Institutional Equities
This page has been intentionally left blank
Institutional Equities
Real Estate Sector 4 October 2011
Till Debt Do Us Part View: Negative
We believe the residential segment in India will decelerate further with the inventory level expected to go up over the next one year on declining off-take Param Desai amid increased launch of new projects on the back of the festive season kicking [email protected] +91-22-3926 8128 in. The consequent weakness in transaction volumes will exert further pressure on developers in servicing their debt while having a stretched Balance Sheet.
This could lead to softening of prices, as banks could force realtors to cut their inventory level to repay debt. While share prices of most real estate companies are at a significant discount to their NAV barring Godrej Properties (GPL), we One Year Indexed Performance (Based to 100) believe those having good visibility on new project launch/pricing strategy, 120 strong Balance Sheet and pre-sales will able to withstand any further downturn. 110 100
Sector Sector Top picks from our coverage are Oberoi Realty (ORL) and HDIL. 90 80 Volumes to disappoint: We expect volumes to remain subdued over the next one 70 60 year on account of delay in government approvals and affordability issue due to higher 50 realty prices and rising interest rates on home loans. Though the market consensus 40 30 expects home loan rates to peak out, we believe the developers’ reluctance to cut Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 prices can delay the recovery process and thereby hurt volumes. We expect Sobha BSE Sensex BSE Realty Index Developers (SDL) and DLF to miss their FY12 contracted sales guidance of Rs15bn Source: Bloomberg and Rs70bn, respectively, as we estimate contracted sales at Rs13.3bn and Rs55bn, thereby leading to earnings downgrade. On other hand, for HDIL, we are banking on competitive pricing strategy and FSI (floor space index) sales to drive volumes. In the case of ORL, the launch of Oasis (Worli, Mumbai) will drive pre-sales in the near term. Strain on operating cash flow: We expect muted debt reduction over FY11-13E on account of subdued volumes and margin contraction. The focus on meeting debt commitments will hamper project execution. Hence, we believe revenue recognition will lag on account of slower cash collection, which will exert pressure on working capital as buyers make construction-linked payment rather than time-linked. Going forward, we expect operating cash flow to remain negative for GPL, SDL and DLF. Positive cash flow + deleveraging = Buy: Among our coverage universe, ORL and HDIL are the only companies to have positive operating cash flow after accounting for interest costs over FY11-13. ORL is our top pick, given its high valuation visibility, as the ongoing city-centric projects, operational lease assets and cash account for 51% of NAV and we expect ORL to be aggressive on the new project launch front in FY13. We also assign a Buy rating to HDIL as it will turn operating cash flow positive after interest costs with a strong earnings CAGR of 23.5% over FY11-13E, largely driven by competitive pricing strategy, strong pre-sales amounting to Rs46bn (2.5x FY11 sales) and FSI sales. We assign a Sell rating to DLF as we expect muted debt reduction and subdued earnings CAGR of 6.2% over FY11-13. We also assign a Sell rating to GPL as it is trading at a 10% premium to our NAV, and we expect contraction in margins and rising leverage. As regards SDL, 63% of its project launch in new cities will be challenging and muted visibility on debt reduction in FY12 offsets the 32% discount to NAV. We assign a Hold rating to SDL as the stock appears to be fairly valued.
Target Up/ EPS Market cap NAV Discount/ P/BV (x) RoE (%) CMP Price (down) CAGR (%) (Rs/ (premium) Company Rating Rsbn US $bn (Rs) (Rs) (%) FY11-13E share) to NAV (%) FY12E FY13E FY12E FY13E DLF Sell 341 6.9 201 174 (13.4) 6.2 217 7.4 1.2 1.2 6.1 6.6 Godrej Properties Sell 46 0.9 660 600 (9.1) 13.1 600 (10.0) 4.6 4.0 14.1 17.0 HDIL Buy 39 0.8 92 142 54.3 23.5 202 54.5 0.4 0.3 10.3 11.2 Oberoi Realty Buy 76 1.6 232 283 22.0 26.3 283 18.0 2.0 1.7 14.9 19.7 Sobha Developers Hold 20 0.4 208 227 9.1 13.9 307 32.2 1.0 0.9 9.2 11.2 Source: Bloomberg, Nirmal Bang Institutional Equities Research
Institutional Equities
Table of Contents
Residential demand to decelerate further..…………………………………………………………...….05
Inventory levels to go up……………………………………………………………………………………06
Commercial segment’s performance good so far..……………………………………………….……..08
Funding moderating, but not drying……………………………………………………………………….10
Operational cash flow still remains weak…………………………………………………………………12
We are below consensus estimates in respect of DLF, GPL and SDL………………………….…….14
Valuation..…………………… …………………………………………………………………..…….……16
Companies
DLF…………………………………………………………...…………………….………….……..….……21 Godrej Properties ……………………………………………………………………………...…….….…..31 HDIL……………………………………………………………………………………………….……..……39 Oberoi Realty………………………………………….……………………………...…………..……….…47 Sobha Developers..…………………………………………………………………...……….….……..….55
4 Real Estate Sector
Institutional Equities
Residential demand to decelerate further Volumes contract in 1QFY12 Transaction volumes in 1QFY12 declined across cities on sequential basis whereas cities like Mumbai, Gurgaon, Hyderabad and Kolkata reported negative growth YoY, mainly due to subdued project launches, the lowest since March 2010. This was mainly on account of delay in government approvals and subdued demand because of higher prices as well as interest rates on home loans. Consequently, it dented affordability and resulted in buyers deferring purchases, thereby boosting rentals (10-20% YoY increase across major cities). The rise in rentals delayed correction in the secondary market. We believe that as of now the structural demand exists at lower price points and mortgage rates, but developers’ reluctance to cut prices can prolong the recovery. Exhibit 1: 1QFY12 residential demand growth
Chennai Bangalore Pune Kolkata Hyderabad Mumbai Ahmedabad MMR (%) Gurgaon
(60) (40) (20) - 20 40 60 80 100 YoY growth QoQ growth Source: Industry, Nirmal Bang Institutional Equities Research Salary growth lags behind rise in property prices The salaried class, which accounts for ~70% of total residential demand in India, has witnessed 10-13% CAGR in salary over FY09-11, as per industry experts like Aon Hewitt and Mercer. However, property prices in cities like Mumbai and NCR (national capital region), which account for more than 40% of residential demand, have gone up by 60-80% from their FY09 lows. Hence, transactions in Mumbai and NCR have been hurt the most over the past few quarters. Further, rising inflationary pressure since 2HFY2011 has dented the purchasing power of buyers. Other cities like Chennai and Kolkata have also seen a rise in property prices by 25-40% since FY09, but prices in Bangalore have moved in line with salary growth. Exhibit 2: Price trend across cities
(Price Index) 190
170
150
130
110
90
70 CY08 CY09 CY10 1HCY11 Gurgaon Noida Bangalore Chennai Kolkata Mumbai Salary Source: ICICI HFC, Cushman & Wakefield, Note: Assume 100 as the base for Jan 08
5 Real Estate Sector
Institutional Equities
Inventory levels to go up As per media reports and industry sources, the residential inventory level is still at 42-80% off its peak (2008). Over the past few months, the inventory has been stable at around 9-15 months, as against its peak of 30-55 months in December 2008, across cities, despite slowdown in transactions. We believe this is largely on account of subdued new launches in cities like Mumbai, Noida and Chennai, mainly due to delay in government approvals and regulatory issues. On other hand, the inventory level has moved up slightly in Bangalore on account of aggressive new launches, thanks to stable IT/ITES demand. All this has resulted in prices remaining firm across cities despite subdued demand. Going forward, we expect the inventory level to go up in FY12 with slowdown in off-take and increased new launches with the festive season kicking in. Exhibit 3: Outstanding inventory days (Fig. in months) Dec-2008 Jun-2011 Deviation from peak Gurgaon 55 12 (78.2) Bangalore 42 18 (57.1) Ahmedabad 35 10 (71.4) Noida 33 9 (72.7) Kolkata 31 17 (45.2) Chennai 30 11 (63.3) Mumbai 26 15 (42.3) Source: Industry, Nirmal Bang Institutional Equities Research Affordability takes a hit We believe affordability has taken a hit with lowering loan-to-value ratio (LTV), from 90% to 80%, thereby increasing the down payment sum for buyers. Further, the Reserve Bank of India (RBI) has hiked interest rates 12 times (325bps) since March 2010 to combat inflationary pressure and increased risk weight to 100% (from 50% earlier) for teaser home loans. This led to a rise in home loan rates, which have gone up from a low of 8% in January 2010 to 11-12% currently. Consequently, transaction volumes have gone down, especially in Mumbai and NCR, where prices have gone up steeply and are quite visible in 1QFY12 volumes. As per market consensus estimates, another 25bps hike in interest rates is likely and the reversal in rates may set in from 4QFY12, depending upon the inflation level. In the case of rate reversal, it will give some respite to buyers, but we believe residential demand will be driven more by affordable prices and salary growth. To cite an example, SDL and Prestige Estates’ buyer profile comprises only 55-60% who actually opt for a mortgage loan, of which the average LTV is 50-55% and in the case of ORL, the buyers with bank financing are just 40%. Exhibit 4: Hike in interest rates by 325bps since March 2010 Exhibit 5: Banks’ mortgage rates
(%) Floating rates Aug -2011 (%) 8.5
7.5 HDFC 11.3
6.5 ICICI Bank 11.0 5.5 PNB 12.5 4.5
3.5 IDBI Bank 11.0
2.5
Kotak Mahindra Bank 11.0
10 11 11 10
10 11 11
10 10 11 11
10 11
11
10 11 10
10 10
- - - -
- - -
- -
- -
- - -
- - -
- -
Jul Jul
Oct Apr Apr
Jun Jan Jun
Mar Mar
Feb
Aug Nov Dec Aug Sep Sep
May May Repo rate Reverse repo rate SBI 11.0
Source: RBI Note: For loans between Rs 3-7.5mn Source: Companies
6 Real Estate Sector
Institutional Equities
DLF, SDL to miss sales guidance in FY12… We expect DLF to report flattish YoY growth in volumes (10.5mn sq ft) with 18% drop in contracted sales, as against the company’s guidance of 10-12mn sq ft with a 10% YoY growth in contracted sales. This is on account of delay in approvals, thereby delaying its high-end residential projects (NTC and Chanakyapuri) projects and higher contribution from low value plot sales. Further, we expect SDL to sell 2.9mn sq ft, accounting for Rs13.3bn of sales, as against annual volume guidance of 3.2-3.5mn sq ft (Rs15bn of sales). This is on account of SDL’s overdependence on new cities and its Bangalore launch concentrated in a single location, which will hurt volumes. Exhibit 6: Contracted sales, volume trends
80 67 70 58 60 55 50 40 30 20 15 10.3 11 10.5 13 11.6 10 2.7 2.9 3.3 0 DLF SDL DLF SDL DLF SDL
FY11 FY12E FY13E
Area sold (mn sq ft) Sales (Rsbn) Source: Companies, Nirmal Bang Institutional Equities Research …but HDIL, GPL and ORL have strong pre-sales GPL’s pre-sales have been stronger in FY11, which increased to 3.2mn sq ft (up 128.6% YoY) in volume terms and Rs10.7bn (up 153.8% YoY) in value terms, thanks to Garden City project (in Ahmedabad). On the other hand, ORL has also registered strong pre-sales at its Exquisite and Esquire project in Goregaon (East), thereby providing revenue visibility of Rs12.8bn (1.3x FY11 sales), which will get booked over the next two years. HDIL follows the most conservative method of revenue booking among its peer group, wherein it books revenue on project completion. HDIL has also registered strong pre-sales of Rs46.3bn (2.5x FY11 sales) since March 2009, which will get booked over the next two–three years. Further, we believe ORL with zero debt and HDIL with comfortable net debt-to-equity will be able to focus on faster execution of their ongoing projects with strong pre-sales in place, unlike in the case of GPL which is likely to see increase in leverage and pressure on the working capital front. Exhibit 7: Strong revenue visibility
(Rsmn) 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - HDIL GPL ORL FY11 FY12E FY13E Source: Company, Nirmal Bang Institutional Equities Research
7 Real Estate Sector
Institutional Equities
Commercial segment’s performance good so far Bangalore leading the way in absorption… Unlike the residential segment, recovery in the commercial segment lags behind recovery in the economy. The absorption of commercial space has gone up from 5mn sq ft/quarter in CY09 to 6.3m sq ft/quarter in CY10 among top five cities (Mumbai, NCR, Bangalore, Chennai and Kolkata) i.e. an increase of 26% YoY. Bangalore, led the way with a 79% YoY increase in absorption/quarter along with Chennai and NCR reporting 28% and 33% YoY growth, respectively, thanks to recovery in the IT/ITES segment post the 2008 slowdown. Mumbai reported a decline in absorption in CY10 on account of lesser supply hitting the market, but it gained momentum in 1HCY2011(absorption/quarter increased by 9% YoY) on fresh supply of 3mn sq ft in suburban and peripheral locations. We expect overall absorption/quarter to remain stable in CY11, but CY12 will remain challenging in the event of prolonged slowdown in the US and Europe which will impact IT/ITES demand, particularly in cities like Bangalore. Exhibit 8: City-wise absorption (mn sq ft) 12
10
8
6
4
2
0 Bangalore NCR Mumbai Chennai Kolkata CY09 CY10 1HCY11 Source: Cushman & Wakefield …but SDL’s residential volume in Bangalore peaking out SDL, being the largest mid-income residential developer in Bangalore with 50% of its land bank (total land bank 227mn sq ft), is a key beneficiary of growing demand from the IT/ITES sector. However, SDL’s volumes in Bangalore have declined on a sequential basis over the past two quarters and seem to be peaking out at 0.5-0.6mn sq ft/quarter. We believe the buyers in Bangalore are more price sensitive as compared to other cities, which is reflected in the kind of price hikes witnessed over the past two years. SDL’s average price (Rs4,067/sq ft) has grown 33% in FY11, reporting an average price of Rs4,564/sq ft in 1QFY12. The higher realisation is mainly on account of its product mix skewed towards villas and other high-end products. This has resulted in volumes peaking out for SDL as buyers are looking for more affordable products in the current high inflationary scenario. To cite an example, Prestige’s management has indicated that the company could manage to sell more than 1,000 units (~1.2mn sq ft) in 2QFY12 at its newly launched project Prestige Tranquility (priced at Rs3,000/sq ft) in Bangalore, which is the highest run-rate/quarter achieved by it so far.
8 Real Estate Sector
Institutional Equities
Exhibit 9: Quarterly trend in SDL Bangalore volume Area (sq ft) 620,000
570,000
520,000
470,000
420,000
370,000
320,000 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
Source: Company, Nirmal Bang Institutional Equities Research Vacancy level remains high, expect rentals to remain firm Vacancy levels remain high due to withdrawal of benefits under the Software Technology Park of India (STPI) scheme coupled with the applicability of MAT (minimum alternate tax) on SEZ, which has resulted in IT/ITES companies formulating alternate strategy for the coming years. Further, there are also low pre-commitments on new supply. As per the new regulations, IT units can avail of the benefits under the SEZ Act, 2005 if the SEZ is notified prior to FY13, or units move into the SEZ by FY14. We believe this will result in higher absorption coming into circulation ahead of these two deadlines. Bangalore and Chennai have seen a decline in vacancy on account of strong demand and constricted supply, which has been instrumental in bringing down overall vacancy levels to 13.3% and 17%, respectively. We expect rentals to remain firm in the near term due to consistent demand. However, we have conservatively factored in no increase in rentals for FY12 with a 5% increase from FY13 onwards for companies under our coverage. Exhibit 10: Vacancy level in key cities
(%) 30
25
20
15
10
5
0 Bangalore NCR Mumbai Kolkata Chennai CY10 2QCY11 Source: Cushman & Wakefield Among our coverage universe, DLF and ORL are key beneficiaries of stable commercial demand. DLF had leased assets of 24.5mn sq ft as on end June 2011. However, DLF’s net leasing declined from a net run rate of 1.1mn sq ft/quarter in FY11 to 0.7mn sq ft in 1QFY12, as the management intends to concentrate on leasing existing properties before new project launch. We expect 3mn sq ft of incremental leasing in FY12 as well as FY13 as against 4.1mn sq ft leased out in FY11 with a flattish growth in rentals, thereby taking total leased assets to 30mn sq ft with a rental income of Rs18bn in FY13. In the case of ORL, it has stable rent-yielding assets of 1.3mn sq ft at prime locations, which has yielded rental income of Rs1,792mn (18% of total revenue) in FY11. We expect ORL to show a 28.1% CAGR over FY11-13E in rental income, at Rs 2,941mn, with 2.3mn sq ft of rent-yielding assets getting operational by FY13.
9 Real Estate Sector
Institutional Equities
Prolonged slowdown in US/Europe remains risk for further expansion of IT/ITES sector The IT/ITES sector accounts for ~65-70% of the total demand for office space in India. Commercial demand has remained stable over the past one year with rising absorption and firm rentals. We believe the demand from the IT sector could be restrained owing to prevalent global sentiment, characterised by uncertainty across a few European economies and unrest in the Middle East which will make the IT sector to adopt a cautious approach towards expansion. However, there are still no negative signs from IT/ITES companies with respect to slowdown in hiring or moderating salary growth, even as the market is grappling to estimate the extent of the slowdown in demand from the IT/ITES sector. In the case of an IT/ITES slowdown, DLF and SDL will have a major impact on account of higher rent-yielding assets and greater exposure towards IT/ITES-dominated cities, respectively. Exhibit 11: Trend in IT/ITES sector’s employee growth
(000) (%) 3,000 30 25.4 24.0 2,500 25
2,000 20
1,500 15 11.1 1,000 9.3 10
500 5 4.1 - 0 FY06 FY07 FY08 FY09 FY10 FY11 IT employees-LHS YoY growth-RHS Source: Nasscom Funding: Moderating, not drying Credit growth, which had witnessed a sharp acceleration in 2010-11, moderated in the first quarter of 2011-12 on YoY basis, partly reflecting the effect of higher lending rates and partly the base effect. Bank lending to the real estate sector moderated from 22% growth, YoY, registered in April 2011 to 17% in July 2011. Real estate credit growth lagged behind non-food credit growth YTD. This was on account of the RBI’s directive to banks to slow down their lending to real estate projects as a precautionary measure to avoid loan defaults. Moreover, real estate loans as a percentage of non-food bank credit remained relatively stable at ~3.1% in July 2011, in line with FY11. As per our interaction with developers and industry experts, funding by banks has not dried up for developers having a quality Balance Sheet and stable cash flows. Exhibit 12: Credit growth to real estate sector moderated in 1QFY12
(%) 26
24
22
20
18
16
14
12 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Non-food bank credit YoY growth-LHS Real estate credit growth YoY-RHS Source: RBI
10 Real Estate Sector
Institutional Equities
Interest rates become dearer Average cost of debt for the realty sector has gone up by 100-500bps since FY10. Fresh loans are offered at 12.5-15.0%. Average cost of debt for companies under our coverage has gone up by 20-100bps in 1QFY12 and the recent hike of 25bps by RBI will further increase interest costs in FY12. Most of the mid-sized developers are rushing in for Non Convertible Debentures (NCDs), which are dearer than bank loans, as banks have become more cautious on lending to the real estate sector. The recent NCD issuance by developers carried a coupon of 15-20% per annum. However, debt raised through rental discounting continues to remain attractive. Consequently, DLF, with 20mn sq ft of rent-yielding assets, is able to generate competitive rates as compared to its peer group. Exhibit 13: Average cost of debt Exhibit 14: Recent NCD issuance by developers ( %) FY10 FY11 1QFY12 Rate of Date of Companies Interest (%) issuance Tenor DLF 10.5 11.2 11.4 Puravankara Projects 16.0 Apr-2011 34 months GPL 10.9 9.9 11.0 Century Real Estate 20.0 Feb-2011 48 months HDIL 12.7 14.4 14.2 Kumar Housing & Land Development 19.0 Aug-2011 4 months Lily Realty 19.0 May-2011 31 months ORL* NA NA NA Lodha Dwellers 16.8 Feb-2011 36 months SDL 14.5 12.9 13.6
Parsvnath Developers 14.8 Apr-2011 36 months
Note: ORL is zero debt company Source: NSDL, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research Muted visibility on debt reduction Net debt to equity ratio has improved for all companies under our coverage barring DLF, thanks to fund raising done through the QIP/IPO route and land sales over the past two years. Further, strong pre-sales in the residential segment and lower fresh land acquisitions over FY09-11 helped developers to focus on project execution. This has resulted in strong revenue growth for most of the companies under our coverage over FY09-11. However, DLF reported stagnant revenue growth over FY09-11 due to subdued new project launch. Among our coverage universe, we expect HDIL to reduce its net debt/equity from the current level of 0.43x to 0.31x in FY13 led by increased FSI sales and new launches, whereas ORL continues to remain in a net cash position. Further, GPL’s net debt is set to increase (highest among its peers) from 0.9x to 1.3x in FY13E, as it turns asset heavy with the recent acquisition of land at BKC and its intention to lease out Trees property (Vikhroli, Mumbai) which will be monetised post FY14. Consequently, we expect muted debt reduction visibility for DLF, GPL and SDL due to subdued volumes and increased pressure on working capital. Exhibit 15: Leverage of companies under our coverage (x) 2.5
2.0
1.5
1.0
0.5
0.0 FY09 FY10 FY11 FY12E FY13E (0.5)
(1.0) DLF GPL HDIL ORL SDL Source: Companies, Nirmal Bang Institutional Equities Research
11 Real Estate Sector
Institutional Equities
Front-ended debt maturity could lead to prices softening The maturity profile for DLF and HDIL is spread over four-five years, which makes them less vulnerable to the rise in interest rates. SDL and GPL are more vulnerable to a further hike in interest rates by RBI as 44.3% and 73.8%, respectively, of their outstanding debt matures in FY12. GPL’s Joint Development Agreement (JDA) model is more working capital-intensive, as a result of which its debt profile is more short-term in nature. Consequently, a further hike in interest rates will impact SDL and GPL more among our coverage universe. This was evident in 1QFY12, where average cost of debt rose by 70bps and 100bps for SDL and GPL, respectively. We believe this is the case for most of mid-sized developers, for whom maturity of debt is more front-ended. We believe the consequent weakness in transaction volumes will exert further pressure on servicing debt for mid-sized developers. Hence, we believe this could lead to softening of prices as banks could force a cut in inventory level in order to repay debt. Exhibit 16: Repayment schedule (Rsmn) Debt outstanding Repayment schedule in FY12 Contribution as % of total debt DLF 239,093 28,000 11.7 GPL 9,449 6,969 73.8 HDIL 43,198 4,000 9.3 SDL 12,418 5,500 44.3 Source: Companies, Nirmal Bang Institutional Equities Research Operational cash flow still remains weak Average cost of debt for companies under our coverage has gone up by 100-200bps since FY10. Fresh loans are coming in at 12.5-15.0%, but rental discounting continues to remain attractive. Further, inflationary pressure has led to input cost pressure, leading to weak OPM in FY11. DLF’s positive operating cash of Rs26bn in FY11 was negated by interest costs of Rs26bn. We expect the cash flow to remain negative on account of 18% drop in contracted sales owing to more focus on low value plot sales.
GPL’s JDA model is working capital-intensive and coupled with fresh investment in commercial properties will put further pressure on working capital, thereby increasing its leverage.
Over the past two quarters, HDIL has turned to positive operating cash flow. We expect it to generate Rs 4bn of free operating cash flow after interest costs over FY11-13E, thanks to stable debtors and good collections via pre-sales and FSI sales.
ORL is the only developer among our coverage universe which is cash flow positive from FY09 onwards, thanks to its access to land at a cheaper cost at prime locations in Mumbai. Being net cash reserve of Rs 15.6bn, ORL will be a major beneficiary in the event of correction in land prices.
SDL has generated a positive cash flow of Rs2bn in FY11, owing to land sales worth Rs1.8bn, which we believe will remain challenging under the current tight liquidity environment. Consequently, we expect operating cash flow post interest payment to remain weak for SDL, GPL and DLF. Exhibit 17: No respite to operating cash flow (Rsmn) FY09 FY10 FY11 FY12E FY13E DLF (45,733) (66,727) (4,020) (14,180) (811) GPL (3,883) (4,676) (2,432) (3,566) (4,373) HDIL (12,204) (13,062) (26,219) 1,119 2,612 ORL (1,169) 3,554 240 975 1,856 SDL (1,569) 712 2,063 (1,837) (2,107) Source: Company, Nirmal Bang Institutional Equities Research
12 Real Estate Sector
Institutional Equities
No near-term material impact on cash flow, but detrimental for sector Recent land acquisition bill The Union Cabinet has cleared the Land Acquisition (Rehabilitation & Resettlement) Bill 2011, which will be tabled before the parliamentary standing committee in the winter session of Parliament. The Bill is meant to facilitate land acquisition at a faster pace in a transparent manner and also provide better compensation package for farmers/land owners. We believe such a provision will make land acquisition faster without any litigation and offer transparency in respect of costs associated with the acquisition. However, land acquisition costs are likely to go up by more than 50% when compared with the current scenario. This will impact margins in the long term, as land costs get adjusted to the new compensation policy. It will also discourage developers against going for large township and SEZ (Special Economic Zone) projects. Further, the R&R provisions are applicable for acquisition of more than or equal to 50 acres of land in urban areas as against 100 acres proposed in the earlier draft Bill, which will bring more developers under its purview. However, we believe most real estate companies have land bank visibility for the next 8-10 years and are not keen on land acquisition in the current tight liquidity environment.
CCI penalty on DLF Competition Commission of India (CCI) recently levied a penalty of Rs6,300mn on DLF (Rs4/share, or 38% of FY11 profit) for abuse of its dominant position in Gurgaon, thereby violating the Competition Act, 2002. The penalty order details DLF’s misuse of its dominant position in one of its projects (DLF Beliare) where it has increased the project’s floor size without buyers’ consent and certain conditions in the sales contract were unfair to buyers. DLF can appeal to Competition Appellate Tribunal (CAT) for reversal of the CCI order and can even go to the High Court and Supreme Court in the event of CAT ruling in favor of CCI. We believe CCI’s penalty is detrimental for the realty sector, as most of developer’s contracts are similar. The only saving grace can be the dominant position of DLF in Gurgaon, which we believe would be difficult to prove for other developers.
13 Real Estate Sector
Institutional Equities
We are below consensus estimates in the case of DLF, GPL and SDL
Our estimates vs consensus estimates We believe DLF’s focus on plot sales with s lower value, which will result in 18% YoY drop in contracted sales to Rs 54.6bn in FY12 as against its premium positioning with a diverse mix of products over the years. However, market consensus is hopeful of the company launching its high-end residential projects like Chanakyapuri and NTC, which will result in flat-to-moderate growth in contracted sales. Further, we don’t expect any meaningful reduction in interest expenses in lieu of muted debt reduction visibility. Consequently, we are 7.4% and 12.2% below consensus estimates on profits in FY12 and FY13, respectively. We have assumed 10% YoY decline in GPL’s volumes in FY12, which is below consensus estimate, to factor in the slowdown in the residential segment coupled with the volumes at Garden City project likely to peak out. Further, we expect GPL’s margins to contract in FY12, as they are more vulnerable under the JDA model to raw material cost escalation. Consequently, we are 11.7% and 22.1% below consensus estimates on profits for FY12 and FY13, respectively. We are banking on HDIL’s competitive pricing strategy and expect it to remain aggressive on new launches in FY12 and FY13. We also expect the completion of three residential projects (Premier, Galaxy, and Metropolis) and its industrial park to contribute substantially to revenues starting from 4QFY12. Consequently, we are 3% and 8% ahead of Bloomberg revenue estimates for FY12 and FY13, respectively. We are building in 0.61mn sq ft of area sold for ORL in FY12, which is below consensus estimate. We believe the market is factoring in slowdown in Mumbai property market impacting FY13 earnings rather than FY12 earnings. We believe the company will be aggressive on new launches like Prisma and Exquisite III in FY13 and focus more on execution of existing projects where pre-sales have been very strong. Consequently, we expect more than 1mn of new sales in FY13, with conservative pricing assumption. Hence, we are above consensus estimates by 7.6% for FY13E. SDL’s management has maintained its annual guidance of 11mn sq ft of new project launches, 3.2-3.5mn sq ft of sales (Rs15bn) and net debt/equity of 0.5x for FY12, which appears to be challenging, in our view. We expect 5% volume growth at 2.9mn sq ft (Rs13.3bn) versus market consensus estimate of more than 3mn sq ft and net debt/equity to remain flat YoY at 0.66x. Hence, our profit estimates are 15.7% and 10.5% below consensus estimates for FY12 and FY13, respectively.
14 Real Estate Sector
Institutional Equities
Exhibit 18: Our estimates vs consensus (Rsmn) FY12E FY13E Revenue Bloomberg NBIE Variance (%) Bloomberg NBIE Variance (%) DLF 100,766 97,956 (2.8) 110,493 108,148 (2.1) GPL 7,749 7,651 (1.3) 11,780 10,186 (13.5) HDIL 26,246 27,750 5.7 31,018 34,132 10.0 ORL 11,269 8,793 (22.0) 17,433 17,616 1.0 SDL 16,451 15,825 (3.8) 19,523 19,754 1.2 FY12E FY13E EBITDA Bloomberg NBIE Variance (%) Bloomberg NBIE Variance (%) DLF 44,808 43,847 (2.1) 49,827 47,706 (4.3) GPL 2,176 1,949 (10.4) 3,575 2,754 (23.0) HDIL 14,869 14,447 (2.8) 17,393 17,705 1.8 ORL 6,914 5,307 (23.2) 10,944 10,415 (4.8) SDL 3,720 3,252 (12.6) 4,560 4,277 (6.2) FY12E FY13E PAT Bloomberg NBIE Variance (%) Bloomberg NBIE Variance (%) DLF 17,654 16,353 (7.4) 21,064 18,504 (12.2) GPL 1,531 1,352 (11.7) 2,345 1,828 (22.1) HDIL 9,981 10,284 3.0 11,605 12,524 7.9 ORL 5,727 5,305 (7.4) 7,672 8,258 7.6 SDL 2,103 1,773 (15.7) 2,624 2,350 (10.5) Source: Bloomberg, Nirmal Bang Institutional Equities Research
15 Real Estate Sector
Institutional Equities
Valuation We have used the DCF-based approach to calculate the NAV of companies under our coverage based on existing land bank from which we have deducted customer advances, land bank payables and tax and added net cash or reduced net debt. Key assumptions We have factored in no increase in prices for ongoing projects, 10% reduction in base prices on new projects and 5% increase FY13 onwards. We have assumed zero growth in rentals in FY12 and 5% increase from FY13 onwards. We have assumed 5% increase in construction costs FY12 onwards. We have delayed the timeline of project execution by one year. We have assumed 16% cost of equity and 11% capitalisation rate
We initiate coverage on DLF, Godrej Properties, Oberoi Realty, HDIL and Sobha Developers DLF has a challenging task in FY12 to bring down its gearing level, get faster approvals in order to have successful new launches and for monetising non-core assets at a reasonable value. We expect the company to book 10.5mn sq ft (flat YoY) of development volume in FY12 and foresee limited upside to the management’s guidance of 10-12mn sq ft in FY12 under the current challenging macro environment. At the CMP, DLF trades at 1.2x P/BV and 18.4x P/E on FY13E earnings, which we believe is expensive given the subdued RoE of 6.6% in FY13 and 6.2% earnings growth over FY11-13E. We assign a Sell rating to DLF with a TP of Rs174 (13% downside from CMP), a 20% discount to one-year forward NAV. We believe the likely peaking out of volumes for GPL at its Ahmedabad Garden City township project and contraction of margins will play out over next two years. Further, GPL’s net debt is set to increase (highest among its peers) from 0.9x to 1.3x in FY13E, as it turns into asset-heavy mode with the recent acquisition of BKC land and intention to lease out Trees property (at Vikhroli) which will get monetised post FY14. We assign a Sell rating to GPL with a TP of Rs 600 (1x to our one year forward NAV), down 10% from the CMP. HDIL’s recent FSI sales amounting to Rs13.5bn will drive near-term cash flow visibility and help it to withstand slowdown in Mumbai property market. Over the past two quarters, HDIL has turned operating cash flow positive and we expect it to generate Rs 15bn of free operating cash flow over FY2011-13E on account of FSI sales (Goregaon, Andheri, Vasai and Virar), new project launches and collections from earlier projects. We believe its concerns over Mumbai airport project (MIAL) and weakening TDR demand are well priced in and the recent correction in share price by 32% over the past two months offers a good buying opportunity. At the CMP, HDIL is trading at 0.3x P/BV, 3.1x P/E and 55% discount to our one-year forward NAV. We assign a Buy rating to HDIL with a TP of Rs142 (30% discount to our one-year forward NAV), an upside of 54% from the CMP. We expect ORL to trade at one-year forward NAV, unlike its peers, given the high valuation visibility as ongoing city-centric projects’ operational lease assets and cash account for over 51% of NAV. Further, the company has a net cash balance of Rs15.6bn (Rs 49/share), which will help it in aggressive land acquisition in the case of price correction. We assign a Buy rating to ORL with a target price of Rs 283 (1x to our one year forward NAV) up 22% from the CMP. We believe there is a risk to SDL’s volumes because of its entry into new locations like Chennai, Gurgaon and Mysore (SDL planned launches in Chennai in 2QFY12 but they have been delayed due to government approval), which account for 63% of new project launches in FY12. Hence, we expect moderate volume growth of 5% YoY and thereby muted debt reduction in FY12. SDL’s low margin contractual business (~30% of total revenue) remains healthy with the addition of new clients and unbilled revenue of Rs7,510mn, thereby giving revenue visibility over the next 18 months. We assign a Hold rating to SDL with a TP of Rs227 (up 9% from the CMP), implying a 30% discount to our one-year forward NAV, to factor in any slowdown from the IT/ITES segment.
16 Real Estate Sector
Institutional Equities
Exhibit 19: HDIL looks most attractive on discount to NAV
(10) GPL
SDL 32
ORL 18
HDIL 55
DLF 7 (%)
(20) (10) 0 10 20 30 40 50 60
Source: Nirmal Bang Institutional Equities Research Exhibit 20: RoE vs P/BV (DLF looks most expensive with lowest RoE, higher P/BV)
(%) 25
19.7 20 17.0
15 11.2 11.2 10 6.6
5
0 DLF SDL HDIL GPL ORL
Source: Nirmal Bang Institutional Equities Research Exhibit 21: P/BV (FY13E)
(x) 4.5 4.0 4.0 3.5 3.0 2.5 2.0 1.7 1.5 1.2 0.9 1.0 0.5 0.3 0.0 HDIL SDL DLF ORL GPL
Source: Nirmal Bang Institutional Equities Research
17 Real Estate Sector
Institutional Equities
Exhibit 22: Valuation comparison P/E (x) P/BV (x) RoE (%) EPS CAGR Mkt cap CY11E/ CY12/ CY11E/ CY12/ CY11E/ CY12/ Indian companies (FY11/CY10- (US bn) FY13E/CY12E) FY12E FY13E FY12E FY13E FY12E FY13E DLF * 6.9 6.2 20.9 18.4 1.2 1.2 6.1 6.6 Godrej Properties * 0.9 13.1 34.1 25.2 4.6 4.0 14.1 17.0 HDIL * 0.8 23.5 3.7 3.1 0.4 0.3 10.3 11.2 Oberoi Reality * 1.6 26.3 13.2 9.1 2.0 1.7 14.9 19.7 Sobha Developers * 0.4 13.9 11.5 8.7 1.0 0.9 9.2 11.2 Anant Raj Industries 0.3 32.2 7.2 5.0 0.4 0.4 6.1 8.1 IBREL 0.6 37.6 10.5 7.2 0.3 0.3 2.8 4.0 Prestige 0.6 11.0 12.2 8.8 1.2 1.1 10.3 13.0 Phoenix mills 0.6 28.6 22.8 18.9 1.6 1.5 7.8 8.8 Unitech 1.3 8.8 9.8 7.9 0.5 0.5 5.7 6.5 Average - 20.1 14.6 11.2 1.3 1.2 8.7 10.6 Global companies
China Resources Land 5.2 24.3 7.2 5.9 0.8 0.7 11.7 13.0 Agile Property Holdings 1.9 34.8 2.7 2.2 0.5 0.4 21.2 21.2 Keppel Land 2.8 5.1 11.1 8.3 0.8 0.8 7.4 9.4 City Developments Ltd 6.4 2.8 11.8 11.9 1.2 1.1 10.8 9.6 Sino Land Company Ltd 6.7 16.2 11.2 9.5 0.6 0.6 5.9 6.5 Hang Lung Properties Ltd 13.0 35.7 17.1 14.8 0.9 0.8 5.3 5.9 Average - 19.8 10.8 9.3 0.9 0.8 10.4 10.9 Note: * Nirmal Bang Institutional Equities Research Estimates Source: Bloomberg, Nirmal Bang Institutional Equities Research
18 Real Estate Sector
Institutional Equities
CCoommppaannyy SSeeccttiioonn
19
Institutional Equities
This page has been intentionally left blank
20
Institutional Equities
DLF 4 October 2011
Reuters: DLF.BO; Bloomberg: DLFU IN Debt Overhang Remains SELL DLF’s land bank declined to 363mn sq ft at the end of 1QFY12 from a peak of Sector: Real Estate
755mn sq ft (in FY08) and 416mn sq ft ( in FY10) due to funding pressure which led to land sales and a product mix skewed towards development of plots, CMP: Rs201 thereby reducing FSI sales. We do not expect a meaningful reduction in debt in FY12 in the event of subdued new launches. Further, the recent penalty of Target Price: Rs174 Rs6.3bn levied by Competition Commission of India (CCI) has no near-term cash Downside: 13% flow impact, but could remain an overhang until it gets resolved. We expect 18% YoY drop in contracted sales in FY12, with increased focus on sale of low value Param Desai plots. We assign a Sell rating to DLF with a TP of Rs174. [email protected] +91-22-3926 8128 Our estimates significantly below consensus: We believe the company’s focus on sale of plots come with a lower value, which will result in a 18% YoY drop in contracted sales to Rs54.6bn in FY12 as against its premium positioning with a diverse mix of Key Data products over the years. Further, we don’t expect any meaningful reduction in interest Current Shares O/S (mn) 1,698.0 expenses in lieu of muted debt reduction visibility. Consequently, we are 7% and 12% Mkt Cap (Rsbn/US$bn) 341.0/6.9 below consensus estimates on profit in FY12 and FY13, respectively. Initiating Coverage Initiating 52 Wk H / L (Rs) 398/173 Deleveraging concerns still persist: DLF’s net debt has gone up by Rs50bn in FY11 Daily Vol. (3M NSE Avg.) 8,735,778 (30% YoY) on account of preference share buyback (Rs40bn) and land acquisition (Rs 10bn). Given that the company operates at cash flow breakeven, any debt reduction is firmly contingent on non-core asset disposal and successful new launches. The Share holding (%) 3QFY11 4QFY11 1QFY12 management has given a target of Rs60-70bn of non-core asset sales over the next Promoter 78.6 78.6 78.6 three years, which remains challenging in the near term in a tight liquidity environment. Further, a couple of its key residential projects like NTC (Mumbai) and Chanakyapuri FII 15.8 15.9 15.1 (Delhi) have been delayed following lack of government approvals. Consequently, we DII 0.5 0.4 0.4 expect net debt/equity ratio to remain flat in FY12. Corporate 1.5 1.3 1.5 Lower return ratios on account of inflationary pressure, subdued launches: Over General Public 3.7 3.8 4.4 the past two years DLF’s RoE was impacted on account of lower asset turnover, which was due to subdued new launches and the DLF/DAL merger, thereby increasing total assets. In FY11, inflationary pressure in the form of higher raw material and labour One Year Indexed Stock Performance costs impacted margins and thereby the RoE. We expect the RoE to remain in single digit until FY13E on account of subdued high value new launches. Valuation: DLF has a challenging task in FY12 to bring down its gearing level, get faster approvals in order to have successful launches and monetise its non-core assets at a reasonable value. At the CMP, DLF trades at 1.2x P/BV and 18.4x P/E on FY13E earnings, which we believe is expensive given the subdued RoE of 6.6% in FY13E and 6.2% earnings growth over FY11-13E. We assign a Sell rating to DLF with a TP of Rs174 (13% downside from CMP), a 20% discount to our one-year forward NAV. Y/E Mar (Rsmn) FY09 FY10 FY11 FY12E FY13E Price Performance (%) Net sales 100,354 74,229 95,606 97,956 108,148 1 M 6 M 1 Yr EBITDA 55,900 35,116 37,527 43,847 47,706 Net profit 44,682 17,198 16,396 16,353 18,504 DLF (3.4) (26.2) (48.3) EPS (Rs) 26.3 10.1 9.7 9.6 10.9 Nifty Index (3.8) (16.8) (21.1) EPS growth (%) (42.8) (61.5) (4.7) (0.3) 13.2 EBITDA margin (%) 55.7 47.3 39.3 44.8 44.1 Source: Bloomberg PER (x) 7.6 19.8 20.8 20.9 18.4 P/BV (x) 1.4 1.1 1.3 1.2 1.2 EV/EBITDA (x) 8.8 15.6 15.1 13.2 12.2 RoCE (%) 9.3 4.5 4.1 4.8 5.1 RoE (%) 20.4 6.3 5.8 6.1 6.6 Source: Company, Nirmal Bang Institutional Equities Research
Institutional Equities
Valuation Assign Sell rating with a target price of Rs174 We have valued DLF’s land bank using one-year forward DCF-based NAV, which yields gross NAV of Rs458 from which we have deducted customer advances, land bank payables, tax and net debt. This gives NAV of Rs217. Of the overall valuation, 41% comes from the residential segment, 37% from the commercial segment, 17% from the retail segment and 5% from the hospitality segment. At the CMP of Rs 201 ,DLF is trading at a 7% discount to our one-year forward NAV, which gives limited margin of safety given the kind of muted debt reduction visibility and subdued new launches due to delay in government approvals. DLF trades at 1.2x P/BV and 18.4x P/E on FY13E earnings, which we believe is expensive given the subdued RoE of 6.6% in FY13 and earnings growth of 6.2% expected over FY11-13E. We assign a Sell rating to the stock with a TP of Rs 174, a 20% discount to our one-year forward NAV. Exhibit 1: Valuation summary One-year forward NAV (Rs/share) Commercial segment 165 Residential segment 183 Retail segment 76 Hotel segment 11 Other segments 12 Gross NAV 447 Less: Net debt (146) Less: Taxes (53) Less: Unpaid land cost/ customer advances (30) NAV/share (Rs) 217 Target Price (Rs) 174 Source: Nirmal Bang Institutional Equities Research Key assumptions
We have factored in no increase in pricing of ongoing projects, 10% reduction in base pricing in new launches and 5% increase from FY13.
We have assumed no growth in rentals over FY12 and 5% increase from FY13 onwards.
We have assigned 16% cost of equity and 11% capitalisation rate.
We have assumed tax rate of 25% in FY12 and 28% from FY13 onwards.
Earnings growth profile We forecast operating profit margin to expand to around 44% in FY11-13, from 39% in FY11, due to change in the product mix in favour of high margin plot sales. Our earnings forecast also factors in 20% growth in rentals and Rs 40bn of asset sales in FY11-13. However, we expect 18% contraction in sales (development products) in FY11-13E on account of subdued new launches and higher share of low value plot sales. Consequently, we expect moderate earnings CAGR of 6.2% over FY11-13.
22 DLF
Institutional Equities
Exhibit 2: Earnings trend
(Rsmn) 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - FY09 FY10 FY11 FY12E FY13E
Source: Company, Nirmal Bang Institutional Equities Research How we differ from consensus estimates Our revenue and operating profit is broadly in line with Bloomberg consensus estimates. We are factoring in 10.5mn sq ft of sales in FY12 as against the company’s guidance of 12mn sq ft. Further, we are factoring in Rs20bn of asset sales in FY12, which is broadly in line with the street estimate and the company’s guidance. However, our profit forecast for FY13 are 12.2% lower on account higher interest costs in lieu on muted debt reduction. Exhibit 3: Our estimates vs Bloomberg consensus NBIE estimates Bloomberg consensus Deviation (%) (Rsmn) FY12E FY13E FY12E FY13E FY12E FY13E Net sales 97,956 108,148 100,766 110,493 (2.8) (2.1) EBITDA 43,847 47,706 44,808 49,827 (2.1) (4.3) EBITDA margin (%) 44.8 44.1 44.5 45.1 (29bp) (98bp) PAT 16,353 18,504 17,654 21,064 (7.4) (12.2) EPS 9.6 10.9 10.4 12.4 (7.4) (12.2) Source: Bloomberg, Nirmal Bang Institutional Equities Research
23 DLF
Institutional Equities
Investment Arguments Delay in government approvals, challenging macro environment shifts focus to plot sales DLF’s new launches were impacted due to delay in government approvals, which resulted in a 15.6% decline in FY11 volumes. In order to combat inflation, delay in government approvals and execution risk, DLF has shifted its product mix towards plot sales and high-end luxury apartments over the next two years, which is margin accretive and churns cash faster. However, plot sales have lower value as against DLF’s premium positioning with a diverse mix of products over the years. We believe that under the current challenging macro-environment, the strategy of plot sales will help in sustaining current volumes, but we expect 18% YoY drop in contracted sales in FY12 as against the company’s guidance of 10% growth. Meaningful sales can be witnessed only when there are faster government approvals and improvement in the macro scenario, which will help DLF to launch key high-end residential projects like the one on NTC mill land (Mumbai) and at Chanakyapuri (Delhi). Exhibit 4: Drop in contracted sales likely
(Rsmn) (mn sq ft) 80,000 12.6 14 12.5 12.0 70,000 10.5 12 60,000 10 50,000 10.3 8 40,000 6 30,000 4 20,000 10,000 2 - 0 FY09 FY10 FY11 FY12E FY13E Contracted sales-LHS Area sold-RHS Source: Company, Nirmal Bang Institutional Equities Research Exhibit 5: Planned launch of plot sales in FY12 Area Avg.realisation Location (mn sq ft) (Rs /sq ft) Remarks Gurgaon 3 4,000 Successfully launched and sold out 1.1mn in 1QFY12 Chandigarh 3 3,000 Phase II of ongoing project expected to be launched in 2HFY12 Lucknow 2 1,000 Expected launch in 3QFY12 Indore 2 1,000 Launched in 1QFY12 Source: Company, Nirmal Bang Institutional Equities Research Deliveries picking up, but current inventory still significant DLF had 52mn sq ft of projects under execution at the end of 1QFY12, which included 13mn sq ft of rental properties. This has come down from a peak of 57mn sq ft at the end of 2QFY11 on account of slower new launches in the residential segment and increased share of plot sales. However, DLF has been consciously focusing on faster execution of projects, which is reflected in the company handing over 3.4mn sq ft in 4QFY11 (no handover in 4QFY10) and 1.9mn sq ft (38% YoY) in 1QFY12. The company has given guidance of 12mn sq ft of delivery in FY12 as against 7.3mn sq ft delivered in FY11. The inventory stood at Rs152bn at the end of 1QFY12, or 1.6x FY11 revenue, which is still significant. We believe such piling up of inventory can hurt the company in the case of downturn due to falling prices.
24 DLF
Institutional Equities
Exhibit 6: Area under execution-Going down (mn sq ft) 58 57 57 56 56 56 55 55 54 53 53 52 52 51 51 50 49 48 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
Source: Company, Nirmal Bang Institutional Equities Research Exhibit 7: Inventory piling up
(Rsmn) (x) 180,000 1.7 1.8 1.6 1.6 160,000 1.6 140,000 1.4 1.1 120,000 1.2 100,000 1.0 80,000 0.8 60,000 0.6 40,000 0.4 20,000 0.2 - 0.0 FY09 FY10 FY11 1QFY12 Inventory-LHS Inventory as % of sales-RHS Source: Company, Nirmal Bang Institutional Equities Research Deleveraging concerns still persist… The DAL/Caraf merger, subdued new launches, land acquisition and purchase of compulsorily convertible preference shares (CCPS), have increased net debt by Rs50bn in FY11. This translated into net debt/equity ratio of 0.81x in 1QFY12 as against 0.54x in FY10. DLF’s positive operating cash flow of Rs26bn in FY11 was negated by interest costs of Rs 26bn. We expect debt reduction in FY12 is unlikely in the wake of subdued higher value new project launches, which should result in contraction of sales. However, the management is targeting to reduce its net debt-equity ratio to 0.6x by the end of FY12. …but everything hinges on non-core asset sales DLF has sold Rs31bn of non-core assets during the past two years and has given guidance of another Rs60-70bn of asset sales over the next three years. During the 1QFY12 results conference call, the management had said it is hopeful of monetising certain transactions over the next few quarters which will help to reduce its debt. As per media reports, DLF is in advanced stage of discussions for the sale of two IT parks (Pune and Noida), Aman resorts and Gurgaon land, which should fetch ~Rs 13bn, Rs 20bn and Rs 3bn, respectively. We believe this will have a limited impact on debt reduction as subdued new launches will negate cash inflow to a certain extent from asset sales. Further, asset sales will be challenging as the company may fetch lower value than anticipated under the current tight liquidity situation. We have factored in Rs40bn of asset sales over the next two years and expect the net debt/equity ratio to remain at 0.83x until FY13.
25 DLF
Institutional Equities
Exhibit 8: Muted visibility on debt reduction
(Rsbn) (x) 250 0.86 1.0 0.80 0.81 0.83 0.9 200 0.8 0.63 0.54 0.7 150 0.6 0.5 100 0.4 0.3 50 0.2 0.1 - 0.0 FY09 FY10 FY11 1QFY12 FY12E FY13E Net debt-LHS Net debt/ equity-RHS Source: Company, Nirmal Bang Institutional Equities Research Exhibit 9: Alarming interest coverage ratio (Rsmn) (x) 60,000 4.0 3.3 3.5 50,000 3.0 40,000 2.5 30,000 2.0 1.5 20,000 1.5 1.0 1.2 10,000 0.5 - 0.0 FY09 FY10 FY11 EBIT (LHS) Interest coverage ratio (RHS) Source: Company, Nirmal Bang Institutional Equities Research CCI penalty wont impact cash flow in near term, but it will be overhang on stock price CCI recently levied a penalty of Rs6,300mn (Rs 4/share, or 38% of FY11 profit) on DLF for abuse of its dominant position in Gurgaon by violating the Competition Act, 2002. The penalty order details DLF’s misuse of its dominant position in one of its projects (DLF Beliare) where it has increased the project’s floor size without buyers’ consent and also certain conditions in the sales contract were unfair to buyers. The penalty imposed by CCI is calculated at 7% of average revenue of last three years of the company. DLF can appeal to the Competition Appellate Tribunal (CAT) for reversal of the CCI order, which can further go to High Court and Supreme Court in the event of CAT ruling in favour of CCI. As of now, the penalty levied by CCI pertains only to DLF’s Belaire project. However, buyers of flats in DLF Park Place (3x the size of DLF Beliare) have also similar grievances where the number of flats constructed have gone up from 988 to 1,500 without their consent and thereby delayed the possession. As of now, we have not factored in any impact of the penalty in our earnings estimate as the final outcome of the case will take much time. Slowdown in IT/ITES may impact incremental leasing activity Net leasing has declined from a net run rate of 1.1mn sq ft/quarter in FY11 to 0.7mn sq ft in 1QFY12 as the management intends to concentrate on leasing existing properties before new project launch. We believe that with the slowdown in the IT/ITES sector given the macro headwinds in US/Europe, it may impact DLF as it is the largest commercial developer in India. We expect 3mn sq ft of incremental leasing in FY12 and FY13 each as against 4.1mn sq ft leased out in FY11 with flattish growth in rentals, thereby taking total leased assets to 30mn sq ft with rental income of Rs18bn expected in FY13.
26 DLF
Institutional Equities
Exhibit 10: Stable rental income
(Rsmn) (mn sq ft) 20,000 35 29.8 18,000 30 16,000 26.8 23.8 14,000 25 19.4 12,000 17.4 20 10,000 8,000 15 6,000 10 4,000 5 2,000 - 0 FY09 FY10 FY11 FY12E FY13E Rental income-LHS Leased assets-RHS Source: Company, Nirmal Bang Institutional Equities Research Lower return ratios on account of inflationary pressure, subdued launches DLF’s RoE has come down from a peak of 80% in FY07 to 6% in FY11, despite property prices recovering from their lows and are currently almost close to the 2008 peak. This is on account of equity dilution, subdued new launches, DLF/DAL merger and inflationary pressure. However, contraction of RoE over the past two years is on account of lower asset turnover, which was due to subdued new launches and DLF/DAL merger, thereby increasing total assets. In FY11, inflationary pressure in the form of higher raw material and labour costs impacted margins and thereby the RoE. We expect the RoE to remain in single digit until FY13E on account of subdued high value new launches. Exhibit 11: Subdued RoE (%) 25 20.4 20
15
10 6.6 6.3 5.8 6.1 5
0 FY09 FY10 FY11 FY12E FY13E
Source: Company, Nirmal Bang Institutional Equities Research
27 DLF
Institutional Equities
Key risks Higher non-core asset sales than estimate DLF’s management has given guidance of Rs 60-70bn asset sales over the next two-three years. We have factored in Rs40bn of asset sales over FY11-13. As per media reports, DLF is in advanced stage of discussions for the sale of two IT parks (Pune and Noida), Aman resorts and Gurgaon land sale, which should fetch DLF ~Rs13bn, Rs20bn and Rs3bn, respectively, over the next two-three quarters. We expect asset sales to remain challenging under the current tight liquidity situation. Further, we believe asset sales worth Rs 40bn over the next two years will have a limited impact on debt reduction, as subdued new launches will negate cash inflow to a certain extent from asset sales. However, any fruitful negotiations leading to higher asset sales than expected will help in reducing debt. Faster government approvals to launch residential projects Over the past two years, DLF’s new launches have remained subdued due to delay in getting government approvals, which has impacted monetisation of key high-end residential projects like Chanakyapuri (2mn sq ft) and NTC (4mn sq ft). This has forced DLF to focus on low value plot sales. We expect 18% YoY drop in contracted sales in FY12, as against the company’s guidance of 10% growth. Further, we expect the launch of NTC realty project in 1QFY13 and Chanakyapuri project in FY15. In the event of faster government approvals, which can lead to higher contracted sales and thereby reduce the company’s debt which poses a major risk to our recommendation.
28 DLF
Institutional Equities
Financials Exhibit 12: Income statement Exhibit 13: Cash flow Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Net sales 100,354 74,229 95,606 97,956 108,148 EBIT 53,511 31,866 31,219 36,951 40,658 % growth (30.5) (26.0) 28.8 2.5 10.4 Inc./(dec.) in working capital (45,213) 57,432 (4,760) (24,171) (8,926) Construction costs 32,295 25,669 42,999 37,409 42,466 Cash flow from operations 8,298 89,298 26,459 12,780 31,732 Staff costs 4537 4703 5721 6904 7162 Other income 3,960 4,280 5,839 4,379 3,941 Other overheads 7622 8741 9358 9796 10815 Total expenditure 44,454 39,113 58,079 54,109 60,442 Depreciation 2,390 3,249 6,307 6,896 7,048 EBITDA 55,900 35,116 37,527 43,847 47,706 Interest paid (-) (5,548) (11,100) (17,060) (19,725) (18,690) % growth (42.5) (37.2) 6.9 16.8 8.8 Tax paid (-) (11,115) (8,560) (8,180) (5,401) (7,255) EBITDA margin (%) 55.7 47.3 39.3 44.8 44.1 Dividends paid (-) (3,720) (3,833) (8,990) (4,494) (5,937) Other income 3960 4280 5839 4379 3941 Net cash from operations (5,737) 73,334 4,375 (5,565) 10,840 Interest costs 5548 11100 17056 19725 18690 Capital expenditure (-) (32,488) (133,245) (7,100) (7,834) (11,277) Gross profit 54,312 28,296 26,309 28,501 32,957 Net cash after capex (38,225) (59,911) (2,725) (13,399) (438) % growth (43.7) (47.9) (7.0) 8.3 15.6 Inc./(dec.) in short-term borrowing 4,816 (6,435) 1,440 10,000 (2,000) Depreciation 2390 3249 6307 6896 7048 Profit before tax 51,922 25,046 20,002 21,605 25,909 Inc./(dec.) in long-term borrowing 36,298 60,245 21,700 - - % growth (45.7) (51.8) (20.1) 8.0 19.9 Inc./(dec.) in preference capital 4,464 45,239 (53,430) - - Tax 6754 7022 4594 5401 7255 Inc./(dec.) in borrowings 45,578 99,049 (30,290) 10,000 (2,000) Effective tax rate (%) 13.0 28.0 23.0 25.0 28.0 Inc./(dec.). in investments (4,435) (31,089) 45,990 - - Net profit 45,168 18,024 15,408 16,203 18,654 Equity issue/(buyback) (1,414) (7) 1,400 - - % growth (42.3) (60.1) (14.5) 5.2 15.1 Cash from financial activities 39,729 67,953 17,100 10,000 (2,000) Extraordinary item (211) (933) 1061 250 50 Others (10,969) (10,715) (10,198) 250 50 Minority interest (275) 108 (72) (100) (200) Opening cash 21,421 11,956 9,283 13,460 10,311 Reported net profit 44,682 17,198 16,396 16,353 18,504 PAT margin (%) 44.5 23.2 17.1 16.7 17.1 Closing cash 11,956 9,283 13,460 10,311 7,923 % growth (42.8) (61.5) (4.7) (0.3) 13.2 Change in cash (9,465) (2,673) 4,177 (3,149) (2,388) DPS (Rs) 2.0 2.0 2.0 2.0 2.0 Source: Company, Nirmal Bang Institutional Equities Research Payout (%) 8.3 24.2 24.0 24.1 21.3 Exhibit 15: Key Ratios Source: Company, Nirmal Bang Institutional Equities Research Y/E March FY09 FY10 FY11 FY12E FY13E Exhibit 14: Balance Sheet Per share data (Rs) Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E EPS 26.3 10.1 9.7 9.6 10.9 Cash EPS 27.7 12.0 13.4 13.7 15.1 Equity 3,394 3,395 3,395 3,395 3,395 DPS 2.0 2.0 2.0 2.0 2.0 Reserves 224,184 241,734 241,823 252,240 264,808 Book value 142.3 179.3 155.1 161.3 168.7 Net worth 227,578 245,129 245,218 255,635 268,203 Du Pont analysis Preference share capital 13,960 59,199 18,103 18,103 18,103 Profit margin (%) 44.5 23.2 17.1 16.7 17.1 Total Loans 163,201 216,766 239,903 249,903 247,903 Financial leverage (x) 2.0 2.0 2.2 2.4 2.4 Deferred tax liability (414) 2,515 (1,633) (1,633) (1,633) Asset turnover (x) 0.2 0.1 0.2 0.2 0.2 Minority interest 6,336 6,278 5,752 5,852 6,052 RoE (%) 20.4 6.3 5.8 6.1 6.6 Liabilities 410,662 529,886 507,343 527,860 538,628 Returns (%) Gross block 84,867 178,845 198,277 195,799 195,733 RoE 20.4 6.3 5.8 6.1 6.6 Depreciation 5,743 13,265 19,556 26,453 33,500 RoCE 9.3 4.5 4.1 4.8 5.1 Net block 79,124 165,580 178,721 169,346 162,233 Dividend payout 8.3 24.2 24.0 24.1 21.3 Capital work-in-progress 56,882 111,288 103,120 113,432 124,776 Valuation ratio (x) Goodwill 22,651 12,680 13,840 13,840 13,840 P/E 7.6 19.8 20.8 20.9 18.4 Long-term Investments 12,037 13,851 6,865 6,865 6,865 P/E (cash EPS) 7.2 16.7 15.0 14.7 13.4 Inventories 109,282 124,806 150,388 158,178 168,922 P/BV 1.4 1.1 1.3 1.2 1.2 Debtors 21,648 16,190 17,257 19,591 21,630 EV / EBITDA 8.8 15.6 15.1 13.2 12.2 Cash 11,956 9,282 13,461 10,311 7,923 EV/sales 4.9 7.4 5.9 5.9 5.4 Liquid investments 1,988 41,201 3,093 3,093 3,093 Turnover ratio (x) Other current assets 173,337 122,780 151,612 154,938 159,189 Asset turnover ratio 1.5 0.6 0.5 0.5 0.6 Total current assets 318,212 314,259 335,810 346,112 360,757 Debtor days 177.8 93.0 63.8 68.7 69.6 Creditors 23,249 15,249 38,146 32,465 36,265 Inventory days 371 576 525 575 552 Customer advances 1,537 11,687 32,587 25,396 28,520 Creditor days 386.1 325.3 305.9 227.3 257.8 Other 53,458 60,835 60,280 63,874 65,058 Solvency ratio(x) Total current liabilities 78,244 87,771 131,014 121,736 129,843 Gross Debt-equity 0.7 0.7 0.9 0.9 0.9 Net current assets 239,968 226,488 204,796 224,376 230,914 Interest coverage 3.3 1.5 1.2 1.4 2.0 Total assets 410,662 529,886 507,343 527,860 538,628 Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research
29 DLF
Institutional Equities
This page has been intentionally left blank
30 DLF
Institutional Equities
Godrej Properties 4 October 2011
Reuters: GODR.BO; Bloomberg: GPL IN Pressure Seen On Margins SELL We believe the likely peaking out of volumes at Godrej Properties’ (GPL) Sector: Real Estate
Ahmedabad Garden City project along with margin contraction will have an impact on the stock price over the next two years. Further, the company’s net CMP: Rs660 debt/equity ratio is set to increase (highest among its peers) from 0.9x to 1.3x in FY13, as it turns into asset heavy mode with the recent acquisition of land at the Target Price: Rs600 Bandra-Kurla Complex (BKC) and its plan to lease out Trees property (Vikhroli) Downside: 10% which will get monetised post FY14. We assign a Sell rating to the stock with a TP of Rs 600, down 10% from the CMP. Param Desai [email protected] Our estimates significantly below consensus: GPL’s pre-sales have been stronger +91-22-3926 8128 in FY11, which increased to 3.2mn sq ft (up 128.6% YoY) in volume terms and to Rs10.7bn (up 153.8% YoY) in value terms, thanks to Garden City project. Going forward, we assume a 10% YoY decline in volumes in FY12, significantly below Key Data consensus estimate, to factor in slowdown in the residential segment coupled with Current Shares O/S (mn) 69.9 volumes at the Garden City project likely to peak out. Further, we expect GPL’s Mkt Cap (Rsbn/US$mn) 46.1/941.4 margins to contract in FY12 as they are more vulnerable under the JDA (joint Initiating Coverage Initiating 52 Wk H / L (Rs) 845/532 development agreement) model to raw material cost escalation. Consequently, we are 12% and 22% below consensus estimates on profits for FY12 and FY13, respectively. Daily Vol. (3M NSE Avg.) 53,985 Margins vulnerable under JDA model: As much as 80% of GPL’s land bank is based on the JDA-based model. We believe this makes GPL’s margins more vulnerable to Share holding (%) 3QFY11 4QFY11 1QFY12 raw material cost escalation, as phase II of Garden City and other projects are not covered by fixed price contracts unlike in the past. Further, GPL’s margins in FY10 and Promoter 83.8 83.8 83.8 FY11 were largely driven by stake sales, which will remain challenging under the FII 4.9 5.6 5.6 current tight liquidity environment. Consequently, we expect OPM to drop by 900bps to DII 2.5 2.0 2.0 27% in FY13. Corporate 4.1 3.2 3.1 Volumes at Garden City project to peak out: GPL launched over 3mn sq ft (GPL’s General Public 4.7 5.3 5.5 share 2.4mn sq ft) under three phases in March 2010 under its Garden City project where the initial response was 100% (sold out in almost 10 days of its launch). GPL sold 0.8mn sq ft and 1.6mn sq ft in FY10 and FY11, respectively. The project has One Year Indexed Stock Performance witnessed price appreciation by more than 30% since its launch at Rs2,400/sq to Rs 3,200/sq ft currently. Consequently, we believe such a response will now be challenging as investors in phase 1 will try to sell out at the time of delivery (delivery under phase 1 starts at the end of FY13) to take advantage of price appreciation. Expensive on all parameters: We have valued GPL at 1x to its one-year forward NAV of Rs600 based on the company’s existing land bank, which includes Rs223/share for likely access to 500 acres of land at Vikhroli. At the CMP, GPL trades at 25.2x P/E, 4x P/BV on FY13E earnings and 10% premium to our one-year forward NAV, the highest among its peers. We assign a Sell rating to GPL with a TP of Rs600.
Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Price Performance (%) Net sales 2,053 3,826 5,414 7,651 10,186 1 M 6 M 1 Yr EBITDA 1,154 1,577 1,949 1,949 2,754 Net profit 757 1,242 1,429 1,352 1,828 Godrej Prop. (4.4) (1.4) (11.6) EPS (Rs) 10.8 17.8 20.5 19.4 26.2 Nifty Index (3.8) (16.8) (21.1) EPS growth (%) 0.9 64.1 15.0 (5.4) 35.2 EBITDA margin (%) 56.2 41.2 36.0 25.5 27.0 Source: Bloomberg PE ratio (x) 60.9 37.1 32.3 34.1 25.2 P/BV (x) 13.3 5.6 5.1 4.6 4.0 EV/EBITDA (x) 45.4 33.1 27.7 29.2 22.0 RoCE (%) 15.5 12.5 11.2 9.2 10.7 RoE (%) 28.0 22.3 16.5 14.1 17.0 Source: Company, Nirmal Bang Institutional Equities Research
Institutional Equities
Valuation We have valued GPL’s land bank using 1-yr forward DCF-based NAV which yields gross NAV of Rs 872/share from which we have deducted customer advances, tax and net debt. This gives a NAV of Rs 600/share. Of the overall valuation, 27% comes from the residential segment, 48% comes from the commercial/retail segment and the rest from the land at Vikhroli. We have valued GPL at 1x to its one year forward NAV of Rs600 based on its existing land bank, which includes Rs 223/share for likely access to 500 acres of Vikhroli land (GPL does not have explicit access to the land yet). At the CMP, GPL trades at 25.2x P/E, 4.0x P/BV on FY13E earnings and at 10% premium to one-year forward NAV, which is highest among its peer group having a similar profile of earnings growth over the next two years. We assign a Sell rating to the stock with a TP of Rs 600, down 10% from the CMP. Exhibit 1: Valuation summary One-year forward NAV (Rs/share) Commercial/retail segment 416 Residential segment 232 Vikhroli land 223 Gross NAV 872 Add: Net cash (158) Less: Taxes (114) NAV/share (Rs) 600 Source: Nirmal Bang Institutional Equities Research Exhibit 2: Geographical break-up of NAV (%)
8 Gurgaon Mumbai 26 Kolkata Ahmedabad 30 Bangalore Hyderabad 7 Chennai 1 Pune 2 2 Others 21 2 1 Vikhroli Land Source: Nirmal Bang Institutional Equities Research
Key assumptions We have factored in no increase in the prices at its ongoing residential projects and assumed 10% correction in base prices at new project launches and 5% increase FY13 onwards.
We have assumed no growth in rentals in FY12 and 5% increase FY13 onwards.
We have assigned 16% cost of equity and 11% capitalisation rate
We have assumed tax rate of 30% FY13 onwards.
32 Godrej Properties
Institutional Equities
Earnings growth profile We expect strong revenue growth of 37.2% over FY11-13E, driven by strong pre-sales as the company has sold 4.6mn sq ft over FY09-11 in volume terms and Rs14.9bn in value terms, which will get booked over FY10-13E. However, we expect OPM to contract by 900bps to 27%in FY13 as we believe GPL is more vulnerable on the margin front to cost price escalation under the JDA model. Hence, we expect moderate earnings CAGR of 13.1% over FY11-13E. Exhibit 3: Earnings trend (Rsmn) (%) 2,000 70 1,800 60 1,600 50 1,400 1,200 40 1,000 30 800 20 600 10 400 200 0 - (10) FY09 FY10 FY11 FY12E FY13E PAT (LHS) YoY growth (RHS) Source: Company, Nirmal Bang Institutional Equities Research How we differ from consensus estimates GPL’s pre-sales have been stronger in FY11, which increased to 3.2mn sq ft (up 128.6% YoY) in volume terms and to Rs10.7bn (up 153.8% YoY) in value terms, thanks to Garden City project (Ahmedabad). Going forward, we have assumed10% YoY decline in volumes in FY12, much below the consensus estimate, to factor in slowdown in the residential segment coupled with volumes at Garden City project peaking out. Further, we expect GPL’s margin to contract in FY12 as they are more vulnerable under the JDA model to raw material cost escalation. Consequently, we are 12% and 22% below consensus estimates on profits in FY12 and FY13, respectively. Exhibit 4: Our estimates vs consensus projections NBIE estimates Bloomberg consensus estimates Deviation (%) (Rsmn) FY12E FY13E FY12E FY13E FY12E FY13E Net sales 7,651 10,186 7,749 11,780 (1.3) (13.5) EBITDA 1,949 2,754 2,176 3,575 (10.4) (23.0) EBITDA margin (%) 25.5 27.0 28.1 30.3 (261bp) (331bp) PAT 1,352 1,828 1,531 2,345 (11.7) (22.1) EPS 19.6 27.2 21.9 33.6 (11.7) (22.1) Source: Bloomberg, Nirmal Bang Institutional Equities Research
33 Godrej Properties
Institutional Equities
Investment Arguments Margins vulnerable under JDA model The JDA-based structure is asset light as it involves limited initial investment as against outright land purchase, which gives a margin of safety in case of project delay. Further, the responsibility of procuring approvals and conversion of land lies largely with the landlord. GPL has been able to leverage its strong brand to secure various JDAs across cities over the past two years. As of now, the JDA model accounts for 80% of GPL’s land bank. However, the JDA model comes with a caveat as a JDA partner is entitled to have share in revenue as compensation for land. This exposes GPL to raw material cost escalation during the construction phase as the company sells more than 60% of its project units during the launch, which can dent margins. This is visible in the case of GPL’s projects like Waterside and Prakriti where it is operating at EBITDA breakeven level. We believe, going forward, this makes GPL’s margins more vulnerable to raw material cost escalation as phase II of Garden City and other projects are not covered by fixed price contracts, unlike in the past. Exhibit 5: Margin dilution under JDA model Figures in (Rs/sq ft) Outright land purchase JDA model Selling costs 5,000 5,000 Construction costs 2,000 2,000 Land costs 1,000 - Revenue sharing for JDA partner (30%) NA 1,500 Operating profit 2,000 1,500 OPM (%) 40 30 Source: Nirmal Bang Institutional Equities Research Private equity deals boosted profits over past two years GPL’s profits in FY10 and FY11 were boosted by Rs1,399mn and Rs899mn at the PBT level by selling minority stakes in projects at initial stages of construction. This helped the company to progress cash flows in advance, but it limits any upside from price appreciation during the construction phase. Further, some private equity deals come with the condition of assured IRR, which may impact margins in case of raw material cost escalation. Further, such kind of stake sales will be challenging under the tight liquidity environment in the near term. We have factored in no stake sales in FY12 as well as in FY13. Consequently, we expect OPM to drop by 900bps to 27% in FY13. Exhibit 6: Margins to contract (%) 60 56.2
50 41.2 40 36.0
30 25.5 27.0
20
10
0 FY09 FY10 FY11 FY12E FY13E
Source:Company, Nirmal Bang Institutional Equities Research
34 Godrej Properties
Institutional Equities
Volumes at Garden City project to peak out GPL’s pre-sales have been stronger in FY11, which increased to 3.2mn sq ft (up 128.6% YoY) in volume terms and to Rs10.7bn (up 153.8% YoY) in value terms, thanks to Garden City project (Ahmedabad). Going forward, we have assumed 10% YoY decline in volumes in FY12, much below consensus estimate, to factor in slowdown in the residential segment coupled with volumes at Garden City project likely to peak out. GPL has launched over 3mn sq ft (GPL’s share 2.4mn sq ft) under three phases since March 2010 under the Garden city project, where the initial response was 100% (sold out within 10 days of its launch). It sold 0.8mn sq ft and 1.6mn sq ft in FY10 and FY11, respectively. The project has witnessed price appreciation of more than 30% since its launch at Rs2,400/sq to Rs3,200/sq ft currently. Consequently, we believe such a response will now be challenging as the investors in phase 1 will try to sell at the time of delivery (delivery under phase 1 starts from the end of FY13) to cash in on price appreciation. Consequently, we believe GPL’s volumes over the next two years will largely depend on the success of launches in new cities. Exhibit 7: Moderate volume growth over FY11-13E
(Rsmn) (mn sq ft) 16,000 4.0 14,000 3.5 12,000 3.0 10,000 2.5 8,000 2.0 6,000 1.5 4,000 1.0 2,000 0.5 0 0.0 FY10 FY11 FY12E FY13E
Value-LHS Volume-RHS Source:Company, Nirmal Bang Institutional Equities Research Long gestation period of Vikhroli project Currently, Godrej & Boyce has leased 36 acres of land for a period of 99 years, commencing from April 2010, to Godrej Industries, which, in turn, has given development rights to GPL. Under the current agreement, GPL intends to develop residential, commercial and retail projects, where it will get 60% of overall profit with the remaining going to Godrej Industries. The development plan on 36 acres (2.8mn sq ft) is of mixed nature, where it intends to develop 0.5mn sq ft of residential project and the rest for office/retail use. We have assumed development of entire 2.8mn sq ft project over FY12-17E. As per media reports, GPL could get access to additional portion of land parcels in Vikhroli to the extent of 3,000 acres. However, only 500 acres can be commercially developed as the rest falls under the forest zone. So far, GPL does not have explicit access to development of land from Godrej & Boyce beyond 36 acres. Nevertheless, we have assumed a Memorandum of Understanding (MoU) between GPL and Godrej Industries for development of 500 acres in phases. The management intends to create a model similar to the Bandra-Kurla Complex (BKC), once it has access to large tracts of land in the central suburbs. We have built in an optimistic scenario of development of 500 acres over 25 years, starting from FY18, once the existing 36 acres get absorbed. Consequently, our valuation on development of 500acres via the MoU for Vikhroli- based land on the DCF model works out to Rs 223/share. We believe the market is factoring in too much optimism on these parcels of land where environmental clearance and absorption poses as risks.
35 Godrej Properties
Institutional Equities
Exhibit 8: Vikhroli NAV assumption Particulars Assumptions Total area 500 acres FSI 2 Saleable area 44 Development schedule 25 years GPL share 60% profit Base selling Rs9,500/sq ft Base construction cost Rs3,000/sq ft Other overheads 5% of sales Tax rate 30% EV Rs15.6bn Value/share Rs223 Source: Nirmal Bang Institutional Equities Research Leverage to increase GPL is adding investment properties with the recent BKC land deal and Trees project at Vikhroli with the sole intention to lease it out, which requires an upfront payment unlike the JDA model. GPL has to pay out Rs5bn for the BKC deal to Jet Airways and is likely to incur Rs3bn on construction of the above investment properties over the next three years. Consequently, we expect GPL’s net debt/equity ratio to increase from 0.9x in FY11 to 1.3x in FY13E, the highest among its peers. Further, 70% of its debt is used for meeting working capital requirement, which will lead to higher interest costs in FY12. We believe selling minority stake for the above investment properties will be difficult under the current tight liquidity environment, which will lead to equity dilution in the near future. Exhibit 9: Highest net debt to equity among its peers
(Rsmn) (x) 18,000 2.5 16,000 2.1 14,000 2.0 12,000 1.5 10,000 1.3 8,000 1.1 1.0 6,000 0.9 0.8 4,000 0.5 2,000 - 0.0 FY09 FY10 FY11 FY12E FY13E
Gross debt-LHS Net debt/equity-RHS Source: Company, Nirmal Bang Institutional Equities Research
36 Godrej Properties
Institutional Equities
Key risks Decline in input costs, better volumes We have factored in pressure on margins owing to withdrawal of the fixed contract system for upcoming projects and no stake sale to private equity firms. Consequently, we expect margins to contract by 900bps in FY13. In case there is a reduction in input costs and stake sale at a higher valuation, there will be improvement in margins. Further, we have assumed volumes from its Ahmedabad township project to peak out at the current level and fresh volumes to be largely driven by project launch in new cities. In the event of continued stupendous response for its Garden City project, there will be a boost to volumes, thereby providing an upside to our assumptions. Monetisation of Vikhroli land falls short of expectations We have assumed GPL’s access to 500 acres of land at Vikhroli to get monetised over FY18 to FY41. In the case of monetisation of land earlier than expected and access to more land than anticipated (500 acres), there will be an upside to our NAV.
37 Godrej Properties
Institutional Equities
Financials Exhibit 10: Income statement Exhibit 11:Cash flow Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Net sales 2,053 3,826 5,414 7,651 10,186 EBIT 1,143 1,551 1,910 1,908 2,671 % growth (9.7) 86.4 41.5 41.3 33.1 Inc./(dec.) in working capital (3,993) (3,240) (4,715) 1,747 (3,750) Construction cost 1,211 2,000 3,240 5,396 6,974 Cash flow from operations (2,851) (1,689) (2,805) 3,656 (1,079) Staff 38 107 73 115 153 Other income 450 78 175 200 180 Other overheads 100 141 151 191 306 Depreciation 11 26 40 41 82 Total expenditure 1,348 2,249 3,464 5,702 7,432 EBITDA 704 1,577 1,949 1,949 2,754 Interest paid (-) (545) (662) (34) (77) (98) % growth (41.3) 123.9 23.6 (0.0) 41.3 Tax paid (-) (429) (366) (547) (609) (826) EBITDA margin (%) 34.3 41.2 36.0 25.5 27.0 Dividends paid (-) (288) (177) (326) (365) (401) Other income 450 78 175 200 180 Net cash from operations (3,652) (2,790) (3,497) 2,845 (2,141) Interest costs 53 6 34 77 98 Capital expenditure (-) (31) (68) (236) (5,646) (1,332) Gross profit 1,101 1,650 2,091 2,072 2,836 Net cash after capex (3,683) (2,858) (3,733) (2,802) (3,474) % growth (5.2) 49.9 26.7 (0.9) 36.9 Inc./(dec.) in short-term borrowing 2477 749 91 0 0 Depreciation 11 26 40 41 82 Inc./(dec..) in long-term borrowing 1,355 466 (643) 3,000 3,000 Profit before tax 1,089 1,624 2,051 2,031 2,754 % growth (5.5) 49.1 26.3 (1.0) 35.5 Inc./(dec.) in borrowings 3,833 1,215 (551) 3,000 3,000 Tax 323 382 622 609 826 (Inc.)/Dec. in investments 0 (522) 2,836 0 0 Effective tax rate (%) 29.7 23.5 30.3 30.0 30.0 Equity issue/(buyback) 0 4,286 0 0 0 Net profit 766 1,242 1,429 1,422 1,928 Cash from financial activities 3,833 4,978 2,284 3,000 3,000 % growth 2.4 62.1 15.0 (0.5) 35.5 Others 33 (1,434) 1,984 (70) (100) Minority interest (9) 0 0 (70) (100) Opening cash 86 269 955 1,490 1,619 Reported net profit 757 1,242 1,429 1,352 1,828 Closing cash 269 955 1,490 1,619 1,045 PAT margin 36.9 32.5 26.4 17.7 17.9 Change in cash 183 686 535 198 (474) % growth 0.9 64.1 15.0 (5.4) 35.2 DPS (Rs) 2.2 4.0 4.5 5.0 5.4 Source: Company, Nirmal Bang Institutional Equities Research Payout (%) 23.3 26.2 25.6 29.7 24.1 Exhibit 13: Key Ratios Source: Company, Nirmal Bang Institutional Equities Research Y/E March FY09 FY10 FY11 FY12E FY13E Exhibit 12: Balance Sheet Per Share Data (Rs) Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E EPS 10.8 17.8 20.5 19.4 26.2 Equity 604 699 699 699 699 Cash EPS 11.0 18.2 21.0 19.9 27.3 DPS 2.2 4.0 4.5 5.0 5.4 Reserves 2,385 7,474 8,417 9,368 10,754 Book value 49.5 117.0 130.5 144.1 164.0 Net worth 2,989 8,173 9,116 10,067 11,453 Du Pont analysis Short-term loans 4,471 4,471 5,601 6,969 6,969 Profit margin (%) 36.9 32.5 26.4 17.7 17.9 Long-term loans 2,092 2,625 3,848 5,480 8,480 Financial leverage (x) 4.7 2.9 2.3 2.6 2.9 Total loans 6,563 7,096 9,449 12,449 15,449 Asset turnover (x) 0.2 0.2 0.3 0.3 0.3 Minority interest 17 30 148 148 148 RoE (%) 28.0 22.3 16.5 14.1 17.0 Liabilities 9,569 15,298 18,713 22,664 27,050 Returns (%) Gross block 398 340 560 6,207 7,539 RoE 28.0 22.3 16.5 14.1 17.0 RoCE 15.5 12.5 11.2 9.2 10.7 Depreciation 39 63 99 140 222 Dividend payout 23.3 26.2 25.6 29.7 24.1 Net block 359 276 461 6,067 7,317 Valuation ratio (x) Capital work-in-progress 33 2 14 14 14 P/E 60.9 37.1 32.3 34.1 25.2 Inventories 4,759 7,251 10,154 9,361 11,668 P/E (cash EPS) 60.0 36.4 31.4 33.1 24.1 Debtors 5,757 1,798 2,899 3,533 4,665 P/BV 13.3 5.6 5.1 4.6 4.0 Cash 269 955 1,490 1,619 1,045 EV / EBITDA 45.4 33.1 27.7 29.2 22.0 Liquid investments - 2,078 141 141 141 EV/sales 25.5 13.7 10.0 7.4 5.9 Other current assets 3,967 4,929 6,973 7,669 8,052 Turnover Ratio (x) Asset turnover ratio 0.2 0.2 0.3 0.3 0.3 Total current assets 14,752 17,011 21,658 22,323 25,571 Debtor days 873 360 158 153 147 Creditors 5,377 729 2,152 2,281 2,601 Inventory days 676 573 587 466 377 Customer advances - 226 112 2,267 2,018 Creditor days 1359 496 152 142 120 Other 198 1,037 1,156 1,192 1,232 Solvency ratio(x) Total current liabilities 5,575 1,991 3,420 5,740 5,852 Gross debt-equity 2.2 0.9 1.0 1.2 1.3 Net current assets 9,177 15,020 18,238 16,583 19,719 Interest coverage 2.3 2.1 2.1 1.6 1.8 Total Assets 9,569 15,298 18,713 22,664 27,050 Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research
38 Godrej Properties
Institutional Equities
HDIL 4 October 2011
Reuters: HDIL.BO Bloomberg: HDIL IN FSI sales to drive growth BUY HDIL is a leading listed developer (in terms of land bank) in the most resilient Sector: Real Estate
property market, Mumbai, which has registered 12mn sq ft of sales since March 2009. Recent FSI sales amounting to Rs13.5bn will drive near-term cash flow CMP: Rs92 visibility and help to withstand the slowdown in Mumbai market. We believe the concerns over Mumbai international airport project (MIAL) and weakening TDR Target Price: Rs142 (transfer developmental rights) demand are well priced in and the recent Upside: 54% correction in stock price by 32% over the past two months provides a good buying opportunity. At the CMP, HDIL is trading at 0.3x P/BV, 3.3x P/E and at Param Desai
Coverage 55% discount to our one-year forward NAV. We assign a Buy rating to HDIL with [email protected] a TP of Rs142 (30% discount to one-year forward NAV), up 54% from the CMP. +91-22-3926 8128
Promising new launches provide strong revenue visibility: HDIL’s competitive pricing strategy by launching projects at a 10-15% discount to prevailing market rates Key Data has been successful, as it managed to sell 80% of 15mn sq ft launched since FY09. Current Shares O/S (mn) 419.0 Till date, it has registered cumulative bookings amounting to Rs 46.3bn, which will get Mkt Cap (Rsbn/US$mn) 38.6/784.6 booked over FY11-14 as the company follows the conservative method for project Initiating Initiating completion. Consequently, we expect strong revenue growth of 35.8% over FY11-13E. 52 Wk H / L (Rs) 291/92 Our revenue, profit estimates ahead of consensus expectations: We are banking Daily Vol. (3M NSE Avg.) 8,223,803 on HDIL’s competitive pricing strategy and expect new projects to witness a strong response. We also expect the completion of three residential projects (Premier, Share holding (%) 3QFY11 4QFY11 1QFY12 Galaxy, and Metropolis) and its industrial park to contribute substantially to revenue, starting from 4QFY12. Consequently, we are 6-10% and 3-8% above consensus Promoter 38.6 38.6 38.6 estimates on revenue and profit fronts, respectively, over FY11-13E. FII 42.3 39.8 39.5 Positive cash flow, improving return ratios: We expect HDIL’s net debt/equity to go DII 0.4 0.5 0.5 down from the current level of 0.43x to 0.31x in FY13E, thanks to collection of Rs8.5bn Corporate 9.8 10.1 11.0 via FSI sales at Goregaon expected by March 2012, ongoing FSI sales at Vasai/Virar, General Public 8.9 11.0 10.4 outright sale of its Metropolis project (Andheri) and sales generated from new launches. Over the past two quarters, HDIL has turned operating cash flow positive and expect it to generate Rs15bn of free operating cash flow over FY2011-13E, as One Year Indexed Stock Performance against Rs22bn of negative free cash flow generated over FY09-11. This will also 110 result in improvement of RoCE/RoE from the current levels of 8.2/9.9 to 11/11.2, 100 90 respectively, in FY13E. 80 70 Current valuation at bottom level: We have given zero value to the MIAL project due 60 to uncertainty in execution, except for 3mn sq ft of TDR which will get booked in FY12- 50 40 13. Further, we have also excluded Bandra SRS project in our NAV calculation due to 30 20 ongoing dispute. We believe the concerns have been well priced in with less Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 dependence on TDR than in FY09-11, thanks to successful new launches. We expect HOUSING DEVELOPM NSE S&P CNX NIFTY INDEX 23.5% earnings CAGR over FY11-13E. At the CMP, HDIL is trading at 0.3x P/BV, 3.1x P/E and 55% discount to our one-year forward NAV. We assign a Buy rating to HDIL. Price Performance (%) Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Net sales 17,504 15,021 18,500 27,750 34,132 1 M 6 M 1 Yr
EBITDA 8,017 7,901 11,036 14,447 17,705 HDIL (12.8) (49.4) (66.0) Net profit 7,860 5,678 8,218 10,284 12,524 EPS (Rs) 16.1 13.7 19.6 24.5 29.9 Nifty Index (3.8) (16.8) (21.1) EPS growth (%) (52.0) (15.4) 43.6 25.1 21.8 Source: Bloomberg EBITDA margin (%) 45.8 52.6 59.7 52.1 51.9 P/E ratio (x) 5.7 6.7 4.7 3.7 3.1 P/BV (x) 0.6 0.5 0.4 0.4 0.3 EV/EBITDA (x) 9.9 9.1 7.2 5.4 4.3 RoCE (%) 10.4 7.3 8.2 9.5 11.0 RoE (%) 19.5 9.9 9.9 10.3 11.2 Source: Company, Nirmal Bang Institutional Equities Research
Institutional Equities
Valuation HDIL is trading at 55% discount to our 1-year forward NAV We have valued HDIL’s land bank using 1-yr forward DCF based NAV which yields gross NAV of Rs 396/share from which we have deducted customer advances, land bank payables, tax and net debt. This gives our NAV of Rs 202/share. Of the overall valuations, 46% comes from the residential segment, 25% comes from the commercial segment, 10% from retail and 19% from SRS. We have given zero value to MIAL due to uncertainty on execution except 3mn sq ft of TDR which will get booked in FY12-13. Further we have also excluded Bandra SRS project in our NAV calculation due to ongoing dispute. At CMP of Rs 92, HDIL is trading at 0.3x P/BV, 3.1x P/E on FY13E and 55% discount to our 1 yr forward NAV which gives margin of safety given kind of earnings visibility from its ongoing projects with another 25mn sq ft of new launches lined up over next two years and Rs 15bn generation of operating cash flow over FY11-13E. . Exhibit 1: Valuation summary One-year forward NAV (Rs/ share) Residential projects 184 Commercial projects 98 SRS projects 75 Retail projects 39 Gross NAV 396 Less
Net debt (108) Unpaid land costs and customer advances (42) Tax (42) NAV/share (Rs) 202 Target price (Rs) 30% discount to NAV 142 Source: Nirmal Bang Institutional Equities Research Exhibit 2: HDIL trading at significant discount to P/BV (x) 12
10
8
6
4
2
0 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 P/BV 4 Year avg Source: Bloomberg, Nirmal Bang Institutional Equities Research
40 HDIL
Institutional Equities
Key assumptions
We have factored in no increase in pricing of ongoing projects, 10% reduction in base pricing in new launches and 5% increase FY13 onwards.
We have assumed no growth in rentals in FY12 and 5% growth FY2013 onwards.
We have assigned 16% Cost of Equity and 11% capitalization rate
We have assumed 25% of tax rate FY12 onwards.
How we differ from consensus estimates We are banking on HDIL’s competitive pricing strategy and expect its new launches to evoke a strong response. We also expect the completion of its three residential projects (Premier, Galaxy, and Metropolis) and its industrial park to contribute substantially to revenue, starting from 4QFY12. Consequently, we are 6% and 10% above consensus estimates on revenues for FY12 and FY13, respectively. Our OPM is below consensus estimate as we believe a major portion of revenue booking will be through residential projects and FSI sales at Andheri/Goregaon where margins are lower as compared to its historical margins of 55- 60%. Consequently, we are 3% and 8% ahead in profit estimates when compared with consensus estimates. Exhibit 3: Our estimates vs Bloomberg consensus NBIE estimates Bloomberg consensus Deviation (%) (Rsmn) FY12E FY13E FY12E FY13E FY12E FY13E Net Sales 27,750 34,132 26,246 31,018 5.7 10.0 EBITDA 14,447 17,705 14,869 17,393 (2.8) 1.8 EBITDA margin (%) 52.1 51.9 56.7 56.1 (460bp) (420bp) PAT 10,284 12,524 9,981 11,605 3.0 7.9 EPS 24.5 29.9 23.8 27.7 3.0 7.9 Source: Bloomberg, Nirmal Bang Institutional Equities Research Earnings profile We expect HDIL to report strong 23.5% CAGR in earnings over FY11-13E, driven by strong visibility of pre- sales at Rs46bn, which will get booked over FY11-14E. Further, HDIL has sold FSI worth Rs13.5bn at Andheri/Goregaon, out of which Rs3.5bn has already been booked in 4QFY11 and the rest will get booked in FY12. FSI sales enjoy 50% OPM, but it attracts 33% tax as against MAT on TDR sales historically. Consequently, we expect tax rate of 25% over FY11-13E as against the current level of 16%. Exhibit 4: Earnings trend (Rsmn) (%) 14,000 50 12,000 40 (%) 10,000 30 8,000 20 6,000 10 4,000 0 2,000 (10) - (20) FY09 FY10 FY11 FY12E FY13E PAT (LHS) YoY growth (RHS) Source: Company, Nirmal Bang Institutional Equities Research
41 HDIL
Institutional Equities
Investment Arguments Positive cash flow, improving return ratios HDIL’s net debt/equity has gone down from a peak of 0.92x in FY09 to 0.43x, thanks to the QIP and improvement in the residential segment. We expect HDIL’s net debt/equity to go down further from the current level of 0.43x to 0.31x in FY13E on account of improvement in core operating cash flow. We expect HDIL to generate Rs15bn of free operating cash flow over FY2011-13E, as against Rs 22bn of negative free cash flow generated over FY09-11, thanks to Rs8.5bn collection via FSI sales in Goregaon expected by March 2012, ongoing FSI sales in Vasai/Virar, outright sale of its commercial project Metropolis (Andheri) and sales generated from new launches. Over the past two quarters, HDIL has turned operating cash flow positive on account of stable debtors. We also expect improvement of RoE/RoCE from the current level of 8.2/9.9 to 11/11.2 in FY13E, driven by strong earnings CAGR of 23.5% over FY11-13E. This augurs well for HDIL to speed up project execution under the current tight liquidity environment. Exhibit 5: Leverage to improve (Rsmn) (x) 50,000 1.0 0.92 0.9 0.8 40,000 0.7 0.6 0.47 30,000 0.43 0.5 0.37 0.4 0.31 0.3 20,000 0.2 0.1 10,000 0.0 FY09 FY10 FY11 FY12E FY13E
Gross debt-LHS Net debt/equity-RHS Source: Company, Nirmal Bang Institutional Equities Research Exhibit 6: Turning FCF positive (Rs mn) 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 FY12E FY13E PBT 2,782 2,484 2,728 2,592 2,829 13,712 16,699 Add Interest costs 1,407 1,511 1,393 1,465 1,364 5,992 5,359 Add Depreciation 19 16 15 22 21 849 993 Change in working capital (7,121) (6,082) (14,877) (1,424) (1,592) (9,188) (10,038) Less Tax paid 439 355 164 619 739 3,428 4,175 Less: Capex (103) 72 11 951 26 827 868 FCF (3,249) (2,498) (10,916) 1,085 1,857 7,110 7,970 Source: Company, Nirmal Bang Institutional Equities Research Exhibit 7: Return ratios to improve (%) 25
20
15
10
5
0 FY09 FY10 FY11 FY12E FY13E RoCE RoE Source: Company, Nirmal Bang Institutional Equities Research
42 HDIL
Institutional Equities
High margin slum redevelopment project is big opportunity HDIL is the largest listed Slum Rehabilitation developer in the Mumbai property market. SRA projects do not involve upfront investment in land compared to conventional real estate projects. The cost per sq. ft in a slum re-development project is around Rs3,000/sq. ft versus Rs5,000-6,000/sq. ft (including land cost) in the case of freehold land due to high property prices in Mumbai. This has resulted in a higher margin for HDIL on account of access to cheap land bank in Mumbai. Slum redevelopment also has high entry barriers because it requires expertise and experience, as it entails dealing with government agencies and slum dwellers regularly until project completion. In Mumbai, more than 54% of the population lives in slum clusters situated in certain pockets of the city. A slum population of 7.5 million could translate into 1.5mn families with an average household size of five people. This could translate into SRA potential of 644mn sq. ft and revenue potential of Rs2,000bn for redevelopers. Exhibit 8: High slum population in Mumbai (%) 60 54.1
50
40 32.5 30
18.9 18.7 20 17.2 13.5 10 10
0 Mumbai Kolkata Chennai Delhi Hyderabad Ahmedabad Bangalore
Source: Census 2001 Promising new projects provide strong revenue visibility HDIL has strategically deleveraged its business model by launching various projects through the conventional route since March 2009, thereby reducing its overdependence on the TDR market. Till date, it has registered cumulative sales/bookings amounting to Rs46.3bn on 15mn sq ft launched i.e. ~80%.has been pre-sold. Some of the company's recent projects have met with success on account of their launch at a 10-15% discount to prevailing market prices. In 1QFY12, sales registered by existing projects remained subdued as only Rs1.9bn was added in 1QFY12 to cumulative sales due to weak property market and lack of government approvals to projects. But HDIL managed to launch 0.8m sq ft (Whispering Towers phase-II project in Mulund), registering strong pre-sales of 10% during the launch. However, we remain hopeful of the management maintaining its FY11annual run rate of 6mn sq ft of sales in FY12, led by competitive pricing strategy for forthcoming projects as well. Exhibit 9: Aggressive pipeline of new launches Project Location Saleable area (mn sq ft) Remarks Ekta Nagar Kandivali 1.5 Rehabilitation in progress, sales to commence Meadows-Phase II Goregaon 3.6 MHADA redevelopment in progress, sales to commence Daulat Nagar Santacruz 0.8 Rehabilitation in progress, sales to commence Premier Residency-Phase II Kurla 0.8 Planning and approval stages, sales to commence Ghatkopar Ghatkopar 0.51 Planning and approval stages, sales to commence Kochi Kochi 6.3 Land aggregation & site infrastructure in progress Kharadi Pune 0.4 Construction started Novinon property MMR 5 Site preparation & infrastructure work in progress Paradise City (phase III) Palghar 6.8 Sales to commence Total 25.7 Source: Company, Nirmal Bang Institutional Equities Research Currently, HDIL has ~14.5mn sq ft of residential projects under construction, 80% of which is pre-booked, resulting in Rs46bn of revenue to be booked over FY12- 14E. Further, HDIL has ~25.7mn sq ft of new projects in the pipeline in FY12-13, which would help maintain sales volume.
43 HDIL
Institutional Equities
Exhibit 10: Strong pre-sales Launch Estimated area Avg . sales price Estimated Sales achieved Project (Rsmn) date (mn sq ft) (Rs/sq ft) sales till June 2011 Premier Residencies-Kurla 4QFY09 1.0 5,901 5,901 5,606 Metropolis- Andheri 4QFY09 0.7 10,028 6,518 6,192 Galaxy-Kurla 1QFY10 0.5 4,898 2,327 2,141 Industrial park (Virar) 2QFY10 1.5 2,066 3,099 2,944 Majestic (Bhandup) 3QFY10 1.3 5,976 7,769 4,661 Residency Park (Virar) 4QFY10 1.3 2,861 3,576 2,933 Harmony (Goregaon) 1QFY11 0.0 8,601 378 358 Meadows (phase I), Goregaon 1QFY11 1.0 8,010 8,010 6,408 Exotica (Kurla W) 2QFY11 0.7 7,001 4,901 3,234 Whispering Towers-phase I (Mulund (W) 3QFY11 0.8 6,936 5,549 3,052 Paradise City (phase I) Palghar 3QFY11 3.0 1,950 5,850 5,674 Paradise City (phase II) Palghar 3QFY11 2.0 2,100 4,200 2,520 Whispering Towers-phase II (Mulund (W) 1QFY12 0.8 7,551 6,041 604 Total - 14.5 - 64,119 46,327 Source: Company, Nirmal Bang Institutional Equities Research Status quo on MIAL project Status quo has been maintained in the MIAL project, with the Maharashtra government yet to determine the eligibility criteria for slum families (who have encroached on the land of MIAL) who would be entitled to rehabilitation of their dwelling. However, in June 2011, 300 families were given allotment letters by the Mumbai Metropolitan Region Development Authority (MMRDA). The HDIL management has indicated that MMRDA intends to shift another 2,500 families as per current norms. HDIL has already generated 11mn sq ft of TDR from the project so far, despite more than one year’s delay in shifting the families under phase 1 of the project. Reducing dependence on TDR market is a big positive The TDR market remained soft over the past few quarters, thanks to slowdown in new launches in the Mumbai market due to delay in government approvals. HDIL has visibility of 3mn sqft of TDR from the MIAL project, out of which 0.6mn sq ft of TDR has been sold in 1QFY12. We have factored in 2.4mn sq ft of TDR sales in FY12 at Rs2,200/sq ft (i.e. 12% discount to current level of Rs2,500/sq ft). Given the delay/uncertainty in shifting of families, we have excluded 10mn sq ft (potential 65 acres), which HDIL is expected to get in the airport vicinity as it rehabilitates 85,000 families and no TDR sales from FY13 onwards. Even market consensus estimate has removed the entire valuation from MIAL on account of indefinite delay in project execution. Overall, we expect the share of TDR sales in the revenue mix to fall from 67% in FY11 to 18% in FY12 and to zero in FY13E. In the event of clarity on all three phases of the MIAL project, it will add Rs100 to our NAV. Exhibit 11: Softening TDR demand (Rs/sqft) (sq ft) 3,500 1.8 2.0 1.7 1.8 3,000 1.5 1.5 1.6 2,500 1.3 1.4 1.1 1.0 1.2 2,000 0.9 1.0 1,500 0.6 0.8 1,000 0.6 0.4 500 0.2 0 0.0 1QFY10 2QFY10 3QFY10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 TDR realisation TDR sales Source: Company, Nirmal Bang Institutional Equities Research
44 HDIL
Institutional Equities
Key risks Long gestation period for SRS projects Around 48% of HDIL's saleable area (including the MIAL project) comes from long gestation SRS project development, which involves getting the necessary consensus from slum dwellers, government approvals, clearing encroachments, and rehabilitation of project-hit families. Any delay in the above processes could increase project costs and delay sales generation from project FSI. Over-dependence on Mumbai, MMR region Mumbai and the MMR region (excluding Mumbai) contribute 42% and 50%, respectively, to HDIL's overall saleable area. They contribute 95% to our NAV. Transaction volumes have slowed down in Mumbai property market, thanks to delay in approvals and affordability issue. Any prolonged slowdown in Mumbai property market will impact our earnings estimates and thereby our NAV
45 HDIL
Institutional Equities
Financials
Exhibit 12: Income statement Exhibit 13: Cash flow Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Net sales 17,504 15,021 18,500 27,750 34,132 EBIT 7,976 7,177 10,197 13,598 16,712 % growth (26.9) (14.2) 23.2 50.0 23.0 Inc./(dec.) in working capital (18,234) (16,152) (34,372) (9,188) (10,038) 2,991 1,414 925 6,814 10,148 Construction costs Cash flow from operations (10,258) (8,976) (24,175) 4,411 6,675 Staff costs 221 285 464 626 795 Other income 320 345 499 1,000 900 Administrative costs 908 650 658 757 1037 Depreciation 25 724 838 849 993 Others 5,367 4,772 5,417 5,106 4,446 Total expenditure 9,487 7,121 7,464 13,302 16,427 Interest paid (-) (582) (471) (836) (886) (913) EBITDA 8,017 7,901 11,036 14,447 17,705 Tax paid (-) (629) (1,202) (515) (3,428) (4,175) % growth (48.9) (1.5) 39.7 30.9 22.5 Dividends paid (-) (751) - - (478) EBITDA margin (%) 45.8 52.6 59.7 52.1 51.9 Net cash from operations (11,874) (9,579) (24,189) 1,946 3,002 Other income 320 345 499 1,000 900 Capital expenditure (-) (625) (3,423) (1,749) (827) (868) Interest costs 582 471 836 886 913 Net cash after capex (12,499) (13,002) (25,938) 1,119 2,134 Gross profit 7,755 7,775 10,698 14,561 17,692 Inc./(dec..) in borrowing 10,306 (416) 2,181 (2,000) (3,000) % growth (51.6) 0.3 37.6 36.1 21.5 Inc./(dec.) in borrowings 10,306 (416) 2,181 (2,000) (3,000) Depreciation 41 724 839 849 993 Profit before tax 7,715 7,051 9,860 13,712 16,699 Inc./(dec.). in investments (571) 5 1,898 - - % growth (51.8) (8.6) 39.8 39.1 21.8 Equity issue/(buyback) 0 20,784 16,507 825 - Tax 943 1330 1591 3428 4175 Cash from financial activities 9,735 20,373 20,586 (1,175) (3,000) Effective tax rate (%) 12.2 18.9 16.1 25.0 25.0 Others 14 (208) (269) - - Net profit 6,772 5,721 8,268 10,284 12,524 Opening cash 3,505 755 7,918 2,297 2,241 % growth (52.0) (15.5) 44.5 24.4 21.8 Closing cash 755 7,918 2,297 2,241 1,375 E.O.item 1093 (44) (45) - - Change in cash (2,750) 7,163 (5,621) (56) (866) Minority interest (5) - (6) - - Reported net profit 7,860 5,678 8,218 10,284 12,524 Source: Company, Nirmal Bang Institutional Equities Research PAT margin (%) 44.9 37.8 44.4 37.1 36.7 % growth (44.2) (27.8) 44.7 25.1 21.8 Exhibit 15:Key Ratios Dividend Payout (%) - - - 4.1 3.3 Y/E March FY09 FY10 FY11 FY12E FY13E Source: Company, Nirmal Bang Institutional Equities Research Per share data (Rs) Exhibit 14: Balance Sheet EPS 16.1 13.7 19.6 24.5 29.9 Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Cash EPS 16.2 15.4 21.6 26.6 32.3 Equity 2,755 3,588 4,150 4,190 4,190 DPS - - - 1.0 1.0 Reserves 41,463 66,840 90,720 101,312 113,358 Book Value 160.5 196.3 228.6 251.8 280.5 Net worth 44,218 70,429 94,870 105,502 117,548 Du Pont analysis Short-term loans 4,500 8,500 2,000 4,000 4,000 Profit margin (%) 44.9 37.8 44.4 37.1 36.7 Long-term Loans 36,933 32,517 41,198 37,198 34,198 Financial leverage (x) 2.1 1.9 1.7 1.7 1.6 Total loans 41,433 41,017 43,198 41,198 38,198 Asset turnover (x) 0.2 0.1 0.1 0.2 0.2 Deferred tax liability 24 51 69 69 69 RoE (%) 19.5 9.9 9.9 10.3 11.2 Minority interest - - 46 46 46 Returns (%) Liabilities 85,675 111,497 138,183 146,814 155,861 RoE 19.5 9.9 9.9 10.3 11.2 Gross block 654 1,937 2,417 3,244 4,112 RoCE 10.4 7.3 8.2 9.5 11.0 Depreciation 56 107 142 991 1,984 Dividend payout - - - 4.1 3.3 Net block 598 1,830 2,275 2,252 2,127 Valuation ratio (x) Capital work-in-progress 152 217 917 917 917 P/E 5.7 6.7 4.7 3.7 3.1 Goodwill 478 2,591 2,203 2,203 2,203 P/E (cash EPS) 2.7 5.7 6.0 4.3 3.5 Investments 2,491 2,429 520 520 520 P/BV 0.6 0.5 0.4 0.4 0.3 Inventories 69,128 87,567 114,152 123,159 133,273 EV / EBITDA 9.9 9.1 7.2 5.4 4.3 Debtors 1,669 2,030 3,611 4,171 4,772 EV/Sales 4.5 4.8 4.3 2.8 2.2 Cash 755 7,918 2,297 2,241 1,375 Turnover ratio (x) Other current assets 17,097 15,677 35,522 39,072 42,977 Asset turnover ratio 28.5 11.6 8.5 9.8 9.3 Total current assets 90,080 114,843 155,583 168,644 182,397 Debtor days 23.3 44.9 55.6 51.2 47.8 Creditors 3,304 3,081 4,724 5,321 6,571 Inventory days 1297 1904 1990 1561 1371 Customer advances 1,882 4,119 13,329 16,661 19,993 Creditor days 236.3 383.3 742.5 655.7 625.5 Other current liabilities 1,507 1,561 5,261 5,739 5,739 Solvency ratio (x) Total current liabilities 6,693 8,761 23,315 27,721 32,303 Gross debt-equity 0.9 0.9 0.6 0.5 0.4 Net current assets 83,388 106,082 132,268 140,922 150,094 Interest coverage 1.3 1.4 1.6 2.3 3.1 Total assets 85,675 111,497 138,183 146,814 155,861 Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research
46 HDIL
Institutional Equities
Oberoi Realty 4 October 2011
Reuters: OEBO.BO; Bloomberg: OBER IN Outperformance to continue BUY Oberoi Realty (ORL) has a proven track record in Mumbai property market, Sector: Real Estate
which is well reflected by its premium pricing compared to competitors and timely execution of projects. While the slowdown in Mumbai property market due CMP: Rs232 to affordability issue and delay in government approvals is well priced in, it will help the company in aggressive land acquisition as it has net cash reserves of Target Price: Rs283 Rs15.6bn. We believe ORL’s outperformance will continue when compared with Upside: 22% the BSE Sensex and Realty Index (outperformed Sensex and Realty Index by 10% and 27% YTD, respectively) owing to its debt-free status, higher RoE Param Desai (~20%), earnings CAGR of 26% over FY11-13E and front-ended NAV. We assign a [email protected] Buy rating to the stock with a TP of Rs283 (1x to our one-year forward NAV). +91-22-3926 8128
Slowdown in Mumbai property market priced in: We have extended the launch period of its projects like Exotica, Exquisite III and Prisma by one year against the Key Data company’s guidance to factor in the slowdown in Mumbai property market. Further, we Current Shares O/S (mn) 328.2 have assumed no increase in prices at its ongoing projects, a 10% price correction in Mkt Cap (Rsbn/US$bn) 76.5/1.6 new project launches and have factored in a 12% YoY volume de-growth in FY12 Initiating Coverage Initiating (ORL reported 30% YoY volume growth in 1QFY12 as against 25% de-growth in 52 Wk H / L (Rs) 307/210 Mumbai property registrations). Despite the above assumptions, we are 8% above Daily Vol. (3M NSE Avg.) 59,658 consensus earnings estimates for FY13. Worli project launch to act as near-term positive catalyst: We expect the launch of Share holding (%) 3QFY11 4QFY11 1QFY12 ORL’s Worli high-end residential project (0.5mn sq ft) in 4QFY12 with all approvals in place and the tie-up with Japanese contractor (Samsung) for project execution. ORL Promoter 78.8 78.8 78.8 also intends to tie up with an operator for hotel space, which will lead to better rates in FII 18.9 19.0 19.0 the residential segment. We have assumed an average price of Rs34,200/sq ft as DII 1.0 1.0 1.0 against the company’s guidance of Rs38,000/sq ft and ongoing rates in similar vicinity Corporate 0.5 0.5 0.4 of more than Rs35,000/sq ft, as per Cushman & Wakefield. General Public 1.1 1.1 1.0 Strong Balance Sheet with healthy leasing portfolio: ORL had net cash of Rs15.6bn and pre-sales amounting to Rs12.8bn at the end of 1QFY12, which will get booked over next two years. Further, it has stable rent-yielding assets of 1.3mn sq ft at One Year Indexed Stock Performance prime locations, which have led to rental income of Rs1,792mn in FY11. This provides 120 flexibility to withstand any downturn and manage working capital requirement. We expect ORL to report 28.3% rental income CAGR over FY11-13E at Rs2,941mn, with 110 2.33mn sq ft of rent-yielding assets getting operational by FY13. 100 90 Attractive valuation with limited downside risk: At the CMP, ORL is trading at 1.7x P/BV and 9.2x P/E on FY13E earnings and at a 18% discount to our one-year forward 80 70 NAV. We expect the stock to trade at one-year forward NAV, unlike its peers, given the Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 higher valuation visibility as the ongoing (already launched) city-centric projects, OBEROI REALTY NSE S&P CNX NIFTY INDEX operational lease assets and cash account for over 51% of NAV.
Y/E Mar (Rsmn) FY09 FY10 FY11 FY12E FY13E Price Performance (%) Net sales 4,254 7,899 9,960 8,793 17,616 EBITDA 2,474 4,734 5,770 5,307 10,415 1 M 6 M 1 Yr
Net profit 2,521 4,582 5,172 5,305 8,258 Oberoi Realty 3.6 (8.4) - EPS (Rs) 7.7 14.0 15.8 16.2 25.2 Nifty Index (3.8) (16.8) (21.1) EPS growth (%) (14.6) 81.7 12.9 2.6 55.7 EBITDA margin (%) 58.2 59.9 57.9 60.4 59.1 Source: Bloomberg PE ratio (x) 30.2 16.6 14.7 14.4 9.2 P/BV (x) 4.8 3.7 2.3 2.0 1.7 EV/EBITDA (x) 28.6 14.5 10.1 10.9 5.4 RoCE (%) 17.0 28.0 21.2 14.1 24.0 RoE (%) 19.9 28.5 20.1 14.9 19.7 Source: Company, Nirmal Bang Institutional Equities Research
Institutional Equities
Valuation Assign Buy rating with a target price of Rs283 We have valued ORL’s land bank using one-year forward DCF-based NAV, which led to gross NAV of Rs304 from which we have deducted customer advances, land bank payables, tax and added net cash. Of the overall valuation, 47% comes from the residential segment, 35% from the commercial segment and the rest from hospitality and infrastructure projects. Our NAV factors in slowdown in Mumbai property market by way of moderate volume CAGR of 20% over FY11-13E. We believe efficient utilisation of its cash reserves and Worli project launch will act as key catalysts for its stock price performance. At the CMP, ORL is trading at 1.7x P/BV and 9.2x P/E on FY13E earnings and at a 18% discount to one-year forward NAV. We expect the stock to trade at one-year forward NAV, unlike its peers, given the higher valuation visibility as the ongoing city-centric projects and operational lease assets account for over 42% of its NAV. Further, the company has net cash balance of Rs15.6bn (Rs49/share), which will help ORL in aggressive land acquisition in the case of price correction. We assign a Buy rating to the stock with a target price of Rs283 (1x to our one-year forward NAV). Exhibit 1: Valuation summary One-year forward NAV (Rs per share) Residential 143 Commercial/retail 107 Hospitality & social infrastructure projects 54 Gross NAV 304 Add: Net cash 54 Less: Unpaid land costs/ customer advances (22) Less: Taxes (53) NAV/share (Rs) 283 Source: Nirmal Bang Institutional Equities Research Exhibit 2: Contribution of 42% NAV from already launched projects Rsmn Rs/share
Commercial/Retail segment 12,840 39 Residential segment 22,916 70 Hotel segment 6,400 19 Total 68,929 128 Source: Nirmal Bang Institutional Equities Research
Key assumptions
We have factored in no increase in prices quoted for ongoing projects, 10% reduction in base prices of new projects and 5% increase FY13 onwards.
We have assumed 5% growth in rentals from FY13.
We have assumed 16% cost of equity and 11% capitalisation rate
We have assumed tax rate of 20% in FY12 and 25% FY13 onwards.
Earnings growth profile We expect OPM to increase from 57.9% to 59.1% in FY13, as pre-sales amounting to Rs12.8bn with higher margins will get booked over the next two years. Our earnings estimates also factor in 28% CAGR in rentals over FY11-13E, with 2.33mn sq ft of rent-yielding assets getting operational by FY13. However, we expect the tax rate to increase from 16% in FY11 to 25% in FY13, as the company enjoyed Section 80 IB benefits until FY11. Consequently, we expect earnings growth of 26% over FY11-13E.
48 Oberoi Realty
Institutional Equities
Exhibit 3: Earnings trend (Rsmn) (%) 9,000 100 8,000 80 7,000 6,000 60 5,000 40 4,000 3,000 20 2,000 0 1,000 - (20) FY09 FY10 FY11 FY12E FY13E PAT (LHS) YoY growth (RHS) Source: Company, Nirmal Bang Institutional Equities Research How we differ from consensus estimates We are factoring in 0.61mn sq ft of area sold in FY12, which is below consensus estimate. We believe the market factoring in slowdown in Mumbai property market will impact FY13 earnings rather than FY12 earnings. However, we expect the company to be more aggressive in new launches like Prisma and Exquisite III in FY13 and focus more on execution of existing projects where pre-sales have been very strong. Consequently, we expect more than 1mn of new sales in FY13 with a conservative pricing assumption. Hence, we are above consensus estimates by 8% for FY13. Exhibit 4: Our estimates vs consensus NBIE estimates Bloomberg consensus Deviation (%) FY12E FY13E FY12E FY13E FY12E FY13E Net sales 8,793 17,616 11,269 17,433 (22.0) 1.0 EBITDA 5,307 10,415 6,914 10,944 (23.2) (4.8) EBITDA margin (%) 60.4 59.1 61.4 62.8 (100bp) (365bp) PAT 5,305 8,258 5,727 7,672 (7.4) 7.6 EPS 16.2 25.2 17.4 23.4 (7.4) 7.6 Source: Bloomberg, Nirmal Bang Institutional Equities Research Outperformance to continue We believe ORL’s outperformance will continue versus the Sensex and Realty Index (outperformed Sensex and Realty Index by 10% and 27% YTD, respectively) owing to debt-free status, higher RoE (~20%) and front- ended NAV unlike its peer group. Exhibit 5: ORL outperformed Realty Index YTD by 27% Exhibit 6: ORL outperformed Sensex by 10% YTD
(x) (x) 110 105
100 100 95 90 90 80 85 70 80
60 75
50 70 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oberoi Realty Index Oberoi Sensex Source: Bloomberg, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research
49 Oberoi Realty
Institutional Equities
Exhibit 7: Valuation table–Project-wise Project Segment Location Area (mn sq ft) Execution schedule NAV (Rsmn) Completed
Oberoi Mall Retail Goregaon (E) 0.55 - 6,682 Oberoi Commerz 1 Commercial Goregaon (E) 0.36 - 4,523 Westin Hotel Hospitality Goregaon (E) 0.38 - 5,115 International school Social Infrastructure Goregaon (E) 0.31 - 470 Ongoing projects (Already launched)
Oberoi Splendor Residential Andheri (E) 1.28 FY08-FY12 1,403 Oberoi Splendor Grande Residential Andheri (E) 0.28 FY10-FY15 1,520 Oberoi Exquisite - I Residential Goregaon (E) 1.51 FY11-FY15 7,275 Esquire (Exquisite II) Residential Goregaon (E) 1.97 FY12-FY16 9,799 Ongoing/planned
Oberoi Exquisite - IIII Residential Goregaon (E) 2.54 FY14-19 7,993 Oberoi Commerz II Commercial Goregaon (E) 0.73 FY13 8,064 Oberoi Commerz III Commercial Goregaon (E) 1.66 FY16 9,778 Oasis Residential Worli 0.51 FY13-16 4,900 Oasis Commercial Worli 0.08 FY14-16 695 Oasis Retail Worli 0.04 FY15-16 329 Oasis Hospitality Worli 0.1 FY16 509 Oberoi Exotica I Residential Mulund 1.6 FY14-19 4,069 Oberoi Exotica II Residential Mulund 1.6 FY15-19 3,611 Oberoi Splendor – Maxima Commercial Andheri (E) 0.3 FY17-19 1,645 Oberoi Splendor IT Tower Commercial Andheri (E) 0.1 FY15-16 484 Oberoi Splendor –Prisma Commercial Andheri (E) 0.7 FY13-17 4,044 Oberoi Splendor - School Social Infrastructure Andheri (E) 0.4 FY16 455 Sangam City Residential Pune 0.77 FY15-19 612 Sangam City Commercial Pune 0.3 FY18-20 256 Sangam City Retail Pune 0.3 FY18-20 234 Education Complex Social Infrastructure Goregaon (E) 0.9 FY15 1,169 Hospital Social Infrastructure Goregaon (E) 0.4 FY15 420 Total - - 19.6 - 86,055 Source: Company, Nirmal Bang Institutional Equities Research
50 Oberoi Realty
Institutional Equities
Investment Arguments Play on resilient Mumbai property market Realty market in Mumbai, the financial hub of India, has been quite resilient, being the last one to show weakness in the 2008-09 meltdown and the first to show signs of recovery on improving sentiment. ORL is a Mumbai–focused developer which has created ‘destination developments’ by offering balanced projects involving diverse products, thereby enhancing the market value of its residential units. It has developable area of ~20mn sq ft (93% of the land bank in Mumbai) which was acquired during the pre-2005 boom period at an average cost of Rs350/sq ft. Most of its land bank will get monetised over next five- six years. Exhibit 8: Destination developments Oberoi Garden City Area (Goregaon East) (mn sq ft) Remarks Residential 5.8 Successfully sold Oberoi Woods (0.6mn sq ft), launched Exquisite I & II in FY11 (2.7mn sq ft) with decent success Oberoi Commerz 1 (0.36mn sq ft) given on lease with 80% occupancy, Commerz II (0.73 mn sq ft)is expected to be given for fit- Commercial 2.8 outs in FY13 Retail 0.55 Mall (0.5mn sq ft) operational with 95% occupancy Hotel 0.38 Hotel operational with 70% occupancy and ARR of ~Rs7,000 Social infrastructure 1.7 Oberoi International School operational with 1,200 student capacity, intends to have educational complex and hospital. Total 11.3 - Source: Company, Nirmal Bang Institutional Equities Research Enjoys premium pricing ORL has been able to charge premium prices as compared to peers in similar vicinity because of perceived better governance with respect to clear land title and creation of ‘destination development’ through facilities like schools, hospitals and malls. Further, it executes projects by outsourcing the design and construction to renowned firms such as Singapore and Benetel Associates, SCDA Architects and Larsen and Toubro, thereby ensuring timely execution of projects with superior quality. This helps ORL to focus on core activities such as land procurement, market intelligence etc. Regulatory hurdles, affordability issues impacted Mumbai property market… Volumes in Mumbai property market have been sluggish since January 2011 on account of stringent compliance norms from regulatory authorities, thereby delaying new launches. However, the proposed changes in respect of increase in FSI under car parking provisions and inclusion of flower bed, balcony etc in FSI will be beneficial for ORL, as it allows a level playing field with respect to development area one can extract from the land. Further, 325bps hike in interest rates since March 2010 by the Reserve Bank of India (RBI) to curb inflation, along with real estate prices at their peak in Mumbai, postponed the purchase decision of buyers. Consequently, it resulted in subdued volumes for developers, which is reflected in sales deed registrations in Mumbai (down ~25% YoY in CY11 YTD). However, ORL has been able to withstand the slowdown by launching its products at attractive rates. It has launched Oberoi Esquire (Exquisite II) at Goregaon (East) at a base rate of Rs10,000/sq ft versus Rs11,500/sq ft for Exquisite I, which is over a year closer to completion and managed to sell 22% (Rs5,100mn of sales) in five months of its launch (4QFY11). Exhibit 9: Mumbai property registrations (YoY de-growth)
(31) Jul-11
(27) Jun-11
(1) May-11
(30) Apr-11
(30) Mar-11
(22) Feb-11
(21) Jan-11
(29) Dec-10
(20) Nov-10
(3) Oct-10
(35) (30) (25) (20) (15) (10) (5) 0 (%)
Source: Industry, Nirmal Bang Institutional Equities Research
51 Oberoi Realty
Institutional Equities
…but concerns have been factored in We have assumed 12% de-growth in volume (area sold) in FY12 (ORL reported 30% YoY volume growth in 1QFY12), no price hike for ongoing projects and 10% price correction for new projects to factor in the slowdown in Mumbai property market. Further, we have extended the launch period of its projects like Exotica, Exquisite III and Prisma by one year as against the company’s guidance. We expect the launch of its Worli project in 4QFY12 with all approvals in place and the tie-up with Japanese contractor (Samsung) for project execution. ORL also intends to tie up with an operator in the hotel space, which will lead to better rates for the residential segment. This will drive near-term volume visibility. Further, ORL has revenue visibility (pre-sales) of Rs12.8bn, which will get booked over the next two-three years. Exhibit 10: Volume assumptions Particulars FY11 1QFY12 FY12E FY13E Oberoi Esquire 273,025 166,835 318,134 370,000 Oasis (Worli) - - 150,000 200,000 Oberoi Exquisite I 293,930 13,250 54,500 150,000 Oberoi Splendor 26,649 2,961 26,000 51,000 Oberoi Splendor Grande 81,900 27,300 66,000 66,000 Oberoi Prisma - - - 120,000 Exquisite III - - - 250,000 Others 21,602 - - - Total 697,106 210,346 614,634 1,007,000 Source: Company, Nirmal Bang Institutional Equities Research Exhibit 11: Strong revenue visibility of Rs12.8bn Total area Area sold as Revenue recognised Revenue to ( Rsmn) Sales value (sq ft) on 1QFY12 as on 1QFY12 be booked Oberoi Esquire 1,970,530 439,860 5,163 - 5,163 Oberoi Exquisite 1,506,810 772,570 9,257 3,052 6,205 Oberoi Splendor 283,920 109,200 1,411 507 904 Oberoi Splendor Grande 1,279,152 1,192,296 13,716 13,199 517 Total 5,040,412 2,513,926 29,547 16,758 12,789 Source: Company, Nirmal Bang Institutional Equities Research Healthy leasing portfolio ORL has stable rent-yielding assets of 1.3mn sq ft at prime locations, which has led to rental income of Rs1,792mn (18% of total revenue) in FY11. We expect ORL to report rental income CAGR of 28.1% over FY11-13E, at Rs2,941mn, with 2.33mn sq ft of rent-yielding assets getting operational by FY13. This provides flexibility to withstand any downturn and manage working capital requirement. Exhibit 12: Rental income to witness CAGR of 28.1% over FY11-13E ( Rsmn) FY11 FY12E FY13E Occupancy assumption Oberoi mall 701 748 794 95% Westin 699 888 960 70 % ( FY12), 80% ( FY13) Oberoi commerz I 398 455 538 90% Oberoi commerz II - - 594 50% in FY13 Oberoi International school - 43 55 - Total 1,798 2,135 2,941 - Source: Company, Nirmal Bang Institutional Equities Research
52 Oberoi Realty
Institutional Equities
Acquisition of ICICI Venture stake in Worli project In 2004, ORL promoters and ICICI Venture had acquired a four-acre prime property from GlaxoSmithKline at Worli for Rs1,076mn, with each having a 50% stake. Assuming an FSI of 2.5x (under the car parking provision) it leads to 0.58mn sq ft of saleable area (assuming loading of 30%). Though the company has not disclosed the consideration sum for acquisition of ICICI Venture stake, media reports indicate it to be Rs3bn, which works out o be Rs10,337/sq ft. We believe the transaction appears to be fair at an FSI of 2.5x. The said land was originally leased out by Brihanmumbai Municipal Corporation (BMC) to GlaxoSmithKline for an indefinite period, resulting in 7.5% of the transaction value to be set aside for BMC as transfer premium on change of ownership. However, the BMC demanded 50% of the transaction value (Rs1,076mn), as against 7.5% decided earlier, and filed a suit in this connection, which it lost. The project is yet to get Commencement Certificate (CC) from the BMC. As per ORL’s management, the BMC is rethinking to bring its demand down to 10% in order to make it more reasonable. We believe the monetisation of land will take place post FY13 once the BMC issue is settled. The management has given guidance of another 8-10 months for official launch of the Worli project. As of now, we have not factored this project in our NAV as we wait for further clarity with respect to transaction costs and likely FSI for the project. Cash utilisation holds key ORL had net cash of Rs15.6bn on its books at the end June 2011, which is a rare phenomenon in the realty sector. This was largely on account of acquisition of land at a cheaper cost and monetising its land bank at a faster pace along with outsourcing, thereby providing timely project execution. We believe monetisation of current land bank has revenue visibility for the next five-six years, which provides comfort to ORL for acquiring fresh land/joint development of projects at its own pace. Further, its competitors’ power to hold land under the current tight liquidity environment and high interest rates scenario is getting squeezed.
Key risks Replenishing land bank on sustainable basis will be key challenge ORL has land bank of ~20mn sq ft (93% in Mumbai), which will be developed over the next 6-7 years. This is lower than that of other listed peers and the company proposes to increase its land bank to ensure long-term growth. Currently, Slum Rehabilitation Authority’s block redevelopment and mill lands are primary sources of land supply in Mumbai, where competition is intense. This could limit value accretion in new land acquisition in Mumbai and may expose ORL to newer territories/cities, which may result in moderation of margins over the long term. Prolonged slowdown in Mumbai real estate market Mumbai property market is in the middle of a slowdown due to delay in approvals and affordability issue. We have assumed delay in new project launch by one year and a 10% price correction to factor in slowdown in Mumbai. However, any prolonged slowdown in Mumbai property market will impact ORL’s earnings as 93% of its current land bank is located in the city. Further, 12% of our NAV stands at a risk as the company still awaits environmental clearance for its Mulund project and conversion of land into non-agricultural in the case of Pune project.
53 Oberoi Realty
Institutional Equities
Financials
Exhibit 13: Income statement Exhibit 14: Cash flow Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Net sales 4,254 7,899 9,960 8,793 17,616 EBIT 2,401 4,644 5,534 5,052 10,112 % growth (16.8) 85.7 26.1 (11.7) 100.3 Inc./ (dec.) in working capital (927) 1,316 (2,367) (3,324) (4,608) Construction costs 1,596 3,043 3,766 2,978 6,462 Cash flow from operations 1,474 5,960 3,167 1,727 5,505 Staff costs 87 70 270 308 440 Other income 295 156 627 1,500 900 Other overheads 97 51 153 200 298 Total expenditure 1,780 3,164 4,190 3,486 7,200 Depreciation 73 91 237 256 303 EBITDA 2,474 4,734 5,770 5,307 10,415 Interest paid (-) (50) (2) - (2) (2) % growth (3.9) 91.4 21.9 (8.0) 96.2 Tax paid (-) (395) (836) (1,399) (1,244) (2,753) EBITDA margin (%) 58.2 59.9 57.9 60.4 59.1 Dividends paid (-) (58) (85) (71) (381) (458) Other income 295 156 627 1,500 900 Net cash from operations 1,339 5,284 2,560 1,855 3,495 Interest costs 4 - 2 2 2 Capital expenditure (-) (2,219) (1,672) (1,760) (1,262) (2,097) Gross profit 2,765 4,890 6,396 6,806 11,314 Net cash after capex (880) 3,612 800 593 1,398 % growth (9.3) 76.9 30.8 6.4 66.2 Inc./(dec..) in short-term borrowing (227) (107) - - - Depreciation 73 91 237 256 303 Profit before tax 2,692 4,800 6,159 6,550 11,011 Inc./(dec.) in long-term borrowing (1,101) - - - - % growth (11.1) 78.3 28.3 6.3 68.1 Inc./(dec..) in preference capital (212) (212) - - - Tax 177 226 983 1,244 2,753 Inc./(dec.) in borrowings (1,540) (319) - - - Effective tax rate (%) 6.6 4.7 16.0 19.0 25.0 Inc./(dec). in investments 3,690 (640) 140 - - Net profit 2,515 4,574 5,176 5,305 8,258 Equity issue/(buyback) - - 10,286 - - % growth (15.0) 81.8 13.2 2.5 55.7 Cash from financial activities 2,150 (959) 10,426 - - EO Item (6) (8) 5 - - Others (62) (714) (840) - - Reported net profit 2,521 4,582 5,172 5,305 8,258 Opening cash 461 1,669 3,607 13,993 14,586 PAT margin 59.3 58.0 51.9 60.3 46.9 % growth (14.6) 81.7 12.9 2.6 55.7 Closing cash 1,669 3,607 13,993 14,586 15,984 DPS (Rs) 2.0 0.2 1.0 1.2 1.4 Change in cash 1,208 1,938 10,385 593 1,398 Payout (%) 0.7 1.7 7.4 8.6 6.7 Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research Exhibit 16: Key ratios Exhibit 15: Balance Sheet Y/E March FY09 FY10 FY11 FY12E FY13E Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Per Share Data (Rs) EPS 7.7 14.0 15.8 16.2 25.2 Equity 26 2,887 3,282 3,282 3,282 Cash EPS 7.9 14.2 16.5 16.9 26.1 Reserves 13,839 15,393 29,834 34,682 42,391 DPS 0.2 1.0 1.2 1.4 1.4 Net worth 13,865 18,280 33,117 37,964 45,673 Book value 48.0 63.3 100.9 115.7 139.1 Preference share capital 571 359 359 359 359 Du Pont analysis Total loans 107 - - - - Profit margin (%) 59.3 58.0 51.9 60.3 46.9 Liabilities 14,543 18,639 33,476 38,323 46,032 Financial leverage (x) 1.4 1.4 1.3 1.2 1.2 Gross block 2,837 3,258 7,996 9,048 11,145 Asset turnover (x) 0.2 0.4 0.3 0.2 0.4 Depreciation 101 188 415 671 974 ROE (%) 19.9 28.5 20.1 14.9 19.7 Returns (%) Net block 2,736 3,070 7,581 8,377 10,171 RoE 19.9 28.5 20.1 14.9 19.7 Capital work-in-progress 3,851 5,101 2,110 2,321 2,321 RoCE 17.0 28.0 21.2 14.1 24.0 Inventories 7,122 6,194 7,742 10,647 16,766 Dividend payout 2.7 2.6 6.3 7.4 5.7 Debtors 272 404 468 515 926 Valuation ratio (x) Cash 1,669 3,607 13,993 14,586 15,984 P/E 30.2 16.6 14.7 14.4 9.2 Liquid investments 150 790 650 650 650 P/E (cash EPS) 29.4 16.3 14.1 13.7 8.9 Other current assets 2,737 6,315 7,344 7,702 8,078 P/BV 4.8 3.7 2.3 2.0 1.7 Total current assets 11,950 17,310 30,197 34,100 42,404 EV / EBITDA 17.0 28.0 21.2 14.1 24.0 EV/sales 17.7 9.2 6.3 7.0 3.4 Creditors 200 245 341 279 576 Turnover ratio (x) Customer advances 3,762 4,931 3,919 3,879 5,789 Asset turnover ratio 1.4 1.4 1.2 0.9 1.4 Other 31 1,667 2,152 2,316 2,499 Debtor days 33 16 16 20 15 Total current liabilities 3,993 6,842 6,412 6,474 8,864 Inventory days 506 302 240 326 270 Net current assets 7,957 10,468 23,785 27,626 33,540 Creditor days 36 26 26 32 22 Total assets 14,543 18,639 33,476 38,323 46,032 Solvency ratio(x) Source: Company, Nirmal Bang Institutional Equities Research Gross debt-equity - - - - - Source: Company, Nirmal Bang Institutional Equities Research
54 Oberoi Realty
Institutional Equities
Sobha Developers 4 October 2011
Reuters: SOBH.BO; Bloomberg: SOBHA IN Entry Into New Locations Poses Risk HOLD Sobha Developers (SDL), the largest South-based developer in terms of land Sector: Real Estate
bank with 90% exposure towards the residential segment, stands at risk in a rising interest rate environment. Further, any fundamental slowdown in the CMP: Rs208 US/Europe economy is a key risk for SDL, as 36% of its customers are from the IT/ITES segment. We believe there is also a risk to volumes from SDL’s entry Target Price: Rs227 into new locations like Chennai, Gurgaon and Mysore (SDL’s planned launches Upside: 9% in Chennai in 2QFY12 have been delayed because of lack of government approvals), which account for 63% of its new launches in FY12. Hence, we Param Desai expect moderate volume growth of 5% YoY and thereby muted debt reduction in [email protected] +91-22-3926 8128 FY12. We assign a Hold rating to the stock with a target price of Rs227. Our profit estimates are below consensus expectations: SDL’s 1QFY12 numbers were disappointing in the wake of lower revenue execution in the real estate segment Key Data and increase in net debt by Rs1,000mn, which has resulted in consensus earnings Current Shares O/S (mn) 98.1 estimate downgrade by 5-10%. However, SDL’s management has maintained its Mkt Cap (Rsbn/US$mn) 20.3/412.6 annual guidance of 11mn sq ft of new launches, 3.2-3.5mn sq ft of sales (Rs15bn) and Initiating Coverage Initiating 52 Wk H / L (Rs) 404/185 net debt of 0.5x in FY12, which appear to be challenging, in our view. We expect 5% volume growth at 2.9mn sq ft (Rs13.3bn) versus consensus estimate of more than Daily Vol. (3M NSE Avg.) 154,720 3mn sq ft and net debt/equity ratio to remain flat YoY at 0.65x. Hence, our profit estimates are 15.7% and 10.5% below consensus estimates for FY12 and FY13, Share holding (%) 3QFY11 4QFY11 Q1FY12 respectively. Promoter 60.6 60.6 60.4 Project launch in new cities to be challenging: As much as 63% of SDL’s planned project launches in FY12 will be in new cities where it currently does not have a FII 32.1 30.4 29.8 presence. It has already started facing challenges with the delay in government DII 2.9 4.6 5.4 approval for its Chennai project (1mn sq ft). We believe the over-dependence on new Corporate 1.5 1.5 1.2 cities and the Bangalore launch concentrated at a single location will hurt volumes. General Public 3.0 2.9 3.0 Gearing unlikely to go down: Net debt increased by Rs1,000mn QoQ to Rs13bn (0.69x- net D/E) in 1QFY12 on account of expenditure incurred on its newly launched project in Gurgaon. SDL has been fairly successful in reducing its net D/E, from 1.74x One Year Indexed Stock Performance
in FY09 to 0.69x in 1QFY12, through a combination of land sales and QIP. We believe 110 that under the current tight liquidity environment, land sales and equity raising will 100 remain challenging and thereby any debt reduction hinges on operating cash flow, 90 80 which remains weak. 70 Valuation: At the CMP, SDL is trading at 0.9x P/BV and 8.7x P/E on FY13E earnings 60 50 and at a 32% discount to our one-year forward NAV. As much as 63% of its launches 40 in new cities will be challenging, and muted visibility on debt reduction in FY12 offsets Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 32% discount to NAV. We assign a Hold rating on SDL as the stock appears to be SOBHA DEVELOPERS NSE S&P CNX NIFTY INDEX fairly valued at a TP of Rs227 at a 30% discount to our one-year forward NAV. Y/E Mar (Rsmn) FY09 FY10 FY11 FY12E FY13E Price Performance (%) Net sales 9,740 11,299 14,739 15,825 19,754 1 M 6 M 1 Yr EBITDA 2,788 2,463 3,161 3,252 4,277 Net profit 1,078 1,341 1,813 1,773 2,350 Sobha (7.9) (29.9) (47.4) EPS (Rs) 11.0 13.7 18.5 18.1 24.0 Nifty Index (3.8) (16.8) (21.1) EPS growth (%) (52.8) 24.4 35.2 (2.2) 32.5 EBITDA margin (%) 28.6 21.8 21.4 20.6 21.6 Source: Bloomberg PE ratio (x) 18.9 15.2 11.3 11.5 8.7 P/BV (x) 1.4 1.2 1.1 1.0 0.9 EV/EBITDA (x) 14.2 13.9 10.3 10.3 8.1 RoCE (%) 8.4 6.9 9.2 9.2 11.2 RoE (%) 10.4 9.6 10.2 9.2 11.2 Source: Company, Nirmal Bang Institutional Equities Research
Institutional Equities
Valuation Assign Hold rating with target price of Rs227 We have valued SDL’s land bank of 227mn sq ft using the one-year forward DCF-based NAV, which leads to gross NAV of Rs651/share from which we have deducted customer advances, land bank payables, tax and net debt. Of the overall valuation, 85% comes from the residential segment, 8% from the commercial segment and the rest from the contractual segment, which is valued at 5x EV/EBIDTA on FY13E earnings. At the CMP, SDL is trading at 0.9x P/BV and 8.7x P/E on FY13E earnings and at 32% discount to our one-year forward NAV. We assign a Hold rating to the stock with a target price of Rs 227, at a 30% discount to one-year forward NAV, to factor in any demand slowdown from the IT/ITES segment. Exhibit 1: Valuation summary One -year forward NAV (Rs per share) Residential segment 543 Commercial/retail segment 50 Contractual segment 41 Gross NAV 634 Less: Net debt (154) Less: Unpaid land cost/ customer advances (36) Less: Taxes (137) NAV/share (Rs) 307 Target Price (Rs) 30% discount to NAV 227 Source: Nirmal Bang Institutional Equities Research Exhibit 2: Geographical break-up of NAV (%)
4 2 6
6
42 10
11
19 Bangalore Chennai Cochin Hosur Gurgaon Pune Coimbatore Mysore Source: Nirmal Bang Institutional Equities Research
56 Sobha Developers
Institutional Equities
Key assumptions
We have factored in no increase in pricing of ongoing projects, 10% reduction in base pricing in new launches and 5% increase FY13 onwards.
We have assumed no growth in rentals over FY12 and 5% increase FY13 onwards.
We have assigned 16% cost of equity and 11% capitalisation rate.
We have assumed tax rate of 33% FY13 onwards. Earnings growth profile We expect OPM to remain flat at 21.6% in FY13 from the current level. We have assumed Rs1,000mn of land sales each in FY12 and FY13. Our earnings forecasts also factor in a moderate 10% volume CAGR over FY11-13E. Further, we expect SDL to pay full tax rate of 33% FY13 onwards, as against 26.6% in FY11, due to the conclusion of Section 80IB tax benefits in FY11. Consequently, we expect moderate earnings CAGR of 13.9% over FY11-13E. Exhibit 3: Earnings trend (Rsmn) 2,500
2,000
1,500
1,000
500
0 FY09 FY10 FY11 FY12E FY13E
Source: Company, Nirmal Bang Institutional Equities Research
57 Sobha Developers
Institutional Equities
Investment Arguments Our profit estimates for FY12, FY13 below consensus expectations For the past two quarters, SDL results were disappointing because of higher inflationary pressure impacting margins, slower project execution as compared to sales and moderate volume growth. Further, its net debt increased by Rs1,000mn in 1QFY12, which was a big disappointment. This led to 5-10% revenue and earnings downgrade over the past two quarters in consensus estimates. The company also missed its annual volume guidance of 3mn sq ft in FY11. However, it has maintained FY12 guidance of 11mn sq ft of new launches, 3.2-3.5mn sq ft of sales (Rs15bn) and net debt of 0.5x, which appears to be challenging, in our view. We expect 5% volume growth at 2.9mn sq ft (Rs13.3bn) versus market consensus estimate of more than 3mn sq ft and net debt remaining flat YoY at 0.65x. Our OPM is also 206bps below consensus estimate in FY12 because of higher contribution from the low margin contractual segment. Hence, our profit estimates are 15.7% and 10.5% below consensus estimates for FY12 and FY13, respectively. Exhibit 4: PAT downgrade likely Exhibit 5: EBITDA downgrade likely
(Rsmn) (Rsmn) 3,500 5,500 3,250 5,000 3,000 2,750 4,500
2,500 4,000 2,250 3,500 2,000 1,750 3,000
1,500 2,500 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 BBG FY12 BBG FY13 NBIE FY12 NBIE FY13 BBG FY12 BBG FY13 NBIE FY12 NBIE FY13 Source: Bloomberg, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research
Exhibit 6: Sales downgrade likely (Rsmn) 22,000
21,000
20,000
19,000
18,000
17,000
16,000
15,000 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 BBG FY12 BBG FY13 NBIE FY12 NBIE FY13 Source: Bloomberg, Nirmal Bang Institutional Equities Research Exhibit 7: Our estimates vs Bloomberg consensus NBIE estimates Bloomberg estimates Deviation (%) (Rsmn) FY12E FY13E FY12E FY13E FY12E FY13E Net sales 15,825 19,754 16,451 19,523 (3.8) 1.2 EBITDA 3,252 4,277 3,720 4,560 (12.6) (6.2) EBITDA margin (%) 20.6 21.6 22.6 23.4 (206bp) (171bp) PAT 1,773 2,350 2,103 2,624 (15.7) (10.5) EPS 18.1 24.0 21.4 26.8 (15.7) (10.5) Source: Bloomberg, Nirmal Bang Institutional Equities Research
58 Sobha Developers
Institutional Equities
Project launch in new cities to be challenging As much as 63% of SDL’s planned launches in FY12 will be in new cities where it currently does not have a presence. The company has already started facing challenges, stuck following the delay in government approval for its Chennai project (1mn sq ft). As per industry sources, a total of 676 projects for developing around 43.5 million sq ft of residential and commercial space are awaiting approval from the concerned authorities in Tamil Naidu. There is still no clarity on the timeframe for Sobha Sunshine and Pudupakkam projects in Chennai. Further, the company follows direct marketing strategy in Bangalore which is in sharp contrast to the strategy adopted in Gurgaon where developers depend on realty agents to secure the initial response. We believe the over-dependence on new cities and the Bangalore launch concentrated at a single location will hurt volumes. Success of Gurgaon project is key SDL has 173 acres (saleable share 4.3mn sq ft) under joint development agreement (JDA) in Gurgaon adjoining the Dwarka expressway wherein it intends to sell villas/row houses. In July 2011, SDL launched 1mn sq ft of villas at Rs9,500/sq ft and managed to sell 75,000 sq ft that month. We have assumed 0.25mn sq ft of sales in FY12. The management has given guidance regarding the launch of remaining 3.3mn sq ft over the next three-four quarters. SDL has so far incurred ~Rs4.5bn on its newly launched project in Gurgaon. In the case of successful launch and completion of the project over the next five years without any additional costs (excluding construction costs), the company should be able to garner Rs10-12bn of net cash from this project. We believe the performance of Gurgaon project holds the key for SDL’s stock performance in the near term. Exhibit 8: 63% of launches concentrated in new cities Existing location Project Type Area (mn sq ft) Comments Bangalore Sobha Signature Residential 0.22 Launched in June 2011 Bangalore Sobha City Mixed residential 3.04 Launched 0.86mn sq ft in June 2011 Bangalore Sobha Pristine Residential 0.18 Launched in August 2011 Pune Sobha Garnet Residential 0.35 Launch in July 2011 Pune Sobha Carnation Commercial 0.4 Yet to get approval Coimbatore Sobha Hill View Residential 0.3 Yet to get approval Thirssur Sobha City Commercial 0.19 Plan sanctioned New locations Mysore Belavatta Residential 0.22 Launch in May 2011 Chennai Sobha Sunshine Residential 0.2 Stuck on lack of government approvals Chennai Pudupakkam Residential 0.7 Gurgaon, NCR Township Villas/row houses 4.16 Launched 1mn sq ft in July 2011 Gurgaon, NCR Group Housing Residential 1.8 Likely to launch in 3QFY12 Total - - 11.8 - Source: Company, Nirmal Bang Institutional Equities Research Moderate volume growth, steady realisation We expect 10% volume CAGR over FY11-13E as against 16.4% CAGR over FY09-11. This is on account of Bangalore volumes peaking out at 0.5-0.6mn sq ft /quarter, challenging times at new locations and a rising interest rate environment. We expect realisation to remain healthy on account of a better product mix in FY12 (10% YoY growth) and expect it to remain steady in FY13.
59 Sobha Developers
Institutional Equities
Exhibit 9: Bangalore volumes peaking out Area (sq ft) 620,000
570,000
520,000
470,000
420,000
370,000
320,000 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
Source: Company, Nirmal Bang Institutional Equities Research Exhibit 10: Moderate volume growth (sq ft) ( %) 4,000,000 35 33 3,500,000 30 3,000,000 25 2,500,000 20 2,000,000 16 15 1,500,000 10
1,000,000 5 5 500,000 (1) 0 0 (5) FY09 FY10 FY11 FY12E FY13E Area-LHS Volume yoy growth -RHS Source: Company, Nirmal Bang Institutional Equities Research Steady contractual income Revenue from the low margin contract and manufacturing segment stood at Rs1,230mn, up 33% YoY (but down 4.5% QoQ) in 1QFY12. The company received new contracts worth around Rs450mn during 1QFY12 ex Infosys Technologies contract. SDL has added 15 new clients including ITC, Biocon and GMR Infrastructure over the past six-nine months. The estimated un-billed value of contracts on hand and forthcoming projects is about Rs7,510mn. The company’s management has given revenue guidance of Rs5bn for FY12 (up 19.4% YoY), which we believe is achievable, given the existing order backlog. Exhibit 11: Steady contractual income (Rsmn) (%) 6,000 60 53.8 50 5,000 40 30 4,000 19.4 20 3,000 9.5 10 0 2,000 (10) 1,000 (26.7) (20) (30) 0 (40) FY09 FY10 FY11 FY12E FY13E Contractual revenue (LHS) YoY growth (RHS) Source: Company, Nirmal Bang Institutional Equities Research
60 Sobha Developers
Institutional Equities
Gearing reduction unlikely Net debt increased by Rs1,000mn QoQ to Rs13bn (0.69x-net debt/equity) in 1QFY12 on account of expenditure incurred on its newly launched project in Gurgaon. The company has been fairly successful in reducing its net debt-equity ratio, from 1.74x in FY09 to 0.69x in 1QFY12, through a combination of land sales and fund raising through the QIP route. However, we expect operating cash flows in the core real estate business to be weak in FY12, as a large share of sales are expected from new geographies where SDL does not have a presence (implying higher pre-launch expenses). We believe land sales appear to be increasingly challenging in the current tight liquidity environment for developers. Further, SDL already has a commitment of Rs700mn in 2QFY12 for dividend payment and purchase of stake in one of its projects. Accordingly, we believe SDL will be unable to reduce its debt by Rs 3bn over FY12E as expected by the management (guidance of 0.5x net D/E ratio by end- FY12 from 0.69x currently). However we expect net debt-equity ratio to remain at 0.65x in FY12E. Exhibit 12: Muted visibility on debt reduction (Rsmn) (x) 25,000 1.9 1.76 1.7 20,000 1.5
15,000 1.3 1.1 10,000 0.82 0.9 0.69 0.65 0.65 0.66 0.7 5,000 0.5 0 0.3 FY09 FY10 FY11 1QFY12 FY12E FY13E Net debt ((LHS) Net debt (RHS) Source: Company, Nirmal Bang Institutional Equities Research
Key risks Over-dependence on residential segment SDL’s portfolio is tilted towards residential projects, with marginal exposure to commercial and retail projects. The company has no annuity cash flows that could sustain it in the event of a downturn. Under these circumstances, it will be under pressure to sell its land bank at depressed prices to service debt, as it happened in FY09-10. Slowdown in IT/ITES segment may hurt volumes As much as 50% of SDL’s land bank is located in Bangalore, which is an IT/ITES hub and thereby a major demand driver for residential and commercial properties. We believe the demand from the IT/ITES sector could be restrained owing to prevalent weak global sentiment, characterised by uncertainty across a few European economies and unrest in West Asia which will make the IT sector to adopt a cautious approach towards capacity expansion. Any downturn could severely impact the pricing and volume of SDL projects.
61 Sobha Developers
Institutional Equities
Financials
Exhibit 13: Income statement Exhibit 14:Cash flow Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Net sales 9,740 11,299 14,739 15,825 19,754 EBIT 2,427 2,140 2,883 2,960 3,939 % growth (31.9) 16.0 30.4 7.4 24.8 Inc. (dec.) in working capital (727) 1,054 1,253 (1,959) (3,100) Construction costs 4,398 6,537 8,632 9,872 12,085 Cash flow from operations 1,701 3,194 4,137 1,001 839 Staff costs 1009 768 1035 1019 1389 148 39 75 82 90 Other overheads 1546 1530 1911 1682 2003 Other income Total expenditure 6,953 8,835 11,578 12,573 15,478 Depreciation 360 323 278 292 338 EBITDA 2,788 2,463 3,161 3,252 4,277 Interest paid (-) (1,003) (460) (365) (452) (425) % growth (46.6) (11.6) 28.3 2.9 31.5 Tax paid (-) (296) (162) (356) (777) (1,189) EBITDA margin (%) 28.6 21.8 21.4 20.6 21.6 Dividends paid (-) (474) (166) (287) (343) (343) Other income 148 39 75 82 90 Net cash from operations 436 2,768 3,481 (198) (690) Interest costs 1074 521 444 452 425 Capital expenditure (-) (410) (132) (224) (572) (504) Gross profit 1,862 1,981 2,792 2,882 3,942 Net cash after capex 26 2,636 3,256 (770) (1,195) % growth (60.0) 6.4 40.9 3.2 36.8 - - 9 - - Depreciation 360 323 278 292 338 Inc./(dec.) in short-term borrowing Profit before tax 1,501 1,658 2,514 2,590 3,604 Inc./(dec.) in long-term borrowing 1,479 (4,569) (2,334) 1,000 1,500 % growth (65.2) 10.4 51.6 3.0 39.1 Inc./(dec.) in preference capital Tax 402 275 669 777 1189 Inc./(dec.) in borrowings 1,479 (4,569) (2,325) 1,000 1,500 Effective tax rate (%) 26.8 16.6 26.6 30.0 33.0 Inc/(/dec). in investments (571) (650) - - - Net profit 1,099 1,383 1,846 1,813 2,415 Equity issue/(buyback) - 5,094 - - - % growth (71.3) 25.9 33.4 (1.8) 33.2 Cash from financial activities 908 (125) (2,325) 1,000 1,500 E.O. items - - - - - Others (1,007) (1,899) (1,468) (40) (65) Minority interest 21 42 33 40 65 287 214 825 289 479 Reported net profit 1,099 1,383 1,846 1,773 2,350 Opening cash PAT margin (%) 11.3 12.2 12.5 11.2 11.9 Closing cash 214 825 289 479 720 % growth (71.3) 25.9 33.5 (3.9) 32.5 Change in cash (73) 612 (536) 190 240 DPS (Rs) 4.8 1.0 2.5 3.0 3.0 Source: Company, Nirmal Bang Institutional Equities Research Payout (%) 24.3 7.9 21.4 18.9 19.3 Exhibit 16:Key Ratios Source: Company, Nirmal Bang Institutional Equities Research Y/E March FY09 FY10 FY11 FY12E FY13E Exhibit 15: Balance Sheet Per Share Data (Rs) Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E EPS 11.0 13.7 18.5 18.1 24.0 Cash EPS 14.7 17.0 21.3 21.1 27.4 Equity 729 981 981 981 981 DPS 1.0 2.5 3.0 3.0 3.0 Reserves 10,145 16,057 17,527 18,957 20,964 Book value 149 174 189 203 224 Net worth 10,874 17,038 18,508 19,938 21,945 Du Pont analysis Short-term loans 2,500 2,614 3,167 5,500 5,500 Profit margin (%) 11.1 11.9 12.3 11.2 11.9 Long-term Loans 16,822 12,126 9,251 7,918 9,418 Financial leverage (x) 3.4 2.7 2.2 2.1 2.1 Total loans 19,322 14,740 12,418 13,418 14,918 Asset turnover (x) 0.3 0.3 0.4 0.4 0.4 Minority equity 249 291 324 324 324 RoE (%) 10.4 9.6 10.2 9.2 11.2 Liabilities 30,445 32,069 31,250 33,681 37,187 Returns (%) Gross block 2,930 2,942 3,148 3,720 4,224 RoE 10.4 9.6 10.2 9.2 11.2 Depreciation 1,198 1,513 1,775 2,067 2,404 RoCE 8.4 6.9 9.2 9.2 11.2 Net block 1,732 1,429 1,373 1,653 1,819 Dividend payout 7.9 21.4 18.9 19.3 14.6 Capital work-in-progress 516 632 668 668 668 Valuation ratio (x) Long-term investments 27 27 37 37 37 P/E 18.9 15.2 11.3 11.5 8.7 Inventories 11,394 11,101 10,685 12,470 15,427 P/E (cash EPS) 14.2 12.3 9.8 9.9 7.6 Debtors 3,683 4,430 4,252 4,114 4,346 P/BV 1.4 1.2 1.1 1.0 0.9 Cash 214 826 288 479 720 EV/EBITDA 14.2 13.9 10.3 10.3 8.1 Other current assets 18,996 20,154 21,657 22,736 23,869 EV/sales 4.1 3.0 2.2 2.1 1.8 Total current assets 34,287 36,511 36,881 39,799 44,361 Turnover ratio (x) Creditors 808 869 1,043 1,257 1,548 Asset turnover ratio 3.5 3.8 4.8 4.6 5.0 Customer advances 1,605 2,042 1,819 2,177 2,903 Debtor days 173 131 107 96 78 Others 3,704 3,619 4,847 5,042 5,247 Inventory days 371 363 270 267 258 Total current liabilities 6,117 6,529 7,709 8,477 9,698 Creditor days 42 35 30 33 33 Net current assets 28,170 29,981 29,172 31,323 34,663 Solvency ratio(x) Total assets 30,445 32,069 31,250 33,681 37,187 Gross debt-equity 1.8 0.9 0.7 0.7 0.7 Source: Company, Nirmal Bang Institutional Equities Research Interest coverage 0.8 0.9 1.7 1.6 2.1 Source: Company, Nirmal Bang Institutional Equities Research
62 Sobha Developers
Institutional Equities
Disclaimer
Stock Ratings Absolute Returns
BUY > 15%
HOLD 0-15%
SELL < 0%
This report is published by Nirmal Bang’s Institutional Equities Research desk. Nirmal Bang has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities.
We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice.
Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication.
63
Institutional Equities
Team Details:
Name Email Id Direct Line
Rahul Arora CEO [email protected] +91 22 3926 8098 / 99
Hemindra Hazari Head of Research [email protected] +91 22 3926 8017 / 18
Sales and Dealing:
Neha Grover AVP Sales [email protected] +91 22 3926 8093
Ravi Jagtiani Dealing Desk [email protected] +91 22 3926 8230, +91 22 6636 8833
Sudhindar Rao Dealing Desk [email protected] +91 22 3926 8229, +91 22 6636 8832
Prad eep Kasat Dealing Desk [email protected] +91 22 3926 8100/8101, +91 22 6636 8831
Michael Pillai Dealing Desk [email protected] +91 22 3926 8102/8103, +91 22 6636 8830
Nirmal Bang Equities Pvt. Ltd.
Correspondence Address B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park Lower Parel (W), Mumbai-400013. Board No. : 91 22 3926 8000/1 Fax. : 022 3926 8010
64