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UBS Investment Research
DB Realty
Worst seems priced in
Share price has fallen 51% over the past three months
DB Realty’s share price correction was due to concerns over: 1) the controversy on
2G licence allotments in 2008/likely penalties to DB Group’s associate company,
Etisalat DB; 2) a potential involvement in the loan syndication scam; and 3) likely
delays/cancellation of projects due to a change in Maharashtra’s chief minister.
The company has denied any adverse impact on its core real estate business. Our
discussion with management suggests the correction was an overreaction.
Worst appears to be priced in
With the stock trading at a 66% discount to our revised NAV of Rs600.00
(excluding the Bandra redevelopment), a 52% discount to our bear case NAV of
Rs420.00, 1.2x FY11E P/BV, and much lower than the value of Rs320 ascribed to
ongoing/presold projects, we think the worst has been priced in.
How negative sentiments can change
We believe negative sentiments have outweighed the fundamentals, affecting its
stock performance. However, sentiments could change if: 1) Mumbai and DB
Realty’s presales volume over the next three to six months grow 10%-12% YoY;
2) the company cancels the Rs8.53bn corporate guarantee that was given to its cofounders
prior to the IPO; and 3) it pays part of the FSI premium on the Bandra
redev colony project and enters into a private equity transaction to fund it.
Valuation: lower price target from Rs560.00 to Rs360.00
We view DB Realty as a good proxy to Mumbai, which is demand resilient. We
believe attractive valuations outweigh the risks, even as we lower our price target
on a 40% discount (30% earlier) to our NAV estimate of Rs600.00, factoring in
negative stock sentiment, policy/absorption concerns in Mumbai and lower risk
appetites.
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