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UBS Investment Research
DB Realty
News flow the overhang; though valuations
compelling
Negative news flow led to sharp correction
Ongoing investigations in the 2G licence allotment to DB Group’s associate
company Etisalat DB has resulted in negative press - 1) Mr. Shahid Balwa’s arrest
in connection with 2G investigations; 2) DB Realty’s indirect link to investing
Rs2.14bn for a likely stake in TV channel owned by a political party. Though the
company clarified on no stake in TV channel; such news flow will be an overhang.
What’s the likely impact on core real estate business?
With Q3 pre-sales of 1.17msf (vs. 1.95msf in 1HFY11); leverage in control with
debt at Rs3.87bn (D/E 0.12x) – we believe it’s on track to meet our FY11E.
However, current events may result in some 1) pre-sales slowdown, 2) execution
delays and 3) tight liquidity; which may result in downside risk to FY12-13E.
What can change sentiments?
1) No major fallout of 2G investigation/arrests on the DB Group; 2) more visibility
on Bandra re-dev colony project with PE’s taking stake for funding the same; and
3) Mumbai and DB Realty’s pre-sales grow 10%-plus over next 3-6mths.
Valuation compelling: Maintain Buy, but lower PT to Rs192/share
While extreme negative sentiments may remain a near-term overhang, we see
compelling vals of deep disc to NAV and 1x P/BV outweigh risks; even as we
lower our PT to Rs192 from Rs360 on 40% disc to our revised NAV of Rs320
ascribed to ongoing projects of 14msf (vs. Rs600 earlier for development portfolio
of 61msf).
Negative news flow an overhang
DB Realty has corrected sharply by 75% over last 3-months on the back of slew
of negative news flow being 2G license, loan syndication, likely policy risks due
to change in Maharashtra’s chief minister. News flow however remains a
dampener, particularly with ongoing investigations on 2G license resulting in -
1) Mr. Shahid Balwa’s arrest; 2) DB Realty’s being named to have indirect link
to investing Rs2.14bn for a likely stake in TV channel owned by a political
party; all of which led the stock to correct by 50% in last 1-mth. While the DB
Realty management has clarified on no wrong doing or stake/investment in any
TV channel; we believe such news flow will remain an overhang on near-term
stock performance.
Impact on core real estate business
Factoring company’s Q3 pre-sales of 1.17msf (vs. 1.95msf in 1HFY11) and
consolidated debt of Rs3.87bn (D/E of 0.12x) as at end of Dec’10 – we believe
the company is on track to meet our FY11 earnings estimates. However, we do
foresee some reputational risk to the core business. Likely effects could be
slower pre-sales, execution delays and tighter liquidity for the company; which
could possibly impact our FY12-13E. That said, the DB management through its
press release clarified the company has enough funds to continue with all its
ongoing projects and denied any adverse impact on DB Realty’s core real estate
business due to any of the negative press due to 2G issues.
Compelling valuations outweigh risks
While negative sentiment will remain an overhang on near-term stock
performance, most concerns seem priced in with stock down 75% in 3-mths. At
current levels, we believe compelling valuations of deep 60% discount to NAV
and 1x P/BV outweigh the risks; even as we lower our price target to Rs192
based on 40% discount to our revised NAV of Rs320 ascribed to ongoing
projects of 14msf vs. our earlier NAV of Rs600 (for entire 55msf portfolio).
We continue to believe DB Realty’s is a good proxy to Mumbai residential
markets, which is demand resilient. Its prime-location land assets, domain
expertise in redevelopment/urban renewal projects does differentiate it from
peers.
Our lower target price of Rs192, factors nearterm
low visibility on execution
We have however lowered our price target to Rs192 based on 40% discount
to our revised NAV estimate of Rs320 ascribed to ongoing projects of 14msf
(vs. our earlier NAV of Rs600 ascribed for entire 55msf portfolio). Our high
discount is largely to factor 1) a higher absorption/price risks for South
Mumbai’s luxury projects; 2) political and regulatory risks due to change in
Maharashtra’s chief minister; 3) any likely negative impact of group’s 2G issues
on the core real estate business due to reputational risks of the group.
The revision in our base-case NAV estimate to Rs320 for only ongoing projects
(vs. Rs600 earlier) involves the following assumptions: 1) developmental
volume of 8.86msf and 4.74msf of TDR; 2) excludes any planned projects given
current uncertainty over the group; 3) no price escalations, 4) one to two years
of execution delays; 4) average cost of capital of 14%; and 5) 25% tax rate.
Key Risks
Likely risks to our investment thesis are: 1) any penalties/contingent liabilities
arising on the company/key management personnel from ongoing investigations
under 2G controversy for Group/loan syndication issues, 2) significant execution
delays due to policy, regulatory risks and management stuck amidst 2G
controversy for long; 3) high concentration in Mumbai could face affordability
issues, dampened pre-sales given sharp run-up in prices for a prolonged period
in time;. That said, with stock at 60% discount, we believe large part of these
risks are priced in.
DB Realty
Incorporated in early 2007, DB Realty is a real estate developer active in the
Mumbai and Pune regions. The company operates mainly through the JV model,
whereby the land is contributed by the partner and DB Realty develops the
project. The company is currently engaged in developing mass housing for local
authorities, which provides it with transfer development rights, and the cluster
redevelopment of old and dilapidated structures in Mumbai, which grants it
additional floor space index.
Statement of Risk
Likely risks to our thesis are: 1) Execution Delay 2) Regulatory risk 3) An
economic slowdown creating affordability issues.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
DB Realty
News flow the overhang; though valuations
compelling
Negative news flow led to sharp correction
Ongoing investigations in the 2G licence allotment to DB Group’s associate
company Etisalat DB has resulted in negative press - 1) Mr. Shahid Balwa’s arrest
in connection with 2G investigations; 2) DB Realty’s indirect link to investing
Rs2.14bn for a likely stake in TV channel owned by a political party. Though the
company clarified on no stake in TV channel; such news flow will be an overhang.
What’s the likely impact on core real estate business?
With Q3 pre-sales of 1.17msf (vs. 1.95msf in 1HFY11); leverage in control with
debt at Rs3.87bn (D/E 0.12x) – we believe it’s on track to meet our FY11E.
However, current events may result in some 1) pre-sales slowdown, 2) execution
delays and 3) tight liquidity; which may result in downside risk to FY12-13E.
What can change sentiments?
1) No major fallout of 2G investigation/arrests on the DB Group; 2) more visibility
on Bandra re-dev colony project with PE’s taking stake for funding the same; and
3) Mumbai and DB Realty’s pre-sales grow 10%-plus over next 3-6mths.
Valuation compelling: Maintain Buy, but lower PT to Rs192/share
While extreme negative sentiments may remain a near-term overhang, we see
compelling vals of deep disc to NAV and 1x P/BV outweigh risks; even as we
lower our PT to Rs192 from Rs360 on 40% disc to our revised NAV of Rs320
ascribed to ongoing projects of 14msf (vs. Rs600 earlier for development portfolio
of 61msf).
Negative news flow an overhang
DB Realty has corrected sharply by 75% over last 3-months on the back of slew
of negative news flow being 2G license, loan syndication, likely policy risks due
to change in Maharashtra’s chief minister. News flow however remains a
dampener, particularly with ongoing investigations on 2G license resulting in -
1) Mr. Shahid Balwa’s arrest; 2) DB Realty’s being named to have indirect link
to investing Rs2.14bn for a likely stake in TV channel owned by a political
party; all of which led the stock to correct by 50% in last 1-mth. While the DB
Realty management has clarified on no wrong doing or stake/investment in any
TV channel; we believe such news flow will remain an overhang on near-term
stock performance.
Impact on core real estate business
Factoring company’s Q3 pre-sales of 1.17msf (vs. 1.95msf in 1HFY11) and
consolidated debt of Rs3.87bn (D/E of 0.12x) as at end of Dec’10 – we believe
the company is on track to meet our FY11 earnings estimates. However, we do
foresee some reputational risk to the core business. Likely effects could be
slower pre-sales, execution delays and tighter liquidity for the company; which
could possibly impact our FY12-13E. That said, the DB management through its
press release clarified the company has enough funds to continue with all its
ongoing projects and denied any adverse impact on DB Realty’s core real estate
business due to any of the negative press due to 2G issues.
Compelling valuations outweigh risks
While negative sentiment will remain an overhang on near-term stock
performance, most concerns seem priced in with stock down 75% in 3-mths. At
current levels, we believe compelling valuations of deep 60% discount to NAV
and 1x P/BV outweigh the risks; even as we lower our price target to Rs192
based on 40% discount to our revised NAV of Rs320 ascribed to ongoing
projects of 14msf vs. our earlier NAV of Rs600 (for entire 55msf portfolio).
We continue to believe DB Realty’s is a good proxy to Mumbai residential
markets, which is demand resilient. Its prime-location land assets, domain
expertise in redevelopment/urban renewal projects does differentiate it from
peers.
Our lower target price of Rs192, factors nearterm
low visibility on execution
We have however lowered our price target to Rs192 based on 40% discount
to our revised NAV estimate of Rs320 ascribed to ongoing projects of 14msf
(vs. our earlier NAV of Rs600 ascribed for entire 55msf portfolio). Our high
discount is largely to factor 1) a higher absorption/price risks for South
Mumbai’s luxury projects; 2) political and regulatory risks due to change in
Maharashtra’s chief minister; 3) any likely negative impact of group’s 2G issues
on the core real estate business due to reputational risks of the group.
The revision in our base-case NAV estimate to Rs320 for only ongoing projects
(vs. Rs600 earlier) involves the following assumptions: 1) developmental
volume of 8.86msf and 4.74msf of TDR; 2) excludes any planned projects given
current uncertainty over the group; 3) no price escalations, 4) one to two years
of execution delays; 4) average cost of capital of 14%; and 5) 25% tax rate.
Key Risks
Likely risks to our investment thesis are: 1) any penalties/contingent liabilities
arising on the company/key management personnel from ongoing investigations
under 2G controversy for Group/loan syndication issues, 2) significant execution
delays due to policy, regulatory risks and management stuck amidst 2G
controversy for long; 3) high concentration in Mumbai could face affordability
issues, dampened pre-sales given sharp run-up in prices for a prolonged period
in time;. That said, with stock at 60% discount, we believe large part of these
risks are priced in.
DB Realty
Incorporated in early 2007, DB Realty is a real estate developer active in the
Mumbai and Pune regions. The company operates mainly through the JV model,
whereby the land is contributed by the partner and DB Realty develops the
project. The company is currently engaged in developing mass housing for local
authorities, which provides it with transfer development rights, and the cluster
redevelopment of old and dilapidated structures in Mumbai, which grants it
additional floor space index.
Statement of Risk
Likely risks to our thesis are: 1) Execution Delay 2) Regulatory risk 3) An
economic slowdown creating affordability issues.
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