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UBS Investment Research
Indiabulls Real Estate
Strong beat to estimates
Strong execution momentum drives robust earnings growth
IBREL reported Q3 revenues of Rs 3,997 million (+33% QoQ; 9.6x YoY)
EBITDA margins of 31% (vs. 27% in Q2); EBITDA grew 51% QoQ to Rs 1,229
million. Net Income grew strongly 52% QoQ to Rs 766 million. We believe good
execution momentum continued to drive Q3 earnings growth. We increase our
FY11E revenue & earnings forecast by 55% and 43% respectively reflecting faster
rampup in execution and healthy pre-sales.
Pre-sales and leasing remains strong; though leverage higher
1. Strong pre-sales momentum with 2.27 msf generating Rs 8,680 million
cashflows. 2. Leasing continues to pickup with 0.25 msf leased (vs. 0.11 msf in
Q2) 3. Area under construction increased by 3msf to 17msf. We believe debt likely
increased by Rs 8-9 billion on account of land acq. payments (primarily NTC).
However, we are not concerned at this point given pre-sales and leasing
momentum (~2msf inventory) remains strong
Power business ownership restructuring a likely positive
IBREL’s 58.6% share (Rs 82/share) in Indiabulls Power Ltd will be demerged to
Indiabulls Infrastructure & Power (2.95:1 ratio). We believe this could unlock
value in power subs. through lower holding co. disc. vs. current 40% ascribe.
Valuation: Maintain Buy Rating and Rs 205 PT
With discounts at 60% on base NAV of Rs315 and 33% to Rs 181 bear NAV, we
think valuations are attractive. Our higher 35% discount to NAV factors FSI policy
risks in Mumbai and transparency issues.
Results Analysis
Revenues grew 33% QoQ to Rs 3,997 mn (+33% QoQ, +967% YoY). EBITDA
Margins grew 400 bps to 31 % vs 27% in Q2, in-line with our expectations.
EBITDA grew 51% QoQ to Rs 1,229 million. Net Profit grew 51% QoQ to Rs
766 million.
Pre-sales & Leasing strong; Debt higher
1. Strong pre-sales momentum with 2.27 msf generating Rs 8,680 million
cashflows. 2. Leasing continues to pickup with 0.25 msf leased (vs. 0.11 msf in
Q2) 3. Area under construction increased by 3msf to 17msf. We believe net
debt likely increased by Rs 8-9 billion on account of land acquisition payments
(primarily NTC). However, we are not concerned at this point given pre-sales
and leasing momentum (~2msf inventory) strong.
Steps to unlock value in the power subsidiary
Indiabulls Board of directors has approved the restructuring of the power
business and now it is subject to necessary approvals of shareholders and
creditors. In the previous meeting on 20 Oct 2010 they had discussed the same.
Shareholders will get 2.95 shares of IIPL (Indiabulls Infrastructure and Power
Ltd.) for every 1 share of IBREL and the appointed date for the demerger is
April 1 2011. IIPL will hold the entire 58.6% that IBREL currently holds in
Indiabulls Power limited (IPL) and shall subsequently be listed leading to value
creation. We believe this is a positive for the stock as it will lead to unlocking of
value in the power subsidiary. We ascribed a 40% discount to the power
business in our valuation.
Change in earnings estimates
We increase our FY11 estimates to factor stronger execution through 9MFY11.
We raise our FY11E revenues to Rs 11,869 million, EBITDA to Rs 3,201
million and Net Income to Rs 2,200 million. We also increase our FY12E &
FY13E to factor improved execution visibility, healthy pre-sales and outlook.
In value zone at 60% discount to NAV
Our price target of Rs205 is based on 35% discount to our NAV of Rs315. We
find the stock attractive at 60% discount to our NAV. Our higher 35% discount
largely factors in - 1) increased risk of lower returns on NTC mill land, given
likely policy change raising uncertainty on extra FSI in Mumbai, 2) dampen
sentiments due to short-term leverage of Rs8bn likely to be raised for funding
NTC auction payments; 3) higher holding company discount to power business
stake and 4) increased concerns on transparency issues amidst reducing risk
appetite;
Trading at 33% discount to Bearcase NAV gives additional comfort
With NAVs expected to remain volatile during recovery cycles, we highlight the
Bearcase scenario for IBREL’s NAV at Rs181. This factors 1) 5-year
development visibility (25msf, 23% of NAV), 2) values undeveloped land
reserves; (18% of NAV) 3) new Mumbai land auction taking 1.33 FSI
developable area for the 2.39 acre and value paid for 8.37acre parcel (28% of
NAV), 4) larger holding company discount for its stake in power venture (31%
of NAV). With stock trading at 25% discount to our bearcase NAV, we see
more upside potential from current levels. Alternatively, from a bullcase, which
builds in 1) 52% stake in IPIT (vs. 45% in base case), 2) 10% higher
prices/rentals, 3) faster execution cycle – we see larger upside potential.
Likely Risks
What remains discomforting though – 1) lack of disclosures on a/c policies,
balance sheet, 2) likely regulatory risk on FSI increase for its recent NTC mill
auction and 3) its constant efforts to raise more capital, with relatively low
promoter holding (23%) – has further proposed to raise ~Rs4.7bn via 28.7m
preferential warrant issue at Rs165/share to promoters. Though this may
increase promoter holding by 4.89% to 27.65%; taking cues from the recent
aggressive bids for Mumbai auction, we see risks of dampened returns from
fresh capital raising in the current environment.
Indiabulls Real Estate
Indiabulls Real Estate Limited (IBREL), which was de-merged from Indiabulls
Financial Services Limited, is one of the largest listed real estate companies in
India and a leading national player across multiple realty and infrastructure
sectors. Its projects cover a total land area in excess of 10,000 acres. IBREL
projects include high-end office and commercial spaces, premium residential
developments, integrated townships, luxury resorts and special economic zones.
IBREL has entered into partnerships with internationally renowned consultants
and construction companies to develop its projects.
Statement of Risk
Key risks for IBREL are exposure to Mumbai, political regulatory and policy
risks, rising interest rates
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