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Indiabulls Real Estate
Valuations continue to look attractive
IBREL's 3Q interims continued to show good improvement in financials and
operations. We expect the proposed de-merger of its power business to unlock
value, but the increase in net debt (ex Power) from non-value-accretive land
acquisitions has driven a 28% cut in our target price to Rs180. Maintain Buy.
3QFY11 results – financial performance continues to gain traction
Having long been considered an asset play, earnings are now in focus at Indiabulls Real
estate (IBREL) with a sequential improvement in its financials in 3QFY11: revenues grew
33% qoq to Rs3.9bn and PAT was up 51% qoq to Rs766m. We highlight that the company
has turned EBITDA-positive this fiscal year and has shown an improving EBITDA margin
from 12.6% in 1Q to 30.7% in 3Q. Operationally, in 3Q, IBREL group sold 2.27 m sq ft (msf)
(+24% qoq), equally spread between premium (Gurgaon and Panvel) and mid-income
(Chennai, etc), and it leased 0.25msf (total leased area now at 1.4msf).
Debt increase on account of Worli NTC mill land whose value has now turned negative
During 3Q, IBREL paid Rs21.5bn for land acquisitions in Mumbai, Panvel, NCR and
Chennai. This increased its (ex Power) net debt from Rs3.2bn at end-September 2010 to
Rs21bn (Rs52/sh) at end-December 2010. The debt increase was largely on account of the
Rs20bn IBREL paid for the Bharat and Poddar mill projects at Worli, whose value we now
calculate has turned negative as we have reduced our floor space index (FSI) assumption
from 4x to 1.33x post the discontinuation of additional floor space for car parking.
Proposed de-merger of power business should unlock value
IBREL’s board of directors has approved the de-merger of Indiabulls Power (IBPOW), in
return for which IBREL’s shareholders will eventually get 2.95 IBPOW shares for every 1
share held in IBREL. Valuing the power business at Rs62/share (applying a 20% holding
company discount to IBPOW’s current stock price), IBREL’s stock price implies its real estate
business being valued at Rs59/share (see Table 4) vs our valuation of Rs118/share.
We cut our target price 28% to Rs180; maintain Buy on attractive valuations
We revise our FY11-13 estimates by +18% to -9%, factoring in the current momentum in
FY11 ytd financials and the delay in approvals (and hence launches) of its major project
(Delhi-Tehkhand). Chiefly on account of our lower FSI assumption and higher net debt, our
SOTP target price falls 28% to Rs180: 1) Rs118/share for real estate, and 2) Rs62/share for
the 58.6% stake in IBPOW. Buy.
Gaining momentum
IBREL’s financial performance continues to gain traction, as seen in the 3Q interims.
Sequential EBITDA margin expansion and value unlocking through planned de-merger of
the power business are positives, marginally offset by the net debt increase. Maintain Buy.
3QFY11 results: Continues to gain traction
Results beat market expectations, but were marginally lower than our forecasts
Having long been considered an asset play, earnings are now in focus at IBREL with a sequential
improvement in the FY11 ytd operating results. The company turned EBITDA-positive this fiscal
year and has seen its EBITDA margin expand from 12.6% in 1Q to 30.7% in 3Q. The key
highlights were:
IBREL reported 3QFY11 revenues of Rs3.9bn (+33% qoq). This was ahead of the Bloomberg
consensus estimate of Rs3.1bn (but marginally behind our Rs4.2bn estimate) as more
projects become eligible for revenue recognition, including Panvel, Gurgaon, Chennai, etc.
EBITDA of Rs1.2bn was up 51% qoq due to the EBITDA margin strengthening to 30.7% vs
27.1% the previous quarter. The EBITDA margin was also marginally better than our estimate
of 30.2%, due to a greater contribution of higher-margin projects such as Panvel.
Interest expense was lower than expected. However, we note the decline in ‘other income’
due to cash being used to bid for the Worli project in Mumbai during the quarter.
While PBT at Rs1.3bn (+47% qoq) was in line with our expectation, the high tax rate continues
to surprise us on the negative side (reported tax rate of 40.6% vs our estimate of 30%).
Thus, reported PAT of Rs766m (+51% qoq) was below our Rs950m estimate but surpassed
the Bloomberg consensus estimate of Rs614m.
We note that these results do not include any contribution from the high-potential Central Mumbai
assets, which are invested in Indiabulls Property Investment Trust (IPIT SP, Non Rated), because
IBREL holds only a 45% stake in IPIT (and hence does not consolidate its contribution).
Good ramp-up continues in sales and execution
We observe that there has been a good ramp-up in sales and execution. During 3Q, the area
booked for sale for the IBREL group (including IPIT) was 2.27msf. The total area booked for sale
has therefore increased to 7.1msf from 5.4msf in the previous quarter, while the area under
construction now stands at 17.2msf vs 14.69msf in the previous quarter. Total leased assets are
now at 1.41msf, including the 0.25msf leased out during the quarter
However, IBREL’s net debt (ex-Power) has spiked on land acquisitions
Given that in our valuation of Indiabulls Power (IBPOW) we ascribe a holding discount to the
current stock market price, we track IBREL’s net cash/net debt on an ex-Power basis to compute
its gross asset value (GAV) and net asset value (NAV).
We highlight that there has been a sequential increase in net debt of about Rs17.7bn (ex-Power),
largely due to the Rs21.5bn IBREL paid to acquire land parcels in Mumbai, Panvel, NCR region
and Chennai, including about Rs20bn for 20 acres in Bharat and Poddar Mills at Worli.
De-merger of Indiabulls Power should unlock value, in our view
Board of directors’ approval received for de-merger of Indiabulls Power
IBREL currently holds 58.6% of the shares in Indiabulls Power (IBPOW). The IBREL board of
directors has approved the recommendation of the Restructuring Committee to de-merge this
business by issuing 2.95 equity shares of ‘Indiabulls Infrastructure and Power Limited’ (IIPL)
for every 1 equity share held in IBREL. This is, however, subject to shareholder, creditor and
court approval (effective date fixed at 1 April 2011).
Through the de-merger, IIPL would be listed on the Bombay Stock Exchange and the National
Stock Exchange and will become the owner of a 58.6% stake in IBPOW.
The 58.6% of IBPOW owned by IBREL translates into 1,184.5m shares of IBPOW as at 30
September 2010. In addition, with 401.8m outstanding IBREL shares at the same date, the
de-merger ratio of 2.95 IBPOW shares for every 1 share held in IBREL seems fair to us.
We believe the proposed de-merger is a positive development for IBREL
We believe the proposed de-merger of the power business would be a positive development for
IBREL’s shareholders as it would unlock value given that:
IBREL’s current market prices pegs the value of its real estate business at Rs59.3/sh (see
Table 2) vs our valuation of Rs138/sh.
The de-merger would also vest the two businesses (real estate and power) in two separate
entities. This would, in turn, result in a simpler structure, improved analysis and better
corporate governance, in our view.
We revise estimates and target price; maintain Buy rating
FY11F: we incorporate operating margin expansion in 3Q results
We recognise the sequential expansion in the EBITDA margin that we have seen this fiscal year.
We fine-tune our FY11 revenue forecasts and raise our EBITDA margin assumptions from 22% to
26.9%, which is partly offset by an increase in our tax rate assumption from 33% to 40%. Overall,
we raise our FY11 earnings forecast by 18%.
FY12/13F: we factor in sector headwinds as well as margin expansion
We also acknowledge the headwinds faced by the property sector in general and by Mumbai
developers in particular, as well as the delay in approvals – and hence launches – of IBREL’s
major project (Delhi-Tehkhand).
We therefore reduce our FY12 and FY13 revenue forecasts by 21% and 15%, respectively, but
highlight that they still reflect impressive revenue growth of 38% and 24%. We raise our EBITDA
margin assumptions for these years by 620bp and 210bp to 29.1% and 28.6%, respectively. Netnet, our FY12 earnings forecasts remain unchanged while our FY13 forecasts see a 9% cut.
We cut our target price 28% to Rs180; reiterate Buy
The headwinds faced by the sector – declining affordability levels due to rapid, steep price
increases implemented by developers – have resulted in absorption volumes remaining muted
across most key property markets in India.
Building in these sector headwinds as well as IBREL’s execution delays (eg Tehkhand project
in Delhi due to approval delays) leads to a 7% haircut in our valuation of IBREL’s real estate
portfolio (ex-IPIT assets).
The company is now eligible for a FSI (floor space index) of only 1.33x for its Mumbai NTC
mill projects, against our earlier expectation of 4x, due to the discontinuation of approval of
extra floor space for car parking. We reduce our FSI assumption to 1.33x but now factor in the
incremental debt for its land acquisition (cRs20bn). Therefore, while our gross value for this
project stands at Rs29/sh, we calculate that the projects are now likely to result in a loss (if we
strip out related debt of Rs20bn).
We factor in lower lease rentals from Elphinstone Towers (IPIT project) – we now factor in
rentals of Rs140-150 psf per month compared with Rs160 earlier.
There has been a sequential increase in net debt of about Rs17.7bn (ex-Power) due to land
acquisition for the Mumbai NTC mill projects (cRs20bn) and for about 37.56 acres across
Panvel, NCR region and Chennai.
Therefore, our NAV estimate for its real estate business is reduced 35% to Rs118/sh.
We factor in the current price of IBPOW of Rs26.25/sh (vs Rs28.5 in mid-November 2010),
which results in IBREL’s stake in IBPOW now being valued at Rs62/sh (Rs67/sh earlier)
Net-net, our target price falls 28% to Rs180.
To sum up, the key reason for our valuation downgrade is our reduced FSI assumption for
IBREL’s Mumbai NTC mill projects. The strengthening EBITDA margin seen so far this fiscal year
augurs well. The proposed de-merger of the power business has started taking shape, which is
likely to unlock value for IBREL. We believe the prevailing market prices do not adequately reflect
the value of IBREL’s real estate business (Rs59.3/sh vs our estimate of Rs118/sh). We therefore
retain our Buy rating on the stock
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