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UBS Investment Research
DB Realty
Headwinds; but distressed valuations\
�� News flow could weigh on near-term stock performance
We believe news of: 1) the arrests of both co-founders in the ongoing 2G spectrum
investigation; 2) potential pre-sale cancellations at key projects and construction delays; and
3) previously awarded projects being re-investigated will weigh on near-term stock
performance; even though we believe the sharp correction of 80% in the past six months
seems to have priced in the worst-case scenario.
�� Prolonged overhang raises risks; we cut our earnings and price target
Although members of the co-founders’ families have been appointed to the board to manage
in the interim, if the investigation is prolonged it could affect business and earnings. Based
on this and the likely increase in leverage, we lower our FY11E/12E/13E EPS
13%/63%/60%%, respectively, to factor in slower execution. We also lower our price target
to Rs153 based on a higher 45% discount to our lower NAV estimate of Rs279, using a
higher WACC of 17% (15% before).
�� What would change sentiment?
We believe: 1) no major fallout from the 2G investigation on the real estate business in the
form of penalties, 2) potential re-instatement of the founders to management; 3)
clarity/visibility on pre-sales and encouraging ramp-up in construction of projects; and 4)
private equity transaction to monetize some of the company’s prime land assets in Mumbai
for liquidity will boost sentiment.
�� Valuation: maintain Buy; lower NAV and price target
While extreme negative sentiments will remain a near-term overhang, trading at distressed
valuations of a deep discount to NAV and 0.6x FY11E P/BV, we believe the stock offers a
high-reward opportunity. Our revised price target of Rs153 is at 45% discount to our revised
NAV of Rs279 ascribed to ongoing projects of 14msf (versus a portfolio of 61msf).
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
We believe key risks for real estate companies include a prolonged higher
interest rate environment (one+year), higher mortgage rates impacting consumer
affordability, slower annual GDP growth of <7% impacting demand for
residential and commercial properties, changes in foreign direct investment
regulations impacting capital availability for the sector, changes in regulatory
policies impacting commercial viability of development, and inflation impacting
consumer affordability.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
DB Realty
Headwinds; but distressed valuations\
�� News flow could weigh on near-term stock performance
We believe news of: 1) the arrests of both co-founders in the ongoing 2G spectrum
investigation; 2) potential pre-sale cancellations at key projects and construction delays; and
3) previously awarded projects being re-investigated will weigh on near-term stock
performance; even though we believe the sharp correction of 80% in the past six months
seems to have priced in the worst-case scenario.
�� Prolonged overhang raises risks; we cut our earnings and price target
Although members of the co-founders’ families have been appointed to the board to manage
in the interim, if the investigation is prolonged it could affect business and earnings. Based
on this and the likely increase in leverage, we lower our FY11E/12E/13E EPS
13%/63%/60%%, respectively, to factor in slower execution. We also lower our price target
to Rs153 based on a higher 45% discount to our lower NAV estimate of Rs279, using a
higher WACC of 17% (15% before).
�� What would change sentiment?
We believe: 1) no major fallout from the 2G investigation on the real estate business in the
form of penalties, 2) potential re-instatement of the founders to management; 3)
clarity/visibility on pre-sales and encouraging ramp-up in construction of projects; and 4)
private equity transaction to monetize some of the company’s prime land assets in Mumbai
for liquidity will boost sentiment.
�� Valuation: maintain Buy; lower NAV and price target
While extreme negative sentiments will remain a near-term overhang, trading at distressed
valuations of a deep discount to NAV and 0.6x FY11E P/BV, we believe the stock offers a
high-reward opportunity. Our revised price target of Rs153 is at 45% discount to our revised
NAV of Rs279 ascribed to ongoing projects of 14msf (versus a portfolio of 61msf).
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
We believe key risks for real estate companies include a prolonged higher
interest rate environment (one+year), higher mortgage rates impacting consumer
affordability, slower annual GDP growth of <7% impacting demand for
residential and commercial properties, changes in foreign direct investment
regulations impacting capital availability for the sector, changes in regulatory
policies impacting commercial viability of development, and inflation impacting
consumer affordability.
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