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Indiabulls Real Estates (INRL.BO)
Attractive Valuations, But A High Risk Pick
Execution picking up, real estate business is showing numbers — The
real estate business has started contributing to revenues starting Q1FY11.
The company has launched several projects, which have garnered a good
response. Execution of ongoing projects is proceeding well. The stock trades
at ~50% discount to base NAV, which is attractive in our view, but it remains
a high risk play in the sector. An improving risk appetite and macro
environment could result in meaningful upside in the stock, in our view.
New Base NAV of Rs 232 vs Rs 325 — Our new NAV adjusts for – a) roll
forward to Dec-11; b) building in further delays to few projects; c)
incorporated current pricing, rentals and cost of construction assumptions; d)
increased cost of capital to 17.7% versus 14% earlier- this assumes debt
costs at 12%, long-term DE of 0.3, a risk free rate of ~8%, a market premium
of 8% and a tax rate of 30%.
Reduce Target Price to Rs 160 — Based on the geographic mix of its
landbank (high Mumbai exposure), we have assumed a 70% probability of
15% price cut - reduced NAV/share comes to Rs 203. We have increased
the discount attributable to Lower Parel and Worli Mill land projects by 5%
given oversupply and lack of traction in the luxury resi segment. Based on
our new methodology and discount of ~20%, we arrive at a target price of Rs
160 - upside of ~38%. While this is a high-risk call, at a 50% discount to base
NAV, valuations appear attractive. We maintain our Buy recommendation.
Key drivers — 1) large lease sign-ups at Mumbai over next six-to-eight
months – 3QFY11 was decent with ~0.25msf new leased space; 2) potential
FSI increase in development plans of newly acquired land parcels (such as
Worli Mill land); 3) continued execution – will alleviate some concerns which
the market has on the company; and 4) further big-ticket additions to the land
bank.
Challenges/Risks — a) the Mumbai market could show further weakness,
specially in belts of South Central Mumbai where IBREL has a large
exposure; b) regulatory risks in Mumbai are high, and could remain an
overhang; c) disclosures have historically been a cause of concern for
investors; d) low promoter holding of ~23%; and e) other sector concerns –
interest rates, inflation, etc.
Quants View − Glamour
Indiabulls Real Estate currently lies in the Glamour quadrant of our Value-
Momentum map with strong momentum but relatively weak value scores. It has
been a resident there for the past three months. Compared to its peers in the
Real Estate sector, Indiabulls Real Estate fares worse on the valuation metric
but better on the momentum metric. Similarly, compared to its peers in its home
market of India, Indiabulls Real Estate fares worse on the valuation metric but
better on the momentum metric.
From a macro perspective, Indiabulls Real Estate has a high Beta to the region
so is likely to rise (or fall) faster than the region. It is also likely to benefit from
Value outperformance, falling commodity (ex-oil) prices, tightening Asian
interest rates, falling EM yields, a weaker US dollar, and a weaker yen.
Indiabulls Real Estates
Valuation
Our target price of Rs160 is based on a ~21% discount to our Dec-11E blended
NAV of Rs203. IBREL has large exposure to Central Mumbai, Navi Mumbai and
NCR. We believe chances of price cuts are quite probable, especially in
Mumbai given the price hikes the city has seen. Hence, we have assigned 70%
probability of potential 15% price cuts to arrive at our TP. This is in line with our
valuation methodology for the sector. Our Dec-11E base NAV of Rs 232
incorporates (1) the IPIT assets at Rs66/share, (2) Worli mill land development
conservatively at Rs12/share at 2.0x FSI, (3) the stake (58.6%) in listed power
sub at Rs 70/share (current market cap), (4) Discounted value for other non-
Mumbai city projects.
Discount of 21% is a combination of: 1) ~25% holding company discount on the
company's power business stake at market value (2) 20% discount to Lower
Parel assets (IPIT), with slow leasing momentum for its ready commercial asset
and slowdown in premium luxury resi segment in Mumbai (3) 25% discount to
its Worli Mill land development as we factor in: (a) the high impending resi
supply pipeline in central Mumbai, and (b) lack of clarity on execution plans. 4)
25% discount attributed to other cities based on limited track record.
Our NAV estimate of Rs232 is based on the following assumptions: 1)
Development volume of 180msf (eco. interest) (2) An average cost of capital of
17.2% (assuming low DE of 0.33) (3) Cap rate of 10% (Mumbai City) and 11%
(Non Mumbai City); and 5) 27% effective average tax rate.
Risks
While our quantitative risk-rating system, which tracks 260-day historical share
price volatility, assigns Indiabulls Real Estate a High Risk rating, we see
Medium Risk as more appropriate given the company's balance sheet strength
and increased visibility in project execution. Key downside risks to our target
price are: 1) slower-than-expected leasing of the company’s two flagship
Mumbai projects and rentals softening further; 2) any regulatory risk on the
company’s claim for higher FSI of 4/5 at its Mumbai property, 3) any disclosure
issues on its accounting policies; and 4) geographic concentration still remains
high – has gone up post the recent mill land acquisitions; 5) slower-thanexpected
pre-sales, leasing and execution for company's residential/SEZ
projects.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indiabulls Real Estates (INRL.BO)
Attractive Valuations, But A High Risk Pick
Execution picking up, real estate business is showing numbers — The
real estate business has started contributing to revenues starting Q1FY11.
The company has launched several projects, which have garnered a good
response. Execution of ongoing projects is proceeding well. The stock trades
at ~50% discount to base NAV, which is attractive in our view, but it remains
a high risk play in the sector. An improving risk appetite and macro
environment could result in meaningful upside in the stock, in our view.
New Base NAV of Rs 232 vs Rs 325 — Our new NAV adjusts for – a) roll
forward to Dec-11; b) building in further delays to few projects; c)
incorporated current pricing, rentals and cost of construction assumptions; d)
increased cost of capital to 17.7% versus 14% earlier- this assumes debt
costs at 12%, long-term DE of 0.3, a risk free rate of ~8%, a market premium
of 8% and a tax rate of 30%.
Reduce Target Price to Rs 160 — Based on the geographic mix of its
landbank (high Mumbai exposure), we have assumed a 70% probability of
15% price cut - reduced NAV/share comes to Rs 203. We have increased
the discount attributable to Lower Parel and Worli Mill land projects by 5%
given oversupply and lack of traction in the luxury resi segment. Based on
our new methodology and discount of ~20%, we arrive at a target price of Rs
160 - upside of ~38%. While this is a high-risk call, at a 50% discount to base
NAV, valuations appear attractive. We maintain our Buy recommendation.
Key drivers — 1) large lease sign-ups at Mumbai over next six-to-eight
months – 3QFY11 was decent with ~0.25msf new leased space; 2) potential
FSI increase in development plans of newly acquired land parcels (such as
Worli Mill land); 3) continued execution – will alleviate some concerns which
the market has on the company; and 4) further big-ticket additions to the land
bank.
Challenges/Risks — a) the Mumbai market could show further weakness,
specially in belts of South Central Mumbai where IBREL has a large
exposure; b) regulatory risks in Mumbai are high, and could remain an
overhang; c) disclosures have historically been a cause of concern for
investors; d) low promoter holding of ~23%; and e) other sector concerns –
interest rates, inflation, etc.
Quants View − Glamour
Indiabulls Real Estate currently lies in the Glamour quadrant of our Value-
Momentum map with strong momentum but relatively weak value scores. It has
been a resident there for the past three months. Compared to its peers in the
Real Estate sector, Indiabulls Real Estate fares worse on the valuation metric
but better on the momentum metric. Similarly, compared to its peers in its home
market of India, Indiabulls Real Estate fares worse on the valuation metric but
better on the momentum metric.
From a macro perspective, Indiabulls Real Estate has a high Beta to the region
so is likely to rise (or fall) faster than the region. It is also likely to benefit from
Value outperformance, falling commodity (ex-oil) prices, tightening Asian
interest rates, falling EM yields, a weaker US dollar, and a weaker yen.
Indiabulls Real Estates
Valuation
Our target price of Rs160 is based on a ~21% discount to our Dec-11E blended
NAV of Rs203. IBREL has large exposure to Central Mumbai, Navi Mumbai and
NCR. We believe chances of price cuts are quite probable, especially in
Mumbai given the price hikes the city has seen. Hence, we have assigned 70%
probability of potential 15% price cuts to arrive at our TP. This is in line with our
valuation methodology for the sector. Our Dec-11E base NAV of Rs 232
incorporates (1) the IPIT assets at Rs66/share, (2) Worli mill land development
conservatively at Rs12/share at 2.0x FSI, (3) the stake (58.6%) in listed power
sub at Rs 70/share (current market cap), (4) Discounted value for other non-
Mumbai city projects.
Discount of 21% is a combination of: 1) ~25% holding company discount on the
company's power business stake at market value (2) 20% discount to Lower
Parel assets (IPIT), with slow leasing momentum for its ready commercial asset
and slowdown in premium luxury resi segment in Mumbai (3) 25% discount to
its Worli Mill land development as we factor in: (a) the high impending resi
supply pipeline in central Mumbai, and (b) lack of clarity on execution plans. 4)
25% discount attributed to other cities based on limited track record.
Our NAV estimate of Rs232 is based on the following assumptions: 1)
Development volume of 180msf (eco. interest) (2) An average cost of capital of
17.2% (assuming low DE of 0.33) (3) Cap rate of 10% (Mumbai City) and 11%
(Non Mumbai City); and 5) 27% effective average tax rate.
Risks
While our quantitative risk-rating system, which tracks 260-day historical share
price volatility, assigns Indiabulls Real Estate a High Risk rating, we see
Medium Risk as more appropriate given the company's balance sheet strength
and increased visibility in project execution. Key downside risks to our target
price are: 1) slower-than-expected leasing of the company’s two flagship
Mumbai projects and rentals softening further; 2) any regulatory risk on the
company’s claim for higher FSI of 4/5 at its Mumbai property, 3) any disclosure
issues on its accounting policies; and 4) geographic concentration still remains
high – has gone up post the recent mill land acquisitions; 5) slower-thanexpected
pre-sales, leasing and execution for company's residential/SEZ
projects.
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