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UBS Investment Research
DB Realty
Q3 a sluggish quarter, but seems priced in
Results below expectations; but still on track for UBS FY11E
Revenues & earnings declined 19% and 13% on QoQ basis respectively, and were
lower than UBSe due to slower execution sequentially. However with EBITDA
margins having improved to 44% in Q3 (vs. 41% in Q2) and execution likely to
pick-up in 4Q, we believe the company is on track to meet our FY11 estimates.
Healthy pre-sales and reduced leverage - a silver lining
Operationally, but for slower execution the quarter saw healthy pre-sales of
1.17msf (vs. 1.95msf in 1HFY11) including 0.65msf TDR sales @ Rs2850/sf.
Further, the company also reduced leverage by Rs500m to Rs3.87bn, which is
good in current environment (D/E 0.12x).
What could change sentiments?
While the mgmt did caution for sluggish pre-sales in Mumbai over next 2-quarters
and pricing likely to correct by ~10% amidst current weak sentiments, we are not
too worried. We believe signs of pre-sales recovery in Mumbai, increased visibility
of land payment for Bandra re-development project, and execution ramp-up for
company’s ongoing projects will be strong catalysts for the stock ahead.
Compelling risk-reward – Maintain Buy Rating
We foresee the stock as good proxy to Mumbai, which is demand resilient; We
believe attractive valuations outweigh risks. Our Rs 360 PT is based on 40%
discount to NAV of Rs600; factoring negative stock sentiment, policy/absorption
concerns in Mumbai; and lower risk appetite.
Results Analysis
Revenues declined 19% QoQ to Rs 2,732 million (+51% YoY) as a result of
slower execution sequentially. However EBITDA margins improved from 41%
in Q2 to 44% in Q3 while EBITDA declined 15% QoQ to Rs 1,091 million. Net
Income fell 13% QoQ to Rs 1,087 million, lower than our expectations
Compelling at 75% disc to NAV
Though negative sentiment may remain a near-term overhang on stock
performance, at 75% disc to NAV and growth fundamentals intact - we believe
valuations outweigh risks. We believe DB Realty’s core presence in Mumbai
residential markets, prime-location land assets, domain expertise in
redevelopment/urban renewal projects, and deleveraged balance sheet
differentiates the company.
We find valuations compelling at a 75% disc to NAV compelling vs. peers
trading at a 40-50% discount; and believe with stock trading at 1) 65% discount
to bear-case NAV of Rs420; 2) much lower than NAV of Rs320 ascribed for ongoing/
pre-sold projects; and 3) 1.2x FY11E P/BV – worst seems priced in.
Our higher discount of 40% largely factors in 1) a higher discount for
absorption/price risks for South Mumbai’s luxury projects; 2) political and
regulatory risks due to change in Maharashtra’s chief minister; 3) likely delays
on the recently awarded Bandra redevelopment project and 4) lower risk
appetite amidst weak sentiments.
Our base-case revised NAV/share estimate of Rs600 (vs. Rs800 earlier) involves
the following assumptions: 1) developmental volume of 43msf and 11.7msf of
TDR; 2) excludes 8msf of Bandra redevelopment project (included in our NAV
of Rs800 previously) 3) no price escalations, 4) one to two years of execution
delays; 5) average cost of capital of 14% (vs. 13% earlier); and 6) 25% tax rate.
Available at 65% discount to Bear-case NAV
Given the current volatile and uncertain environment, we highlight the bear-case
scenario for DB Realty’s NAV at Rs420. This factors 1) 5-year development
visibility (~30msf, which forms 90% of NAV), 2) values rest as undeveloped
land reserves (10% of NAV); 3) TDR prices at Rs2000-2200/sf and 4) no value
to Bandra re-development project; and 4) 200bps higher cost of capital at 15%.
With stock trading at 50% discount to our bear-case NAV, we believe the worst
is priced in and foresee good upside potential. Alternatively, our bullcase,
factors in - 1) 10% higher prices and TDR prices of 3000/sf, 2) faster execution
cycle for development projects and 3) faster execution of recent 8msf of Bandra
redevelopment project.
Key Risks
Likely risks to our investment thesis are: 1) significant execution delays due to
policy, regulatory and political risks given the change in Maharashtra’s chief
minister; 2) high concentration in Mumbai could face affordability issues,
dampened pre-sales given sharp run-up in prices for a prolonged period in time;
3) any penalties/contingent liabilities arising on the company from ongoing
investigations under 2G controversy for Group/loan syndication issues. That
said, with stock at 70% 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
Risks to DB Realty include policy, political and regulatory risks, exposure to
Mumbai and rising interest rates
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
DB Realty
Q3 a sluggish quarter, but seems priced in
Results below expectations; but still on track for UBS FY11E
Revenues & earnings declined 19% and 13% on QoQ basis respectively, and were
lower than UBSe due to slower execution sequentially. However with EBITDA
margins having improved to 44% in Q3 (vs. 41% in Q2) and execution likely to
pick-up in 4Q, we believe the company is on track to meet our FY11 estimates.
Healthy pre-sales and reduced leverage - a silver lining
Operationally, but for slower execution the quarter saw healthy pre-sales of
1.17msf (vs. 1.95msf in 1HFY11) including 0.65msf TDR sales @ Rs2850/sf.
Further, the company also reduced leverage by Rs500m to Rs3.87bn, which is
good in current environment (D/E 0.12x).
What could change sentiments?
While the mgmt did caution for sluggish pre-sales in Mumbai over next 2-quarters
and pricing likely to correct by ~10% amidst current weak sentiments, we are not
too worried. We believe signs of pre-sales recovery in Mumbai, increased visibility
of land payment for Bandra re-development project, and execution ramp-up for
company’s ongoing projects will be strong catalysts for the stock ahead.
Compelling risk-reward – Maintain Buy Rating
We foresee the stock as good proxy to Mumbai, which is demand resilient; We
believe attractive valuations outweigh risks. Our Rs 360 PT is based on 40%
discount to NAV of Rs600; factoring negative stock sentiment, policy/absorption
concerns in Mumbai; and lower risk appetite.
Results Analysis
Revenues declined 19% QoQ to Rs 2,732 million (+51% YoY) as a result of
slower execution sequentially. However EBITDA margins improved from 41%
in Q2 to 44% in Q3 while EBITDA declined 15% QoQ to Rs 1,091 million. Net
Income fell 13% QoQ to Rs 1,087 million, lower than our expectations
Compelling at 75% disc to NAV
Though negative sentiment may remain a near-term overhang on stock
performance, at 75% disc to NAV and growth fundamentals intact - we believe
valuations outweigh risks. We believe DB Realty’s core presence in Mumbai
residential markets, prime-location land assets, domain expertise in
redevelopment/urban renewal projects, and deleveraged balance sheet
differentiates the company.
We find valuations compelling at a 75% disc to NAV compelling vs. peers
trading at a 40-50% discount; and believe with stock trading at 1) 65% discount
to bear-case NAV of Rs420; 2) much lower than NAV of Rs320 ascribed for ongoing/
pre-sold projects; and 3) 1.2x FY11E P/BV – worst seems priced in.
Our higher discount of 40% largely factors in 1) a higher discount for
absorption/price risks for South Mumbai’s luxury projects; 2) political and
regulatory risks due to change in Maharashtra’s chief minister; 3) likely delays
on the recently awarded Bandra redevelopment project and 4) lower risk
appetite amidst weak sentiments.
Our base-case revised NAV/share estimate of Rs600 (vs. Rs800 earlier) involves
the following assumptions: 1) developmental volume of 43msf and 11.7msf of
TDR; 2) excludes 8msf of Bandra redevelopment project (included in our NAV
of Rs800 previously) 3) no price escalations, 4) one to two years of execution
delays; 5) average cost of capital of 14% (vs. 13% earlier); and 6) 25% tax rate.
Available at 65% discount to Bear-case NAV
Given the current volatile and uncertain environment, we highlight the bear-case
scenario for DB Realty’s NAV at Rs420. This factors 1) 5-year development
visibility (~30msf, which forms 90% of NAV), 2) values rest as undeveloped
land reserves (10% of NAV); 3) TDR prices at Rs2000-2200/sf and 4) no value
to Bandra re-development project; and 4) 200bps higher cost of capital at 15%.
With stock trading at 50% discount to our bear-case NAV, we believe the worst
is priced in and foresee good upside potential. Alternatively, our bullcase,
factors in - 1) 10% higher prices and TDR prices of 3000/sf, 2) faster execution
cycle for development projects and 3) faster execution of recent 8msf of Bandra
redevelopment project.
Key Risks
Likely risks to our investment thesis are: 1) significant execution delays due to
policy, regulatory and political risks given the change in Maharashtra’s chief
minister; 2) high concentration in Mumbai could face affordability issues,
dampened pre-sales given sharp run-up in prices for a prolonged period in time;
3) any penalties/contingent liabilities arising on the company from ongoing
investigations under 2G controversy for Group/loan syndication issues. That
said, with stock at 70% 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
Risks to DB Realty include policy, political and regulatory risks, exposure to
Mumbai and rising interest rates
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