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Indiabulls Real Estates (INRL.BO)
Q4FY11: A Disappointing Quarter
Revenue beats, EBITDA margin drops — FY11 revenue increased from ~Rs1.3b to
~Rs14b as real estate projects started recognizing revenue in the year. QoQ revenue
growth came in at ~40% − much ahead of our expectations. However, a sharp drop in
operating margins (owing to the shift in geographic mix of sales with lower margins), no
other incomes (FMP returns to come on maturity) and higher interest expenses (Worli
mills payment debt funded) resulted in a PAT decline of 70% QoQ. Overall FY11 PAT
came in at ~Rs1.8b (vs ~Rs68m last year), below expectations.
Operationally, muted performance QoQ — Q4 was a bit slower than Q3 − presales
at ~1.2msf vs ~1.8msf in Q3 (though higher compared to 0.8msf in Q4FY10). ~0.2msf
of new leases vs 0.25msf in Q3. 0.65msf of commercial was handed over. FY11
presales totaled 5.94msf (vs 3msf in FY10) – at Rs48.4b (up 244%). New leases were
0.91msf in FY 11 and total leased area stands at 1.61msf as at Mar-11.
Other key highlights — (1) Debt increased by Rs24b through FY (related to Power +
Worli mills acquisition). While sequentially it is up by ~Rs4b, management expects it to
remain stable through FY12 (2) IPIT rental income (in the form of dividends) has yet not
come in (3) Wholesale services has been demerged – led to revenue & PAT erosion of
~Rs807m & ~Rs239m respectively (4) Power business demerger is likely to materialize
within CY12, awaiting HC clearance (4) Proposed 15% final dividend.
New TP of Rs164 offers 35% upside; Maintain Buy — Base NAV has increased to
Rs252 vs Rs232 earlier. While we have (1) built in delays in execution (2) moderated
Lower Parel rentals (3) increased discount to NAV pertaining to Worli & rest of India
development, the adverse impact has been more than negated by: (1) Impact of roll
forward (2) Net debt adjusted to account for real estate business only (with increased
disclosures); power like wholesale services is likely to get demerged soon. Stock
remains attractive, though with key risks related to: Central Mumbai market (regulatory
+ oversupply), disclosures and low promoter holding.
Key positive changes to valuation:
Roll forward NAV to Sep-12
Net debt adjusted to account for real estate business only (with increased
disclosures); power like wholesale services is likely to get demerged soon.
Key negative changes to valuation:
Increased discount to NAV on Worli mills development and other developments
(ie rest of India)
Moderated rentals of Lower Parel commercial assets
Beta changed from ~1.5 to ~1.6. Hence, cost of capital has increased by 50bps
to 17.7%
Built in conservative delays in execution given limited track record
Indiabulls Real Estates
Company description
Indiabulls Real Estate (IBREL) is the de-merged real-estate arm of the Indiabulls
Group, which started in the financial services sector and diversified into the real
estate in 2005. It has been credited with bringing in the first real estate FDI in India,
through Farallon Capital Management LLC, for two mill lands it won at auctions in
Central Mumbai. Despite its short operating history, the company has established a
geographically diverse land bank of ~60m sq ft and ~3000acres with significant
presence in the residential, retail, commercial and SEZ verticals in Tier-I cities,
suburban locations of Mumbai, NCR and Chennai and Tier II & III cities as well. It is
also amongst the first Indian developers to list a business trust (Indiabulls Property
Investment Trust) on the Singapore Stock Exchange in Jun'08 − in which it has
effective 52% ownership. The company is co-founded and managed by professional
board of the Indiabulls Group which owns a ~25% stake.
Investment strategy
We have a Buy/Medium Risk rating on Indiabulls Real Estate (IBREL). We see the
company positioned as a Tier-II developer with geographic concentration and
limited execution track record and hence expect it to trade at a reasonable discount
to NAV. A pick-up in pre-sales and leasing enquiries, along with stabilizing rentals
and tenants moving in at its flagship Mumbai property, are encouraging trends.
While execution has picked up relatively, visibility remains low on non-metro cities
and SEZ projects. Also, supply absorption, given the geographic concentration,
remains a concern. But at current levels these seem largely priced in.
Valuation
Our target price of Rs164 is based on a ~26% discount to our Sept-12E blended
NAV of Rs223. 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 a 70% probability
of potential 15% price cuts to arrive at our TP. This is in line with our valuation
methodology for the sector. Our base NAV of Rs252 incorporates 1) the IPIT assets
at Rs70/share, 2) Worli mill land development conservatively at Rs13/share at base
FSI, 3) the stake (58.6%) in listed power sub at Rs65/share (current market cap), 4)
discounted value for other non-Mumbai city projects.
Discount of ~26% 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
anticipated slowdown in premium luxury resi segment in Central Mumbai; 3) 30%
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 approvals/execution
plans; 4) 30% discount attributed to other cities based on its limited track record.
Our NAV estimate of Rs252 is based on the following assumptions: 1) development
volume of 180msf (eco. interest); 2) an average cost of capital of 17.7% (assuming
low DE of 0.33); 3) cap rate of 10% (Mumbai City) and 11% (Non Mumbai City); and
5) a 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) slowerthan-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 at
its Mumbai property, 3) any disclosure issues on its accounting policies; 4)
geographic concentration still remains high – has gone up post the recent mill land
acquisitions; 5) slower-than-expected 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)
Q4FY11: A Disappointing Quarter
Revenue beats, EBITDA margin drops — FY11 revenue increased from ~Rs1.3b to
~Rs14b as real estate projects started recognizing revenue in the year. QoQ revenue
growth came in at ~40% − much ahead of our expectations. However, a sharp drop in
operating margins (owing to the shift in geographic mix of sales with lower margins), no
other incomes (FMP returns to come on maturity) and higher interest expenses (Worli
mills payment debt funded) resulted in a PAT decline of 70% QoQ. Overall FY11 PAT
came in at ~Rs1.8b (vs ~Rs68m last year), below expectations.
Operationally, muted performance QoQ — Q4 was a bit slower than Q3 − presales
at ~1.2msf vs ~1.8msf in Q3 (though higher compared to 0.8msf in Q4FY10). ~0.2msf
of new leases vs 0.25msf in Q3. 0.65msf of commercial was handed over. FY11
presales totaled 5.94msf (vs 3msf in FY10) – at Rs48.4b (up 244%). New leases were
0.91msf in FY 11 and total leased area stands at 1.61msf as at Mar-11.
Other key highlights — (1) Debt increased by Rs24b through FY (related to Power +
Worli mills acquisition). While sequentially it is up by ~Rs4b, management expects it to
remain stable through FY12 (2) IPIT rental income (in the form of dividends) has yet not
come in (3) Wholesale services has been demerged – led to revenue & PAT erosion of
~Rs807m & ~Rs239m respectively (4) Power business demerger is likely to materialize
within CY12, awaiting HC clearance (4) Proposed 15% final dividend.
New TP of Rs164 offers 35% upside; Maintain Buy — Base NAV has increased to
Rs252 vs Rs232 earlier. While we have (1) built in delays in execution (2) moderated
Lower Parel rentals (3) increased discount to NAV pertaining to Worli & rest of India
development, the adverse impact has been more than negated by: (1) Impact of roll
forward (2) Net debt adjusted to account for real estate business only (with increased
disclosures); power like wholesale services is likely to get demerged soon. Stock
remains attractive, though with key risks related to: Central Mumbai market (regulatory
+ oversupply), disclosures and low promoter holding.
Key positive changes to valuation:
Roll forward NAV to Sep-12
Net debt adjusted to account for real estate business only (with increased
disclosures); power like wholesale services is likely to get demerged soon.
Key negative changes to valuation:
Increased discount to NAV on Worli mills development and other developments
(ie rest of India)
Moderated rentals of Lower Parel commercial assets
Beta changed from ~1.5 to ~1.6. Hence, cost of capital has increased by 50bps
to 17.7%
Built in conservative delays in execution given limited track record
Indiabulls Real Estates
Company description
Indiabulls Real Estate (IBREL) is the de-merged real-estate arm of the Indiabulls
Group, which started in the financial services sector and diversified into the real
estate in 2005. It has been credited with bringing in the first real estate FDI in India,
through Farallon Capital Management LLC, for two mill lands it won at auctions in
Central Mumbai. Despite its short operating history, the company has established a
geographically diverse land bank of ~60m sq ft and ~3000acres with significant
presence in the residential, retail, commercial and SEZ verticals in Tier-I cities,
suburban locations of Mumbai, NCR and Chennai and Tier II & III cities as well. It is
also amongst the first Indian developers to list a business trust (Indiabulls Property
Investment Trust) on the Singapore Stock Exchange in Jun'08 − in which it has
effective 52% ownership. The company is co-founded and managed by professional
board of the Indiabulls Group which owns a ~25% stake.
Investment strategy
We have a Buy/Medium Risk rating on Indiabulls Real Estate (IBREL). We see the
company positioned as a Tier-II developer with geographic concentration and
limited execution track record and hence expect it to trade at a reasonable discount
to NAV. A pick-up in pre-sales and leasing enquiries, along with stabilizing rentals
and tenants moving in at its flagship Mumbai property, are encouraging trends.
While execution has picked up relatively, visibility remains low on non-metro cities
and SEZ projects. Also, supply absorption, given the geographic concentration,
remains a concern. But at current levels these seem largely priced in.
Valuation
Our target price of Rs164 is based on a ~26% discount to our Sept-12E blended
NAV of Rs223. 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 a 70% probability
of potential 15% price cuts to arrive at our TP. This is in line with our valuation
methodology for the sector. Our base NAV of Rs252 incorporates 1) the IPIT assets
at Rs70/share, 2) Worli mill land development conservatively at Rs13/share at base
FSI, 3) the stake (58.6%) in listed power sub at Rs65/share (current market cap), 4)
discounted value for other non-Mumbai city projects.
Discount of ~26% 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
anticipated slowdown in premium luxury resi segment in Central Mumbai; 3) 30%
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 approvals/execution
plans; 4) 30% discount attributed to other cities based on its limited track record.
Our NAV estimate of Rs252 is based on the following assumptions: 1) development
volume of 180msf (eco. interest); 2) an average cost of capital of 17.7% (assuming
low DE of 0.33); 3) cap rate of 10% (Mumbai City) and 11% (Non Mumbai City); and
5) a 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) slowerthan-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 at
its Mumbai property, 3) any disclosure issues on its accounting policies; 4)
geographic concentration still remains high – has gone up post the recent mill land
acquisitions; 5) slower-than-expected pre-sales, leasing and execution for
company's residential/SEZ projects.
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