IBREL has booked revenue from projects
that are under construction.
Valuation
We value IBREL’s real estate business at INR181
per share using DCF of its real estate project cash
flows (WACC of 15.3%, risk free rate 7%, market
risk premium 5.5%, CoD 11%, CoE 15.2%) and the
power business at INR63 (current market price less
20% holding company discount). We value IBREL
at a 50% discount to NAV (from 20%), which is in
line with other large sector peers, though lower than
sector leader DLF (valued at 30% discount to NAV).
We believe the NAV discount is justified given the
company’s business positioning and execution track
record and the weakness in the Indian residential real
estate market.
Under our research model, the Neutral rating band
is 10ppt above and below the hurdle rate of 10.5%
for volatile India equities, or 0.5-20.5% above the
current share price. Our target price of INR140
implies a potential return of 9.9% (including
prospective dividend yield), which is within the
Neutral band. Thus we downgrade IBREL to
Neutral (V) from Overweight (V).
Risks
The key risks to our valuations are:
Lower-than-anticipated demand for
residential and commercial projects and a
sharper increase in interest rates, impacting
affordability and housing demand.
IBREL has recently started recognizing
revenues from its pre-sold projects. Therefore,
slower-than-expected execution of pre-sold
projects would lead to delayed cash flows.
Key upside risks include a sharp improvement
in residential sector demand and sustained
higher than expected new project launches.
No comments:
Post a Comment