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Indiabulls Real Estate
Reuters: INRL.BO Bloomberg: IBREL IN
Coherent strategy and robust
execution momentum
Flexibility to adapt new strategy and focus on execution drives growth
With a few of its high-potential projects not taking off, Indiabulls now focuses on
smaller projects and continues to add value-adding new land parcels in key
metros. While demand for both its high-end residential & office at central Mumbai
is lacklustre, execution momentum continues with every quarter witnessing few
new projects crossing the revenue recognition threshold. We believe high-margin
Mumbai residential projects will flow into P&L in FY12 as profit from associates;
thus, we revise our financials. We cut our target price to INR175; maintain Buy.
Maintains its opportunistic streak to capture market opportunities…
With its robust balance sheet and expertise in securing and executing capitalintensive
mega-projects that have large regulatory hurdles, IBREL focuses on a
few high-potential projects. But many bids did not work out. Regulatory changes
may significantly constrain profitability of a high-prized bid in Central Mumbai.
Hence, the focus is on smaller projects in 3 metros—MMR, NCR, and Chennai.
…and continual robust execution momentum to drive future growth
While demand for high-end residential and leasing of office space at Central
Mumbai remains lacklustre, execution across all geographies is robust, with
projects crossing their revenue recognition threshold in a phased manner. While
the high-margin Mumbai residential project will likely cross its threshold in FY12E,
these will flow in as associates. The proposed de-merger of IPL (its listed power
subsidiary) is on track for completion in September 2011.
Revising estimates, cutting target price to INR175, maintaining Buy; risks
We incorporate the delay in leasing and high inflation in our estimates. We also
make adjustments to take a share of profit from IPIT directly to PAT (as
associates)– resulting in a sharp cut in EBITDA. We cut our DCF-based target
price to INR175 (previously INR290/sh). With c.47% potential upside, we maintain
our Buy. Risks are a demand slowdown in residential, continual slowdown in
office, and an execution slowdown.
Investment thesis
Outlook
Indiabulls Group, which has demonstrated execution capabilities in varied sectors, seeks to
capitalize its expertise (in raising equity, securing and executing capital-intensive megaprojects
that have large regulatory hurdles) through IBREL in high-potential real estate and
power sectors. Hence, despite being largely a net cash company, it raised USD550m through
a 56% equity dilution in May 2009. Although IBREL tried to focus on a few high-margin
projects, quite a few large bids did not work out. The change in development regulations may
significantly constrain upsides for its mid-CY10 successful bids for land parcels in Central
Mumbai (Bharat and Poddar Mills). While the mega Raigarh SEZ remains in limbo due to land
acquisition tribulations, its 2,500 acre Nasik SEZ is yet to see any external anchor tenant.
Hence, Indiabulls Group is focusing on smaller projects in three metro areas – MMR, NCR,
and Chennai. We are still concerned about: 1) a slow pick-up in leasing at its marquee
Mumbai office project (c.64% of 2.5msf completed is leased with ~balance 1msf to be
completed in the next three months) and 2) continual weakness in demand for high-end
properties in Central Mumbai due to aggressive prices. However, we believe the group’s
focus on execution and realistic pricing should drive pre-sales/leasing and cash flows. We
maintain our Buy rating.
Valuation
We prefer a DCF-based valuation for Indiabulls Group’s property assets, as it captures the
value of its land bank (the main driver for the sector) and is also not very influenced by the
lumpy nature of earnings. On our major assumptions of: (a) constant prices and costs
(following c.6% increase in base prices and c.10% increase in construction costs), (b) entire
land bank to be developed in c.11 years, (c) cap rate of 10-12% and WACC of 17.5% (16.0%
earlier), and (d) effective tax rate of 27.5%, we arrive at a GAV of INR256 per share. However,
considering significant execution risks and sector headwinds, we increase our discount to our
DCF-based GAV to 30% (earlier 10%) to arrive at an adjusted GAV of INR179 per share. We
then add INR41 per share as value of the power division (at a 30% discount to its current
market price) and then exclude INR46 per share for its net debt (after the payment of recently
acquired land parcels). Thus, we arrive at a target price of INR175 per share.
Risks
Key downside risks include: (a) a demand slowdown in the residential segment due to
significant price hikes and continual weakness in the office segment in its major markets of
Mumbai and NCR, (b) a slowdown in execution, and (c) changes in the macro environment
(changes in interest rates, tightening liquidity for the sector, persistent high inflation, etc.).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indiabulls Real Estate
Reuters: INRL.BO Bloomberg: IBREL IN
Coherent strategy and robust
execution momentum
Flexibility to adapt new strategy and focus on execution drives growth
With a few of its high-potential projects not taking off, Indiabulls now focuses on
smaller projects and continues to add value-adding new land parcels in key
metros. While demand for both its high-end residential & office at central Mumbai
is lacklustre, execution momentum continues with every quarter witnessing few
new projects crossing the revenue recognition threshold. We believe high-margin
Mumbai residential projects will flow into P&L in FY12 as profit from associates;
thus, we revise our financials. We cut our target price to INR175; maintain Buy.
Maintains its opportunistic streak to capture market opportunities…
With its robust balance sheet and expertise in securing and executing capitalintensive
mega-projects that have large regulatory hurdles, IBREL focuses on a
few high-potential projects. But many bids did not work out. Regulatory changes
may significantly constrain profitability of a high-prized bid in Central Mumbai.
Hence, the focus is on smaller projects in 3 metros—MMR, NCR, and Chennai.
…and continual robust execution momentum to drive future growth
While demand for high-end residential and leasing of office space at Central
Mumbai remains lacklustre, execution across all geographies is robust, with
projects crossing their revenue recognition threshold in a phased manner. While
the high-margin Mumbai residential project will likely cross its threshold in FY12E,
these will flow in as associates. The proposed de-merger of IPL (its listed power
subsidiary) is on track for completion in September 2011.
Revising estimates, cutting target price to INR175, maintaining Buy; risks
We incorporate the delay in leasing and high inflation in our estimates. We also
make adjustments to take a share of profit from IPIT directly to PAT (as
associates)– resulting in a sharp cut in EBITDA. We cut our DCF-based target
price to INR175 (previously INR290/sh). With c.47% potential upside, we maintain
our Buy. Risks are a demand slowdown in residential, continual slowdown in
office, and an execution slowdown.
Investment thesis
Outlook
Indiabulls Group, which has demonstrated execution capabilities in varied sectors, seeks to
capitalize its expertise (in raising equity, securing and executing capital-intensive megaprojects
that have large regulatory hurdles) through IBREL in high-potential real estate and
power sectors. Hence, despite being largely a net cash company, it raised USD550m through
a 56% equity dilution in May 2009. Although IBREL tried to focus on a few high-margin
projects, quite a few large bids did not work out. The change in development regulations may
significantly constrain upsides for its mid-CY10 successful bids for land parcels in Central
Mumbai (Bharat and Poddar Mills). While the mega Raigarh SEZ remains in limbo due to land
acquisition tribulations, its 2,500 acre Nasik SEZ is yet to see any external anchor tenant.
Hence, Indiabulls Group is focusing on smaller projects in three metro areas – MMR, NCR,
and Chennai. We are still concerned about: 1) a slow pick-up in leasing at its marquee
Mumbai office project (c.64% of 2.5msf completed is leased with ~balance 1msf to be
completed in the next three months) and 2) continual weakness in demand for high-end
properties in Central Mumbai due to aggressive prices. However, we believe the group’s
focus on execution and realistic pricing should drive pre-sales/leasing and cash flows. We
maintain our Buy rating.
Valuation
We prefer a DCF-based valuation for Indiabulls Group’s property assets, as it captures the
value of its land bank (the main driver for the sector) and is also not very influenced by the
lumpy nature of earnings. On our major assumptions of: (a) constant prices and costs
(following c.6% increase in base prices and c.10% increase in construction costs), (b) entire
land bank to be developed in c.11 years, (c) cap rate of 10-12% and WACC of 17.5% (16.0%
earlier), and (d) effective tax rate of 27.5%, we arrive at a GAV of INR256 per share. However,
considering significant execution risks and sector headwinds, we increase our discount to our
DCF-based GAV to 30% (earlier 10%) to arrive at an adjusted GAV of INR179 per share. We
then add INR41 per share as value of the power division (at a 30% discount to its current
market price) and then exclude INR46 per share for its net debt (after the payment of recently
acquired land parcels). Thus, we arrive at a target price of INR175 per share.
Risks
Key downside risks include: (a) a demand slowdown in the residential segment due to
significant price hikes and continual weakness in the office segment in its major markets of
Mumbai and NCR, (b) a slowdown in execution, and (c) changes in the macro environment
(changes in interest rates, tightening liquidity for the sector, persistent high inflation, etc.).
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