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DB Realty
A non-real-estate quarter; maintain Buy
In light of impact of recent events on DBRL’s property business,
we see some short-term credit issues. Three projects were softlaunched
in Sep ’10; the major projects under construction are
debt free. We change estimates on removal/changes in some
projects, in view of payments and regulatory approvals. Our Mar
’12e NAV is `374 and we trim our price target to `299. Buy.
Non real-estate issues; impact on business. In the past two
months, DBRL’s stock price sharply plunged, impacted by events
related to telecom (same promoters, different company) and the
loan-bribery issue. Other promoter company events do not have
any quantitative impact on the balance sheet, but could affect
sales. Recent government changes could lead to project delays.
Balance sheet strong, but acquisitions to cause cash crunch.
Debt was `7bn in Sep ’10, with no scheduled principal repayments
for FY11. Combined project debt of its 3 key projects is <`350m,
with sales of +`33.5bn. But recent events could raise short-term
credit issues, especially with huge project/land payments planned.
Change estimates. We remove the Bandra (E) project, where
premium has yet to be paid (impact on NAV: 16%). We shift
Pune and Mira Road townships to residual land (land acquisition
and clearance pending; impact on NAV: 9%). We re-visit our
construction cost estimates (impact on NAV: 11%).
Valuation and risks. Our Mar ’12e NAV is `374 and target price
is `299. At current market price, the stock trades at 0.9x Mar ’12e
PBV. Risks. Liquidity tightening, slowing sales, policy changes.
Non-real-estate issues; evaluating
business impact
In the past two months, DBRL’s stock price has reacted sharply to
events related to telecommunications (same promoters, different
company) and the loan-bribery issue. Other promoter company
events, we believe, do not have any quantitative impact on the
company’s balance sheet, but could affect sales. Recent government
changes in the state could result in project delays (as with other
developers in Mumbai).
Key events
Probe in 2G spectrum allotment – DB Realty link
DBRL promoters run/own three businesses through separate entities –
real-estate under DB Realty, hospitality under D B Hospitality, and
telecoms, a JV with Etisalat under Etisalat DB Telecoms (Pvt). DB Realty
has provided corporate guarantees for loans taken by its group companies,
of `14.7bn. These guarantees have been provided since the last two years,
also pointed out as risks in our report “Mumbai Property: The old order
changeth, yielding place to new” dated 4 Oct ’10. Over and above this, the
company has a minority stake in a hospitality project in DIAL
In addition to the guarantee provided by the company, both managing
directors have provided personal guarantees of `16.57bn and US$138m
each in the telecoms and hospitality businesses respectively. The net worth
of the telecoms company is `40bn and cash on its books is ~`15bn.The
hospitality company has a net worth of `5.5bn, with debt of ~`1.5bn.
Although the corporate guarantees provided by DBRL are huge, given its
balance sheet, we believe there would be no material impact on the
performance of the company nor a strain on its balance sheet.
Loan bribery case
DBRL’s name also came up in the recent loan bribery event, for `1.88bn
drawn from LIC Housing Finance through a market intermediary. The
company has clarified its position regarding the issue.
We believe this to be a non-event for DBRL. But, given the present
environment, we believe credit would turn expensive and sanctions and
disbursals would be difficult in the near term. Although the balance sheet
is net cash (2QFY11) and DBRL has a sales order book of over `40bn, its
huge project/land acquisition spending would slow down, given the low
availability of credit and requirement of cash in hand for working capital.
Balance Sheet
Debt stood at `7bn as of Sep ’10, with no scheduled principal
repayments in FY11 and `1.96bn in FY12. The balance sheet in
Nov ’10 was largely net cash, and three key projects – Orchid Crown,
Orchid Heights and Orchid Turf View – have combined project debt
of less than `350m, with sales of over `35.2bn. Recent events could
lead to near-term credit issues, given the huge project/land
payments planned.
Balance sheet not strained, but credit flow important
With the `15bn raised though its IPO in 4QFY10, the company was net
cash in Sep ’10. Although it had no scheduled debt repayments in FY11
(after repaying `800m to IDFC as stated as the object of the IPO), it has,
in addition, already repaid ~`3bn of debt as of Nov ’10. Scheduled
repayment in FY12 is ~`1.96bn.
Sales order book good
In the past six quarters, till Sep ’10, DBRL launched and sold stock worth
~`64bn. It also soft launched/launched a few projects in 3QFY11. We
estimate DBRL to have sold stock worth +`9bn in 3QFY11.
In 3QFY11, DBRL soft-launched/launched five projects in Pune and
Mumbai. Certain projects are subsequent phases of the under-construction
projects.
We revise our sales and sales duration estimates for a few projects, as the
launched prices are above our estimated average selling prices.
Change in stance
We remove the Bandra (E) project from our valuation; the LoA has
already been received but a premium of `8.02bn has yet to be paid
(initially due in Sep ’10; negative impact on NAV: 16%). We shift the
Pune and Mira Road townships to residual land (as land acquisition
and clearances are pending; impact on NAV: 9%). Also, we re-visit
our construction cost estimates for all projects/Mumbai property
industry (impact on NAV: 11%).
We have removed the Bandra (E) government colony project from our
valuation. The money, initially to be paid in Sep ’10, has now been delayed
to Feb ’11. Also, the project sellable area of 8m sqft depends on Bandra
(E) coming under the MMRDA influence zone and obtaining FSI, on
payment of the premium. We believe the increase in FSI could take time
even after the premium is paid vs. that guided by management earlier.
We change the method for valuing the Mira Road (Orchid Acre) and
Sangamwadi (Orchid Lawn) projects. Land acquisition in Sangamwadi is
still ongoing and land conversion could delay the project from the original
guidelines.
Since the IPO filing, DBRL has raised construction cost estimates for a
few of its under-construction projects on account of: extra fittings to be
provided and inclusion of car-park construction costs. As these projects
are high-rises, we believe the company had under-estimated construction
costs.
In our report “Mumbai Property: The old order changeth, yielding place to
new” dated 4 Oct ’10, our construction cost estimates were 7% more than
the estimates of the company. With more high-rises using different
development schemes, differentiated product offerings and our interaction
with different market participants, we have increased our construction
costs estimates for under-construction and planned projects. We believe
that management could revise its construction cost estimates upwards after
construction commences, as it has done recently.
Nine projects are being developed by securing higher FSI through the
public parking schemes. Recently, the government of Maharastra decided
to re-think DCR 33(24) relating to public parking schemes, especially for
allotment in south-central Mumbai. Although DB Realty has secured
primary approvals for all its projects and cancellation is unlikely, in certain
projects the area could come down. We introduce a discount to account
for this, till further clarity emerges.
Certain projects depend on securing higher FSI through the PPP format.
Till approvals are obtained, we introduce a discount.
Fig 18 - PPP schemes yet to be cleared
Project Remark
Centre P2 Police Station clearance to be done; P1 (Golf View) and Centre 1 started
Hill Park Police housing - to be cleared
Mahal Pictures Police Housing - to apply for it
Gov Colony Premium yet to be paid
Orchid Town Rental Housing; approval stage, some premium paid
Source: Company
We raise cost of debt by 100bps, resulting in an increase in WACC to
16%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
DB Realty
A non-real-estate quarter; maintain Buy
In light of impact of recent events on DBRL’s property business,
we see some short-term credit issues. Three projects were softlaunched
in Sep ’10; the major projects under construction are
debt free. We change estimates on removal/changes in some
projects, in view of payments and regulatory approvals. Our Mar
’12e NAV is `374 and we trim our price target to `299. Buy.
Non real-estate issues; impact on business. In the past two
months, DBRL’s stock price sharply plunged, impacted by events
related to telecom (same promoters, different company) and the
loan-bribery issue. Other promoter company events do not have
any quantitative impact on the balance sheet, but could affect
sales. Recent government changes could lead to project delays.
Balance sheet strong, but acquisitions to cause cash crunch.
Debt was `7bn in Sep ’10, with no scheduled principal repayments
for FY11. Combined project debt of its 3 key projects is <`350m,
with sales of +`33.5bn. But recent events could raise short-term
credit issues, especially with huge project/land payments planned.
Change estimates. We remove the Bandra (E) project, where
premium has yet to be paid (impact on NAV: 16%). We shift
Pune and Mira Road townships to residual land (land acquisition
and clearance pending; impact on NAV: 9%). We re-visit our
construction cost estimates (impact on NAV: 11%).
Valuation and risks. Our Mar ’12e NAV is `374 and target price
is `299. At current market price, the stock trades at 0.9x Mar ’12e
PBV. Risks. Liquidity tightening, slowing sales, policy changes.
Non-real-estate issues; evaluating
business impact
In the past two months, DBRL’s stock price has reacted sharply to
events related to telecommunications (same promoters, different
company) and the loan-bribery issue. Other promoter company
events, we believe, do not have any quantitative impact on the
company’s balance sheet, but could affect sales. Recent government
changes in the state could result in project delays (as with other
developers in Mumbai).
Key events
Probe in 2G spectrum allotment – DB Realty link
DBRL promoters run/own three businesses through separate entities –
real-estate under DB Realty, hospitality under D B Hospitality, and
telecoms, a JV with Etisalat under Etisalat DB Telecoms (Pvt). DB Realty
has provided corporate guarantees for loans taken by its group companies,
of `14.7bn. These guarantees have been provided since the last two years,
also pointed out as risks in our report “Mumbai Property: The old order
changeth, yielding place to new” dated 4 Oct ’10. Over and above this, the
company has a minority stake in a hospitality project in DIAL
In addition to the guarantee provided by the company, both managing
directors have provided personal guarantees of `16.57bn and US$138m
each in the telecoms and hospitality businesses respectively. The net worth
of the telecoms company is `40bn and cash on its books is ~`15bn.The
hospitality company has a net worth of `5.5bn, with debt of ~`1.5bn.
Although the corporate guarantees provided by DBRL are huge, given its
balance sheet, we believe there would be no material impact on the
performance of the company nor a strain on its balance sheet.
Loan bribery case
DBRL’s name also came up in the recent loan bribery event, for `1.88bn
drawn from LIC Housing Finance through a market intermediary. The
company has clarified its position regarding the issue.
We believe this to be a non-event for DBRL. But, given the present
environment, we believe credit would turn expensive and sanctions and
disbursals would be difficult in the near term. Although the balance sheet
is net cash (2QFY11) and DBRL has a sales order book of over `40bn, its
huge project/land acquisition spending would slow down, given the low
availability of credit and requirement of cash in hand for working capital.
Balance Sheet
Debt stood at `7bn as of Sep ’10, with no scheduled principal
repayments in FY11 and `1.96bn in FY12. The balance sheet in
Nov ’10 was largely net cash, and three key projects – Orchid Crown,
Orchid Heights and Orchid Turf View – have combined project debt
of less than `350m, with sales of over `35.2bn. Recent events could
lead to near-term credit issues, given the huge project/land
payments planned.
Balance sheet not strained, but credit flow important
With the `15bn raised though its IPO in 4QFY10, the company was net
cash in Sep ’10. Although it had no scheduled debt repayments in FY11
(after repaying `800m to IDFC as stated as the object of the IPO), it has,
in addition, already repaid ~`3bn of debt as of Nov ’10. Scheduled
repayment in FY12 is ~`1.96bn.
Sales order book good
In the past six quarters, till Sep ’10, DBRL launched and sold stock worth
~`64bn. It also soft launched/launched a few projects in 3QFY11. We
estimate DBRL to have sold stock worth +`9bn in 3QFY11.
In 3QFY11, DBRL soft-launched/launched five projects in Pune and
Mumbai. Certain projects are subsequent phases of the under-construction
projects.
We revise our sales and sales duration estimates for a few projects, as the
launched prices are above our estimated average selling prices.
Change in stance
We remove the Bandra (E) project from our valuation; the LoA has
already been received but a premium of `8.02bn has yet to be paid
(initially due in Sep ’10; negative impact on NAV: 16%). We shift the
Pune and Mira Road townships to residual land (as land acquisition
and clearances are pending; impact on NAV: 9%). Also, we re-visit
our construction cost estimates for all projects/Mumbai property
industry (impact on NAV: 11%).
We have removed the Bandra (E) government colony project from our
valuation. The money, initially to be paid in Sep ’10, has now been delayed
to Feb ’11. Also, the project sellable area of 8m sqft depends on Bandra
(E) coming under the MMRDA influence zone and obtaining FSI, on
payment of the premium. We believe the increase in FSI could take time
even after the premium is paid vs. that guided by management earlier.
We change the method for valuing the Mira Road (Orchid Acre) and
Sangamwadi (Orchid Lawn) projects. Land acquisition in Sangamwadi is
still ongoing and land conversion could delay the project from the original
guidelines.
Since the IPO filing, DBRL has raised construction cost estimates for a
few of its under-construction projects on account of: extra fittings to be
provided and inclusion of car-park construction costs. As these projects
are high-rises, we believe the company had under-estimated construction
costs.
In our report “Mumbai Property: The old order changeth, yielding place to
new” dated 4 Oct ’10, our construction cost estimates were 7% more than
the estimates of the company. With more high-rises using different
development schemes, differentiated product offerings and our interaction
with different market participants, we have increased our construction
costs estimates for under-construction and planned projects. We believe
that management could revise its construction cost estimates upwards after
construction commences, as it has done recently.
Nine projects are being developed by securing higher FSI through the
public parking schemes. Recently, the government of Maharastra decided
to re-think DCR 33(24) relating to public parking schemes, especially for
allotment in south-central Mumbai. Although DB Realty has secured
primary approvals for all its projects and cancellation is unlikely, in certain
projects the area could come down. We introduce a discount to account
for this, till further clarity emerges.
Certain projects depend on securing higher FSI through the PPP format.
Till approvals are obtained, we introduce a discount.
Fig 18 - PPP schemes yet to be cleared
Project Remark
Centre P2 Police Station clearance to be done; P1 (Golf View) and Centre 1 started
Hill Park Police housing - to be cleared
Mahal Pictures Police Housing - to apply for it
Gov Colony Premium yet to be paid
Orchid Town Rental Housing; approval stage, some premium paid
Source: Company
We raise cost of debt by 100bps, resulting in an increase in WACC to
16%.
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