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EBITDA margin drops
In 1QFY12 Indiabulls Real Estate (IBREL) EBITDA margins fell ~500bp sequentially to 12.4%. EBITDA grew 39% YoY
to INR301m and revenue rose 41% YoY to INR2.4b. The decline in EBITDA margins can be attributed to a combined
impact of a change in revenue-mix and inflation.
Other income boosts net profit
Net profit grew 221% YoY to INR660m, led by a jump in other income to INR1.4b. The one-off other income was due to
maturity of liquid investment in mutual funds.
Sales volume declines for the second consecutive quarter
In 1QFY12, IBREL's residential sales fell for the second successive quarter. It sold ~0.8msf (v/s 1.2msf in 4QFY11)
sales in ongoing projects, amounting to ~INR3.8b (v/s INR5.6b in 4QFY11). Cumulative sales of ongoing projects were
INR65b (~9.2msf) v/s INR61b (~8.4msf) in 4QFY11.
Leasing momentum steady
Leasing momentum was steady at IBREL's IPIT commercial properties in Mumbai with ~0.17msf of new leasing in
1QFY12, leading to total leased area of 1.8msf. Recent leasing at Indiabulls One was at INR175/square foot, and
average prevailing lease rental at Indiabulls Finance Centre was INR125-140/square foot.
Valuation and view
IBREL is available at a 52% discount to our one-year forward NAV estimate of INR237 and trades at 0.5x FY13E BV of
INR242 and 14.6x FY13E EPS of INR7.9. Maintain Buy.
Residential sales volume falls, leasing steady at IPIT commercial properties
In 1QFY12, IBREL launched no new project, though it began initial developments in
its land parcel at Savreli (new Panvel) and soft launched ~2.6msf of residential projects.
However, sales volumes declined steadily to ~0.8msf (v/s 1.2msf in 4QFY11) sales at
its ongoing projects, worth ~INR5.6b (v/s INR8.7b in 4QFY11). Total sales of its
ongoing projects amounted to INR65b (for ~9.2msf).
The key projects contributing ~60% of total sales volume are Indiabulls Green, Panvel,
Chennai and mid and premium-end projects in Gurgaon. Prices were stable at most of
its ongoing projects.
Average realization in 1QFY12 was steady at INR4,859/square foot (v/s INR5,000/
square foot in 4QFY11). However, lower average realization over past nine months in
comparison to its 2QFY11 level of INR17,217/square foot indicates a sharp fall in
sales momentum in IBREL's key super luxury projects in central Mumbai.
IBREL is awaiting approval at Bleu (Worli) project and is likely to launch the project
in 2QFY12 along with launch of Savreli town ship.
Leasing momentum was steady at IBREL's IPIT commercial properties in Mumbai.
The company leased ~0.17msf of new leasing in 1QFY12 (against 0.21msf in 4QFY11
and 0.25msf in 3QFY11), leading to total leased area of 1.8msf. Recent leasing at
Indiabulls One was at INR175/square foot and the average prevailing lease rental at
Indiabulls Finance Centre was ~INR125-140/square foot. Key tenants include Morgan
Stanley, Tata Motor and Bloomberg.
Meaningful execution progress augurs well for robust cash flow
IBREL made meaningful progress in execution at its ongoing projects. Total residential
area under construction was 14.6msf and almost 1msf of new area of mid-income
commercial projects was added in 1QFY12, taking area under construction to 2.6msf
in 1QFY12.
With the start of its new development at Savreli (~2.6msf), total developable area
increased to ~62.6msf, with 86% skewed towards residential projects.
IBREL has been focusing equally on mid-income and premium segment projects with
~44% and 47% of developable area being allocated to these segments respectively.
Super premium projects account for ~5.5msf of developable area.
The management has guided for strong traction in execution with INR65b capex over
3-4 years in the RE vertical.
- IBREL's steady growth in revenue booking is attributable to its considerable progress
in construction. This also augurs well for a steady cash flow momentum.
IBREL posted significant traction in land bank expansion after a subdued FY10 with
acquisition of ~193 acres (INR24.4b) of land in FY11 against 77 acres (INR1.3b) in
FY10. In 1QFY12, IBREL continued to acquire contiguous land pacrecels of ~51.7acres
for INR2.5b acroos key locations such as Panvel (Mumbai), NCR and Chennai.
Steady increase in net DER(x) to 0.28x
In 1QFY12 IBREL's gross debt declined to INR32.6b (v/s INR37.3b in 4QFY11).
IBREL's consolidated gross debt includes INR10.3b from Indiabulls Power (IPL).
However, due to a sharp decline in liquid investment from INR19.3b in 4QFY11 to
INR5.4b in 1QFY12 net debt increased to INR26b against INR15b in 4QFY11, implying
net DER(x) of 0.28x v/s 0.16x in 4QFY11.
Corporate restructuring: De-merger of non-core entities positive
Scheme of arrangements: In 1QFY12 after the High Court's approvals on the scheme
of arrangement, IBREL de-merged its wholly owned subsidiary Indiabulls Wholesale
Services Limited (IBWSL) and in consideration for the de-merger, IBWSL issued one
equity share of face value of INR2 for every eight equity shares of face value of
INR2 in IBREL. The process of listing IBWSL is underway and expected in 2/3QFY12.
De-merger of the power business: In 1QFY12 IBREL received required approval
from shareholders and creditors on the restructuring of the power and infrastructure
business. IBREL will transfer the power business, comprising 58.6% stake in Indiabulls
Power (a listed company) as a going concern to Indiabulls Infrastructure and Power
Limited (IIPL). This is a 100% subsidiary of IBREL and IBREL shareholders will be
entitled to ~2.95 shares of IIPL for every share held in IBREL.
Indiabulls Builders (a 100% subsidiary of IBREL, Thane SEZ) will also be amalgamated
with IBREL. The process is awaiting approvals from the Delhi High Court, which are
expected over 3-6 months.
We believe IBREL's strategy of de-merging its non-core business will create focused
entities and is a key positive since it is likely to address shareholder concerns and
unlock values through the possible listing of de-merged entities going forward.
Other updates
In 1QFY12 IBREL received a stop-work notice from the Maharashtra Pollution Control
Board (MPCB) pertaining to a residential project on plot numbers 612 and 613 (Sky
Suites, Elphinstone Mills) due to the absence of requisite environmental clearance.
IBREL is awaiting MoEF approvals for its projects.The management expects
construction to resume in 2QFY12.
However IBREL Sky (the oldest and most advanced of the lot), in which the company
has approval until floor 35, is progressing well.
Indiabulls Power
Indiabulls Power's (IPL) ~2.7GW unit (1.35GW each at Nashik and Amravati), has
made considerable physical progress. The management had indicated that Phase-2 of
the projects would enter construction phase in FY12.
Projects of ~5,400MW were under execution for IPL as on 4QFY11 and the combined
capex for the entire capacity is ~INR270b.
IPL awarded BTG equipment for Phase 1 of the Nasik and Amravati projects (2.7GW)
to BHEL in mid-FY09 and BOP for the projects were awarded to various vendors
(Shapoorji for civil work, Gammon for the chimneys, Paharpur for the cooling towers
and ABB for the switchyard). For Phase II of the projects we understand BTG was
awarded to BHEL and part advances given (~6% of the contract value).
IPL aims to commission the first unit of Amravati projects by May 2012 and the entire
project by January 2013. IPL expects the first unit at Nashik project to be commissioned
by September 2012 and the entire project by June 2013.
Fuel availability: IPL received fresh linkages for Phase 2 Amravati (1,320MW) and
Nashik (1,320MW) in April 2010 from the Standing Linkage Committee of the ministry
of coal, government of India. Given the current coal linkages, IPL has secured fuel
availability for the entire 5.4GW capacity (including 2.6GW each at Amravati and
Nashik).
Off-take arrangement: IPL has entered into a long-term PPA with Maharashtra
State Electricity Distribution Company (MSEDCL) for supply of 1,200MW at a levelized
tariff of INR3.26/unit for its Amravati project. PPA entails net supply of 1,200MW of
power and thus, the actual capacity booked is ~1,320MW (considering ~10% auxiliary
consumption). Also, the PPA entails that 100% fuel cost is a pass through under tariff
(escalable component) and thus, IBPL is immune to fuel cost increase. For the Nashik
project too, it signed a PPA with MSEDCL at a levelized tariff of INR3.42/unit.
Financial closure for 5.4GW: IPL has started debt drawal for Phase 1 of the Nasik
and Amravati projects (2.7GW). The total debt drawn as on 1QFY12 was INR15.7b
(INR11.5b in 4QFY11) in Amravati Phase I and INR13.9b (INR9.5b in 4QFY11)
Nasik Phase 1. However significant debt has been drawn as a Letter of Credit in
favor of the supplier. Actual outstanding debt on the books is thus lower at INR10.3b.
The management plans to meet the equity requirement of Phase II projects through a
combination of existing equity and equity augmentation plan to (a) augment the net
worth of the company by ~INR10.5b by the possible amalgamation with IIDL, and (b)
tie-up with sub-debt-cum-SBLC facility for INR9b with a private bank.
Valuation and view
We believe that in FY11, IBREL mitigated several key concerns regarding overcapitalization
and lack of operational visibility on the core real estate business, through
(1) deployment of surplus cash in the acquisition of strategic land parcel, (2) steady
sales and execution progress across projects, and (3) strong ongoing recovery in the
commercial vertical.
While oversupply and sluggish sales in its key central Mumbai market have been a
major concern, we believe IBREL has the first mover advantage with a large part of
the central Mumbai construction set to be completed ahead of the competition. The
presence of mid-income projects in attractive markets such as Panvel and Gurgaon
provide strong volume cushion during sales torpidity in the luxury segment.
IBREL is available at a 52% discount to our one-year forward NAV estimate of
INR237 and trades at 0.5x FY13E BV of INR242 and 14.6x FY13E EPS of INR7.9.
Maintain Buy.
Company description
IBREL, the de-merged real estate arm of Indiabulls
Financial Services (IBFSL), listed on the Bombay Stock
Exchange and the National Stock Exchange in March 2007.
It entered the real estate sector in 2005 after it won two
land parcels at auction bids of textile mill land in central
Mumbai. The company is focused on development and sale
of residential properties in tier-I cities like the NCR, Mumbai
and Chennai and rental of commercial properties to be
developed in Mumbai.
Key investment arguments
Strong monetization visibility from robust pre-sales and
steady progress in execution;
Strong ongoing recovery in the commercial vertical a
positive;
Restructuring of IBREL's holding in IPL a positive for
IBREL shareholders and the move will reduce its NAV
discount.
Key investment risks
Since IBREL is a relatively new player in the real estate
space, execution of its aggressive development plan
seems to be a challenge.
Oversupply concerns in central Mumbai may lead to
price rationalization, which could have a detrimental
impact on its IPIT projects.
Delay in execution and lower FSI approval in recently
acquired mill land.
Recent developments
In 1QFY12 IBREL received required approval from
shareholders and creditors on the restructuring of the
power and infrastructure business. IBREL will transfer
the power business, comprising 58.6% stake in Indiabulls
Power (a listed company) as a going concern to
Indiabulls Infrastructure and Power Limited (IIPL).
Valuation and view
We believe over FY11, IBREL has mitigated concerns
regarding its over-capitalization and lack of operational
visibility on the core real estate business, due to (1)
deployment of surplus cash, (2) steady sales and
execution progress across projects and (3) strong
ongoing recovery in the commercial vertical.
IBREL is available at a 52% discount to our one-year
forward NAV estimate of INR237 and trades at 0.5x
FY13E BV of INR242 and 14.6x FY13E EPS of
INR7.9. Maintain Buy.
Sector view
RE sector has been a major underperformer over the
last 12 months with multiple operational and nonoperational
headwinds such as volume slowdown (due
to declining affordability), monetary tightening, pilling
liquidity pressure etc. However, with a buoyant macropicture,
increasing focus on execution and ongoing
revival in the commercial and retail segments, we
believe the outlook will improve going forward.
