| Indiabulls Real Estate (IBREL IN) Earnings below expectations on lower revenues; strong cash generation and high dividend payout key positives | Overweight Price: Rs61.55 22 Apr 2014 Price Target: Rs110.00 PT End Date: 31 Mar 2015 | |
IBREL’s 4Q FY14 EPS of Rs1 (-16% Y/Y) came in below estimates due to lower-than-expected revenues. The DPU payout, though, increased substantially, with the company paying Rs3 (50%+ payout) in FY14 given strong cash generation in the business. Cash flows for the company remain strong (FY14 at Rs8B, JPMe) and are tracking significantly ahead of the reported PAT number (FY14 at Rs2.3B) which is currently depressed due to POCM accounting. This, in our view, should reverse in FY15 as the high-value Worli project hits the revenue recognition threshold (Rs25B+ sales book) thereby resulting in a strong earnings scale-up ahead. Pre-sales performance has moderated at the margin; however, the company has a fairly strong launch pipeline going into FY15, which should aid pre-sales activity ahead.
· Pre-sales moderating at the margin…IBREL reported pre-sales of Rs30B in FY14, which was flat Y/Y. 4Q pre-sales, however, were muted at Rs3B. There has been a moderation in pre-sales activity over the past two quarters, attributable to a weak demand environment and lack of new launch activity. Leasing portfolio performance remains steady with the Lower Parel asset now largely leased (~95% levels) and rentals have started inch up at the margin. Overall we note that the company’s pre-sales at Rs30B for FY14 are significantly ahead of the revenue recognition given that the high-value projects in Mumbai aren’t contributing to the P/L. This implies scope for a significant scale-up in revenues/ earnings over FY15/16 as these projects reach the revenue recognition threshold.
· However, the FY15 launch pipeline is strong. The company has a fairly impressive launch pipeline going into FY15. Overall the company is looking to launch 8.5msf of projects primarily in the Gurgaon market (7.6msf) and a small project in prime Mumbai suburb. Overall these new launches have a sales potential of Rs80B+. However, off-take in new projects would hinge on an overall improvement in demand environment. Recent absorption trends in Gurgaon market have been fairly weak.
· Cash flows remain better than earnings. Net debt for the company increased by Rs12B Y/Y to Rs24.1B (Rs3B increase Q/Q) in FY14. Factoring in the PE buyout of Rs12B, dividend payout of Rs2B and pay-down of IPL advances (Rs6B), the company generated cash flows of Rs8B in FY14 (JPMe), compared to reported PAT of Rs2.3B for FY14. The company paid out DPU of Rs3 in FY14, which implies a 50% payout. This in our view can further increase in FY15 given the robust cash generation in the business and no large capex (land / PE) commitments.
· Worli recognition key to earnings scale up in FY15. IBREL’s high-value Worli project is not contributing to the P/L due to POCM accounting. Close to 50% of the project is already sold and has an order book of Rs25B+. As this project hits the revenue recognition threshold, the earnings for the company should see a significant scale-up over FY15 / FY16.
Investment Thesis
IBREL has marquee assets on the B/S, and pre-sales have also been impressive with the approval issues now largely resolved for its projects (in Lower Parel/Worli). Execution, too, despite IBREL being a relative newcomer, has been much better than the peer group’s. Cash flow generation is solid. Earnings, however, are lagging due to POCM accounting with key projects yet to hit the recognition thresholds. Over the next few quarters, as earnings scale up, we think the stock should see a significant re-rating, thereby narrowing the gap to fair value.
Valuation
Our Mar-15 PT of Rs110 is based on 8x EV/EBITDA, in line with the sector average.
Risks to Rating and Price Target
(a) Lower-than-expected sales momentum; and (b) delay in pick-up in revenue recognition.
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