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I ndiabulls Real Estate Ltd
Backed by some quality assets;
reinstate at Buy
Positive triggers in FY13; Buy
We reinstate coverage on IBREL with a Buy rating and price objective of Rs96
(37% potential upside) based on a 20% discount to our NAV of Rs.120. Our NAV
factors in lower floor space index (FSI) for its Worli project and power business at
a 30% discount to book. We acknowledge lack of triggers over the next six
months, but it trades at an attractive valuation (0.3x P/B) and we expect approvals
for its key projects by FY13. At our PO, the stock will trade one std. dev. lower
than the three-year average P/B (0.4x), which we believe adequately factors in
the regulatory risks and delays.
Central Mumbai sluggish but commendable execution
We expect the residential projects of Indiabulls in Central Mumbai will continue to
see tepid sales for the next 6-9 months till all the approvals are in place. These
projects account for 34% of the NAV and key for the stock performance. But
IBREL is ahead of competition on execution and should see the benefit of the
same in terms of pricing and volume in FY13, when demand improves.
Power business valuation adequately factors in the risk
We believe the firm’s power subsidiary trades at a cheap valuation of 30%
discount to its book value given the approval status and execution pace of the
power projects. But, we see rerating only post the commissioning of power plants
in 2HFY13. The demerger in 2HFY12 will be positive, but its latest plan to infuse
further capital in the power business is a negative for the real-estate business as
it will lead to a transfer of about Rs8bn cash to the power business postdemerger.
Limited downside on correction in Mumbai resi prices
We see limited downside for Indiabulls from the correction in Mumbai residential
prices given only 39% of its NAV is derived from this segment.
Risks
Delay in approvals for the residential projects – The key risk is the delay in
approval for its residential projects in lower Parel Mumbai which could lead to
reduction in NAV.
Delay in power projects – The power projects in its subsidiary are expected to
start operations from FY13. Any delay could harm its valuation.
Execution risk – It is under taking development of luxury high rises for the first
time and delay in execution could lead to penalties and reduction in NAV.
Commercial assets – They face stiff competition and if leasing is delayed
beyond our expectation, or are done at rates lower than our estimate, we could
see reduction in NAV.
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