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Indiabulls Real Estate Ltd
Results below expectation,
Maintain Buy
„Results below expectation, Maintain Buy
IBREL reported 4Q earnings well below our and consensus estimate at Rs117mn
even though revenue was much higher at Rs5.6bn. The sharp drop in earnings
was due to higher interest cost, minority interest and taxes. We maintain our Buy
rating with PO of Rs142 suggesting potential upside of 14%. We have increased
our revenue estimate for FY12/13 due to better execution but lowered our
earnings estimate by 10% to factor in higher interest cost and lower other income.
Improving execution and strong pre sales
The execution across projects has picked up pace leading to higher revenue
recognition in 4Q (40% QoQ growth). It currently has 17mn sq ft of projects under
construction with 9mn sq ft pre sold. The pre sales remain strong in its Panvel and
Gurgaon projects with 1.2mn sq ft booked in 4Q (~6mn sq ft in FY11). The net
debt saw a marginal increase by 10% to Rs7bn in 4Q, but management expects
the debt to remain flat in FY12 with no major land acquisition planned.
Supply pressure easing in Lower Parel
IBREL derives 33% of its NAV from residential projects in Lower Parel. The
supply pressure in the residential segment in Lower Parel (central Mumbai) is
expected to ease given change in FSI policy leading to delay in new launches and
substantial reduction in saleable area for the new projects. This we believe would
help IBREL to clock higher realization for its Lower Parel projects though demand
is likely to remain subdued for another12 months given unaffordable prices.
Progress in power sub remains on track
The execution on the Ph-1 of both the power projects is as per schedule with
Rs20bn debt draw down and has achieved financial closure for Ph-II. The
demerger has been approved by the stock exchanges and IBREL has applied to
the court for its approval which may take another 3-6months.
Maintain Buy; PO of Rs142
We maintain our Buy rating on IBREL with a price objective of Rs142 offering
14% potential upside from the current levels. Our PO is based on 15% discount to
our NAV est. of Rs167. The stock has outperformed the Realty index (up 15%
against 6% for the index) since March 2011. We believe the stock offers value
even after we build in a sharp cut of 25-30% in sale price in its key real estate
projects. Further, we believe the market is ignoring considerable execution
progress made by its power subsidiary where IBREL holds a 58.5% stake.
Our NAV est. values only the key projects with visibility on launch and execution
over the next two years in our NAV estimates. In our NAV, we have valued only
the Lower Parel projects (with lower prices), the power subsidiary at 1x P/B, and
other real estate projects in Panvel and Gurgaon that have already been
launched for sale by IBREL.
Limited downside risk to our NAV est.
The downside risks to NAV are limited as we believe have factored in most of the
negatives while there remains upside risks from launch/execution of projects not
included in our valuation.
Table 2: Conservation assumptions should protect downside
Projects Assumptions
Lower Parel Residential NAV includes 25-30% lower prices, don’t expect further downside
Lower Parel Office Rental assumption of Rs140-165/sq ft/month, leasing in 3 years
Power 15% discount to P/B of 1x, power utilities trading in the range of 1.5-2.2x
Source: BofA Merrill Lynch Global Research
Key triggers –
„ The improving execution in its Lower Parel projects over next 6-12 months
will help establish its ability to deliver the project and we believe will also
improve sales volume
„ Increased leasing at the Lower Parel projects where currently only 50% is
leased
„ Restructuring of the power subsidiary in next 6 months
Earnings reduced to factor in higher interest cost
We have cut our earnings estimate by 10% for FY12 and FY13 to factor in higher
interest cost and lower other income. IBREL has taken most of the debt at
corporate level instead of construction debt, and thus it is charging the interest
cost to P&L rather than capitalizing as project cost. We have also cut our estimate
for other income by 60% given low surplus cash (most of the cash has now been
invested for land acquisition) and also we don’t expect any dividend payout from
the IPIT (listed REIT in Singapore) as the cash flows from residential sales would
be utilized for repayment of debt and construction cost in FY12 and 13.
Price objective basis & risk
Indiabulls Real Estate Ltd (IBELF)
Our preferred valuation methodology is NAV, calculated by discounting the cash
flows from each of the real estate projects. Our price objective of Rs142 is
therefore based on a 15% discount to our NAV of Rs167. We expect IBREL to
trade at 15% discount to large developers like DLF, on price to NAV multiple,
because of its smaller size. Key assumptions underlying our NAV are WACC of
14.7%, capitalization rate of 11-12% and inflation of 5% from FY13 on both selling
prices and construction costs. On a P/E basis, at our PO of Rs142, the stock
would trade at 28x FY12E earnings. Downside risks are lower-than-expected
sales volume and a delay in revival of demand for commercial real estate.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indiabulls Real Estate Ltd
Results below expectation,
Maintain Buy
„Results below expectation, Maintain Buy
IBREL reported 4Q earnings well below our and consensus estimate at Rs117mn
even though revenue was much higher at Rs5.6bn. The sharp drop in earnings
was due to higher interest cost, minority interest and taxes. We maintain our Buy
rating with PO of Rs142 suggesting potential upside of 14%. We have increased
our revenue estimate for FY12/13 due to better execution but lowered our
earnings estimate by 10% to factor in higher interest cost and lower other income.
Improving execution and strong pre sales
The execution across projects has picked up pace leading to higher revenue
recognition in 4Q (40% QoQ growth). It currently has 17mn sq ft of projects under
construction with 9mn sq ft pre sold. The pre sales remain strong in its Panvel and
Gurgaon projects with 1.2mn sq ft booked in 4Q (~6mn sq ft in FY11). The net
debt saw a marginal increase by 10% to Rs7bn in 4Q, but management expects
the debt to remain flat in FY12 with no major land acquisition planned.
Supply pressure easing in Lower Parel
IBREL derives 33% of its NAV from residential projects in Lower Parel. The
supply pressure in the residential segment in Lower Parel (central Mumbai) is
expected to ease given change in FSI policy leading to delay in new launches and
substantial reduction in saleable area for the new projects. This we believe would
help IBREL to clock higher realization for its Lower Parel projects though demand
is likely to remain subdued for another12 months given unaffordable prices.
Progress in power sub remains on track
The execution on the Ph-1 of both the power projects is as per schedule with
Rs20bn debt draw down and has achieved financial closure for Ph-II. The
demerger has been approved by the stock exchanges and IBREL has applied to
the court for its approval which may take another 3-6months.
Maintain Buy; PO of Rs142
We maintain our Buy rating on IBREL with a price objective of Rs142 offering
14% potential upside from the current levels. Our PO is based on 15% discount to
our NAV est. of Rs167. The stock has outperformed the Realty index (up 15%
against 6% for the index) since March 2011. We believe the stock offers value
even after we build in a sharp cut of 25-30% in sale price in its key real estate
projects. Further, we believe the market is ignoring considerable execution
progress made by its power subsidiary where IBREL holds a 58.5% stake.
Our NAV est. values only the key projects with visibility on launch and execution
over the next two years in our NAV estimates. In our NAV, we have valued only
the Lower Parel projects (with lower prices), the power subsidiary at 1x P/B, and
other real estate projects in Panvel and Gurgaon that have already been
launched for sale by IBREL.
Limited downside risk to our NAV est.
The downside risks to NAV are limited as we believe have factored in most of the
negatives while there remains upside risks from launch/execution of projects not
included in our valuation.
Table 2: Conservation assumptions should protect downside
Projects Assumptions
Lower Parel Residential NAV includes 25-30% lower prices, don’t expect further downside
Lower Parel Office Rental assumption of Rs140-165/sq ft/month, leasing in 3 years
Power 15% discount to P/B of 1x, power utilities trading in the range of 1.5-2.2x
Source: BofA Merrill Lynch Global Research
Key triggers –
„ The improving execution in its Lower Parel projects over next 6-12 months
will help establish its ability to deliver the project and we believe will also
improve sales volume
„ Increased leasing at the Lower Parel projects where currently only 50% is
leased
„ Restructuring of the power subsidiary in next 6 months
Earnings reduced to factor in higher interest cost
We have cut our earnings estimate by 10% for FY12 and FY13 to factor in higher
interest cost and lower other income. IBREL has taken most of the debt at
corporate level instead of construction debt, and thus it is charging the interest
cost to P&L rather than capitalizing as project cost. We have also cut our estimate
for other income by 60% given low surplus cash (most of the cash has now been
invested for land acquisition) and also we don’t expect any dividend payout from
the IPIT (listed REIT in Singapore) as the cash flows from residential sales would
be utilized for repayment of debt and construction cost in FY12 and 13.
Price objective basis & risk
Indiabulls Real Estate Ltd (IBELF)
Our preferred valuation methodology is NAV, calculated by discounting the cash
flows from each of the real estate projects. Our price objective of Rs142 is
therefore based on a 15% discount to our NAV of Rs167. We expect IBREL to
trade at 15% discount to large developers like DLF, on price to NAV multiple,
because of its smaller size. Key assumptions underlying our NAV are WACC of
14.7%, capitalization rate of 11-12% and inflation of 5% from FY13 on both selling
prices and construction costs. On a P/E basis, at our PO of Rs142, the stock
would trade at 28x FY12E earnings. Downside risks are lower-than-expected
sales volume and a delay in revival of demand for commercial real estate.
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