Myirisbreport.myiris.com/ksbl/DLFUNIVE_20130624.pdf · June 24, 2013 Institutional Equities Real Estate India Research THEME REPORT DLF BUY CMP (Rs) 175 Target Price (Rs) 248 Upside

Real Estate Wake up and smell the game change, er paradigm shift, er coffee

June 24, 2013

Analysts Contact Parikshit Kandpal

022 6184 4311

[email protected]

Varun Chakri

022‐6184 4326

[email protected]

June 24, 2013

Real Estate Institutional Equities

India Research

THEME REPORT

DLF BUY

CMP (Rs) 175

Target Price (Rs) 248

Upside (%) 42

Oberoi Realty BUY

CMP (Rs) 200


Upside (%) 54

Prestige Estates BUY

CMP (Rs) 162


Upside (%) 28

Phoenix Mills BUY

CMP (Rs) 259


Upside (%) 22

Sobha Developers BUY

CMP (Rs) 382


Upside (%) 30

Puravankara Projects BUY

CMP (Rs) 81


Upside (%) 70

Kolte Patil BUY

CMP (Rs) 77


Upside (%) 135

Wake up and smell the paradigm shift, er coffee

To us FY13 was disappointing but then again expectedly the sector

suffered due to: (i) budgetary changes; (ii) delayed approvals; and (iii) high

interest costs. Correction of such magnitude demands confidence to

outweigh caution as fundamentals on ground remains robust, presenting

an opportunity for investors to access high returns through bargain‐

basement purchases. BSE Realty now trades at one‐year forward P/BV of

0.6x and P/E of 11x. We initiate coverage on the sector with BUY.

Rear view not pretty – though rendering sector cheap on historical Last 6M has seen stock prices of real estate developers getting cratered with

10‐50% absolute underperformance. The correction of such magnitude has

left the sector looking cheap relative to its historical valuations, with most of

the stocks trading at touching distance to FY09‐10 recession multiples.

Capex stabilizing ‐ realty an attractive end‐cycle asset reflation playOur analysis of the real estate players asset portfolio suggest that bulk of the

office/retail assets have become commercially operational during FY13‐14E.

With Capex peaking out being supported by a more conducive interest rate

cycle, reflation shall help ease pressure on the parent’s balance sheet. Likely

beneficiary include DLF, Oberoi, Phoenix Mills & Prestige Estates.

Competitive positioning Real estate players We have done macro(top down) and micro (bottom ups) competitive

mapping of Indian real estate players and screened developers with firm

grisp of their composure, right mix of defense (annuity assets) and offense

(residential) and relatively high transparency/governance. These developers

are maturing toward mid‐cycle cashflow stage with some of them now

having a stated dividend policy of distributing 20‐25% profits as dividend.

Valuation undemanding – Initiate coverage with BUY DLF, Oberoi, Prestige & Phoenix are our top picks owing to a well balanced

mix of defense (annuity assets) and offense (residential). Sobha, Puravankara

& Kolte Patil are our pure play residential bets owing to strong launch

pipeline, history of meeting expectations & high dividend payouts in case of

the later two. Our stock selection offers high margins of safety owing to a

robust past track record of braving cycles and a more confident future.

Valuation Summary@

Rating CMP TP Mcap RoE (%) P/BV (x) P/E (x)

(Rs) (Rs) (Rs bn) FY14E FY15E FY14E FY15E FY14E FY15E

DLF BUY 175 248 312 6.4 7.6 1.0 1.0 39.8 21.7

Oberoi Realty BUY 200 308 66 15.5 19.6 1.4 1.1 9.4 6.3

Prestige Estates BUY 162 207 57 12.0 12.9 1.9 1.7 15.5 13.0

Phoenix Mills BUY 259 315 38 7.6 9.6 2.0 1.8 26.7 19.3

Sobha Developers BUY 382 495 37 11.9 15.2 1.6 1.4 14.2 10.0

Puravankara Project BUY 81 138 19 12.8 11.3 0.8 0.7 7.9 7.4

Kolte Patil BUY 77 180 6 15.2 16.6 0.7 0.6 4.5 3.7

Source: Karvy Institutional Research

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June 24, 2013

Real Estate

CONTENTS

THEMATIC SECTION

Why invest in Indian Real estate sector? 4

Unaffordability – Price correction imminent for volume sustainability 7

Valuations price “doom” whilst property markets remain buoyant 8

The Realty demand remains robust 10

Dependency ratio/demographic dividend ‐ key structural drivers 12

Source of competitive advantage – Macro Markets 13

Increasing allocation of Sovereign wealth funds to office space 17

Competitive mapping of real estate players – Macro Factors 18

Source of competitive advantage – Micro Model 19

Competitive business positioning 20

Competitive positioning on land bank and pricing 21

Balance sheet positioning 22

Overall positioning ‐ Competitive mapping of Real estate developers 23

Optional value ‐ strategy to move of home markets becoming a dominant theme 24

Relative Valuation – multiple reflections 26

COMPANIES

DLF: Hysteria Creates new buying opportunity 29

Oberoi Realty: A lot to blue sky 43

Prestige Estates: Plotting a careful trajectory 56

Phoenix Mills: The right ingredients 69

Sobha Developers: The Southern Architect 82

Puravankara Projects: Fresh ambition, fresh upside 95

Kolte Patil Developers: Savings the good news for next year 108

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June 24, 2013

Real Estate

Why Invest in Indian Real estate Sector?

The sector has seen sharp underperformance over the last

12 months … The BSE Realty Index has underperformed Sensex by 17.2% since Jun’12 and 25.1%

CYTD. The key triggers for this fall have been: (i) adverse budgetary provisions;

(ii) rising labour cost/manpower shortage; (iii) slower execution/delivery; (iv)

unaffordability due to prices in Northern and Western India rising above their

previous highs of FY08; (v) liquidity crunch in the sector & (vi) higher credit

pricing.

Exhibit 2: Absolute and relative performance of BSE Realty v/s Sensex Index

Absolute Returns (%) Relative to SENSEX Index (%)

1m 3m 6m 12m CYTD 1m 3m 6m 12m CYTD

BSE Realty Index (23.2) (16.3) (26.3) (7.0) (28.4) (16.5) (16.2) (23.8) (17.2) (25.1)

Source: Bloomberg, Karvy Institutional Research

As one would expect, a correction of this magnitude has left the sector looking

cheap relative to its historical valuation multiples (BSE Realty Index is trading at

0.66x, one year forward P/BV — a 50% discount to its last five years’ mean of

1.31x). In a worst case scenario, a further 5% correction will lead to the sector

hitting its historical P/BV i.e. 0.63x, a lowest multiple recorded during recession in

Mar’09.

Exhibit 3: Absolute and relative performance of real estate developers

Absolute Returns (%) Relative to Sensex Returns (%)

Company 1m 3m 6m 12m FYTD 1m 3m 6m 12m FYTD

Anant Raj (27.7) (10.4) (40.3) 17.7 (39.4) (21.0) (10.3) (37.9) 7.5 (36.1)

Ansal Properties (27.8) (19.5) (51.6) (31.0) (54.2) (21.1) (19.4) (49.1) (41.2) (50.8)

Brigade Enterprises (14.5) 7.3 (39.2) 29.0 (33.7) (7.8) 7.4 (36.7) 18.8 (30.3)

DLF (27.3) (26.9) (20.2) (9.7) (24.0) (20.6) (26.8) (17.8) (19.9) (20.7)

Godrej Properties (7.1) 1.9 (17.8) (6.2) (17.5) (0.5) 2.0 (15.4) (16.4) (14.1)

Oberoi Realty (21.5) (25.6) (32.2) (17.1) (30.7) (14.9) (25.5) (29.7) (27.3) (27.3)

Phoenix Mills (6.9) (2.6) 8.4 48.2 0.8 (0.2) (2.5) 10.9 37.9 4.2

Omaxe (9.6) (7.6) (17.3) (8.7) (15.6) (2.9) (7.5) (14.8) (18.9) (12.2)

Parsvnath (15.0) (24.2) (22.0) (50.5) (22.0) (8.4) (24.1) (19.5) (60.7) (18.6)

Prestige Estates (9.3) (3.7) (8.8) 39.7 (9.9) (2.7) (3.6) (6.3) 29.4 (6.6)

Puravankara (15.3) (1.9) (18.3) 28.4 (19.4) (8.6) (1.8) (15.8) 18.2 (16.0)

Sobha Developers (7.8) 0.4 (1.3) 20.2 0.5 (1.2) 0.5 1.1 10.0 3.8

Sunteck Realty 7.1 (5.4) (5.0) 20.0 (10.9) 13.8 (5.3) (2.6) 9.8 (7.5)

Unitech (29.2) (11.2) (36.9) (4.6) (38.6) (22.5) (11.1) (34.4) (14.8) (35.3)

Kolte Patil (22.8) (9.6) (29.9) 98.2 (32.4) (16.1) (9.5) (27.5) 88.0 (29.0)

BSE Realty (23.2) (16.3) (26.3) (7.0) (28.4) (16.5) (16.2) (23.8) (17.2) (25.1)

Source: Karvy Institutional Research, Company

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June 24, 2013

Real Estate

…due to budgetary provisions, rising labour costs and

property price unaffordability…

Budgetary provisions – death knell to investors; healthy for markets

Budget FY14E has provisions which may have short term negative impact on

buyers sentiment whilst on a longer term it will eat into the profit pie of the

developers/investors who until now had a dream run with yearly returns in north

of 30% CAGR FY10‐13. The key provision include

TDS at the rate of 1% on the value of transfer of immovable properties where consideration exceeds Rs5mn (agricultural land exempted) ‐ this will increase

compliance as TDS will be deducted and tax credits need to be offset by buyers

in their tax filing. The bigger impact will be reduction in black money

transaction as Income Tax (IT) department will have direct access to housing

registration data and can match up sources of income and tax paid. Overall cost

for investors will increase making realty less attractive as an alternative asset

class.

For homes/flats with carpet area>2000sqft or value >Rs10mn rate of abatement reduced from 75% to 70% ‐ this will increase the service tax burden from 3% to

3.6% of sale price (an increase of 60bps). Negative for real estate players as they

have to recover this amount from buyers.

Sec 43ca & Sec 50c – the most ugliest of all – new provision of 43ca provides stamp duty value for the purpose of computation of income under head “profit

or gain of business or profession” in respect of all transaction related to land or

building or both became effective from 1st April 2013. This will result in tax

computation on notional income. The major implication for the sector is if the

real estate transaction happens below stamp duty/ready reckoner rates the IT

will consider notional income value at the stamp duty/ready reckoner rates and

the notional gain will be taxed both for the developer & the buyers. It is also

provided that the date of agreement fixing and date of registration are different

then the ready reckoner/stamp duty value will be considered at the date of

agreement. However this provision shall be only applicable for all the means of

finance except for cash. We have analyzed ready reckoner rates vs market price

at some of the regions and find that the rates are still at 20% discount to the

market price. Over next 2‐3 years we expect the ready reckoner rates converging

with market rates, this should result in improvement of earnings quality as

‘underground economy’ will shrink. The most improved markets would be ones

with opaque structures viz. Western & NCR. Least impacted would be more

transparent Southern realty markets.

The budget measures look draconian in the short term as investors influence in

volume growth will get diluted whilst on long term they will (i) improve

compliance efficiency (ii) help diffuse ‘underground economy’ largely cash

transactions (iii) result in property price correction (specially in overheated

markets viz. Mumbai, NCR & (iv) improvements in earnings quality (as

incremental demand will tilt in favor of end users). Whilst all these variables

will take time to re‐calibrate, they will surely have a deafening impact on the

overall health of the sector.

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June 24, 2013

Real Estate

Migrant labour shortfall of 25% is impacting execution – NREGA

& Bihar the key culprit

Urban labour market supply is expected to shrink by 20‐25%, whilst NREGA

(National Rural Employment Guarantee Act) has created alternative employment

opportunities, Bihar returning to development path, has resulted in state’s migrant

labourers (constituting highest component of construction labour force) returning

to their home turf. This has resulted in spiraling of labour cost over the past few

years (please refer Exhibit 5).

Besides real estate sector execution/delivery has been under pressure due to

shortage of skilled labour and has been facing stiff competition from the

construction sector for the influx. Earlier, Andhra Pradesh, with its low‐cost labour

model, was dominating the labour market, but with the state currently facing the

political uncertainty and shortage of new projects the local construction companies

have increased their order book share to other States, the substitution effect has

resulted in increased demand for local labour upsetting supply for urban centers

and hence increased costs and lower margins.

Exhibit 4: GDP of Indian Cities

Regions FY11 FY12 FY13 GSDP CAGR (%)

Southern Region

Andhra Pradesh 9.7 7.8 NA 8.7

Karnataka 9.7 5.5 5.9 7.6

Tamil Nadu 9.8 7.4 4.6 8.6

Central Region

Madhya Pradesh 7.1 11.8 10.0 9.4

Uttar Pradesh 7.8 6.9 5.4 7.3

Eastern Region

Bihar 11.3 13.3 9.5 12.3

Chhattisgarh 9.7 8.1 8.6 8.9

Jharkhand 8.7 8.9 9.1 8.8

Western Region

Gujarat 10.0 8.5 NA 9.3

Maharashtra 11.3 8.5 NA 9.9


Exhibit 5: Wage Inflation (%)


‐10

‐5

0

5

10

15

20

25

30FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

3QFY13

Ploughing digging Unskilled

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June 24, 2013

Real Estate

Unaffordability – Price correction imminent for volume sustainability

Residential real estate prices in Southern India range between Rs5,500‐6,500/sq ft.

Adjusted for wage inflation, these prices are similar to the Rs4,500‐5,500/sq ft

prices prevailing in FY10‐11 (and down 18% from the inflation adjusted peak

prices in FY08). In Mumbai and Delhi on the other hand, thanks to the heavy

influence of investors, residential real estate prices are now north of their peak

inflation adjusted prices in FY08.

Our affordability model uses residential price data across key macro markets to

assess buying attractiveness. This model suggests that:

I. For Southern India: Affordability is at FY10 levels. However, we are building

in 5‐6% price appreciation on the back of new launches volume discipline and

focus on current inventory liquidation. Aggressive launch plans of several

Southern developers may take a back seat as most developers are looking to

diversify energies outside Southern India.

II. For Western India: Markets may return to affordability if property prices

undergo a 20% correction, particularly in central Mumbai & central suburbs,

which are dominant luxury housing hubs. This correction will bring

affordability to FY09 levels, which witnessed sharp pick‐up in housing

demand. Anecdotally we have observed that Western developers adjust

prices downward with a lag and are the first ones to increase them. We are

already seeing initial signs of price correction with new launches being priced

10% below market prices. Any sustainable end user demand pick up is

contingent to ‘investors’ cashing out of market on anticipation of price

correction.

III. For Northern India (NCR): We expect a 15% price correction in the Gurgaon

region to bring affordability back to FY09 levels. Noida may still witness

some price appreciation. NCR developers follow price trends in line with the

Western developers.

Exhibit 6: Affordability Index for key real estate markets in India


50

100

150

200

250

300

350

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13E

Mumbai Affordability Bangalore Affordability Gurgaon Affordability

Noida Affordability Pune Affordability Chennai Affordability

Our real estate affordability model:

We have assumed average household income of

Rs0.3mn starting FY2000 and loaded wage

inflation of 5‐8% over time

Using 80% LTV we have modeled the EMI at

prevailing mortgage rates and 15 years

mortgage duration

This gives us historical time series on the EMI

value of a 1,200 sq ft apartment at historical

prevailing prices

The loan EMI v/s the monthly household

income ratio trend, with FY00 as a base gives

us the affordability index

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June 24, 2013

Real Estate

So are stock prices mirroring distress?...

Valuations price “doom” whilst property markets remain buoyant

Whilst the realty stock prices are 10‐50% off their recent highs reflecting “doom”

and “gloom” environment, underlying property markets remain buoyant. Similar

trend is being reflected upon the 1‐yr forward P/BV & 1‐yr forward P/E valuation

ratios vs historical cross cycle ratios.

Distressed stock prices – large discounts to cross cycle

We have mapped stock prices of realty developer’s pre & post recessionary

scenario (across cycles). While comparing the current stock prices with the

maximum prices seen during the previous two cycles, we find that the loss in

market value is in the range of 10‐85%, signaling distressed stock valuations.

Exhibit 7: Market cap. comparison across last two cycles

Company MPC1* MPC2* MinLast

Price

% from

MPC1

% from

MPC2

% min vs

cmp

Oberoi Reality NA 317 194 200 NA (36.8) 3.1

Kolte Patil 259 129 19 77 (70.3) (40.4) 305.3

Godrej Properties NA 815 466 528 NA (35.2) 13.4

DLF 1208 399 133 175 (85.5) (56.2) 31.7

Anant Raj 376 154 36 54 (85.6) (64.9) 49.0

Jaypee Infratech NA 102 37 25 NA (75.5) (32.4)

Sobha Developers 1102 454 76 382 (65.3) (15.9) 402.6

Puravankara 502 139 30 81 (83.9) (41.8) 172.7

Prestige Estate NA 216 60 162 NA (25.0) 170.5

Brigade 400 173 29 62 (84.5) (64.2) 113.4

Average (79.2) (45.6) 122.9

Source: Bloomberg Note: * MPC1 –Maximum price FY06‐09, MPC2 –Maximum price FY09‐CFYTD13

One year forward P/BV ebbing to all time low?

On P/BV(x) multiple, we find that most of the developers are trading below the

multiples witnessed across real estate cycles. Comparing valuation multiples with

long term averages also yield similar results. The price erosion of such magnitude

has rendered the sector attractive as a “value BUY”.

Exhibit 8: Price/book value (x) comparison across last two cycles

Company MPC1 MPC2Average

P/BV

Last

Price

% from

MPC1

% from

MPC2

% cmp

vs average

Oberoi Reality NA 2.7 2.0 1.6 NA (42.5) (21.3)

Kolte Patil 3.0 1.1 0.6 0.8 (72.1) (24.7) 29.1

Godrej Properties NA 5.1 3.2 2.9 NA (43.9) (11.3)

DLF 5.3 3.2 2.0 1.1 (79.8) (66.3) (45.5)

Anant Raj 2.4 1.3 0.8 0.4 (83.2) (67.4) (46.7)

Jaypee Infratech NA 1.5 1.3 0.5 NA (62.9) (59.4)

Sobha Developers 4.1 2.0 1.4 1.8 (57.3) (12.6) 23.5

Puravankara 4.6 1.8 1.3 0.9 (80.2) (48.5) (29.9)

Prestige Estate NA 3.2 1.8 2.1 NA (34.8) 16.3

Brigade 2.4 1.8 0.9 0.6 (76.5) (67.6) (39.0)

Average (73.7) (45.9) (16.8)

Source: Bloomberg Note: MPC1 –Maximum price FY06‐09, MPC2 –Maximum price FY09‐CFYTD13

Most of the real estate developers trading at

15‐85% discount (% from MPC1, MPC2) to

the previous highs of FY09‐CYTD13

Most of the real estate developers are trading

at 10‐60% discount to long term cross cycle

average P/BV(x)

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June 24, 2013

Real Estate

One year forward P/E reflecting low consensus earnings estimate

On P/E(x) multiple, we find these developers trading closer to the multiples

witnessed during the recessionary phase and 16‐50% discount to their long term

average cross cycle valuation multiples. Whilst this may imply that the market is

factoring sharp deceleration in the earnings growth, to which we ascribe low

probability as we build in ~20% earnings growth over FY13‐15E. Again, we may be

at the trough of the “earnings downgrade cycle” and going into FY14E, market

may start pricing in a “multiple expansion”.

Exhibit 9: Price/Earnings (x) comparison across last two cycles

Company MPC1 MPC2Average

P/E

Last

Price

% from

MPC1

% from

MPC2

% cmp

vs average

Oberoi Reality ‐ 19.3 14.9 8.3 NA (57.0) (44.3)

Kolte Patil 19.0 13.6 7.4 4.5 (76.3) (66.9) (39.2)

Godrej Properties ‐ 54.0 34.4 18.3 NA (66.1) (46.8)

DLF 29.2 47.0 31.1 29.9 2.4 (36.4) (3.9)

Anant Raj 39.0 31.6 16.0 7.4 (81.0) (76.6) (53.8)

Jaypee Infratech ‐ 11.3 7.9 4.6 NA (59.2) (41.9)

Sobha Developers 42.1 19.9 13.9 12.2 (71.0) (38.7) (12.5)

Puravankara 43.8 22.5 13.7 5.8 (86.8) (74.2) (57.6)

Prestige Estate ‐ 53.4 24.0 14.7 NA (72.5) (38.8)

Brigade 30.0 19.5 11.7 8.5 (71.7) (56.4) (27.4)

Average (64.1) (60.4) (36.6)

Source: Bloomberg Note: MPC1 –Maximum price FY06‐09, MPC2 –Maximum price FY09‐CFYTD13

In nutshell, all these indicators point to a favorable risk‐reward at these price

points suggesting a “distressed valuation scenario”. In absence of further negative

surprises, we expect a sharp recovery leading to a re‐rating from these levels to the

ʺboomʺ phase.

Most of the real estate developers are trading

at 10‐60% discount to long term cross cycle

average P/E(x)

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June 24, 2013

Real Estate

…besides realty sector has long term macro/micro drivers

The Realty demand remains robust

Since there is no published source of measuring Indian housing demand we

estimate overall demand potential using tax payer’s data with Exhibit 10 as proxy.

We have assumed the target home buyers segment in the Rs10‐20lakhs &

>Rs20lakhs bracket for the Mid income housing upto Rs75lakhs.

Exhibit 10: Estimated number of tax payers (FY12)

Slab (Rs) Number (mn) % taxpayers

0‐5 lakhs 28.8 89.0

5‐10 lakhs 1.8 5.5

10‐20 lakhs 1.4 4.3

>20 lakhs 0.4 1.3

Total 32.4

Source: Standing committee report on DTC 2010

There are a total of ~1.8mn tax payer in this segment which implies 1.3% share. So

this roughly translates into a potential housing demand of 1.8mn units.

Exhibit 11: Estimate of tax collection in each slab (FY12)

Slab Rs bn % tax collected Tax per person (Rs’000)

0‐5 lakhs 150.1 10.1 5.2

5‐10 lakhs 219.8 14.8 122.9

10‐20 lakhs 178.6 12.1 129.6

>20 lakhs 932.3 63.0 2,296.3

Total 1480.7

Source: Standing committee report DTC

This 1.3% of the tax payer by volume contributes about 63% to the total tax

collections.

Exhibit 12: Housing market forecast

City Market Size (mn sqft)

Bangalore 61

Pune 30

Mumbai 58

Gurgaon 29

Noida 62

Ahmedabad 38

Chennai 53

Kolkata 17

Hyderabad 42

Total 390

Source: Industry, Karvy Research Estimate *We estimate housing demand for only top 9 realty markets

Our interaction with the mortgage providers suggests an average 6‐7years of loan

repayment period for a household with 2 earnings member which results in a

recurring potential housing demand of ~0.15mn sqft (1.8mn/(6.5yrs X 2)). This

segment is the key demand driver for the HIG (high income group) ticket size of

Rs8mn+. Multiplying this with a plain vanilla 2BHK area of 1200sqft it translates

into a housing demand of 180mn sqft annually. Assuming NRIʹs and business class

contribute equally the real demand numbers can be double at 360mn sqft. This is

also closer to the number we had estimated market wise in the exhibit 12.

Our housing demand assumptions:

We have assumed the target home buyers

segment in theRs10‐20lakhs & >Rs20lakhs

bracket for the Mid income housing upto

Rs75lakhs

As per the Standard committee report DTC –

Mar’12 there are total ~1.8mn tax payers in

this segment. So this roughly translates into a

potential housing demand of 1.8mn housing

units, assuming each payer is potential buyer

Assuming the first time household with two

earning members takes 6‐7 years to repay his

loan hence average housing demand annually

can be ~0.15mn units annually

Multiplying this with a plain vanilla 2BHK

area of 1200sqft it translates into a housing

demand of 180mn sqft annually

Assuming business community and NRIʹs put

together could be as big as the ‘tax paying

community’ the real demand* numbers can be

double at 360mn sqft

This is also closer to the number we had

estimated market wise in the exhibit 12

*The real demand number can be much higher

as we don’t have estimates of individuals who

are non tax compliant and don’t file returns,

other individuals who doesn’t avail housing

loan (in Sobha Developers case 53% clientele

doesn’t take home loan), NRI’s, HUFs &

Investors (which account for 30% of total

housing demand)

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June 24, 2013

Real Estate

High GDP growth to drive Urbanization & support demand

Real estate demand is highly elastic to urbanization. For every 1% increase in the

urban population there is a 6% increase in the real estate demand. By far Delhi is

the only region which has near 97.5% urbanization. We expect urbanization to

grow at 2.5% CAGR over FY13‐30E resulting in a 15% CAGR growth in the realty

demand over the same period. With the pricing growth CAGR of 6% this

translates into 22% realty sector growth over FY13‐30E.

Exhibit 13: Urbanization vs GDP Geometric mean % FY01‐11

Source: Census 2011, Karvy Institutional Research

AP

Delhi

MP

GujaratMaharashtra

Karnataka

TN

‐

20

40

60

80

100

120

5 7 9 11 13 15 17 19

Urbanization %

GDP Geometric mean % ‐ FY01‐11

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June 24, 2013

Real Estate

Dependency ratio/demographic dividend ‐ key structural drivers

Future change in dependency ratio is a key factor in determining real estate

demand. Real estate demand is more likely to grow during the house hold

formation (25‐35yrs age). India has 35% of the population in the 15‐34yrs group &

10% > 65yrs, according to a JLL estimate, the average age in India by 2020 will be

~29yrs compared with 37yrs in China & United States, 48yrs in Japan, providing

immense opportunities to reap this demographic dividend. We believe that the

Top 9 regions discussed above will be the major beneficiary of rapid urbanization

& decreasing ‘dependency ratio’ or increasing working population.

Exhibit 14: Dependency ratios* in developed & emerging markets

Country 2000 2004 2008 2011

Japan 46.6 49.8 53.8 57.9

Russia 44.1 41.1 38.8 38.9

Singapore 40.5 39.5 36.9 35.5

China 48.1 42.9 39.2 37.8

USA 51.0 49.2 48.9 50.1

Brazil 54.0 51.6 49.3 47.4

Mexico 62.5 59.4 56.3 54.3

India 63.8 60.0 56.6 54.3

Source: World Bank * Dependency ratio = (Age<15yrs + Age>65yrs)/ 15yrs<Age<65yrs

13

June 24, 2013

Real Estate

Source of competitive advantage – Macro Markets We juxtapose demand drivers into different market and assess the sources of long

term competitive advantage for real estate developers using the following

parameters:

Brand/reputation, Affordability, Stability & Health To understand the macro‐markets we conducted a buyers’ survey across India to

understand buying preferences and analyze factors influencing real estate decision

making. Based on our discussions with buyers, the key drivers of brand appear to

be the execution track record of a developer and the quality of construction.

Brand valuation – key determinant of the premium

In the Northern Region, whilst 68% of the end‐users said that they want to buy for

‘self use’ 32% opted for ‘investment’ as their choice. This conforms to our primary

data checks regarding the Northern market being more investor‐ driven. As

expected, 89% of the respondents felt that realty prices in NCR are too high whilst

11% believed that property prices are reasonable.

Exhibit 15: Northern Developers Brand Premium % vs ROE’s


In the northern market, Jaypee and DLF developers score highly on brand

premium, attributable to attractive land parcels and quality of construction. Rest of

the players have weaker brand premium and return on equity profiles.

Split between the Northern market

Northern markets are driven by Noida & Gurgaon (National Capital Region). The

total annual housing demand for the segment is 91mn sqft with Noida

contributing about 62mnsqft and Gurgaon 29mn sqft. The NCR region has high

investor interest constituting about 35‐40% of the total realty demand. Whilst the

office and retail space drives the Gurgaon premium segment, affordable housing

avenues fuels the realty demand in the Noida – Greater Noida region.

Price appreciation & outlook

Noida region has seen a 0‐5% price increase YoY, Gurgaon 10‐12% and rest of

Delhi 8‐15% price increase YoY. Going into FY14E, we expect Noida property

prices to move in line with the inflation at 6% whilst price may correct by 15% in

Gurgaon luxury segment. The realty demand is expected to grow at 15%. There

could be construction delays in Gurgaon region owing to restriction in

underground water usage in the region. With land issues getting sorted out in

Noida/Noida extension supply is expected to increase keeping the price muted.

Ansal

DLF

Omaxe

Unitech

Parsvnath

Anant Raj

Jaypee

(2)

3

8

13

18

23

‐1 1 3 5 7 9 11 13 15

brand premium %

RoE %

14

June 24, 2013

Real Estate

Western region – high on investors

Our Western region survey points a different story with 64% of the end‐users

wanting to buy for ‘self use’ & 36% opting ‘investment purpose’ as their choice.

This is departure from our earlier primary data checks wherein the investors

constituted 45‐50% of the total realty demand. Mumbai property price is already at

the high end of the price curve and hence investors are following caution as

property prices are expected to remain muted with limited future appreciation this

has resulted in waning investor’s interest. As expected, 85% of the respondents felt

that property price in Mumbai is too high whilst 15% believed that property prices

are reasonable.

Exhibit 16: Western Developers Brand Premium % vs ROE’s

Source: Karvy Institutional Research *unlisted companies ROE not available

In the Western India market, Godrej Properties, Hiranandani, Raheja & Oberoi

Realty score high on strong brand recall attributable to attractive land parcels and

high quality of construction.

Western market – Mumbai slowing down, Pune going strong

Mumbai markets are driven by Services sector, Pune by IT/ITES & Auto. Whilst

Mumbai enjoys an annual housing demand of 58mnsqft, Pune demand is pegged

at 30mn sqft. The Mumbai region has high investor interest constituting about 35‐

40% of the total realty demand. Whilst Pune mirrors Bangalore closely, with real

estate demand being largely end user driven.


Mumbai region witnessed a 10‐15% price increase YoY whilst Pune property

prices appreciated 15‐20% YoY. Going into FY14E, we expect Pune property prices

to move in line with the inflation at 6% whilst we envisage a 15‐20% price

correction in Mumbai’s property market. The realty demand is expected to grow at

15%. There could be construction delays in Mumbai region owing to restriction in

sand mining & labour shortage. With faster movement on pace of approvals

supply is expected to increase, resulting in price correction.

Sunteck

Oberoi

Godrej

HDIL

Orbit

Raheja*

Hiranandani*

Kalpataru*

(2)

3

8

13

18

23

28

33

‐2 3 8 13 18 23 28 33 38

brand premium %

RNA

Wadhwa

RoE %

15

June 24, 2013

Real Estate

Southern market – high on quality & stability

Out Southern region survey portrays a better & more stable quality clientele

comprising 77% as end‐users wanting to buy for ‘self use’ & 23% opting

‘investment purpose’ as their choice. This is in‐line with our earlier primary data

checks wherein the investors constituted 20‐25% of the total realty demand. As

expected, 89% of the respondents felt that property price in Southern markets is

too high whilst 11% believed that property prices are reasonable.

Exhibit 17: Southern Developers Brand Premium % vs ROE’s

Source: Karvy Institutional Research *unlisted companies ROE not available

In the Southern India market, Prestige Estates, Sobha Developers & Puravankara

score high on strong brand recall attributable to attractive land parcels and high

quality of construction.

Southern market – Bangalore still strong, Chennai more affordable

Southern markets are driven by Indian IT capital – Bangalore & Chennai. Whilst

Bangalore enjoys an annual housing demand of 61mnsqft, Chennai demand is

pegged at 53mn sqft. The Southern region is largely end‐user driven with investor

constituting about 20‐25% of the total realty demand. IT/ITES sector is the key

driver for the property demand constituting about 60% share; NRIs investments in

Southern markets have been high at 20‐25% vs total share of 8‐10% pan India.


Bangalore region has seen a 10‐15% price increase YoY whilst Chennai witnessed

price increase of 15‐20% YoY. Going into FY14E, we expect sales price to move in

line with the inflation at 6% with muted to minor corrections in the premium

segment. The realty demand is expected to grow at 15%. IT/ITES recovery is key to

the sustained reality demand and Chennai market is expected to be the better

appreciating reality market between the two.

Nitesh

Prestige

Sobha

Mantri*

PuravankaraBrigade

(2)

‐

2

4

6

8

10

12

14

‐1 1 3 5 7 9 11 13 15 17

brand premium %

RoE%

16

June 24, 2013

Real Estate

Health of key markets – Bangalore, Pune outperforms

We measure the health of the macro‐markets using the inventory months of the

under construction property. Mumbai, NCR are the main outliers with unhealthy

absorption rates and high inventory levels. The market positioning is further

impacted by high property prices. Bangalore and Pune are the best performing

markets with lowest inventory level, high end user concentration and relatively

stable property prices.

Exhibit 18: Residential Health – Top Cities

1QCY13 Under construction

inventory

Average

Absorption/Qtr

Inventory

(months)

Mumbai ‐ ex Kalyan 110,000 11,000 30

Bangalore 30,000 11,000 8

NCR 160,000 18,000 27

Chennai 40,000 6,000 20

Pune 40,000 10,000 12

Hyderabad 20,000 3,000 20

Source: Industry, Karvy Institutional Research

The residential activity is highly correlated with the commercial office sales. We

highlight the trend across Top cities and find that Bangalore, Pune & Hyderabad

continue to do well with healthy vacancy rates. Again Mumbai & NCR lag with

high vacancy rates. This has led to commercial capitalized rates being 30‐50%

discount to residential capital values also the rental yields have improved and

range between 8‐10% for Grade A offices.

Exhibit 19: Commercial Health – Top Cities

Cities Office Stock

India (mn sqft)

Demand

(mn sqft)

CY05‐CY12

Absorption

CY05‐CY12

Absorption/Office

Stock India %

Vacancy

rate %

Mumbai 80 6 47 59 22

Bangalore 70 9 52 74 7

NCR 60 5 42 70 23

Chennai 50 4 32 64 22

Pune 35 4 26 74 11

Hyderabad 25 4 20 80 7


IT/ITES key residential growth driver

IT/ITES is the key sector driving the residential/office demand whilst other

services contribute about 20%. Similar trend is visible in the office segment with

IT/ITES & Manufacturing leading the charts.

Exhibit 20: Indian Housing demand by sector

Sector %

IT/ITES 40

Manufacturing 10

Services 20

BFSI 10

Others 20

Total 100


Exhibit 21: Indian commercial demand

Sector %

IT 40

Manufacturing 11

Consumer Goods 10

Pharma 6

Professional Services 10

BFSI 10

Others 13

Total 100


Leases by Geography %

USA Clients 40

European Clients 20

Indian Companies 20

Others 20

Total 100


Since bulk of domestic commercial demand is

contingent on overseas companies expanding

Indian operations, we are highly dependent on

GDP growth in these countries

17

June 24, 2013

Real Estate

Increasing allocation of Sovereign wealth funds to office space

Our interaction with Industry experts suggests an increase inclination of Global

funds to invest in the investment grade commercial real estate sector. Some of the

changes in the allocation is highlighted in the Exhibit 22.

Exhibit 22: Pension funds allocations

Increase in Pension funds allocation globally 2007 2012 Comment

Government Pension Fund of Norway 0 5%# Real estate investments

National Pension Service of Korea 2.50% 10%*Alternative investments

(include realty also)

Canadian Pension Plan Investment Board 4.3% 10.6% Real estate investments

Source: JLL, Karvy Institutional Research #in Mar‐10 allowed maximum 5% allocation to real estate,* by 2016

Comparing real estate transactions by volumes taking 2007 as base, (peak of

market) we find that Asia has seen the sharpest recovery with volumes now at

77% of t he 2007 peak, followed by America and Europe.

Exhibit 23: Realty Commercial Volumes, CY2012 vs CY2007

Source: JLL 2013,USD dollar term, Karvy Institutional Research

Exhibit 24: Institutional Grade Commercial Investment %

Source: Pramerica Real Estate Investors, JLL 2012, Karvy Institutional Research

Over the 2011‐31 period investments, Pramerica Real Estate Investors estimates

suggest that while the US and EMEA weighting to the global real estate investable

universe will decline, Asia Pacific’s is likely to rise sharply from 21% of the global

total in CY2011 to 49% in CY2030. Within the Asian pie China & India remain the

top choices for portfolio expansion by firms across the three regions.

Real estate factor sensitivities

In Exhibit 25 we highlight the real estate factor sensitivities to change in

investment allocation across assets classes. A small tilt in the asset class can result

in favorable rise in real estate holdings.

Exhibit 25: Real estate factor sensitivities

Factor Sensitivities Impact on Real estate

1% down‐weighting in equity markets in favour of

investment in non‐residential real estate equity

Implies a 7.8% rise in holdings in the real

estate market

1% down‐weighting in bond markets in favour of

investment in non‐residential real estate equity Has a similar impact

1.2% reallocation of the funds of 30 largest

sovereign wealth funds towards real estate

Would increase capital allocation by $50bn,

equivalent to entire Sydney CBD office mkt.

Source: JLL, Karvy Institutional Research

The strong demand of investment grade commercial real estate is likely to benefit

listed players, DLF, Oberoi, Prestige Estates who already have lease assets

portfolio. Sobha has plans in the lease space & remains a strong contender.

77

62

46

‐

10

20

30

40

50

60

70

80

90

Asia Pacific America Europe

2007 = 100

3835

2724

27

49

0

10

20

30

40

50

60

EMEA America Asia Pacific

2011 2031

18

June 24, 2013

Real Estate

Competitive mapping of real estate players – Macro

Factors We have done competitive mapping of real estate developers based on (i)

affordability (ii) health of markets (iii) residential segment presence (iv)

commercial segment presence & (v) brand premium across key regions. These

factors have been arrived using top down approach.

Exhibit 26: Competitive positioning – Macro factors

Affordability Health of

Markets

Residential

Segment

presence

Commercial

segment

presence

Brand

PremiumOverall Comments

Northern

DLF

Broad based presence across markets in Residential

& Commercial segments leads to strong

competitive positioning

Unitech

A mid ‐ Quartile

Anant Raj

Omaxe

JP Infra

Concentrated presence in Greater Noida a key risk,

rate as a mid‐quartile

Parsvnath

Western

Oberoi

Strong brand and presence in Commercial &

Residential segment imply strong competitive

positioning

Godrej

Strong brand and presence in Commercial &

Residential segment imply strong competitive

positioning

HDIL

Middling

Hiranandani

A mid‐ quartile

Raheja

A mid‐ quartile

Sunteck

A middling

Wadhwa

Kolte Patil

Strong market share in Pune & healthy market

undertone results in a mid‐quartile ranking

Southern

Sobha

Strong brand, healthy markets strengthen

competitive positioning as a mid‐quartile. Weak

competitive positioning in the commercial segment

a dampener

Prestige

Top quartile in the residential & commercial

segment

Puravankara

Mid‐quartile in most parameters

Mantri


Brigade


Source: Karvy Institutional Research; Note: Strong; Relatively Strong; Average; Relatively Weak Weak

Based on the competitive mapping DLF stands out as top Tier in Northern

Market, Oberoi & Godrej Properties in Western India markets & Sobha,

Prestige & Puravankara in the Southern India markets.

19

June 24, 2013

Real Estate

Source of competitive advantage – Micro Model After doing our Macro Analysis of the top Indian real estate’s markets we find that

Pune, Bangalore markets are relatively healthier vs NCR & Mumbai. We go further

into identifying the key players in these macro markets and there competitive

positioning using the bottom up approach

Quality & execution remains key factor in identifying new age winners

New age buyers are now more aware and internet activism has provided a strong

platform in the way end users approach residential projects. Leading portals like

“real estate forum “has first hand information from current buyers and occupiers

of the first phase of these residential projects. Construction progress is updated on

the regular basis and grievances are addressed in joint meeting of these buyers

group with the developer’s marketing heads. In this scenario ‘quality’ remains

given and any developer faltering will find it difficult to enjoy price premium. On

larger strategy of building brand premium ‘execution’ plays a paramount role as

quicker delivery helps in creating strong brand equity and in returning cash‐flows

to investors.

Shift from monolithic structures to large format projects require strong

vendor & contractor tie ups

Some of the developers have faced quality/execution issues while transforming

themselves from being a Monolithic structure developer to developing Mega

Townships/Gigantic structures. Bigger structures require strong execution

capability & stricter cost controls on back of fixed price nature of apartment

contracts. In the race of protecting margins, developers have compromised on

‘quality of contractors’ and ‘quality of materials’ used in construction. In some

instances we have seen luxury projects being awarded to EPC Contractors who

have traditionally done affordable housing projects. This leads to a situation where

buyers pay a premium price and in turn gets a product which is inferior and hence

2nd or 3rd Phases of the project doesn’t sell though Phase 1 was a success. Another

reason is that in order to get scale to fulfill “market map” ambitions many

developers have not judiciously developed a strong supplier or vendor’s network.

Real estate industry continues to be promoter driven, second rung

leadership missing in most organization

Indian real estate companies continue to be Promoter driven with family members

involved in day‐to‐day decision making. They do take advice from the second

rung leadership which is mostly overturned to suit Promoter line of thinking. As

the family tree grows the question of “too many decision makers “ starts playing

and results in all kind of issues viz (i) difference in strategic thinking (ii) related

party transaction (iii) no clear cut separation in roles & responsibility. This

ultimately leads to dilution in promoter commitment to the organization and

destruction in shareholder value. Historically, we have seen these differences lead

to periodic disintegration of real estate companies balance sheets as families split

through a separation and start new realty offshoots under the same brand name.

This has resulted in very few financially stable companies which have a long term

standing & strong balance sheets.

20

June 24, 2013

Real Estate

Competitive business positioning Based on the parameters discussed under the ‘micro – model’ above we have done

competitive business mapping of the real estate developers. We highlight our

finding in the Exhibit 27

Exhibit 27: Real estate competitive mapping

Execution Vendors tie

up

Management

bandwidth

Construction

Quality

Ability to

acquire landsOverall Comments

Northern

DLF

Top quartile in all the parameters

Unitech

A middling

Anant Raj

Omaxe

JP Infra

A mid ‐ Quartile

Parsvnath

Western

Oberoi


Godrej

HDIL

Hiranandani


Raheja

Sunteck

Wadhwa

Kolte Patil

A mid ‐ Quartile

Southern

Sobha


Prestige

A mid ‐ Quartile

Puravankara

A mid ‐ Quartile

Mantri

Brigade


In the Northern markets DLF & JP Infra stand out as top tier, Western India,

Oberoi & Hiranandani are dominant winners, whilst Southern India Sobha,

Prestige & Puravankara stand out. Next few years markets may continue to

support all developers but over next 2‐3 years buyers will have a clear sense on the

winner who ‘deliver’s on time every time’ every ‘sqft’ and in‐turn creates ‘wealth

for minority investors’

21

June 24, 2013

Real Estate

Competitive positioning on land bank and pricing Land Acquisition, Rehabilitation and Resettlement Bill 2011 (LARR) is awaiting

passage in the Parliament and shall replace the Land Acquisition act 1894. Once

passed LARR will have far reaching consequences on property prices. LARR Bill

proposes payment of compensation upto 4x the market value in rural areas and 2x

the market value in urban areas. Our interaction with the realty developers

suggests that under new LARR the cost of acquisition of land may go up by 30‐

40%, this may result in 15‐20% rise in property prices (assuming land is 30% of

sales price). Hence the Companies with large historical land bank shall witness

inventory gains on low historical cost of land. LARR will create huge entry barrier

for marginal land owners. We map competitive positioning of realty developer

across land bank and pricing attractiveness of the land bank. Exhibit 28: Land bank positioning

Land bank Pricing attractiveness Overall Comments

Northern

DLF

Largest land bank amongst listed players

and attractive price positioning. DLF is a

top quartile

Unitech

A middling

Anant Raj

Omaxe

JP Infra

A mid ‐ Quartile

Parsvnath

Western

Oberoi

MMRDA focused land bank with attractive

price positioning

Godrej

A mid ‐ Quartile

HDIL

Largest land bank in MMRDA and high

attractive price positioning

Hiranandani

Raheja

A mid – Quartile

Sunteck

A mid ‐ Quartile

Wadhwa

A middling

Kolte Patil

Largest land bank in Pune and attractive price

positioning

Southern

Sobha

Largest land bank amongst listed players and

attractive price positioning. We rate Sobha as

top quartile

Prestige

A middling on land bank and top quartile on

pricing attractive. Overall a mid ‐ quartile

Puravankara

A mid‐quartile on land bank and pricing

attractive. Overall a mid ‐ quartile

Mantri

A mid ‐ Quartile

Brigade


Based on the competitive mapping DLF stands out as top Tier in Northern

Market, HDIL in Western India markets & Sobha in the Southern India

markets. Oberoi, Prestige, Kolte Patil & Puravankara are mid‐quartile in their

respective macro‐markets. LARR will impact these developers positively as

property price increase shall augur well for profitability.

22

June 24, 2013

Real Estate

Balance sheet positioning

Exhibit 29: Balance sheet positioning

Debt/

Equity

FCF/

EBIDTA

EBIT/

Interest RoE P/FCFS Overall Comments

Northern

DLF

DLF is a mid‐quartile in all the parameters

as high debt impacts overall rating

Unitech

Healthy balance sheet & strong expected

cash flows result in company as a top

quartile

Anant Raj

A mid‐quartile

Omaxe

A mid quartile

JP Infra

A top quartile

Parsvnath

Middling in all parameter

Western

Oberoi

Top quartile with no debt, higher return

ratios and strong cash‐flows

Godrej

High leverage is key dampener whilst

company is working on rights issue of

Rs7bn. We rate it a mid‐quartile

HDIL


Hiranandani


Raheja


Sunteck

Top quartile on back of low leverage, high

return ratios

Wadhwa


Kolte Patil

Mid ‐quartile with low D/E &

undemanding valuations

Southern

Sobha

Sobha is the best company on balance sheet

positioning due to low and stable

debt/equity, positive operating cash flow

and superior return ratios on the back of

superior operating margins.

Prestige

Prestige Estates scores well on balance

sheet positioning. Secondary dilution

through IPP has helped the company

improve its cashflows and return ratios

Puravankara

Deleveraging of balance sheet through IPP

& OFS route, positive operating cash flow

and superior return ratios on the back of

superior operating margins pitches

Puravankara as a mid‐quartile.

Mantri

A middling

Brigade

Brigade seems mid‐quartile. Focus on

strengthening balance sheet & improved

transaction on new launches has been key

drivers for change in competitive

positioning

Source: Karvy Institutional Research; Note: Strong; Relatively Strong; Average; Relatively Weak Weak *on FY15E numbers

DLF, JP Infra, Oberoi, Godrej, Sobha, Prestige Estates & Puravankara ranks high

on competitive balance sheet positioning.

23

June 24, 2013

Real Estate

Overall positioning ‐ Competitive mapping of Real estate developers

Finally, we have done a weighted average indexing of four factors discussed above

with the highest weight being ascribed to macro‐competitive positioning. We

highlight our finding in exhibit 30 to arrive at overall competitive positioning.

Exhibit 30: Overall competitive positioning of real estate developers

Macro

Competitive ‐

30% weight

Business

Competitive ‐

25% weight

Land bank

& Pricing ‐

20% weight

Balance

Sheet

positioning ‐

25% weight

Overall Comments

Northern

DLF

DLF is a Top‐quartile in all the parameters except balance

sheet positioning

Unitech

Healthy balance sheet & strong expected cash flows result in

company as a mid quartile

Anant Raj

A middling

Omaxe

A middling

JP Infra

A mid quartile

Parsvnath


Western

Oberoi

Top quartile with no debt, higher return ratios and strong

cash‐flows

Godrej

A top quartile on macro competitive whilst mid‐quartile on

all other parameter. High leverage is the key overhang. We

rate it a mid‐quartile

HDIL


Hiranandani

Raheja


Sunteck

Overall a Mid ‐quartile on back of low leverage, high return

ratios

Wadhwa


Kolte Patil

A Mid ‐quartile on all parameters

Southern

Sobha

Sobha is the best positioned on strong balance sheet

positioning, high brand recall and superior land bank. We

rate it a top quartile

Prestige

Prestige Estates scores well on execution and brand recall. It

scores well on the JDA strategy of land acquisition. A Mid‐

quartile in most of the parameters.

Puravankara

A mid‐quartile on all parameters. Expected deleveraging of

balance sheet through OFS route shall further strengthen


Mantri

A mid‐quartile with strong brand recall in southern markets

Brigade

Brigade seems middling


On overall competitive positioning, we find that the top real estate players

include: DLF and JP Infra in Northern markets, Oberoi and Godrej in Western

markets and Sobha, Prestige & Puravankara in Southern markets. The right mix of

branding, execution capability, balance sheet strength and underlying business

fundamentals are the key influencers. Notwithstanding their scores differ on these

factors we see limited differentiation on an overall basis.

24

June 24, 2013

Real Estate

Optional value ‐ strategy to move of home markets becoming a dominant

theme

Regional to Top 8 cities aspiration is driving domestic realty players to diversify

outside their core regions. Whilst we believe that pan India theme has its own

challenges we expect Oberoi, Sobha & Godrej Properties’ competitive position to

change in markets outside their core’s. NCR now contributes 15% to Sobha’s sales

volume and we expect similar numbers to pan out for Oberoi & Godrej on back of

their strong brand recall replication in other markets.

Exhibit 31: Strategy to move out of home markets

Mumbai Pune NCR Bangalore Chennai Hyderabad Overall Comments

DLF

Broad based presence across markets, strong

competitive positioning though Mumbai exit

remains key dampener

Oberoi

Diversification outside Mumbai remains key re‐

rating trigger; we see strong change in competitive

positioning over next 2‐3yrs with NCR, Bangalore

markets as new additions. We estimate new

markets to contribute 10‐15% to volumes

Sobha

Successful NCR foray sets tone for a stronger

growth outside home turf Bangalore. We rate

Sobha as a mid‐quartile

Prestige

Middling in most regions. Competitive positioning

in Bangalore remains strong, Chennai

consolidating

Puravankara

Middling on most locations. Bangalore & Chennai

remain dominant regions. Looking to diversify

outside the home markets

Godrej

We rate Godrej as a mid‐quartile for diversification

outside Mumbai. Launches have met with strong

success. Brand leveraging will help further

consolidation in the competitive positioning

Kolte

Middling on most locations. Kolte is a dominant

Pune player with emerging presence in Bangalore

where they are looking to further consolidate and

improve market share, whilst in Mumbai the

company is looking towards its first launch.


Gaining market share in newer location offers an option value and should a

developer exercise this option successfully the growth can be ahead of industry. In

the past few developers’ diversification strategy met with limited success and we

would wait and watch before building this theme in the valuation multiples. It

remains as a long term option to be exercised and a potential re‐rating trigger for

Oberoi, Sobha & Godrej Properties.

25

June 24, 2013

Real Estate

Sectoral valuation

Exhibit 32: Relative valuation

Company CMP P/E (x) P/B (x) EV/EBIDTA (x) ROE %

Rs FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E

DLF 175 39.8 21.7 1.0 1.0 15.9 12.9 6.4 7.6

Unitech 21 13.0 10.0 0.4 0.4 14.8 10.9 3.4 4.2

Oberoi Realty 200 9.4 6.3 1.4 1.1 6.1 3.9 15.5 19.6

HDIL 34 1.9 1.9 0.1 0.1 4.1 3.5 5.4 6.5

Godrej Properties 528 18.3 13.0 2.4 2.1 12.8 9.1 14.2 17.5

Prestige Estates 162 15.5 13.0 1.9 1.7 10.4 8.7 12.0 12.9

Sobha Developers 382 14.2 10.0 1.6 1.4 8.3 6.7 11.9 15.2

Omaxe 138 14.0 5.1 1.1 0.9 8.7 3.9 8.5 19.5

Anant Raj 54 7.4 7.2 0.4 0.4 8.4 7.6 5.0 5.4

Puravankara Project 81 7.9 7.4 0.8 0.7 5.4 5.3 12.8 11.3

Phoenix Mills 259 26.7 19.3 2.0 1.8 11.8 9.5 7.6 9.6

Kolte Patil 77 4.5 3.7 0.7 0.6 2.2 1.9 15.2 16.6

Average 14.4 9.9 1.1 1.0 9.1 7.0 9.8 12.1

Source: Karvy Institutional Research, Bloomberg

26

June 24, 2013

Real Estate

Relative Valuation – multiple reflections

Based on the brand premium we had mapped the EV/EBIDTA of the companies

across the developer’s vs the brand premium enjoyed by the companies. In case of

unlisted developers we have only plotted them on brand premium as we don’t

have the EV/EBIDTA details for these companies as they are privately held.

Exhibit 33: JP Infra looks underpriced vs DLF


Exhibit 34: Oberoi looks underpriced vs Godrej


Exhibit 35: Sobha looks underpriced vs Prestige

Source: Karvy Institutional Research *unlisted companies EV/EBIDTA not available

Ansal

DLF

Omaxe

Unitech

Parsvnath

Anant Raj

Jaypee

(5)

‐

5

10

15

20

25

4 6 8 10 12 14

Brand Premium %

EV/EBIDTA(x)

Sunteck

Oberoi

Godrej

HDIL

Orbit

Raheja*

Hiranandani

*

Kalpataru*

(2)

3

8

13

18

23

28

33

‐2 3 8 13 18

Brand Premium %

RNA*

Wadhwa*

EV/EBIDTA(x)

Nitesh

Prestige

Sobha

Mantri *

Puravankara

Brigade

(2)

‐

2

4

6

8

10

12

14

‐1 1 3 5 7 9 11 13

Brand Premium %

EV/EBIDTA(x)

27

June 24, 2013

Real Estate

Company Specific Summaries

DLF: Hysteria Creates new buying opportunity

(BUY, CMP Rs175, upside 42%)

Over the last twelve months the share price of DLF has underperformed the

Sensex by 20% and the stock is trading close to its 52‐week low. The risks over

deleveraging roadmap, margins recovery and pick up in new sales & cashflows

seems overpriced as we derive comfort from (i) strong annuity asset mix (ii)

successful high value Gurgaon Phase‐V launches (iii) concrete non‐core assets sale

and; (iv) strong competitive positioning. Hysteria around stock price correction

has created a new buying opportunity we initiate coverage with BUY stance and

42% upside. Our valuation is based on 0.8x our end‐FY14E NAV forecast. We

believe that the near‐term catalysts are: (i) success of new launch; (ii) balance sheet

deleveraging & (iii) margins improvements.

Oberoi Realty: A lot to blue sky


Over the past 6 months Oberoi Realty Ltd. (ORL) share price has fallen by 32%,

owing to (i) concerns on slowing sales & unaffordable property markets; (ii) delay

in getting Mulund project regulatory clearance and (iii) pessimistic outlook on new

sales booking for FY14E. In spite of this we initiate coverage with a BUY because of

ORL’s strong competitive positioning, healthy balance sheet and upcoming strong

launch pipeline. Our valuation is based on 1x our end‐FY14E NAV forecast. We

believe that the near‐term catalysts are: (i) Mulund & Worli launch; (ii) successful

foray outside Mumbai & (iii) new land acquisitions.

Prestige Estates: Plotting a careful trajectory


Following a catastrophic summer of negative sectoral news flows, slowing

markets, unaffordability, within the realty sector, the share price of Prestige

Estates (PEPL) has largely been insulated, outperforming Sensex by 29% on 12M

relative basis. Going into FY14, we expect sharp re‐rating owing to (i) Robust new

launch plans of 14mn sqft; (ii) annuity portfolio nearing maturity by FY15‐16E (iii)

likely balance sheet deleveraging and (iv) stated dividend policy announcement.

We initiate on the company with a BUY stance and a SOTP‐based target price of

Rs207/share. Our valuation is based on 1x our end‐FY14E NAV forecast. We

believe that the near‐term catalysts are: (i) success of new launch; (ii) new dividend

policy & (iii) annuity business ramp up.

Phoenix Mills: The right ingredients


Over the past 6 months Phoenix Mills (PML) share price has outperformed Sensex

by 11%, owing to (i) improving annuity income; (ii) successful Bangalore launches

and (iii) no incremental Capex. Despite such an outperformance we initiate

coverage with a BUY because of PML’s strong annuity asset base, balance sheet

deleveraging and upcoming launches. We adopt a DCF based approach and a

SOTP‐based target price of Rs315/share. We believe that the near‐term catalysts

are: (i) Success of residential launch; (ii) improvement in Shangrila occupancy

rates.

28

June 24, 2013

Real Estate

Sobha Developers: The Southern Architect


Over the past 6 months Sobha Developers’ (SDL) share price has fallen by 1.3%,

owing to (i) generic factors bedeviling the Real Estate sector; (ii) muted FY13

performance and (iii) likely oversupply in the Southern market. In spite of this we

initiate coverage with a BUY because of SDL’s strong competitive positioning,

healthy balance sheet, geographical diversification and upcoming strong launch

pipeline. We value the real estate business at Rs466/share using a NAV model and

the contracting and manufacturing business (C&M) at Rs29/share. We believe that

the near‐term catalysts are: (i) strong launch pipeline and (ii) focus on further

balance sheet de‐leveraging.

Puravankara Projects: Fresh ambition, fresh upside


Over the past 6M Puravankara Projects (PPL) has underperformed the BSE Realty

index by 16%, partly owing to the slow IT/ITES recovery and partly because of

PPL’s deteriorating leverage. PPL’s stronger financial positioning post IPP & OFS,

healthy competitive positioning in the Southern Indian market and successful

foray into affordable housing would lead to material recovery over 2HFY14E. We

initiate coverage with BUY stance and 70% upside. Our valuation is based on 0.65x

our end‐FY14E NAV forecast. Near‐term catalysts for PPL are: (i) strong launch

pipeline; (ii) margin expansion due to change in product mix; and (iii) balance

sheet de‐leveraging.

Kolte Patil Developers: Savings the good news for next year


KPDL share has corrected 30% over past 6M, whilst the underlying business

dynamics continue to remain strong with (i) new launches on track (ii) new

approvals picking pace; (iii) improvement in transparency & (iv) strong earnings

growth CAGR of 22% FY13‐15E; the correction present good opportunity as KPDL

has 5‐7% dividend yield at current prices and strong cash‐flows support long term

capital appreciation. We maintain our BUY on KPDL with target of Rs180 per

share (10% discount to NAV of Rs200) offering 134% upside. We value KPDL on

NAV based target of Rs180 (giving a 10% NAV discount). At CMP the KPDL

trades at 3.7xFY15E EPS.

Real estate June 24, 2013

DLF

Bloomberg: DLFU INReuters: DLF.BO BUY

Institutional Equities

India Research

INITIATION REPORT

Recommendation

CMP: Rs175

Target Price: Rs248

Upside (%) 42%

Stock Information Market Cap. (Rs bn / US$ mn) 312/5,265

52‐week High/Low (Rs) 289/170

3m ADV (Rs mn /US$ mn) 2,214/37.4

Beta 1.5

Sensex/ Nifty 18,774/5,668

Share outstanding (mn) 1,780

Stock Performance (%) 1M 3M 12M YTD

Absolute (27.3) (26.9) (9.7) (24)

Rel. to Sensex (22.1) (26.8) (18.1) (21.4)

Performance

Source: Bloomberg


022 6184 4311

[email protected]

Varun Chakri

022‐6184 4326

[email protected]

150

200

250

300

15,500

17,500

19,500

21,500

Jun‐12

Aug‐12

Sep‐12

Oct‐12

Nov‐12

Jan‐13

Feb‐13

Mar‐13

May‐13

Jun‐13

Sensex (LHS) DLF

Hysteria creates new buying opportunity Over the last twelve months the share price of DLF has underperformed

the Sensex by 20% and the stock is trading close to its 52‐week low. The

risks over deleveraging roadmap, margins recovery and pick up in new

sales & cashflows seems overpriced as we derive comfort from (i) strong

annuity asset mix (ii) successful high value Gurgaon Phase‐V launches (iii)

concrete non‐core assets sale and; (iv) strong competitive positioning.

Hysteria around stock price correction has created a new buying

opportunity we initiate coverage with BUY stance and 42% upside.

High rank on competitive positioning – Top down & Bottoms up We rate DLF highly on our competitive mapping of real estate developers in

Northern India. Ability to acquire high quality lands, superior brand recall,

robust business model mix and relatively healthy access to finance are the

key contributing factors. DLF enjoys huge competitive advantage on low

historical land cost in an unfavorable regulatory environment.

Annuity assets cashflows to add to incremental EBIDTA DLF has guided for 7.5mn sqft of pre‐sales for FY14E with an average

realization of Rs8,000/sqft and sales value of Rs60bn. Sustainability of these

premium launches is key deleveraging driver besides ramp up in annuity

business alone has a potential to service interest expense from FY16‐17E.

Non‐core assets sale healthy; deleveraging at the horizon DLF’s divestment program is likely to bear fruit in FY14E as we expect the

cashflows from the asset sales to get realized over FY14E and in addition to

this non‐core land sales can add another Rs6,500mn to the deleveraging.

Beyond this DLF will have to look at core operational cashflows to chip in for

any further debt reduction.

Initiate coverage with BUY: Target price Rs248/share We initiate on the company with a BUY stance and a SOTP‐based target price

of Rs248/share. Our valuation is based on 0.8x our end‐FY14E NAV forecast.

We believe that the near‐term catalysts are: (i) success of new launch; (ii)

balance sheet deleveraging & (iii) margins improvements.

Key risks (i) Unaffordability may lead to a 8‐10% real estate price correction; (ii)

CAPEX persistence (iii) adverse ruling on tax demands

Key Financial ‐ Consolidated

Y/E Mar (Rs mn) FY12 FY13 FY14E FY15E

Operating income 96,294 77,728 92,743 94,206

EBITDA 39,043 26,262 34,487 41,953

EBITDA (%) 40.5 33.8 37.2 44.5

Net profit 11,781 6,808 7,344 13,885

EPS (Rs) 7.1 4.2 4.4 8.1

RoE (%) 4.3 2.3 2.4 4.4

RoCE (%) 7.5 6.2 6.4 7.6

P/E (x) 24.7 41.7 39.8 21.7

P/BV (x) 1.1 1.1 1.0 1.0

Source: Company, Karvy Institutional Research

30

June 24, 2013

DLF

FY13 – Consolidated Revenue mix (%)

Source: Company

Land bank ‐ development mix (%)

Source: Company

Residential

Business ,

78.5

Lease

Business ,

21.5

Residential

Business ,

82.2

Lease

Business ,

17.8

Company Background

DLF Ltd (DLF) was incorporated in the year 1963 and is a

leading real estate player in Northern India with a strong

presence in Gurgaon and projects spanning key IT corridors

viz. Bangalore & Chennai. The companyʹs primary focus is

to develop residential, office space, retail, hospitality and

projects in mixed‐use and single‐segment developments.

DLF floated in June 2007 and raised Rs94.7bn (US$1.7bn) by

selling 10.3% of the Company to the public. DLF has an

enviable delivery track record with mix of residential and

commercial projects. Key marquee commercial asset include

DLF Gateway tower, DLF Sqaure, DLF IT Sez Chennai etc.

Current commercial portfolio has leasable area of 22.3mn

sqft. Under residential segment DLF has 50mn sqft of area

under various phases of construction. New launches for

FY14E are being pegged at 7.5mn sqft with total sales value

of Rs60bn.

Company Financial Snapshot Profit & loss

(Rs mn) FY13 FY14E FY15E

Net sales 77,728 92,743 94,206

EBIDTA 26,262 34,487 41,953

Depreciation 7,962 7,987 8,263

Interest Expense 23,140 22,319 20,048

Other income 13,229 6,310 6,194

PBT 8,059 10,492 19,836

Tax 1,251 3,147 5,951

PAT 6,808 7,344 13,885

Adjusted PAT 7,078 7,811 14,376

Profit and Loss Ratios

EBIDTA Margin (%) 33.8 37.2 44.5

Adj Net Margin (%) 9.1 8.4 15.3

P/E (x) 41.7 39.8 21.7

EV/EBIDTA (x) 20.1 15.9 12.9

Dividend Yield (%) 0.1 0.1 0.2

Cash Flow


Profit before tax 8,059 10,492 19,836

Depreciation 7,962 7,987 8,263

Others 3,724 12,860 7,904

Change in Wkg Cap 310 (32,445) (1,553)

CF from Operations 20,056 (1,106) 34,450

Capex (11,500) (8,500) (9,250)

Investments 28,750 750 1,000

Others 2,420 6,310 6,194

CF from Investing 19,670 (1,440) (2,056)

Change in Debt (2,645) (5,500) (10,500)

Interest (32,430) (22,319) (20,048)

Others (2,663) (2,808) (3,576)

Increase in capital 1,390 18,634 ‐

CF from Financing (36,348) (11,993) (34,125)

Change in Cash 3,378 (14,539) (1,731)

Balance Sheet


Total Assets 520,744 538,413 538,222

Net Fixed Assets 190,678 190,191 190,178

Net Current Assets 230,578 248,485 248,306

Other Assets 99,488 99,738 99,738

Total Liabilities 520,744 538,413 538,222

Networth 275,277 298,913 309,713

Debt 248,010 242,510 232,010

Minority Interest 4,020 3,553 3,062

Others (6,563) (6,563) (6,563)

Balance Sheet Ratios

ROE % 2.3 2.4 4.4

ROCE % 6.2 6.4 7.6

Net Debt/Equity 0.8 0.8 0.7

Equity/Total Assets (x) 0.5 0.6 0.6

P/BV (x) 1.1 1.0 1.0

31

June 24, 2013

DLF

Investment Rationale Competitive positioning top down approach We have done competitive mapping of real estate developers based on (i)

affordability (ii) health of markets (iii) residential segment presence (iv)

commercial segment presence & (v) brand premium across key regions. These

factors have been arrived using top down approach.



Markets

Residential

Segment

presence

Commercial

segment

presence

Brand


DLF

Broad based presence across markets in Residential

& Commercial segments leads to strong


Unitech

A mid ‐ Quartile

Anant Raj

Omaxe

JP Infra

Concentrated presence in Greater Noida a key risk,

rate as a mid‐quartile

Parsvnath


Competitive positioning bottom up approach Further we have done competitive positioning using bottom up approach with

factors such as inherent strength of the company in managing its business and

delivery vs. competition.

Exhibit 2: Real estate competitive mapping

Execution Vendors

tie up

Management

bandwidth

Construction

Quality

Ability to

acquire landsOverall Comments

DLF


Unitech

A middling

Anant Raj

Omaxe

JP Infra

A mid ‐ Quartile

Parsvnath


Amongst the Northern peer DLF stands atop on competitive positioning matrix

with strong development & rental portfolio, high quality land banks,

Management bandwidth, ability to acquire lands and quality.

32

June 24, 2013

DLF

Overall positioning – best placed in pan India As highlighted in the thematic section of the note, DLF is best placed amongst the

Northern peers on account of its ability to tie up superior land banks, access to

finance, improving balance sheet and high annuity cashflows through the

commercial and retail leases. The micro factors are well supported by strong

execution, quality construction & management bandwidth. We highlight our

finding in exhibit 3 to arrive at overall competitive positioning.


Macro

Competitive

‐ 30% weight

Business

Competitive ‐

25% weight

Land bank

& Pricing ‐

20% weight

Balance Sheet

positioning ‐

25% weight

Overall Comments

DLF

DLF is a Top‐quartile in all the parameters except

balance sheet positioning

Unitech

Healthy balance sheet & strong expected cash flows

result in company as a mid quartile

Anant Raj

A middling

Omaxe

A middling

JP Infra

A mid quartile

Parsvnath



Based on the competitive mapping DLF stands atop in competitive mapping vs

peers in the Northern India markets.

Annuity assets cashflows to add to incremental EBIDTA

We have forecasted FY13‐18E rental income CAGR of 9.8% including the DLF’s

Mall of Noida (expected commissioning end FY14E) and FY13‐18E rental income

CAGR of 8% excluding Mall on Noida. DLF has guided for Rs27bn of EBIDTA

from Rental business over the next 3yrs vs our estimate of Rs23.4bn. We expect

that with the (i) debt reduction plan currently under spanner (ii) Capex on rental

side of business largely over, DLF should be able to service interest from rental

business cashflows, leaving development business cashflows for reinvestments.

Exhibit 4: Annuity rentals growth trajectory

DLF share FY13 FY14E FY15E FY16E FY17E FY18E

Rental income (Rs mn) 16,209 18,094 20,631 22,904 24,706 25,941

EBIDTA (Rs mn) (assuming 90% margins) 15,399 17,189 19,599 21,759 23,470 24,644

DLF Rental EBIDTA Guidance (Rs mn) 27,000

Consolidated P&L Interest cost (Rs mn) 23,140 22,319 20,048 18,667 15,288 15,280

Coverage Ratio (Rs mn) 0.7 0.8 1.0 1.2 1.5 1.6


33

June 24, 2013

DLF

Balance sheet deleveraging material progress to be seen

during FY14E DLF has embarked on the asset deleveraging plans which have not yet materially

resulted in debt reduction. We expect the cashflows from the asset sales to get

realized over FY14E and in addition to this non‐core land sales can add another

Rs6,500mn to the deleveraging. Beyond this DLF will have to look at core

operational cashflows to chip in for any further debt reduction. The premium high

value/realization launches in Gurgaon Phase V viz. Crest and Camellias hold the

key to further stock re‐rating. Whilst in the past DLF non‐core asset sales didn’t

translate into meaningful debt reduction, the need and urgency has resulted in

financial closure of non core asset sales and it’s a two quarter wait to see it playing

out on balance sheet improvement.

Exhibit 5: Debt reduction

Debt Movement Rs mn comments

Net Debt (FY13) 2,17,300

Less:

Wind/Energy equipments

divestments ‐10000 Rs1,780mn received, expect balance in FY14E

Aman/Misc. Divestments ‐17500

$10mn received in Dec‐12, transaction. Money

lying in the escrow account

expected to get financially closed by 1HFY14E

Mandatory equity raise ‐18600 Already achieved

Total ‐46100

Targeted net debt (end FY14E) 1,712,10

Other non‐core land bank sales 6,500

Media reports suggest DLF has sold 32acres

land in Hyderabad in May‐13. The proceeds

will add on to the debt reduction

Targeted debt post land sales 1,64700 Implies net D/E of 0.55x from current 0.73x

FY14E end


34

June 24, 2013

DLF

Key assumptions and estimates Exhibit 6: Summary of key assumptions and estimates

Estimates Growth (%) Comments

FY13 FY14E FY15E FY14E FY15E

Volume assumptions

Residential (mn sqft) 7.2 7.2 8.0 (0.2) 10.7 New launches driven by 1.5mn in Phase V Gurgaon,

3mn sqft new Gurgaon and 3mn sqft rest of India

Average rate (Rs/sqft) 5,277 7,725 7,910 46.4 2.4

Average realizatiion higher on account of Phase V

projects with Rs15‐20k/sqft realization, namely Crest

and Camellias

Sales value (Rs mn) 38,150 55,719 63,173 46.1 13.4 28.6% FY13‐15E sales CAGR

New leasing (mn sqft) 1.1 1.2 1.5 5.3 25.0 Expect leasing recovery from FY15E

Rental Income

Gross area for lease (mnsf) 28.0 28.0 28.0 ‐ ‐

Average occupancy % 72.5 72.5 78.9 ‐ 8.9 Occupancy increase on account of Mall of Noida

Leased space (mnsf) 20.3 20.3 22.1 ‐ 8.9 Increase on account of Mall of Noida commissioning

Average Rental (Rs/sqft/month) 69 74 78 8.3 4.7 Rental growth in line with product mix

Rental income (Rs mn) 16,700 18,094 20,631 8.3 14.0 6.5% FY13‐15E sales CAGR

Earnings forecast

Residential Sales (Rs mn) 61,028 74,649 73,576 22.3 (1.4) 9.8% CAGR for FY13‐15E

Rental income (Rs mn) 16,700 18,094 20,631 8.3 14.0 6.5% FY13‐15E CAGR

Total 77,728 92,743 94,206 19.3 1.6 10.1% CAGR for FY13‐15E

EBIDTA (Rs mn) 26,262 34,487 41,953 31.3 21.7 26.4% CAGR for FY13‐15E

EBIDTA Margin (%) 33.8 37.2 44.5 339.8 734.8 Margins to expand as high realization project starts

hitting P&L

Net interest expense* 23,140 22,319 20,048 (3.6) (10.2) Interest degrowth in line with deleveraging

PAT (Rs mn) 6,808 7,344 13,885 7.9 89.1 42.8% CAGR for FY13‐15E largely driven my margins

expansion

PAT Margin (%) 8.8 7.9 14.7 (83.9bps) 682bps Increase in net margins in line with EBIDTA

expansion

EPS (Rs) 3.8 4.1 7.8 7.9 89.1 Post IPP dilution

Cash flows forecast

CFO ‐ a 20,056 (1,106) 34,450

CFI ‐ b 19,670 (1,440) (2,056)

FCF ‐ a+b 39,726 (2,546) 32,394

Free cash flow recovery in FY15E excluding Interest.

Adjusted for interest amount, FCF is Rs6.1bn

CFF‐c (36,348) (11,993) (34,125)

Total change in cash ‐ a+b+c 3,378 (14,539) (1,731)


35

June 24, 2013

DLF

Karvy versus consensus Exhibit 7: Estimates – Karvy v/s consensus

Consensus Karvy % Divergence

Sales (Rs mn)

FY14E 89,750 92,743 3.3

FY15E 1,04,727 94,206 (10.0)

EBITDA (Rs mn)

FY14E 35,287 34,487 (2.3)

FY15E 44,563 41,953 (5.9)

Net Profit (Rs mn)

FY14E 10,210 7,344 (28.1)

FY15E 17,525 13,885 (20.8)


Whilst for FY14E our headline numbers are marginally ahead consensus, our

FY15E numbers are sub‐consensus by 10% on account of change in accounting

revenue recognition under the new standard. Our EBITDA margin forecast is

marginally lower than consensus for FY14E (on account of cost overruns in

projects nearing completion), whilst being marginally higher during FY15E as

premium projects cross revenue recognition hurdle and legacy low margins

projects get completed. Our absolute EBITDA growth is sub consensus. Drilling

down further, our reasons for margins improvement are (a) cost overruns being

largely provided; (b) higher realization from existing and new projects; (c)

improvement in commercial occupancy. Net profit estimates are below consensus

on account of higher interest and tax rate assumptions.

36

June 24, 2013

DLF

Valuation

SOTP Valuation We have adopted DCF methodology to arrive at DLF’s NAV/share. We value the

residential real estate business at Rs335/share, commercial annuity assets at

Rs83/share, others ‐ hospitality & project management at Rs33/share and reduce

net debt at Rs134/share and unpaid land bank at Rs7/share to arrive at end‐FY14E

NAV of Rs310/share for the Company. We initiate coverage on DLF with a target

price of Rs248/share. Our valuation is based on 0.8x our end‐FY14E NAV forecast

(see exhibit 8). Our NAV calculation is based on the following methodology:

Exhibit 8: Sum of the Parts

Rs mn Rs/share Comments

Gross NAV Residential 596,699 335 NAV based on the methodology discussed

Gross NAV Commercial 147,152 83 NAV based on the methodology discussed

Other business 58,704 33 8x FY15E EV/EBIDTA

Total Gross NAV 802,556 451

Less: Net Debt (238,470) (134) end FY14E

Unpaid land bank (12,800) (7)

NAV 551,286 310

Discount to NAV 20%

NAV/Share 248


Real estate development – NAV calculation methodology

We have divided DLF’s entire land bank into residential projects (based on the

information given by the company)

We have arrived at the sale price/sq ft. and the anticipated sales volumes for

each project based on our discussions with industry experts

We have deducted the cost of construction based on our assumed cost

estimates which have been arrived at after discussions with industry experts

We have further deducted marketing and other costs which have been

assumed at 5% of the sales revenue

We have then deducted income tax based on the tax applicable for the project

The resultant cash inflows at the project level have been discounted based on

WACC of 14% (cost of equity 14% based on beta of 1x & debt/equity ratio of

0x). All the project level NAVs have then been summed up to arrive at the

NAV of the company

For commercial office/retail space we have discounted rentals using 14%

WACC for the forecasted period and terminal value using the cap rate of 11%

From the NAV, we have deducted the net debt as of FY14E to arrive at the

final valuation of the company.

37

June 24, 2013

DLF

Key valuation assumptions

In exhibit 9 we highlight our sales and cost inflation forecasts. We expect property

price appreciation in line with WPI inflation i.e. 6%. We forecast other costs

including marketing, SGA and employees’ costs at 5% of sales.

Exhibit 9: Base case assumptions

Discount rate 14%

Annual rate of inflation‐sales price 5%

Annual rate of inflation‐cost of construction 5%

Other costs – marketing, SGA, employee cost (as % of sales) 5%

Tax rate (%) 33%


In the exhibit 10 we highlight our sale price and construction cost forecasts. Our

pricing assumptions are moderate and at a 0‐10% discount to the current

prevailing prices.

Exhibit 10: Base property price and construction cost assumptions

Location Prices Cost

Rs/sq ft Rs/sq ft

Gurgaon 7,500‐20,000 2,000‐4,500

Bengaluru 4,500‐7,500 2,000‐2,500

Delhi Metropolitan Area 10,000‐2,5000 4,00 ‐5,500

Chennai 4,500‐7,500 2,000‐2,500

Hyderabad 4,500‐5,500 2,000‐2,200

Chandigarh 4,500‐5,500 2,000‐2,200

Kolkatta 4,500‐5,500 2,000‐2,200

Pune 4,500‐5,500 2,000‐2,200

Goa 4,500‐5,500 2,000‐2,200

Nagpur 3,500‐5,000 2,000‐2,200

Others 3,500‐5,500 2,000‐2,200


38

June 24, 2013

DLF

NAV sensitivity analysis

Sensitivity to our assumption of property price

Obviously, our model is sensitive to changes in the assumptions regarding

property prices. For every 1% change in the base property prices (see exhibit 10 for

base price assumptions), the NAV would change by approximately 2%.

Exhibit 11: NAV sensitivity to change in average sale price

% change in sale price ‐10 ‐5 0 5 10

NAV/share (Rs) 200 224 248 272 295

Change in NAV (%) ‐19.4 ‐9.7 0.0 9.7 19.0


Sensitivity of NAV to changes in sale inflation

In our base case we have assumed annual sale price inflation of 5% (see exhibit 9).

For every 100bps increase in the annual sale price inflation, the NAV would

increase by approximately 6%.

Exhibit 12: NAV sensitivity to change in sales inflation

Sales inflation rates (%) 3 4 5 6 7

NAV/share (Rs) 220 233 248 263 278

Change in NAV (%) ‐11.3 ‐6.0 0.0 6.0 12.1


Sensitivity of NAV to changes in cost inflation

In our base case we have assumed cost inflation to be 5% (see exhibit 9). For every

100bps increase in construction cost inflation, the NAV would change by

approximately 4.4%.

Exhibit 13: NAV sensitivity to change in cost inflation

Cost inflation rates (%) 3 4 5 6 7

NAV/share (Rs) 268 258 248 237 225

Change in NAV (%) 8.1 4.0 0.0 ‐4.4 ‐9.3

Source: Karvy Research Estimate

The combined impact of a 100bps increase in sale price inflation and cost

inflation would be a NAV increase of 1.6%.

Sensitivity of NAV to changes in discount rate

In our base case we have assumed a discount rate of 14%. For every 100bps

increase in the discount rate, the NAV would fall by approximately 3%.

Exhibit 14: NAV sensitivity to change in WACC

WACC rates (%) 12 13 14 15 16

NAV/share (Rs) 265 256 248 239 232

Change in NAV (%) 6.9 3.2 0.0 ‐3.6 ‐6.5


39

June 24, 2013

DLF

Relative valuation At Rs175, DLF trades at 21.7x FY15E EPS, which is a premium of 119% to the

average P/E of the peer group. On P/BV, DLF is trading at a discount of 4% to the

average FY15E P/BV of peers and at 47.3% discount to its historical cross‐cycle

average P/BV of 1.9x. We believe that these discounts are too high given the

improvement in the balance sheet and pick up in residential sales.


CMP P/E (x) P/BV (x) EV/EBITDAT (x) RoE (%)

(Rs) FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E

DLF 175 39.8 21.7 1.0 1.0 15.9 12.9 6.4 7.6

Unitech 21 13.0 10.0 0.4 0.4 14.8 10.9 3.4 4.2

Oberoi Realty 200 9.4 6.3 1.4 1.1 6.1 3.9 15.5 19.6

HDIL 34 1.9 1.9 0.1 0.1 4.1 3.5 5.4 6.5




Omaxe 138 14.0 5.1 1.1 0.9 8.7 3.9 8.5 19.5

Anant Raj 54 7.4 7.2 0.4 0.4 8.4 7.6 5.0 5.4


Phoenix Mills 259 26.7 19.3 2.0 1.8 11.8 9.5 7.6 9.6

Kolte Patil 77 4.5 3.7 0.7 0.6 2.2 1.9 15.2 16.6

Average 14.4 9.9 1.1 1.0 9.1 7.0 9.8 12.1

Source: Bloomberg Consensus, Karvy Institutional Research

Valuation charts On FY15E P/E of 21.7x, DLF is trading at a 41% discount to its historical cross‐cycle

average P/E of 36.7x.

Exhibit 16: One year forward P/E band


Exhibit 17: One year forward P/BV band


0

200

400

600

800

1,000

1,200

Apr‐08

Aug‐08

Dec‐08

Apr‐09

Aug‐09

Dec‐09

Apr‐10

Aug‐10

Dec‐10

Apr‐11

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1.2x

1.8x

2.5x

40

June 24, 2013

DLF

Key catalysts

High realization from new projects may lead to margins expansion

DLF has guided for 7.5mn sqft of new sales during FY14E totaling to an order

book value of Rs60bn (implying Rs8,000/sqft realization). This is ~50% higher vs

average realization of Rs5,252/sqft achieved during FY13. The key driver of this

realization is the Gurgaon Phase V projects ‐ Crest (0.8mn sqft) & Camellias (0.7mn

sqft), comprising a total of 1.5mn sqft in area and Rs30bn in sales. The change in

product mix is inline with DLF margins improvement guidance of 45%+‐3% over

FY15‐16E from current margins levels of 35‐40%. Whilst DLF has been able to sell

Crest (0.8mn sqft, Rs15bn in sales) recording ~Rs17,000/sqft average realization the

Honorable Supreme Court of India has stayed Honorable Punjab and Haryana

High Court order restraining DLF from selling, marketing and constructing the

project. Though the matter is subjudice with next hearing scheduled in July‐13.

DLF remains confident of a favorable judgment even in a scenario of an adverse

outcome the impact will be minimal.

Asset sales; deleveraging materialization key re‐rating trigger

DLF has achieved noncore asset sales of Rs46.1bn (includes Aman, Wind/energy

divestments and IPP equity raise) the proceeds will be realized over 1HFY13

towards debt reduction to ~Rs171bn. This shall turn the DLF into free cash flow

positive zone from FY15E. The deleveraging stress remains the key re‐rating

trigger for the stock.

Key risks to our BUY stance

Unaffordability and price correction

DLF has guided for 2x EBIDTA run rate for FY15‐16E at Rs55bn, of which almost

40% will be contributed from Phase V projects. Hence the success of new Phase V

launches remains key determining factor for further deleveraging. Whilst Crest

has been a successful launch, Camellias (0.7mn sqft) launch is due in 2QFY14E and

the expected pricing of ~Rs20,000/sqft is unattractive in already overheated and

unaffordable Gurgaon market. We build in 10‐15% price correction for Gurgaon

and this may result in sharp financial and stock price underperformance. For every

1% correction in base residential prices (exhibit 11), our NAV estimate for DLF will

be negatively impacted by 2% (the Gurgaon price correction contribution will be

lower to overall NAV).

Rising free cashflows restricted by land capex

DLF investors have had an endless wait to realize free cashflows largely restricted

by land capex and meeting burgeoning interest payments. Whilst the interest part

has now been tackled to an extent the land capex of Rs5‐7bn continues to remain

cashflow dilutive and remains a de‐rating trigger.

Adverse ruling on income tax demands can impact balance sheet

As of FY13 end, DLF has outstanding tax demands owing to disallowance of SEZ

profits u/s 80IAB cumulating to Rs32,704mn, besides CCI has imposed penalty of

Rs6,300mn on the company and restrained them from imposing unfair conditions

and modifying the same for Gurgaon buyers. Both these tax demands in an

adverse outcome can have severe profitability impact.

41

June 24, 2013

DLF

Financials ‐ Consolidated

Exhibit 18: Profit & Loss


Net sales 96,294 77,728 92,743 94,206

Growth (%) 0.7 (19.3) 19.3 1.6

EBITDA 39,043 26,262 34,487 41,953

EBITDA margin (%) 40.5 33.8 37.2 44.5

Growth (%) 4 (33) 31 22

Depreciation 6,888 7,962 7,987 8,263

EBIT 32,155 18,300 26,500 33,691

Net Interest 22,465 23,140 22,319 20,048

Other income 5,945 13,229 6,310 6,194

Exceptional items 160 330 ‐ ‐

PBT 15,475 8,059 10,492 19,836

Taxes 3,693 1,251 3,147 5,951

Net profit 11,781 6,808 7,344 13,885

Minority interest 336 445 467 491

Share of associates (15) 41 0 0

EO items (net of taxes) (95) (175) 0 0

Adjusted Profit 11,335 7,078 7,811 14,376

Margin (%) 11.8 9.1 8.4 15.3

EPS (Rs) 7.1 4.2 4.4 8.1

EPS Growth (%) (26.8) (40.7) 4.7 84.0


Exhibit 19: Balance Sheet


Share capital 21,389 21,389 21,551 21,551

Reserves & surplus 250,969 253,888 277,363 288,162

Networth 272,358 275,277 298,913 309,713

Debt 250,658 248,010 242,510 232,010

Minority Interest 4,207 4,020 3,553 3,062

Deferred tax liability (3,349) (6,563) (6,563) (6,563)

Sources of funds 523,873 520,744 538,413 538,222

Net block 187,140 190,678 190,191 190,178

CWIP 89,928 70,530 71,530 72,530

Goodwill 16,248 15,620 15,620 15,620

Investments 11,268 13,337 12,587 11,587

Current assets 325,961 349,537 375,883 358,027

Inventory 161,756 176,455 201,786 178,846

Sundry debtors 17,659 16,533 22,868 23,229

Cash & bank balance 15,062 18,440 3,901 2,170

Loans & advances 131,484 138,109 147,327 153,782

Current liabilities & provisions 106,672 118,958 127,398 109,721

Net current assets 219,289 230,578 248,485 248,306

Application of funds 523,873 520,744 538,413 538,222


42

June 24, 2013

DLF

Exhibit 20: Cash flow statement


PBT before minority 15,475 8,059 10,492 19,836

Depreciation/amortisation 6,888 7,962 7,987 8,263

Interest 22,465 23,140 22,319 20,048

Non oper. Income (3,447) (10,016) (6,310) (6,194)

Taxes (11,501) (9,400) (3,148) (5,951)

Change in NWC ‐4,683 310 ‐32,445 ‐1,553

Net cash from operations (a) 25,197 20,056 ‐1,106 34,450

(Inc)/dec in investments ‐2,883 28,750 750 1,000

Capex ‐419 ‐11,500 ‐8,500 ‐9,250

Interest/dividend income 3,066 2,420 6,310 6,194

Cash flow from inv. (b) ‐237 19,670 ‐1,440 ‐2,056

FCF (a+b) 24,961 39,726 ‐2,546 32,394

Inc/(dec) in capital 1,054 1,390 18,634 ‐

Inc/dec in loans 10,641 (2,645) (5,500) (10,500)

Interest (30,125) (32,430) (22,319) (20,048)

Dividend (5,952) (5,830) (2,808) (3,576)

Others 1023 3167

Financial cash flow ( c ) (23,359) (36,348) (11,993) (34,125)

Net inc/dec in cash (a+b+c) 1,602 3,378 ‐14,539 ‐1,731


Exhibit 21: Key Ratio

Y/E Mar FY12 FY13 FY14E FY15E

EBIDTA margin 40.5 33.8 37.2 44.5

EBIT margin 33.4 23.5 28.6 35.8

Net profit margin 11.8 9.1 8.4 15.3

Return on capital employed 7.5 6.2 6.4 7.6

Return on equity 4.3 2.3 2.4 4.4

Dividend payout ratio 0.2 0.3 0.4 0.2

Current ratio (x) 3.1 2.9 3.0 3.3

Net debt/ Equity (x) 0.9 0.8 0.8 0.7


Exhibit 22: Valuation Parameters


EPS (Rs) 7.1 4.2 4.4 8.1

Diluted EPS (Rs) 7.1 4.2 4.4 8.1

Book value per share 160.4 162.2 168.1 174.1

P/E (x) 24.7 41.7 39.8 21.7

P/BV (x) 1.1 1.1 1.0 1.0

EV/EBITDA (x) 13.6 20.1 15.9 12.9

EV/Sales (x) 5.5 6.8 5.9 5.7

Turnover ratios (no.)

Debtor days 66 80 78 89

Creditor days 227 212 195 234



Oberoi Realty

Bloomberg: OBER INReuters: OEBO.BO BUY


India Research

INITIATION REPORT

Recommendation

CMP: Rs200

Target Price: Rs308

Upside (%) 54%

Stock Information Market Cap. (Rs bn / US$ mn) 65/1,087


3m ADV (Rs mn /US$ mn) 26/0.4

Beta 0.9


Share outstanding (mn) 328


Absolute (17.6) (24.9) (17.5) (31.3)

Rel. to Sensex (12.8) (24.4) (24.8) (28.3)

Performance

Source: Bloomberg


022 6184 4311

[email protected]

Varun Chakri

022‐6184 4326

[email protected]

0

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400

15,000

17,000

19,000

21,000

Jun‐12

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Mar‐13

May‐13

Jun‐13

Sensex (LHS) Oberoi (RHS)

A lot to blue sky

Over the past 6 months Oberoi Realty Ltd. (ORL) share price has fallen by

32%, owing to (i) concerns on slowing sales & unaffordable property

markets; (ii) delay in getting Mulund project regulatory clearance and (iii)

pessimistic outlook on new sales booking for FY14E. In spite of this we

initiate coverage with a BUY because of ORL’s strong competitive

positioning, healthy balance sheet and upcoming strong launch pipeline.

Strong balance sheet lends scope for locational diversification Strong balance sheet with FY13 net debt/equity of (0.3x) and robust

operational cash flows gives ORL headroom to acquire land banks outside

home locations. We expect NCR/Bangalore to contribute about 15% to

volumes from FY16E though we have not yet built these numbers in our

optional value estimates. Replication of strong brand recall in home markets

across newer markets remains key re‐rating trigger.

Best placed v/s Western peers ORL stands out as a leader in our competitive business mapping of the

Western developers. High land bank quality, superior brand recall and

relatively healthy access to finance are the key contributing factors. We

expect ORL to capture incremental market share outside home location and

deliver above industry average growth.

Well balanced annuity and residential mix augurs well ORL operationally derives value from a well balanced mix of residential &

commercial projects contributing 43% and 42% to our NAV estimates

respectively. Unlike peers, in an event of slowing residential segment sale the

cash flows from commercial projects lend visibility to earnings.


of Rs308/share. We value the residential real estate at Rs133/share,

commercial annuity assets at Rs129/share and others at Rs46/share. We

believe that the near‐term catalysts are: (i) Mulund & Worli launch; (ii)

successful foray outside Mumbai & (iii) new land acquisitions.

Key risks (i) Unaffordability may lead to a 8‐10% real estate price; (ii) Delays in new

land acquisitions remains key de‐rating trigger




EBITDA 4,835 6,121 9,027 14,056

EBITDA (%) 58.6 58.4 58.7 59.5

Net profift 4,633 5,049 6,966 10,394

EPS (Rs) 14.1 15.4 21.2 31.7

RoE (%) 13.1 12.8 15.5 19.6

RoCE (%) 17.3 17.3 20.8 26.9

P/E (x) 14.2 13.0 9.4 6.3

P/BV (x) 1.8 1.6 1.4 1.1


44

June 24, 2013

Oberoi Realty

Shareholding pattern (%)

Source: Company


Source: Company

Promoters,

78.5

FII, 19.8

DII, 0.8

Others , 0.9

Residential ,

78

Annuity , 13

Others , 9

Company Background

Oberoi Realty Ltd (ORL) was incorporated on May 8, 1998

and is a leading real estate player in Western India with a

strong presence in Mumbai. The companyʹs primary focus is

to develop residential, office space, retail, hospitality and

social infrastructure projects in mixed‐use and single‐

segment developments. ORL floated in October 2010 and

raised Rs10.2bn (US$185mn) by selling 12% of the Company

to the public. ORL has an enviable delivery track record

with mix of residential and commercial projects. Key

marquee commercial asset include Westin Goregaon, Oberoi

Mall, Oberoi International School & Commerz. Current

commercial portfolio has leasable area of 1.6mn sqft which is

expected to increase to 3.6mn sqft. On residential side the

residual unsold inventory is 9mn sqft. ORL is one of few

exceptions in the real estate sector with debt free balance

sheet. ORL is scouting for newer markets outside Mumbai.



Net sales 10,476 15,383 23,618

EBIDTA 6,121 9,027 14,056

Depreciation 285 363 512

Interest Expense 4 4 4

Other income 999 710 787

PBT 6,831 9,371 14,328

Tax 1,783 2,405 3,934

Adj. PAT 5,049 6,966 10,394


EBIDTA Margin (%) 58.4 58.7 59.5

Adj Net Margin (%) 48.2 45.3 44.0

P/E (x) 13.0 9.4 6.3

EV/EBIDTA (x) 9.0 6.1 3.9


Cash Flow




Others ‐ ‐ ‐

Change in Wkg Cap (1,707) (4,870) (1,559)

CF from Operations 3,627 2,459 9,347

Capex (776) (2,942) (7,532)

Investments (0) ‐ ‐

Others ‐ ‐ ‐

CF from Investing (776) (2,942) (7,532)

Change in Debt ‐ ‐ ‐

Others (378) (411) (612)

CF from Financing (378) (411) (612)

Change in Cash 2,473 (895) 1,203

Balance Sheet


Total Assets 41,769 48,362 58,149

Net Fixed Assets 6,912 9,744 13,300


Other Assets 6,456 5,830 9,295


Networth 41,621 48,215 58,001

Others 147 147 147


ROE % 12.8 15.5 19.6

ROCE % 17.3 20.8 26.9

Net Debt/Equity (0.26) (0.21) (0.19)


P/BV (X) 1.6 1.4 1.1

45

June 24, 2013

Oberoi Realty

Investment Rationale

Strong balance sheet lends scope for locational

diversification outside home location Regional to Top 8 cities aspiration is driving domestic realty players to diversify

outside their core regions. Whilst we believe that pan India theme has its own

challenges we expect ORL’s competitive position to change in markets outside its

core. NCR now contributes 15% to Sobha’s sales volume and we expect similar

numbers to pan out for Oberoi on back of strong brand recall replication in other

markets. Moreover, a debt free balance sheet augurs well for any acquisition

opportunity in newer markets though ORL remains focused on JDA (Joint

development agreement) model of diversification.

Exhibit 1: Strategy to move out of home markets Mumbai Pune NCR Bangalore Chennai Hyderabad Overall Comments

DLF

Broad based presence across markets, strong

competitive positioning, though Mumbai exit

remains key dampener

Oberoi

Diversification outside Mumbai remains key re‐

rating trigger; we see strong change in competitive

positioning over next 2‐3yrs with NCR, Bangalore

markets as new additions. We estimate new

markets to contribute 10‐15% to volumes

Sobha

Successful NCR foray sets tone for a stronger

growth outside home turf Bangalore. We rate

Sobha as a mid‐quartile

Prestige

Middling in most regions. Competitive positioning

in Bangalore remains strong, Chennai

consolidating

Puravankara

Middling on most locations. Bangalore & Chennai

remain dominant regions. Looking to diversify

outside the home markets

Godrej

We rate Godrej as a mid‐quartile for diversification

outside Mumbai. Launches have met with strong

success. Brand leveraging will help further

consolidation in the competitive positioning

Kolte

Middling on most locations. Kolte is a dominant

Pune player with emerging presence in Bangalore

where it is looking to further consolidate and

improve market share, whilst in Mumbai the

company is looking towards its first launch.


Gaining market share in newer location offers an option value and should a

developer exercise this option successfully the growth can be ahead of industry. It

remains as a long term option to be exercised and a potential re‐rating trigger for

ORL.

46

June 24, 2013

Oberoi Realty

Dominant Western markets positioning As highlighted in the thematic section of the note, ORL is best placed amongst the

Western peers on account of its superior land bank quality, access to finance,

healthy balance sheet and high potential for successful foray in newer markets.

The micro factors are well supported by strong execution, quality construction &

management bandwidth. We highlight our finding in exhibit 2 to arrive at overall

competitive positioning.


Macro

Competitive ‐

30% weight

Business

Competitive ‐

25% weight

Land bank

& Pricing ‐

20% weight

Balance

Sheet

positioning ‐

25% weight

Overall Comments

Oberoi

Top quartile with no debt, higher return ratios and strong

cash‐flows

Godrej

A top quartile on macro competitive whilst mid‐quartile on

all other parameter. High leverage is the key overhang. We

rate it a mid‐quartile

HDIL


Hiranandani

Raheja


Sunteck

Overall a Mid ‐quartile on back of low leverage, high return

ratios

Wadhwa


Kolte Patil

A Mid ‐quartile on all parameters



include Oberoi, Godrej, Hirandandani & Sunteck in Western markets. ORL with

the right mix of branding, execution capability, balance sheet strength and

underlying business fundamentals remains best poised amongst the peers.

Notwithstanding their scores differ on these factors we see limited differentiation

on an overall basis.

47

June 24, 2013

Oberoi Realty




Volume assumptions

Residential (mn sqft) 0.5 1.2 2.0 137.4 69.1 Strong volume growth contributed by Goregaon

projects & Mulund launch

Average rate (Rs/sqft) 17,402 15,538 15,602 (10.7) 0.4 Muted realization on account of lower capital

value in Mulund project

Sales value (Rs mn) 8,687 18,413 31,266 112.0 69.8 89% FY13‐15E sales CAGR on low base

Rental Income

Area for lease (msf) 0.9 1.6 3.3 79.1 101.1 Addition of Commerz ‐II phases results in

increased lease area

Average occupancy (%) 88.1 70.0 76.7 (1804bps) 667bps Slow pick up in Commerz II leasing to reduce

occupancy

Average Rental (Rs/sqft/month) 127 115 124 (9.8) 8.3

Lower rentals in Commerz II on muted

commercial office lease demand, pick up in

FY15E owing to lease renewals

Rental income (Rs mn) 1,252.4 1,448.3 2,020.4 15.6 39.5 27% FY13‐15E sales CAGR

Earnings forecast

Sales real estate (Rs mn) 8,122 12,939 20,530 59.3 58.7 59% CAGR for FY13‐15E on back of Goregaon &

Worli recognition

Income from hospitality 956 996 1,068 4.2 7.2 In line with industry growth

Annuity assets 1,398 1,448 2,020 3.6 39.5 Mix of volume of price growth on account of

pick up in Commerz II lease momentum

Total 10,476 15,383 23,618 46.8 53.5 50% CAGR for FY13‐15E


EBIDTA Margin (%) 58.4 58.7 59.5 25.7bps 83.1bps Margin increase on account of better realization

in Goregaon and Worli projects

Net interest expense* 4 4 4 ‐ ‐

PAT (Rs mn) 5,049 6,966 10,394 38.0 49.2 43.5% CAGR for FY13‐15E

PAT Margin (%) 48.2 45.3 44.0 (291bps) (127bps) Decrease in PAT margins due to increase in

taxes

EPS (Rs) 15.4 21.2 31.7 38.0 49.2

Cash flows forecast

CFO ‐ a 3,627 2,459 9,347

CFI ‐ b (776) (2,942) (7,532)

FCF ‐ a+b 2,850 (483) 1,814 Free cash flow recovery in FY15E

CFF‐c (378) (411) (612)

Total change in cash ‐ a+b+c 2,473 (895) 1,203


48

June 24, 2013

Oberoi Realty



Sales (Rs mn)

FY14E 16,874 15,383 (8.8)

FY15E 22,878 23,618 3.2

EBITDA (Rs mn)

FY14E 10,289 9,027 (12.3)

FY15E 14,226 14,056 (1.2)

Net Profit (Rs mn)

FY14E 7,962 6,966 (12.5)

FY15E 10,490 10,394 (0.9)


Whilst for FY14E our headline numbers are sub‐consensus, our FY15E numbers

are marginally ahead of consensus. For FY14E we build in lower revenue

recognition from Goregaon & Worli and model a pick up during FY15E as

construction progresses. Our EBITDA margin forecast is marginally lower than

consensus (on account of cost overruns in projects nearing completion viz.

Exquisite), our absolute EBITDA growth is sub consensus. Drilling down further,

our reasons for lower margins are (a) we build in cost overruns in projects nearing

completion; (b) slow pick up in Commerz II leasing which has high EBIDTA

margins; slower occupancy shall impact margins negatively. Net profit decline in

line with EBIDTA decline as ORL doesn’t have debt hence there is EBIDTA pass

through.

49

June 24, 2013

Oberoi Realty

Valuation

SOTP Valuation We have adopted DCF methodology to arrive at ORL’s NAV/share. We value the

residential real estate business at Rs133/share, hotels at Rs19/share, commercial

annuity assets at Rs101/share, social infrastructure at Rs10/share, other assets at

Rs15/share and cash at Rs31 to arrive at total SOTP valuation of Rs308/share for

the Company. We don’t ascribe any NAV discount to ORL as we have only valued

the projects which have visibility over the next 5years. For land bank beyond 5

years we ascribe 1x P/BV for invested equity.




Gross NAV Hotels 6,186 19 8x FY15E EV/EBIDTA


Social Infra 3,134 10 discounting at 12% cap rate viz. school, hospital etc

Other Assets 4,911 15 investments in other projects at 1x P/BV,viz. Sangam city, Juhu hotel etc

Less: Net Debt ‐10,142 ‐31 no debt hence the FY14E cash get added

NAV 101,149 308



We have divided ORL’s entire land bank into residential projects (based on the












NAV of the company

For commercial office we have discounted rentals using 14% WACC for the

forecasted period and terminal value using the cap rate of 11%

Social infrastructure created by ORL viz. School, Hospital etc has been

discounted using cap rate of 12%

Other assets have been valued at 1x P/BV of invested equity



Location Gross NAV

(Rs mn)

Rs/

Share

Residential

Goregaon 14,546 44

JVLR 6,943 21

Worli ‐ Residential 8,528 26

Mulund 13,751 42

Total Residential 43,768 133

Hotels

Westin Hotel 4,085 12

Worli Hotel 2,101 6

Total Hotel 6,186 19

Commercial

Commerz‐All Phases 24,121 73

Oberoi Mall 6,274 19

Worli Commercial 2,613 8

Total Commercial 33,008 101

Grand Total 82,963 253


50

June 24, 2013

Oberoi Realty






Discount rate 14%




Tax rate (%) 33%



pricing assumptions are moderate and at a 0‐10% premium to the current

prevailing prices on account of ORL 15‐20% brand premium vs peers.



Rs/sq ft Rs/sq ft

Goregaon 15,000 5,500

Worli 36,000 7,500

Mulund 11,500 4,000

JVLR 14,300 4,500


51

June 24, 2013

Oberoi Realty








NAV/share (Rs) 212 256 308 359 408

Change in NAV (%) ‐31.2 ‐16.9 0.0 16.6 32.5








NAV/share (Rs) 279 293 308 324 338

Change in NAV (%) ‐9.4 ‐4.9 0.0 5.2 9.7





approximately 2.6%.



NAV/share (Rs) 323 316 308 300 292

Change in NAV (%) 4.9 2.6 0.0 ‐2.6 ‐5.2






increase in the discount rate, the NAV would fall by 4%.


WACC rates (%) 12 13 14 15 16

NAV/share (Rs) 338 322 308 295 278

Change in NAV (%) 9.7 4.5 0.0 ‐4.2 ‐9.7


52

June 24, 2013

Oberoi Realty

Relative valuation At Rs200, ORL trades at 6.3x FY15E EPS, which is a discount of 36.4% to the

average P/E of the peer group. On P/BV, ORL is trading at a premium of 10% to

the average FY15E P/BV of peers and at 42.1% discount to its historical cross‐cycle

average P/BV of 1.9x. We believe that these discounts are too high given the debt

free balance sheet and strong free cash flows.




DLF 175 39.8 21.7 1.0 1.0 15.9 12.9 6.4 7.6

Unitech 21 13.0 10.0 0.4 0.4 14.8 10.9 3.4 4.2

Oberoi Realty 200 9.4 6.3 1.4 1.1 6.1 3.9 15.5 19.6

HDIL 34 1.9 1.9 0.1 0.1 4.1 3.5 5.4 6.5




Omaxe 138 14.0 5.1 1.1 0.9 8.7 3.9 8.5 19.5

Anant Raj 54 7.4 7.2 0.4 0.4 8.4 7.6 5.0 5.4


Phoenix Mills 259 26.7 19.3 2.0 1.8 11.8 9.5 7.6 9.6

Kolte Patil 77 4.5 3.7 0.7 0.6 2.2 1.9 15.2 16.6

Average 14.4 9.9 1.1 1.0 9.1 7.0 9.8 12.1


Valuation charts On FY15E P/E of 6.3x, ORL is trading at a 58.6% discount to its historical cross‐

cycle average P/E of 15.2x.





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(Rs)

0.8x

1.5x

2.5x

3x

53

June 24, 2013

Oberoi Realty

Key catalysts

Worli & Mulund launches

ORL has unsold inventory of 9mn sqft as of end FY13 and has planned 4mn sq ft of

new launches over FY14E (Mulund‐3.2mn sqft, Worli gross profit share 0.6mnsqft).

Whilst we forecast the FY14E sales run‐rate from the existing projects to be

maintained at ~0.6mn sq ft, we build in ~0.6mn sq ft addition from proposed

launches in new locations largely contributed by Mulund launch.

Change in product mix can impact margin on upside

Whilst historically ORL margins have been in 55‐60% range owing to low

historical land bank cost and increasing contribution from annuity assets. With the

Worli revenues hitting P&L the margins may expand as the project revenue will be

booked post deduction of construction costs hence the margins will be above

ORL’s EBIDTA margins resulting in positive earnings surprise.

Successful foray outside Mumbai

From being Regional to Top 8 cities realty player aspiration is driving domestic

real estate Companies to diversify outside their core regions. Whilst we believe

that pan India theme has its own challenges we expect ORL to gain 15% sales

volume from new markets (similar to Sobha’s volume contribution from NCR) on

back of its strong brand recall replication.


Correction in property prices

Western markets have 30months of unsold inventory and current property prices

have crossed previous highs making market unaffordable. Whilst ORL is focused

on premium residential developments and has been sticky on holding prices any

correction may be detrimental to our valuation assumptions. For every 1%

correction in base residential prices (exhibit 8), our NAV estimate for ORL will be

negatively impacted by 3%.

Future land bank replenishment

ORL is sitting with cash & cash equivalent of Rs10bn and balance sheet is debt free

and is unleveraged. We assess land replenishment as the key risk owing to ORL’s

conservative track record of new land acquisitions. This may results in ROCE drag

as cash reserves pile up. Whilst the ORL has guided on new land acquisitions

during FY14‐15E any delays can impact future profitability.

Liquidity tightening may result in cash flow pressures

The tightened liquidity scenario has led to developers evaluating current

repayment needs versus new launches. Hence cash flows from existing projects

may be utilized for retiring debt rather than reinvestment in new project launches.

The sustained liquidity tightening may impact new launches and thereby the

momentum in cash flows. Whilst this is a generic risk for the sector, ORL is

relatively unimpacted owing to debt free balance sheet.

54

June 24, 2013

Oberoi Realty




Net sales 8,247 10,476 15,383 23,618

Growth (%) (17.2) 27.0 46.8 53.5

EBITDA 4,835 6,121 9,027 14,056

EBITDA margin (%) 58.6 58.4 58.7 59.5

Growth (%) 1 (0) 0 1

Depreciation 269 285 363 512

EBIT 4,565 5,836 8,665 13,545

Net Interest 3 4 4 4

Other income 1,501 999 710 787

PBT 6,063 6,831 9,371 14,328

Taxes 1,430 1,783 2,405 3,934

Net profit 4,633 5,049 6,966 10,394

Margin (%) 56.2 48.2 45.3 44.0

EPS (Rs) 14.1 15.4 21.2 31.7




Share capital 3,282 3,282 3,282 3,282


Networth 37,341 41,621 48,215 58,001

Deferred tax liability 78 147 147 147

Sources of funds 37,420 41,769 48,362 58,149

Net block 7,009 6,912 9,744 13,300

CWIP 2,841 3,802 3,177 6,641

Goodwill 2,654 2,654 2,654 2,654

Investments 0 0 0 0

Current assets 35,338 39,522 43,038 47,310

Inventory 10,196 12,448 15,029 16,478

Sundry debtors 679 522 889 1,400


Loans & advances 11,529 15,827 16,978 18,184

Current liabilities &

provisions 10,423 11,121 10,250 11,756




55

June 24, 2013

Oberoi Realty



Profit after tax 4,633 5,049 6,966 10,394

Depreciation/amortisation 269 285 363 512

Change in NWC ‐268 ‐1,707 ‐4,870 ‐1,559

Net cash from operations (a) 4,634 3,627 2,459 9,347

(Inc)/dec in investments ‐2,441 0 0 0

Capex ‐985 ‐776 ‐2,942 ‐7,532

Cash flow from inv. (b) ‐3,426 ‐776 ‐2,942 ‐7,532

FCF (a+b) 1,208 2,850 ‐483 1,814

Others (382) (378) (411) (612)

Financial cash flow ( c ) ‐382 ‐378 ‐411 ‐612

Net inc/dec in cash (a+b+c) 826 2,473 ‐895 1,203




EBIDTA margin 58.6 58.4 58.7 59.5

EBIT margin 55.4 55.7 56.3 57.3



Return on equity 13.1 12.8 15.5 19.6


Current ratio (x) 3.4 3.6 4.2 4.0

Net debt/ Equity (x) (0.3) (0.3) (0.2) (0.2)




EPS (Rs) 14.1 15.4 21.2 31.7

Diluted EPS (Rs) 14.1 15.4 21.2 31.7


P/E (x) 14.2 13.0 9.4 6.3

P/BV (x) 1.8 1.6 1.4 1.1

EV/EBITDA (x) 10.9 9.0 6.1 3.9

EV/Sales (x) 6.4 5.2 3.6 2.3






Prestige estates

Bloomberg: PEPL INReuters: PREG.BO BUY


India Research

INITIATION REPORT

Recommendation

CMP: Rs162

Target Price: Rs207

Upside (%) 28%

Stock Information Market Cap. (Rs bn / US$ mn) 53/878



Beta 1.0




Absolute (11.2) (10.8) 28.6 (16.4)

Rel. to Sensex (6.1) (10.2) 17.2 (12.8)

Performance

Source: Bloomberg


022 6184 4311

[email protected]

Varun Chakri

022‐6184 4326

[email protected]

0

50

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Jun‐13

Sensex (LHS) Prestige (RHS)

Plotting a careful trajectoryFollowing a catastrophic summer of negative sectoral news flows, slowing

markets, unaffordability, within the realty sector, the share price of

Prestige Estates (PEPL) has largely been insulated, outperforming Sensex

by 29% on 12M relative basis. Going into FY14, we expect sharp re‐rating

owing to (i) Robust new launch plans of 14mn sqft; (ii) annuity portfolio

nearing maturity by FY15‐16E (iii) likely balance sheet deleveraging and

(iv) stated dividend policy announcement. We initiate coverage with BUY

stance and 28% upside.

Robust residential business and maturing annuity asset base PEPL operationally has a balanced mix of residential & commercial projects

contributing 48% and 52% to our NAV estimates respectively. Moreover

annuity business is likely to mature and stabilize by FY15‐16E and in an

event of slowing residential segment sale the cash flows from commercial

projects lend visibility to earnings and dividends payout. PEPL has been able

to deliver industry ahead residential sales and has 14mn sqft of new launches

planned in FY14E.

Healthy balance sheet; dividend policy key re‐rating trigger PEPL has a relatively healthy balance sheet with FY13 net D/E 0.7x and

which is the level we expect the debt to stabilize. PEPL is evaluating a stated

dividend policy which once approved by Board would yield 5% on current

price (5x jump) and would largely be paid from annuity business cashflows.

High rank on competitive positioning matrix PEPL ranks high in our competitive business mapping of the Southern

developers. Ability to acquire high quality lands, superior brand recall and

relatively healthy access to finance are the key contributing factors.


of Rs207/share. We value the residential real estate at Rs122/share,

commercial annuity assets at Rs132/share and net debt at (Rs47/share). We

believe that the near‐term catalysts are: (i) success of new launch; (ii) new

dividend policy & (iii) annuity business ramp up.

Key risks (i) Unaffordability may lead to a 8‐10% real estate price correction; (ii)

increase in D/E remains key de‐rating trigger




EBITDA 2,966 5,791 7,466 9,037

EBITDA (%) 28.2 29.7 29.1 29.4

Net profift 884 2,941 3,567 4,255

EPS (Rs) 2.5 8.2 10.4 12.5

RoE (%) 4.2 11.8 12.0 12.9

RoCE (%) 7.0 12.3 13.4 14.8

P/E (x) 64.3 19.8 15.5 13.0

P/BV (x) 2.5 2.1 1.9 1.7


57

June 24, 2013

Prestige Estates Projects


Source: Company

FY13 ‐ Consolidated Revenue mix (%)

Source: Company

Promoters,

75.0

FII, 15.6

DII, 7.6

Others , 1.9

Residential ,

79

Annuity , 12

Others , 9

Company Background

Prestige Estate Projects Ltd (PEPL) commenced operations

as a partnership firm on April 1, 1986 and is a leading real

estate player in Southern India with a strong presence in

Bangalore & Chennai. The companyʹs primary focus is to

develop residential, office space, retail, hospitality and

projects in mixed‐use and single‐segment developments.

PEPL floated in October 2010 and raised Rs11.5bn

(US$205mn) by selling 20% of the Company to the public.

PEPL has an enviable delivery track record with mix of

residential and commercial projects. Key marquee

commercial asset include Cessna Park, Forum Malls,

Prestige Shantiniketan, UB City etc. Current commercial

portfolio has leasable area of 10.1mn sqft. PEPL currently

has 58 ongoing projects with an area spanning 47mn sqft.

New launches for FY14E is being pegged at 14mn sqft.



Net sales 19,476 25,670 30,773

EBIDTA 5,791 7,466 9,037

Depreciation 682 891 1,227



PBT 4,256 5,404 6,448

Tax 1,314 1,837 2,192

PAT 2,941 3,567 4,255

Adjusted PAT 2,860 3,656 4,362


EBIDTA Margin % 29.7 29.1 29.4

Adj Net Margin % 14.7 14.2 14.2

P/E (X) 19.8 15.5 13.0

EV/EBIDTA (X) 13.1 10.4 8.7


Cash Flow



Depreciation 682 891 1,227

Others (471) (677) (831)

Change in Wkg Cap (10) 305 (1,477)


Capex (6,533) (4,744) (3,455)

Investments (3,009) (1,000) (1,000)

Others 636 651 661

CF from Investing (8,907) (5,093) (3,794)

Change in Debt 5,557 1,300 600

Inc/(dec) in capital 3,640 ‐ ‐

Interest (1,489) (1,822) (2,023)

Others (390) (642) (766)

CF from Financing 7,317 (1,164) (2,188)

Change in Cash 2,867 (333) (615)

Balance Sheet


Total Assets 54,090 58,494 62,797

Net Fixed Assets 14,611 19,476 27,473


Other Assets 16,558 16,724 12,168


Networth 27,423 30,437 34,033

Debt 23,938 25,238 25,838


Others 110 110 110


ROE % 11.8 12.0 12.9

ROCE % 12.3 13.4 14.8



58

June 24, 2013


Investment Rationale Robust mix of residential and commercial asset base PEPL has well balanced mix of residential development and commercial annuity

income asset base with current operational PEPL lease share of 4.3mnsqft. Based

on our competitive mapping of Southern real estate developers on factors arrived

using top down approach, the key parameters are (i) affordability (ii) health of

markets (iii) residential segment presence (iv) commercial segment presence & (v)

brand premium across key regions.



Markets

Residential

Segment

presence

Commercial

segment

presence

Brand


Sobha

Strong brand, healthy markets strengthen

competitive positioning as a mid‐quartile. Weak

competitive positioning in the commercial segment

a dampener

Prestige

Top quartile in the residential & commercial

segment

Puravankara


Mantri


Brigade



Based on the competitive mapping PEPL stands atop in competitive mapping vs

peers in the Southern India markets.

Annuity assets reaching maturity ‐ leave sufficient headroom for

increase in dividend distribution

PEPL management is working towards having a stated dividend policy over the

FY15‐16E once the Annuity assets achieve maturity and expected annual rental

income generation touches ~Rs5,000mn. PEPL management is internally

evaluating to distribute 50% of rental income about Rs2,500mn as dividend (post

retirement of debt against that) and reinvest the balance for growing rental

business annually. Currently PEPL has a dividend payout of 12% and in case the

stated policy is approved by Board and comes into force the dividend yield on

current price would be 5% vs current yield of ~1%, which shall be a large jump.

Exhibit 2: Annuity rentals growth trajectory

PEPL share FY13 FY14E FY15E FY16E FY17E FY18E

Rental income (Rs mn) 2,289 3,253 3,719 4,728 5,449 5,852

Leaseable area (mn sqft) 5.5 6.4 7.4 7.4 7.4 7.4


59

June 24, 2013


Strong competitive positioning vs peers As highlighted in the thematic section of the note, PEPL is best placed amongst the

Southern peers on account of its ability to tie up superior land banks with the land

owners, access to finance, relatively healthy balance sheet and high annuity

cashflows through the commercial and retail leases. The micro factors are well

supported by strong execution, quality construction & management bandwidth.

We highlight our finding in exhibit 3 to arrive at overall competitive positioning.


Macro

Competitive

‐ 30% weight

Business

Competitive ‐

25% weight

Land bank

& Pricing ‐

20% weight

Balance

Sheet

positioning ‐

25% weight

Overall Comments

Sobha




Prestige



quartile in most of the parameters

Puravankara




Mantri


Brigade




include Sobha, Prestige & Puravankara in Southern markets. PEPL with the right

mix of branding, execution capability, balance sheet strength and underlying

business fundamentals remains best poised amongst the peers. Notwithstanding

their scores differ on these factors we see limited differentiation on an overall

basis.

60

June 24, 2013





Volume assumptions

Residential ‐ Prestige share (mn sqft) 6.0 6.4 5.7 7.5 (11.7)

Strong volume growth in FY14E on back of

14mn sqft new launches, FY15E volume to

remain muted on high prices

Average rate (Rs/sqft) 5,212 5,861 5,783 12.5 (1.3) Average realization higher on account of newer

project being launched at premium

Sales value ‐ Prestige share (Rs mn) 31,221 37,730 32,885 20.8 (12.8) 2.6% FY13‐15E sales CAGR

Rental Income

Gross area for lease (mnsf) 10.1 12.2 14.3 20.9 17.3

Cessna B7, Exora and the Forum Vijaya,

Mangalore & Sujana malls to contribute to

incremental leasing

Prestige Share (mnsf) 5.5 6.4 7.4 16.9 15.5 Share split across economic interest

Prestige leased space (mnsf) 4.26 5.1 5.9 19.7 15.9 Assuming 80% leasing

Average Rental (Rs/sqft/month) 45 53 52 18.7 (1.4) Rental growth in line with product mix

Rental income (Rs mn) 2,288.7 3,252.5 3,719.0 42.1 14.3 27% FY13‐15E sales CAGR

Earnings forecast

Residential Sales (Rs mn) 15,343 20,104 24,589 31.0 22.3 26.5% CAGR for FY13‐15E on back of robust

sales

Rental income (Rs mn) 2,289 3,253 3,719 42.1 14.3 In line with new lease addition discussed

above

Others (Rs mn) 1,844 2,314 2,465 25.5 6.5 Mix of facilities maintenance revenue &

hospitality segment



EBIDTA Margin (%) 29.7 29.1 29.4 (65.1bps) 28.2bps Margins to remain muted

Net interest expense* 1,489 1,822 2,023 22.4 11.0 Interest increase in line with Capex

PAT (Rs mn) 2,860 3,656 4,362 27.8 19.3 23.5% CAGR for FY13‐15E

PAT Margin (%) 14.7 14.2 14.2 (44.1bps) (6.7bps) Decrease in PAT margins due to increase in tax

rate assumption

EPS (Rs) 8.6 10.4 12.5 27.8 19.3

Cash flows forecast

CFO ‐ a 4,457 5,923 5,367

CFI ‐ b (8,907) (5,093) (3,794)

FCF ‐ a+b (4,450) 830 1,573

Adjusted for interest amount, FCF is (Rs992mn)

for FY14E and (Rs449mn) for FY15E

CFF‐c 7,317 (1,164) (2,188)

Total change in cash ‐ a+b+c 2,867 (333) (615)


61

June 24, 2013




Sales (Rs mn)

FY14E 25,156 25,670 2.0

FY15E 31,668 30,773 (2.8)

EBITDA (Rs mn)

FY14E 7,759 7,466 (3.8)

FY15E 9,777 9,037 (7.6)

Net Profit (Rs mn)

FY14E 3,789 3,656 (3.5)

FY15E 5,029 4,362 (13.3)


Whilst for FY14E our headline numbers are marginally ahead consensus, our

FY15E numbers are sub‐consensus. Our EBITDA margin forecast is marginally

lower than consensus (on account of cost overruns in projects nearing completion),

while our absolute EBITDA growth is sub consensus. Drilling down further, our

reasons for lower margins are (a) we build in cost overruns in projects nearing

completion; (b) slow pick up in commercial/retail space which has high EBIDTA

margins; lower occupancy shall impact margins negatively. Net profit estimates

are below consensus on account of higher interest and tax rate assumptions.

62

June 24, 2013


Valuation

SOTP Valuation We have adopted DCF methodology to arrive at PEPL’s NAV/share. We value the

residential real estate business at Rs113/share, commercial annuity assets at

Rs69/share, retail assets at Rs52/share, hospitality & project management at

Rs18/share, net deposits to land owners at Rs2/share and reduce net debt at

Rs47/share to arrive at total SOTP valuation of Rs207/share for the Company. We

don’t ascribe any NAV discount to PEPL as we have only valued the projects

which have visibility over the next 5years. For land bank beyond 5 years we have

valued at current market rates.





Gross NAV Retail 18,367 52 NAV based on the methodology discussed

Hospitality, Project Management 6,134 18 8x FY15E EV/EBIDTA

Other Assets 850 2 Net deposits to land owners

Less: Net Debt (16,553) (47) no debt hence the FY14E cash get added

NAV 72,488 207



We have divided PEPL’s entire land bank into residential projects (based on

the information given by the company)











NAV of the company

For commercial office/retail space we have discounted rentals using 14%

WACC for the forecasted period and terminal value using the cap rate of 11%




63

June 24, 2013







Discount rate 14%




Tax rate (%) 34%




prevailing prices.



Rs/sq ft Rs/sq ft

Bangalore 4,500‐10,000 2,000‐3,000

Chennai 4,500‐5,500 2,000‐2,200

Kochi 5,000‐7,500 2,200 ‐2,500

Hyderabad 4,500‐5,500 2,000‐2,200


64

June 24, 2013






base price assumptions), the NAV would change by approximately 2.6%.



NAV/share (Rs) 154 179 207 234 260

Change in NAV (%) ‐25.8 ‐13.5 0.0 13.2 25.6








NAV/share (Rs) 186 196 207 218 229

Change in NAV (%) ‐10.3 ‐5.2 0.0 5.3 10.7





approximately 2.9%.



NAV/share (Rs) 219 213 207 201 196

Change in NAV (%) 5.9 2.8 0.0 ‐2.9 ‐5.3








WACC rates (%) 12 13 14 15 16

NAV/share (Rs) 223 215 207 199 191

Change in NAV (%) 7.8 3.7 0.0 ‐3.9 ‐7.7


65

June 24, 2013


Relative valuation At Rs162, PEPL trades at 13x FY15E EPS, which is a premium of 31% to the

average P/E of the peer group. On P/BV, PEPL is trading at a premium of 70% to

the average FY15E P/BV of peers and at 5% discount to its historical cross‐cycle

average P/BV of 1.7x.




DLF 175 39.8 21.7 1.0 1.0 15.9 12.9 6.4 7.6

Unitech 21 13.0 10.0 0.4 0.4 14.8 10.9 3.4 4.2

Oberoi Realty 200 9.4 6.3 1.4 1.1 6.1 3.9 15.5 19.6

HDIL 34 1.9 1.9 0.1 0.1 4.1 3.5 5.4 6.5




Omaxe 138 14.0 5.1 1.1 0.9 8.7 3.9 8.5 19.5

Anant Raj 54 7.4 7.2 0.4 0.4 8.4 7.6 5.0 5.4


Phoenix Mills 259 26.7 19.3 2.0 1.8 11.8 9.5 7.6 9.6

Kolte Patil 77 4.5 3.7 0.7 0.6 2.2 1.9 15.2 16.6

Average 14.4 9.9 1.1 1.0 9.1 7.0 9.8 12.1


Valuation charts On FY15E P/E of 13x, PEPL is trading at a 31% discount to its historical cross‐cycle

average P/E of 19x.





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June 24, 2013


Key catalysts

Robust residential launches of 14mn sqft in FY14E

After a robust FY13 wherein PEPL had launched 10.4mn sqft and booked new

sales of 6mn sqft the Company has guided for 14mn sqft of new launches in

FY14E. New launches will have a lion share from two projects (83% of total area)

in Bangalore, namely Prestige Lakeside Habitat & Prestige Sunrise Park

encompassing a total saleable area PEPL share of 5.9mn sqft and 3.3mn sqft

respectively. Whilst we forecast 6.4mn sqft of new sales in FY14E, PEPL implied

new sales stacks upto 8mn sqft (at Rs5,000/sqft of realization), a 25% positive

deviation and a key re‐rating trigger.

Ramp up in annuity business income makes way to increase in

dividend distribution

PEPL expects to improve the Rental income from Commercial and Retail assets

with new asset addition in Cessna Business Park B7, Forum Malls – Vijaya,

Mangalore & Sujana. This shall lead to incremental rental income additions of

Rs1,184mn a growth of 51%. The maturing annuity business remains in a key

trigger for the ramp up of dividends to the investors and also a pause towards new

incremental Capex plans. PEPL expects to fund new Commercial capex from

FY16E onwards by reinvesting 50% of the rental income (Rs5,000mn) and balance

50% is envisaged to be distributed as shareholders dividend.


Oversupply may result in property price correction

High unsold real estate inventory and aggressive launch plans (4x of what they

have launched over past 2‐3 years) of the Southern real estate developers may lead

to an oversupply situation in the Southern real estate market. Whilst affordability

in South is still reasonable (real estate prices are still marginally off from their

previous peak of FY08) an oversupply situation can lead to a 0‐5% price correction.

PEPL has been delivering above average industry absorption and has been the

largest contributor to new supply in Bangalore. Any drop in realization could be

margin dilutive, more so with high input costs. Hence this may result in sharp

financial and stock price underperformance. For every 1% correction in base

residential prices (exhibit 9), our NAV estimate for PEPL will be negatively

impacted by 2.6%.

Aggressive launches may lead to debt inching up

PEPL has 14mn sqft residential pipeline in FY14E and in quest to growth may have

to guide a higher launch schedule for FY15E. This will result in new land bank

addition and hence need for debt finance resulting in D/E moving up. This may be

a key de‐rating trigger for the stock.






momentum in cash flows.

67

June 24, 2013





Net sales 10,523 19,476 25,670 30,773

Growth (%) (31.8) 85.1 31.8 19.9

EBITDA 2,966 5,791 7,466 9,037

EBITDA margin (%) 28.2 29.7 29.1 29.4

Growth (%) (21) 95 29 21

Depreciation 605 682 891 1,227

EBIT 2,361 5,109 6,575 7,809

Net Interest 1,193 1,489 1,822 2,023

Other income 342 636 651 661

PBT 1,510 4,256 5,404 6,448

Taxes 626 1,314 1,837 2,192

Net profit 884 2,941 3,567 4,255

Minority interest (7) 48 89 106

Share of associates (65) (33) 178 213

Adjusted Profit 826 2,860 3,656 4,362

Margin (%) 7.8 14.7 14.2 14.2

EPS (Rs) 2.5 8.2 10.4 12.5

EPS Growth (%) (57.1) 224.5 27.8 19.3




Share capital 3,281 3,500 3,500 3,500


Networth 21,510 27,423 30,437 34,033

Debt 18,381 23,938 25,238 25,838



Sources of funds 42,678 54,090 58,494 62,797

Net block 13,863 14,611 19,476 27,473

CWIP 5,216 10,319 9,306 3,537

Goodwill 1,600 4,490 4,490 4,490

Investments 1,740 1,750 2,928 4,141

Current assets 36,964 41,383 40,486 42,455

Inventory 15,662 17,408 15,934 17,597

Sundry debtors 8,490 8,010 8,411 8,831


Loans & advances 10,799 11,085 11,595 12,095





68

June 24, 2013





Depreciation/amortisation 605 682 891 1,227

Interest 1,193 1,489 1,822 2,023

Non oper. Income (299) (646) (661) (661)

Taxes (1,041) (1,314) (1,837) (2,192)

Change in NWC 389 ‐10 305 ‐1,477


(Inc)/dec in investments ‐2,457 ‐3,009 ‐1,000 ‐1,000

Capex ‐3,805 ‐6,533 ‐4,744 ‐3,455

Interest/dividend income 11 636 651 661

Cash flow from inv. (b) ‐6,250 ‐8,907 ‐5,093 ‐3,794

FCF (a+b) ‐3,893 ‐4,450 830 1,573

Inc/(dec) in capital (15) 3,640 ‐ ‐

Inc/dec in loans 3,639 5,557 1,300 600

Interest (1,090) (1,489) (1,822) (2,023)

Dividend (456) (491) (642) (766)

Others 149 101 0 0

Financial cash flow ( c ) 2,226 7,317 ‐1,164 ‐2,188

Net inc/dec in cash (a+b+c) ‐1,666 2,867 ‐333 ‐615




EBIDTA margin 28.2 29.7 29.1 29.4

EBIT margin 22.4 26.2 25.6 25.4





Current ratio (x) 2.2 2.2 2.2 2.2

Net debt/ Equity (x) 0.8 0.695 0.7 0.6




EPS (Rs) 2.5 8.2 10.4 12.5

Diluted EPS (Rs) 2.5 8.2 10.4 12.5


P/E (x) 64.3 19.8 15.5 13.0

P/BV (x) 2.5 2.1 1.9 1.7

EV/EBITDA (x) 23.4 13.1 10.4 8.7

EV/Sales (x) 6.6 3.9 3.0 2.6


Debtor days 309 155 117 102



Real Estate June 24, 2013

Phoenix Mills

Bloomberg: PHNX INReuters: PHOE.BO BUY


India Research

INITIATION REPORT

Recommendation

CMP: Rs259

Target Price: Rs315

Upside (%) 22%




Beta 0.8




Absolute (5.2) (0.9) 46.8 0.5

Rel. to Sensex 0.3 (0.3) 33.8 4.9

Performance

Source: Bloomberg


022 6184 4311

[email protected]

Varun Chakri

022‐6184 4326

[email protected]

150

200

250

300

15,000

17,000

19,000

21,000

Jun‐12

Aug‐12

Sep‐12

Oct‐12

Dec‐12

Jan‐13

Feb‐13

Apr‐13

May‐13

Jun‐13

Sensex (LHS) Phoenix Mills (RHS)

The right ingredients Over the past 6 months Phoenix Mills (PML) share price has outperformed

Sensex by 11%, owing to (i) improving annuity income; (ii) successful

Bangalore launches and (iii) no incremental Capex. Despite such an

outperformance we initiate coverage with a BUY because of PML’s strong

annuity asset base, balance sheet deleveraging and upcoming launches.

Assets maturity to yield strong cash‐flow; Capex largely over PML has a well placed city centric annuity assets which derive value from

increasing end user consumption. PML marquee asset High Street Phoenix is

seeing strong growth traction and with 0.4mn sqft retail space renewals over

next 2years, we expect sharp uptick in average rental/sqft/month as these will

largely be on revenue share. The market cities in Pune, Chennai, Bangalore

and Kurla are now stabilizing. We expect a 26.2% rental income CAGR FY13‐

15E largely driven by Chennai addition.

Residential launches to support cash‐flow mismatch PML has 3mn sqft of new launches spanning FY14‐15E with a Rs32bn sales

potential. The profits from the residential segment (expected ~Rs9.6bn

contribution to EBIDTA over FY14‐18E) shall help provide support to the

initial cash‐flow mismatch in the annuity business. Whilst we forecast Market

Cities to service their debt by FY16E, Shangrila Hotel remains a key concern

area as we expect it to be cash breakeven by FY15E and PBT breakeven by

FY17‐18E. PML will need to provide equity support to service Shangrila debt.

Balance sheet health to improve; debt peaked out With annuity assets getting operational (except for Courtyard Agra, Luxury

Mall in Chennai), Capex is now behind PML. The debt has peaked at Rs30‐

32bn and economic interest is still lower at ~Rs20bn. We expect the

deleveraging to happen from FY15E onwards wherein free cash surplus may

be utilized for retiring debt.


of Rs315/share. We believe that the near‐term catalysts are: (i) Success of

residential launch; (ii) improvement in Shangrila occupancy rates.

Key risks i) Slowdown in consumption; (ii) Future land bank replenishment.


Y/E Mar ( Rs mn) FY12 FY13 FY14E FY15E


EBITDA 2,114 2,632 5,711 7,302

EBITDA (%) 57.7 56.0 51.6 52.7

Net profit 864 813 1,370 1,894

EPS (Rs) 7.3 5.8 9.8 13.6

RoE (%) 5.7 4.7 7.6 9.6

RoCE (%) 7.4 8.0 11.6 12.7

P/E (x) 36.1 45.3 26.7 19.3

P/BV (x) 2.2 2.1 2.0 1.8


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June 24, 2013

Phoenix Mills


Source: Company


Source: Company

Promoters,

65.9

FII, 22.8

DII, 5.3

Others , 6.0

Residential ,

5

Hospitality ,

1 Annuity, 75

Services, 18

Company Background

Phoenix Mills Ltd (PML) was incorporated in the year 1905

and began operations as a textile manufacturing company

on 17.3acres land at Lower Parel in Mumbai, which now

houses the marquee High Street Phoenix. In the year 1987,

PML entered into growing Indian real estate market. The

companyʹs primary focus is to develop retail, hospitality and

residential projects in mixed‐use and single‐segment

developments. PML has an enviable delivery track record

with key marquee retail asset including HSP, Markets cities

in Pune, Bangalore, Kurla & Chennai and residential project

spanning across Bangalore, Pune & Chennai. Current

commercial portfolio has leasable area of 5.9mn sqft with net

lease rentals of Rs4.7bn annually. On residential side the

residual unsold inventory is 3mn sqft. PML has completed

the CAPEX cycle on the lease side of business and is now

looking towards stabilizing the annuity rental stream.



Net sales 4,699 11,078 13,866

EBIDTA 2,632 5,711 7,302

Depreciation 474 1,268 1,452



PBT 1,248 2,058 2,886

Tax 428 688 992

PAT 820 1,370 1,894

Adjusted PAT 842 1,427 1,974


EBIDTA Margin (%) 56.0 51.6 52.7

Adj Net Margin (%) 17.9 12.9 14.2

P/E (x) 45.3 26.7 19.3

EV/EBIDTA (x) 21.8 11.8 9.5


Cash Flow

FY13 FY14E FY15E


Depreciation 474 1,268 1,452

Others 432 1,697 1,972

Change in Wkg Cap (2,069) 251 1,390

CF from Operations 90 5,280 7,706

Capex (4,510) (600) (700)

Investments (394) (250) (500)

Others 521 453 430

CF from Investing (4,383) (397) (770)

Change in Debt 5,062 (1,500) (3,500)

Interest (1,430) (2,838) (3,394)

Others 345 ‐ ‐


Change in Cash (316) 545 43

Balance Sheet


Total Assets 41,861 53,636 57,537

Net Fixed Assets 27,837 39,020 43,717


Other Assets 7,223 7,523 8,073


Networth 18,059 19,486 21,460

Debt 20,026 30,426 32,426


Others (477) (477) (477)


ROE % 4.7 7.6 9.6

ROCE % 8.0 11.6 12.7



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June 24, 2013

Phoenix Mills


Assets maturity to yield strong cash‐flow; Capex largely

over PML has a well placed city centric annuity assets which derive value from

increasing end user consumption. PML marquee asset High Street Phoenix (HSP)

is seeing strong growth traction and with 0.4mn sqft retail space renewals over

next 2years, we expect sharp uptick in average rental/sqft/month as these will

largely be on revenue share. HSP recorded rental of Rs202/sqft/month during FY13

and Rs Rs212/sqft/month during 4QFY13. We expect HSP to record a rental of

Rs225/sqft/month during FY14E. The market cities in Pune, Chennai, Bangalore

and Kurla are now stabilizing. We expect a 26.2% rental income CAGR FY13‐15E

largely driven by Chennai addition.

Exhibit 1: Annuity assets portfolio

Asset Status Value (Rs/share) FY14E ‐ Rental

Income (Rs mn)

High Street Phoenix Operational 187 2,427

Market City ‐ Kurla Operational 16 1,098

Market City ‐ Pune Operational 44 822

Market City ‐ Bangalore East Operational 46 729

Market City ‐ Chennai Operational 51 1,000

Shangri‐La Hotel, HSP Operational 28 739

Total 372 6816

Source: Company, Karvy Research Estimate

Residential launches to support cash‐flow mismatch PML has 3mn sqft of new launches spanning FY14‐15E with a Rs32bn sales

potential. The profits from the residential segment (expected ~Rs9.6bn contribution

to EBIDTA over FY14‐18E, assuming a 30% EBIDTA margins on the residential

sales) shall help provide support to the initial cash‐flow mismatch in the annuity

business. Whilst we forecast Market Cities to service their debt by FY16E,

Shangrila Hotel remains a key concern area as we expect it to be cash breakeven by

FY15E and PBT breakeven by FY17‐18E. PML will need to provide equity support

to service Shangrila debt. PML is targeting new launches catering to the luxurious

segment any significant slowdown real estate sector may have serious implication

on new sales and hence balance sheet health.

Exhibit 2: Residential segment potential

New Launches Saleable Area (mn sqft) Sale potential (Rs mn)

Bangalore West 1 10,500

Bangalore East 0.4 2,600

Pune 0.4 5,000

Orion Park 0.4 4,000

Gracework 0.45 5625

Chennai 0.41 4305

Total 3.06 32,030

EBIDTA Potential @ 30% margin 9,609


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June 24, 2013

Phoenix Mills

Balance sheet health to improve; debt peaked out With annuity assets getting operational (except for Courtyard Agra, Luxury Mall

in Chennai), Capex is now largely behind PML. We expect the debt to peak out

during FY15E which will have a full impact of the Shangrila, new luxury mall in

Chennai, Courtyard Agra etc. From FY15E onwards we expect the deleveraging to

happen wherein free cash surplus may be utilized for retiring debt. PML will hit

peak debt/equity of 1.51x during FY15E which shall see a meaningful reduction

from FY16E onwards resulting in debt/equity coming reducing to 1.19x.

Residential segment cash‐flows such accelerate balance sheet deleveraging.

Exhibit 3: D/E movement

Rs mn FY12 FY13 FY14E FY15E FY16E

Debt 14,964 20,026 30,426 32,426 28,926

Networth 17,105 18,059 19,486 21,460 24,263

D/E (x) 0.87 1.11 1.56 1.51 1.19


Revenue share brings non‐linearity in growth During Jan‐13, top 10 stores in HSP generated rentals in the range of Rs600‐

1,400/sqft due to revenue share vs Rs212/sqft/month for 4QFY13. Whilst we have

conservative assumptions on the rental growth guided by contractual agreements

the newer license fee renewals in HSP are happening where minimum guarantees

are averaging over Rs350/sqft/month. The revenue share owing to non‐linear

consumption shall reflect on the rental and outperform our conservative growth

assumptions. In our sensitivity of base rentals every 5% increase in base rental

results in 14% increase in our PML NAV/share. With 0.4mn sqft new renewals

coming in HSP over FY14‐15E the rental movement remains key value driver.

Exhibit 4: Rental income movement

Rs mn FY13 FY14E FY15E FY16E FY17E

Rental Income 3,826 5,326 5,573 6,074 6,181

Growth % 93.7 39.2 4.6 9.0 1.8


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Phoenix Mills




Volume assumptions

Residential (mn sqft) 1.6 1.5 1.4 (3.2) (10.0)Bangalore (W), Pune, Orion Park key project driving

dev. Co. segment

Average rate (Rs/sqft) 8,303 10,367 11,444 24.9 10.4

Bangalore (W), Pune project have Rs10,000‐14,000/sqft

expected launch price and drive the realization

growth

Sales value (Rs mn) 12,870 15,550 15,450 20.8 (0.6) 9.5% FY13‐15E sales CAGR

Rental Income

Area for lease (msf) ‐ 100% share 5.9 5.9 5.9 ‐ ‐ No new additions as the CAPEX is largely behind

PML

Net Rental Income (Rs mn) ‐ 100% share 4,286 6,424 6,829 49.9 6.3

Addition of Chennai Market City driving rental

income, Kurla market city also included only for

Gross rental purposes

Net Rental Income (Rs mn) ‐ PML share 3,611 4,687 4,898 29.8 4.5 Rental share from economic interest perspective

Earnings forecast

Sales real estate (Rs mn) 245 3,516 5,558 1,335.3 58.0

Sharp increase in residential revenue on account of

revenue recognition from Bangalore (W) project and

Commercial project

Income from hospitality 58 1,130 1,577 1,848.2 39.6 Increasing occupancy & inventory in Shangrila to

contribute increase in revenue share

Annuity assets 3,529 5,326 5,573 50.9 4.6 Full year impact of Chennai Market City

Services 867 1,105 1,158 27.5 4.8 In line with increase in occupancy



EBIDTA Margin (%) 56.0 51.6 52.7 (445.4) 110.6Margin decrease on account of lower margins in

residential and Hospitality segments

Net interest expense* 1,430 2,838 3,394 98.5 19.6 Sharp increase on account of Chennai, Shangrila debt

consolidation

PAT (Rs mn) 842 1,427 1,974 69.5 38.4 53.1% CAGR for FY13‐15E

PAT Margin (%) 17.9 12.9 14.2 (503.0) 136.1Decrease in PAT margins owing to lower EBIDTA

margins and higher interest expense

EPS (Rs) 5.8 9.8 13.6 69.5 38.4

Cash flows forecast

CFO ‐ a 90 5,280 7,706

CFI ‐ b (4,383) (397) (770)

FCF ‐ a+b (4,293) 4,882 6,937

Free cash flow. Adjusted for interest amount, FCF is

Rs2bn for FY14E and Rs3.5bn for FY15E

CFF‐c 3,977 (4,338) (6,894)

Total change in cash ‐ a+b+c (316) 545 43


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Phoenix Mills



Sales (Rs mn)

FY14E 9,090 11,078 21.9

FY15E 11,368 13,866 22.0

EBITDA (Rs mn)

FY14E 4,551 5,711 25.5

FY15E 5,971 7,302 22.3

Net Profit (Rs mn)

FY14E 1,769 1,427 (19.4)

FY15E 2,638 1,974 (25.2)


Whilst our revenue and EBIDTA numbers are ahead of consensus by 22‐25%, our

net profit estimates are 20‐25% sub‐consensus. We believe that consensus is yet not

factoring revenue recognition from the residential sales achieved in the

Bangalore(W) & Kurla commercial project besides incremental contribution from

the Chennai Market City and Shangrila Hotel. These two asset along with the

residential sales makes our forecast higher vs the consensus. The contribution of

new sales and EBIDTA doesnʹt translate into profitability owing to sharp increase

in debt rising ~52% YoY on account of new assets commissioning leading to ~98%

YoY growth in interest expenses to Rs2,838mn during FY14e. Our EBITDA margin

forecast is marginally ahead of consensus (on account of high margins rental assets

additon). PML has indicated that it shall be declaring consolidated number on Half

yearly basis, we expect high volatility in half yearly profitability as new assets

addition may result in interest costs being higher than the assets EBIDTA as

Shangrila is yet to be PAT breakeven owing to a slower ramp up in occupancy. We

may see a downward risk to our FY14E numbers in case of no meaningful pick up

in occupancy rates.

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June 24, 2013

Phoenix Mills

Valuation SOTP Valuation We have adopted DCF methodology to arrive at PML’s NAV/share. We value the

real estate business (Annuity + Residential) at Rs396/share, hotels at Rs28/share,

other assets at Rs25/share and net debt at (Rs135/share) to arrive at total SOTP

valuation of Rs315/share for the Company. We don’t ascribe any NAV discount to

PML as we have only valued the projects which have visibility over the next

5years. Besides the current land bank will get launched over FY14‐16E.



Gross NAV Real estate 57,418 396 NAV based on the methodology discussed

Gross NAV Hotels 4,050 28 NAV based on the methodology discussed

Others 3,655 25

Total 65,122 450

Less: Net Debt 19,567 135 end FY14E net debt ‐ PML economic share

NAV 45,555 315



We have divided PML’s entire land bank into residential projects (based on the












NAV of the company

For commercial office we have discounted rentals using 14% WACC for the

forecasted period and terminal value using the cap rate of 11%




We have not ascribed any NAV discount as the current land bank has only

next 3‐5yrs visibility on the residential side and beyond that PML is a annuity

based assets driven company

Location Gross NAV

(Rs mn)

Rs/

Share

High Street Phoenix 27,115 187.2

Market City ‐ Pune 6,398 44.2

Market City ‐ Chennai 7,330 50.6

Market City ‐

Bangalore West 4,838 33.4

Market City ‐

Bangalore East 6,700 46.3

Market City ‐ Kurla 2,283 15.8

BARE 2,330 16

EBDPL 1,585 11

Shangrila Hotel 4,050 28

Others 662 5

Phoenix Hospitality 1,832 13

Total 65,122 450

Less: Net Debt 19,567 135

NAV 45,555 315


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June 24, 2013

Phoenix Mills






Discount rate 14%




Tax rate (%) 34%



pricing assumptions are at a 20‐25% premium to the current prevailing prices on

account of PML brand premium vs peers and these projects being largely high end

premium developments.


Location Prices

Rs/sq ft

Cost

Rs/sq ft

Bangalore West ‐ Malleswaram 7,000‐11,500 3,000

Bangalore East ‐ Whitefield 6,500‐7,000 2,500

Pune 12,500‐14,000 4,000

Chennai 6,500‐12,500 3,000

Mumbai ‐ Orion Park 9,500‐10,500 3,500


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June 24, 2013

Phoenix Mills








NAV/share (Rs) 226 269 315 360 405

Change in NAV (%) ‐28 ‐15 0 14 29





increase by approximately 4.1%.



NAV/share (Rs) 290 302 315 328 341

Change in NAV (%) ‐7.9 ‐4.1 0.0 4.1 8.3





approximately 2.2%.



NAV/share (Rs) 328 322 315 308 302

Change in NAV (%) 4.1 2.2 0.0 ‐2.2 ‐4.1








WACC rates (%) 12 13 14 15 16

NAV/share (Rs) 346 330 315 300 285

Change in NAV (%) 9.7 4.8 0.0 ‐4.9 ‐9.5


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June 24, 2013

Phoenix Mills

Relative valuation At Rs259, PML trades at 19.3x FY15E EPS, which is a premium of 95% to the

average P/E of the peer group, though PML is a pureplay retail story and not

comparable to real estate peer on like to like basis. On P/BV, PML is trading at a

premium of 80% to the average FY15E P/BV of peers and at 12% premium to its

historical cross‐cycle average P/BV of 1.6x.




DLF 175 39.8 21.7 1.0 1.0 15.9 12.9 6.4 7.6

Unitech 21 13.0 10.0 0.4 0.4 14.8 10.9 3.4 4.2

Oberoi Realty 200 9.4 6.3 1.4 1.1 6.1 3.9 15.5 19.6

HDIL 34 1.9 1.9 0.1 0.1 4.1 3.5 5.4 6.5




Omaxe 138 14.0 5.1 1.1 0.9 8.7 3.9 8.5 19.5

Anant Raj 54 7.4 7.2 0.4 0.4 8.4 7.6 5.0 5.4


Phoenix Mills 259 26.7 19.3 2.0 1.8 11.8 9.5 7.6 9.6

Kolte Patil 77 4.5 3.7 0.7 0.6 2.2 1.9 15.2 16.6

Average 14.4 9.9 1.1 1.0 9.1 7.0 9.8 12.1


Valuation charts On FY15E P/E of 13x, PML is trading at a 57% discount to its historical cross‐cycle

average P/E of 30x.





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June 24, 2013

Phoenix Mills

Key catalysts

Success of new residential launches

PML has planned 3mn sq ft of new launches over FY14‐15E (Bangalore ‐ 1.4mn

sqft, Chennai ‐ 0.4mn, Pune ‐ 0.4mn sqft). We forecast the FY14E sales at 1.4mn sqft

and value at Rs15.5bn. Since the bulk of the new launches are in the premium

segment the success of new launches remains key re‐rating trigger.

Pick up in Shangrila occupancy

Shangri‐La Hotel became operational during 4QFY13 and recorded a 54% average

monthly occupancy and Rs9,574 ARR. Currently about 200 rooms have been

opened and PML expects to take the total room count to 398 by FY14E end. Any

meaningful pick up in the occupancy rates shall result in stock re‐rating as

currently it is incurring losses.


Correction in property prices

Whilst PML is focused on premium residential developments and has been sticky

on holding prices any correction may be detrimental to our valuation assumptions.

For every 1% correction in base residential prices (exhibit 10), our NAV estimate

for PML will be negatively impacted by 1% as residential remains a finite business

segment for PML with no long term sustenance.

Slowdown in consumption

PMLʹs annuity business model is derivative of underlying consumption demand.

Any sharp slowdown in the economy and deterioration in the macro‐environment

can have a deafening impact on consumption and hence the rental revenue. For

every 1% correction in base rental prices (exhibit 10), our NAV estimate for PML

will be negatively impacted by 3%.

Future land bank replenishment

PMLʹs current land bank of 3mn sqft will get exhausted by FY16E, post that PML

remains an Annuity revenue driven Company. In absence of any meaningful land

bank on the residential side the stock may get de‐rated.






momentum in cash flows.

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June 24, 2013

Phoenix Mills




Net sales 3,666 4,699 11,078 13,866

Growth (%) 74.4 28.2 135.7 25.2

EBITDA 2,114 2,632 5,711 7,302

EBITDA margin (%) 57.7 56.0 51.6 52.7

Growth (%) 251 239 306 245

Depreciation 563 474 1,268 1,452

EBIT 1,551 2,158 4,443 5,850

Net Interest 944 1,430 2,838 3,394

Other income 446 521 453 430

Exceptional items ‐ 7 ‐ ‐

PBT 1,053 1,242 2,058 2,886

Taxes 189 428 688 992

Net profit 864 813 1,370 1,894

Minority interest 100 17 51 74

Share of associates 93 11 6 6

Adjusted Profit 1,056 842 1,427 1,974

Margin (%) 28.8 17.9 12.9 14.2

EPS (Rs) 7.3 5.8 9.8 13.6

EPS Growth (%) 25.4 (20.3) 69.5 38.4




Share capital 290 290 290 290


Networth 17,105 18,059 19,486 21,460

Debt 14,964 20,026 30,426 32,426


Deferred tax liability (247) (477) (477) (477)

Sources of funds 35,388 41,861 53,636 57,537

Net block 11,880 27,837 39,020 43,717

CWIP 13,591 1,670 1,720 1,770

Investments 4,869 5,554 5,804 6,304

Current assets 10,542 14,360 18,257 19,900

Inventory 2,516 7,770 8,770 9,770

Sundry debtors 618 846 946 1,046

Cash & bank balance 1,000 683 1,228 1,271

Loans & advances 6,409 5,061 7,313 7,813





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June 24, 2013

Phoenix Mills




Depreciation/amortisation 563 474 1,268 1,452

Interest 944 1,430 2,838 3,394

Non oper. Income (357) (521) (453) (430)

Taxes (438) (478) (688) (992)

Change in NWC 2,057 ‐2,069 251 1,390

Net cash from operations (a) 3,822 90 5,280 7,706

(Inc)/dec in investments ‐2,279 ‐394 ‐250 ‐500

Capex ‐6,640 ‐4,510 ‐600 ‐700

Others 339 521 453 430

Cash flow from inv. (b) ‐8,581 ‐4,383 ‐397 ‐770

FCF (a+b) ‐4,759 ‐4,293 4,882 6,937

Inc/(dec) in capital 1,288 ‐ ‐ ‐

Inc/dec in loans 5,282 5,062 (1,500) (3,500)

Interest (1,422) (1,430) (2,838) (3,394)

Others (205) 345 ‐ ‐

Financial cash flow ( c ) 4,943 3,977 ‐4,338 ‐6,894

Net inc/dec in cash (a+b+c) 184 ‐316 545 43




EBIDTA margin 57.7 56.0 51.6 52.7

EBIT margin 42.3 45.9 40.1 42.2





Current ratio (x) 1.9 1.9 1.6 1.4

Net debt/ Equity (x) 0.8 1.1 1.5 1.5




EPS (Rs) 7.3 5.8 9.8 13.6

Diluted EPS (Rs) 7.3 5.8 9.8 13.6


P/E (x) 36.1 45.3 26.7 19.3

P/BV (x) 2.2 2.1 2.0 1.8

EV/EBITDA (x) 24.6 21.8 11.8 9.5

EV/Sales (x) 14.2 12.2 6.1 5.0





Infrastructure June 24, 2013

Sobha Developers

Bloomberg: SOBHA INReuters: SOBH.BO BUY


India Research

INITIATION REPORT

Recommendation

CMP: Rs382

Target Price: Rs495

Upside (%) 30%




Beta 1.0




Absolute (7.8) 0.4 20.2 0.5

Rel. to Sensex (1.3) 0.5 9.0 4.0

Performance

Source: Bloomberg


022 6184 4311

[email protected]

Varun Chakri

022‐6184 4326

[email protected]

150

250

350

450

550

15,500

17,500

19,500

21,500

Jun‐12

Jul‐12

Sep‐12

Oct‐12

Nov‐12

Jan‐13

Feb‐13

Mar‐13

May‐13

Jun‐13

Sensex (LHS) SOBHA

The Southern ArchitectOver the past 6 months Sobha Developers’ (SDL) share price has fallen by

1.3%, owing to (i) generic factors bedeviling the Real Estate sector; (ii)

muted FY13 performance and (iii) likely oversupply in the Southern

market. In spite of this we initiate coverage with a BUY because of SDL’s

strong competitive positioning, healthy balance sheet, geographical

diversification and upcoming strong launch pipeline.

Best placed v/s Southern peers Sobha stands out as a leader in our competitive business mapping of the

Southern developers. High land bank quality and quantity, superior brand

recall and relatively healthy access to finance are the key contributing factors.

We expect SDL to capture incremental market share outside home location

and deliver above industry average growth

IT/ITES‐centric land bank key value driver SDL is the largest Southern region real estate developer with 231mn sq ft of

saleable area. SDL’s land bank is well spread with IT/ITES‐driven locations in

Bangalore, Chennai, Kochi, Pune and Mysore contributing 78% to the land

bank and 84% to the NAV (as highlighted in exhibit 3).

Strong balance sheet recovery augurs well for growth Sobha has de‐leveraged its balance sheet from 1.95x net debt/equity end‐FY08

to 0.6x end FY13, thanks to a QIP in June 2009 and strong operational cash

flows. We expect further reduction in the net debt/equity ratio to 0.5x over

FY13‐15E as we forecast stable IT/ITES‐driven housing demand. This

recovery augurs well in terms of funding availability for future growth.


of Rs495/share. We value the real estate business at Rs466/share using a NAV

model and the contracting and manufacturing business (C&M) at Rs29/share.

We believe that the near‐term catalysts are: (i) strong launch pipeline and (ii)

focus on further balance sheet de‐leveraging.

Key risks (i) An oversupply may lead to a 8‐10% real estate price; (ii) Sustained

liquidity tightening could increase borrowing costs by 150‐200bps lowering

our NAV by 6%.




EBITDA 4,666 5,483 6,053 7,515

EBITDA (%) 33.1 29.4 29.2 29.7

Net profit 2,136 2,214 2,641 3,751

EPS (Rs) 21.4 22.1 26.9 38.3

RoE (%) 10.9 10.5 11.9 15.2

RoCE (%) 8.7 9.6 10.7 12.7

P/E (x) 17.8 17.3 14.2 10.0

P/BV (x) 1.9 1.8 1.6 1.4


83

June 24, 2013

Sobha Developers


Source: Company

Land bank distribution (%)

Source: Company

Promoters,

60.6

FII, 33.4

DII, 3.1

Others , 2.9

IT centric , 78

Non‐IT

centric, 22

Company Background

Sobha Developers Ltd (SDL) was incorporated in 1995 and is

a leading real estate player in Southern India (total saleable

area of 231mn sq ft) with a strong presence in Bangalore,

Pune, Chennai, Kochi, Gurgaon etc. SDL floated in

December 2006 and raised Rs6bn (US$107mn) by selling 12%

of the Company to the public. SDL has an enviable delivery

track record, with more than 26mn sq ft of residential

development and 11mn sq ft in the contractual segment. In

1999 Infosys awarded SDL a civil contract for developing its

corporate block. This marked Sobha’s entry into the

contractual segment. Since then Sobha has added other

marquee clients including HP, DELL, HCL, Timken, Taj

Group etc.



Net sales 18,645 20,705 25,260

EBIDTA 5,483 6,053 7,515




PBT 3,282 3,668 5,210

Tax 1,068 1,027 1,459

Adj. PAT 2,214 2,641 3,751



Adj Net Margin % 11.9 12.8 14.8

P/E (X) 17.3 14.2 10.0

EV/EBIDTA (X) 9.2 8.3 6.7


Cash Flow




Others 688 772 1,711

Change in Wkg Cap (1,979) (2,216) (3,516)


Capex (875) (53) (55)


Others (313) ‐ ‐

CF from Investing (1,189) (53) (55)

Change in Debt 1,380 215 (125)

Others (2,569) (2,596) (2,509)

CF from Financing (1,189) (2,381) (2,633)

Change in Cash 163 398 (128)

Balance Sheet


Total Assets 35,642 37,700 40,529

Net Fixed Assets 3,301 2,745 2,186


Other Assets 2 2 2


Networth 21,366 23,209 26,162

Debt 13,536 13,751 13,626

Minority Interest 102 102 102

Others 638 638 638


ROE % 10.5 11.9 15.2

ROCE % 9.6 10.7 12.7



84

June 24, 2013

Sobha Developers


Best placed amongst peers As highlighted in the thematic section of the note, SDL is best placed amongst the

Southern peers on account of its superior land bank quality and quantity, access to

finance, healthy balance sheet & successful foray outside home location in

Gurgaon. The macro factors are well supported by conducive Southern markets

which remain demand healthy and affordable. We highlight our finding in exhibit

1 to arrive at overall competitive positioning.


Macro

Competitive

‐ 30% weight

Business

Competitive ‐

25% weight

Land bank

& Pricing ‐

20% weight

Balance

Sheet

positioning ‐

25% weight

Overall Comments

Sobha




Prestige




Puravankara




Mantri


Brigade




include Sobha, Prestige & Puravankara in Southern markets. SDL with the right

mix of branding, execution capability, balance sheet strength and underlying

business fundamentals remains best poised amongst the peers. Notwithstanding

their scores differ on these factors we see limited differentiation on an overall

basis.

85

June 24, 2013

Sobha Developers

SDL derives maximum value from well placed IT/ITES‐centric land bank

SDL is the largest Southern region real estate developer with 231mn sq ft of

saleable area. Moreover, with a majority of its land bank in IT/ITES centric

locations, SDL is in an enviable position versus peers.

SDL’s land bank is well spread with IT/ITES‐driven locations in Bangalore,

Chennai, Kochi, Pune and Mysore contributing 78% to the land bank and 84% to

the NAV (as highlighted in exhibit 3).

Exhibit 2: IT/ITES locations drive NAV estimates

Location % land bank spread % NAV contribution

Bangalore 36.9 56.2

Chennai 16.5 14.9

Kochi 20.9 8.7

Pune 2.3 4.0

Mysore 1.1 0.5

Total 77.6 84.3


Exhibit 3: Land bank analysis

Location Area

(mn sq ft)% FSI (x)

Land cost

(Rs mn)%

NAV

(Rs mn)%

NAV/Land

cost (x)

Land cost

(Rs/sq ft)

NAV

(Rs/sq ft)

Bangalore 85.3 36.9 2.1 9,239 39.1 43,855 56.2 4.7 108 514

Chennai 38.1 16.5 1.7 3,000 12.7 11,614 14.9 3.9 79 305

Kochi 48.4 20.9 2.5 4,855 20.5 6,791 8.7 1.4 100 140

Hosur 34.8 15.1 1.7 327 1.4 5,048 6.5 15.5 9 145

Pune 5.3 2.3 1.1 1,915 8.1 3,100 4.0 1.6 361 585

Coimbatore 6.0 2.6 1.5 397 1.7 1,576 2.0 4.0 67 264

Mysore 2.6 1.1 2.4 354 1.5 400 0.5 1.1 137 154

Thrissur 5.6 2.4 2.5 44 0.2 1,737 2.2 39.7 8 308

Gurgaon 4.3 1.9 0.8 3,398 14.4 3,330 4.3 1.0 793 777

Calicut 1.0 0.4 2.0 116 0.5 533 0.7 4.6 114 528

Total 231 100.0 1.9 23,645 100.0 77,984 100.0 3.3 102 337


Based on our valuation estimates, IT/ITES centric cities viz. Bangalore, Chennai,

Pune and upcoming Kochi and Hosur are the key drivers of Sobha’s NAV, with

Bangalore and Chennai contributing the maximum valuation upside (as

highlighted in exhibit 3, NAV/Land cost (x)).

86

June 24, 2013

Sobha Developers

Key assumptions and estimates

Exhibit 4: Summary of key assumptions and estimates



Volume assumptions

Residential (mn sqft) 3.8 4.2 5.3 12.7 26.3 Expect 18% volume CAGR FY13‐15E

Total 3.8 4.2 5.3 12.7 26.3

We forecast gradual pick up in the residential sales on

continued recovery in the IT sector. Expect growth to

come from newer lcoation viz. Chennai & Cochin. SDL

sold peak volume of 3.76mn sqft in 2013

Realization

Residential (Rs/sqft) 5897 6150 6,465 4.3 5.1

Expect a marginal increase in realization in line with

inflation. At lower end of our micro market price growth

assumptions of 5‐10%

Earnings forecast

Sales (Rs mn) 13,092 15,429 19,913 17.9 29.1 Growth of 22.4% factors volume & price growth of 18% &

5% respectively for FY13‐15E

Land sale 1,020 650 579 (36.3) (11.0) Factoring a decline as BS is healthy

Contractual 4,533 4,626 4,768 2.1 3.1

Forecasting a flattish growth as contracts visibility is only

for next 2yrs and revenue projection is in line with

management guidance

Total 18,645 20,705 25,260 11.0 22.0 Lower land sales & flattish contractual revenue dilute

FY13‐15E revenue CAGR to 16.4%

EBIDTA (Rs mn) 5,483 6,053 7,515 10.4 24.1

EBIDTA Margin (%) 29.4 29.2 29.7 (17.1bps) 51.3bps FY15E margin increase on account of better realization in

Gurgaon and operating leverage

Net interest expense* 1,662 1,834 1,751 10.3 (4.5) Expected to remain muted as debt level stabilize and

interest rate correct

Avg. interest rate (%) 13 14 13 90bps (50bps) Interest rates are expected to harden by 90bps in FY14E

and correct 50bps in FY15E

PAT (Rs mn) 2,171 2,641 3,751 21.7 42.0

PAT Margin (%) 11.6 12.8 14.9 111bps 209bps Increase in PAT margins in line with overall estimates

EPS (Rs) 22.1 26.9 38.3 21.7 42.0

Cash flows forecast

CFO ‐ a 2,541 2,832 2,560

CFI ‐ b (1,189) (53) (55)

FCF ‐ a+b 1,352 2,780 2,505

Strong positive free cash flow generation. Adjusted for

Interest expense, FCF is Rs923mn and Rs733mn for FY14E

and FY15E respectively

CFF‐c (1,189) (2,381) (2,633)

Total change in cash ‐

a+b+c 163 398 (128)

Source: Company, Karvy Institutional Research Note: Net interest expense = Interest on loans – Interested Capitalized ‐ Interest income earned

87

June 24, 2013

Sobha Developers



Sales (Rs mn)

FY14E 14,665 20,705 (8.6)

FY15E 17,427 25,260 (7.8)

EBITDA (Rs mn)

FY14E 3,450 6,053 (9.2)

FY15E 4,316 7,515 (8.2)

Net Profit (Rs mn)

FY14E 1,920 2,641 (12.7)

FY15E 2,504 3,751 (7.0)


Our FY14E & FY15E headline numbers are sub consensus as we build in lower

contribution from real estate and land sales and factor in a sub‐consensus increase

in price realization. Whilst this results in our EBITDA margin forecast being

slightly below consensus (on account lower realization), our absolute EBITDA

growth marginally trends lower than revenue growth. Drilling down further, our

reasons for lower margins is (a) we build in lower contributions from land sales on

account of healthy balance sheet; (b) sub‐consensus assumptions regarding price

realization on account of possible oversupply situation in Southern market.

88

June 24, 2013

Sobha Developers

Valuation SOTP Valuation We initiate coverage on SDL with a SOTP‐based target price of Rs495/share. We

value the real estate business at Rs466/share and the contracting and

manufacturing business (C&M) at Rs29/share. We use the net profit forecasts of

the contracting and manufacturing segment and value these businesses at 6x & 8x

FY15E EPS respectively, in line with the construction sector valuation multiples.

Exhibit 6: Sum of the parts


Residential NAV 45,711 466Valuation at 0.7x FY14E NAV

(see exhibit 7)

Cash contracting business 1,834 19 At 6x FY15E P/E

Manufacturing business 986 10 At 8x FY15E P/E

Total 48,531 495


Real estate development – NAV calculation methodology We have divided SDL’s entire land bank into residential projects (based on the










WACC of 17% (cost of equity 21.3% based on beta of 1.9, cost of debt 15% &

debt/equity ratio of 0.6x). All the project level NAVs have then been summed

up to arrive at the NAV of the company



NAV calculation Based on the valuation methodology above we arrive at SDL’s gross NAV of

Rs77,984mn. We further make adjustments for the value of net debt as at end

March 2014 and incorporate NAV discount of 30% to arrive at SDL’s NAV/share of

Rs466.

Exhibit 7: NAV calculation

Rs mn Comments

Gross NAV 77,984NAV based on the methodology above

(see table on the left for details)

Less net debt 12,683 Net debt as on March 2014E

NAV 65,301

Shares outstanding (mn) 98 As of March 2013

RNAV/share (Rs) 666

Discount to NAV (%) 30

NAV/share (Rs) 466


NAV by location

Location Gross NAV

(Rs mn)%

Bangalore 43,855 56

Chennai 11,614 15

Kochi 6,791 9

Hosur 5,048 6

Pune 3,100 4

Coimbatore 1,576 2

Mysore 400 1

Thrissur 1,737 2

Gurgaon 3330 4

Calicut 533 1

Total 77,984 100


89

June 24, 2013

Sobha Developers






Discount rate 17%




Tax rate (%) 33%




prevailing prices.


Location Saleable area Prices Cost

mn sq ft Rs/sq ft Rs/sq ft

Bangalore 85.3 4,500 2,400

Mysore 2.6 2,200 1,500

Pune 5.3 4,500 2,200

Chennai 38.1 4,300 2,200

Kochi 48.4 3,500 1,900

Hosur 34.8 2,200 1,300

Thrissur 5.6 3,500 2,200

Coimbatore 6.0 3,500 2,200

Gurgaon 4.3 7,500 3,425

Calicut 1.0 3,500 1,800

Total 231


90

June 24, 2013

Sobha Developers








NAV/share (Rs) 360 427 495 563 630

Change in NAV (%) ‐27.3 ‐13.7 0.0 13.7 27.3








NAV/share (Rs) 308 398 495 600 712

Change in NAV (%) ‐37.8 ‐19.6 0.0 21.2 43.8





approximately 12%.



NAV/share (Rs) 594 547 495 439 378

Change in NAV (%) 20.0 10.5 0.0 ‐11.3 ‐23.6






increase in the discount rate, the NAV would fall by 4.5%.


WACC rates (%) 15 16 17 18 19

NAV/share (Rs) 543 518 495 473 453

Change in NAV (%) 9.7 4.6 0.0 ‐4.4 ‐8.5


91

June 24, 2013

Sobha Developers

Relative valuation At Rs382, SDL trades at 10x FY15E EPS, which is a premium of 1% to the average

P/E of the peer group. On FY15E P/BV, Sobha is trading at a premium of 40% to

the average FY15E P/BV of peers and at 2% discount to its historical cross‐cycle

average P/BV of 1.4x.




DLF 175 39.8 21.7 1.0 1.0 15.9 12.9 6.4 7.6

Unitech 21 13.0 10.0 0.4 0.4 14.8 10.9 3.4 4.2

Oberoi Realty 200 9.4 6.3 1.4 1.1 6.1 3.9 15.5 19.6

HDIL 34 1.9 1.9 0.1 0.1 4.1 3.5 5.4 6.5




Omaxe 138 14.0 5.1 1.1 0.9 8.7 3.9 8.5 19.5

Anant Raj 54 7.4 7.2 0.4 0.4 8.4 7.6 5.0 5.4


Phoenix Mills 259 26.7 19.3 2.0 1.8 11.8 9.5 7.6 9.6

Kolte Patil 77 4.5 3.7 0.7 0.6 2.2 1.9 15.2 16.6

Average 14.4 9.9 1.1 1.0 9.1 7.0 9.8 12.1


Valuation charts On FY15E P/E of 10x, SDL is trading at a 30% discount to its historical cross‐cycle






0

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Apr‐09

Aug‐09

Dec‐09

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Apr‐11

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Apr‐13

(Rs)

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Apr‐09

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Apr‐13

(Rs)

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1x

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92

June 24, 2013

Sobha Developers

Key catalysts

Success of new launches

SDL has unsold inventory of 8.23mn sqft as of FY13 and has planned 12.2mn sq ft

of new launches over FY14E with 45% of the launches at locations outside

Bangalore (viz. Chennai, Cochin and Calicut). Whilst we forecast the FY14E sales

run‐rate from the existing projects to be maintained at ~3mn sq ft, we build in

~1.2mn sq ft addition from proposed launches in new locations. We believe that

SDL can surprise the street on the upside with a new sales number closer to

~4.5mn sq ft vs guidance of 4.2mn sqft.

Change in launch mix may result in margin expansion

SDL’s project launch prices in new markets (viz. Chennai, Cochin and Calicut) will

result in better realization as property prices have seen sharp recovery in these

markets over FY12‐13. Until now Sobha’s new sales bookings were predominantly

from Bengaluru where prices are still 5‐10% off their FY08 peak.


Oversupply in the Southern market may result in property price

correction

High unsold real estate inventory and aggressive launch plans (4x of what they

have launched over past 2‐3 years) of the Southern real estate developers may lead

to an oversupply situation in the Southern real estate market. Whilst affordability

in South is still reasonable (real estate prices are still marginally off from their

previous peak of FY08) an oversupply situation can lead to a 0‐5% price correction.

This drop in realization could be margin dilutive, more so with high input costs.

Hence this may result in sharp financial and stock price underperformance. For

every 1% correction in base residential prices (exhibit 10), our NAV estimate for

SDL will be negatively impacted by 3%.






momentum in cash flows. Whilst this is a generic risk for the sector, SDL is

relatively neutrally impacted as balance sheet remains strong.

93

June 24, 2013

Sobha Developers




Net sales 14,079 18,645 20,705 25,260

Growth (%) 1.0 32.4 11.1 22.0

EBITDA 4,666 5,483 6,053 7,515

EBITDA margin (%) 33.1 29.4 29.2 29.7

Growth (%) 30 18 10 24


EBIT 4,278 4,889 5,445 6,900

Net Interest 1,130 1,662 1,834 1,751

Other income 65 55 58 61

PBT 3,213 3,282 3,668 5,210

Taxes 1,077 1,068 1,027 1,459

Net profit 2,136 2,214 2,641 3,751

Margin (%) 15.2 11.9 12.8 14.8

EPS (Rs) 21.4 22.1 26.9 38.3




Share capital 981 981 981 981


Networth 19,998 21,366 23,209 26,162

Debt 12,244 13,536 13,751 13,626

Minority Interest 355 102 102 102


Sources of funds 32,927 35,642 37,700 40,529

Net block 2,852 3,301 2,745 2,186

Investments 0 2 2 2

Current assets 39,520 45,294 49,295 53,918

Inventory 16,759 19,018 21,743 26,268

Sundry debtors 1,180 1,662 1,845 2,251

Cash & bank balance 588 670 1,068 940

Loans & advances 18,268 18,671 19,096 18,775

Other current assets 2,724 5,274 5,543 5,684





94

June 24, 2013

Sobha Developers



Profit before tax 3,177 3,239 3,668 3,751


Interest 1,044 1,583 1,856 1,771

Others (444) (895) (1,085) (61)

Change in NWC 697 ‐1,979 ‐2,216 ‐3,516


(Inc)/dec in investments 10 ‐2 0 0

Capex ‐1,019 ‐875 ‐53 ‐55

Others (1,112) (313) ‐ ‐

Cash flow from inv. (b) ‐2,121 ‐1,189 ‐53 ‐55

FCF (a+b) 2,740 1,352 2,780 2,505

Inc/dec in loans (258) 1,380 215 (125)

Others (2,249) (2,569) (2,596) (2,509)

Financial cash flow ( c ) ‐2,507 ‐1,189 ‐2,381 ‐2,633

Net inc/dec in cash (a+b+c) 233 163 398 ‐128




EBIDTA margin 33.1 29.4 29.2 29.7

EBIT margin 30.4 26.2 26.3 27.3



Return on equity 10.9 10.5 11.9 15.2


Current ratio (x) 4.2 3.5 3.4 3.5

Net debt/ Equity (x) 0.6 0.60 0.55 0.5




EPS (Rs) 21.4 22.1 26.9 38.3

Diluted EPS (Rs) 21.4 22.1 26.9 38.3


P/E (x) 17.8 17.3 14.2 10.0

P/BV (x) 1.9 1.8 1.6 1.4

EV/EBITDA (x) 10.5 9.2 8.3 6.7

EV/Sales (x) 3.5 2.7 2.4 2.0



Puravankara

Bloomberg: PVKP INReuters: PPRO.BO BUY


India Research

INITIATION REPORT

Recommendation

CMP: Rs81

Target Price: Rs138

Upside (%) 70%




Beta 1.1




Absolute (4.9) (12.9) 25.0 (21.4)

Rel. to Sensex 0.6 (12.4) 13.9 (18)

Performance

Source: Bloomberg


022 6184 4311

[email protected]

Varun Chakri

022‐6184 4326

[email protected]

0

50

100

150

15,000

17,000

19,000

21,000

Jun‐12

Aug‐12

Sep‐12

Oct‐12

Nov‐12

Jan‐13

Feb‐13

Mar‐13

May‐13

Jun‐13

Sensex (LHS) Puravanakar (RHS)

Fresh ambition, fresh upsideOver the past 6 months Puravankara Projects (PPL) has underperformed

the BSE Realty index by 16%, partly owing to the slow IT/ITES recovery

and partly because of PPL’s deteriorating leverage. PPL’s stronger financial

positioning post IPP & OFS, healthy competitive positioning in the

Southern Indian market and successful foray into affordable housing

would lead to material recovery over 2HFY14E. We initiate coverage with

BUY stance and 70% upside.

Healthy competitive positioning v/s Southern peers PPL is well positioned in the Southern residential market on account of its

superior land bank quality and quantity, access to finance and healthy

balance sheet. The micro factors are well supported by conducive Southern

markets which remain demand healthy and affordable.

Financial controls up for game change PPL emerged from the FY08‐10 real estate slowdown relatively unscathed

(debt/equity being maintained at 0.5‐0.6x). Whilst other Southern developers

resorted to selling land and diluting equity to repay debt, PPL sold land only

in FY10, to meet its debt obligations and did not resort to equity dilution.

Moreover, since listing in August 2007, PPL’s promoters have not had to

pledge their shares. May 2013, IPP & OFS (offer for sale) brings in Rs3bn

funds to retire debt bringing down net D/E from 0.8x to 0.55x by FY14E.

Successful foray into affordable housing In Aug‐08, PPL through its 100% subsidiary ‘Provident Housing’, announced

its foray into affordable housing. With 10.5mn sq ft in the development phase

in Bengaluru and Chennai, PPL aims to expand across other cities.

Initiate coverage with BUY: Target price Rs138/share We initiate coverage on PPL with a valuation of Rs138/share. Our valuation

is based on 0.65x our end‐FY14E NAV forecast. Near‐term catalysts for PPL

are: (i) strong launch pipeline; (ii) margin expansion due to change in

product mix; and (iii) balance sheet de‐leveraging.

Key risks (i) An oversupply may lead to a 8‐10% real estate price; (ii) High FSI

assumptions (a 1% decline in saleable area would lower our NAV by 1.2%);

and (iii) Sustained liquidity tightening could increase borrowing costs by

150‐200bps lowering our NAV by 7%.


Y/E Mar (Rs mn) FY12 FY13E FY14E FY15E


EBITDA 3,894 5,768 5,953 6,345

EBITDA (%) 47.8 46.3 44.0 42.3

Net profit 1,357 2,434 2,613 2,870

EPS (Rs) 5.7 10.3 11.0 12.1

RoE (%) 7.5 8.0 12.8 11.3

RoCE (%) 11.7 14.3 15.5 15.2

P/E (x) 16.3 14.2 7.9 7.4

P/BV (x) 1.0 0.9 0.8 0.7


96

June 24, 2013

Puravankara


Source: Company

Land bank distribution (%)

Source: Company

Promoters,

75.0

FII, 13.7

DII, 7.4

Others , 3.9

IT centric , 91

Non‐IT

centric, 9

Company Background

Puravankara Projects Ltd (PPL) was incorporated in 1986

and is a major real estate developer in India (total saleable

area of 112mn sqft) with a strong presence in South Indian

cities. PPL floated in August 2007 and raised Rs8bn

(US$138mn). With 30mn sqft currently under development,

PPL plans to launch another 10.6mn sq ft over the next few

quarters (25mn sq ft as part of mid‐income housing and

15.6mn sq ft under affordable housing). Over the last three

years, PPL has successfully forayed into the ‘affordable

housing’ segment through a 100% subsidiary — Provident

Housing, and intends to take this company public over the

next few years. PPL during 1QFY14 has tapped secondary

markets with an IPP (Institutional Placement Programme,

new share issue) and OFS (Offer for Sale, promoter stake

sale) raising Rs3bn. The proceeds of Rs1.9bn (IPP) & Rs1.1bn

(OFS) shall be utilized to reduce debt.



Net sales 12,459 13,515 14,996

EBIDTA 5,768 5,953 6,345




PBT 3,558 3,900 4,283

Tax 1,124 1,287 1,414

Adj. PAT 2,434 2,613 2,870



Adj Net Margin % 19.5 19.3 19.1

P/E (X) 14.2 7.9 7.4

EV/EBIDTA (X) 6.0 5.4 5.3


Cash Flow

(Rs mn) FY13E FY14E FY15E

Net Profit 2,434 2,613 2,870


Interest 2,403 2,150 2,150

Change in Wkg Cap (8,518) (1,964) (3,954)

CF from Operations (3,610) 2,900 1,183

Capex (213) (150) (120)


Others 455 220 332

CF from Investing 33 70 212

Change in Debt 7,894 (2,500) ‐

Equity capital (0) 1,922 ‐

Others (312) (347) (347)

Interest Paid (2,403) (2,150) (2,150)


Change in Cash 1,602 (106) (1,103)

Balance Sheet


Total Assets 36,853 38,541 41,064

Net Fixed Assets 869 918 921


Other Assets 9,419 9,199 8,867


Networth 18,995 23,183 25,706

Debt 17,859 15,359 15,359

Deferred Tax (2) (2) (2)


ROE % 8.0 12.8 11.3

ROCE % 14.3 15.5 15.2



97

June 24, 2013

Puravankara


Strong competitive positioning As highlighted in the thematic section of the note, PPL is well positioned in the

Southern residential market on account of its superior land bank quality and

quantity, access to finance and healthy balance sheet. The micro factors are well

supported by conducive Southern markets which remain demand healthy and

affordable. We highlight our finding in exhibit 1 to arrive at overall competitive

positioning.


Macro

Competitive

‐ 30% weight

Business

Competitive ‐

25% weight

Land bank

& Pricing ‐

20% weight

Balance

Sheet

positioning ‐

25% weight

Overall Comments

Sobha




Prestige




Puravankara




Mantri


Brigade




include Sobha, Prestige & Puravankara in Southern markets. The right mix of

branding, execution capability, balance sheet strength and underlying business

fundamentals are the key influencers. Notwithstanding their scores differ on these

factors we see limited differentiation on an overall basis.

98

June 24, 2013

Puravankara

Land bank high on quality and diversification

With 112mn sq ft of saleable area, PPL is the second largest Southern real estate

developer. Moreover, with the majority of its land bank in IT/ITES‐centric

locations (Bangalore, Chennai and Kochi account for 91% of its land bank) and a

broader product portfolio of ‘mid income’ and ’affordable housing’, PPL is

competitively well placed amongst the real estate players.

Exhibit 2: IT/ITES locations drive NAV estimates

Location % land bank spread % NAV contribution

Bangalore 68.3 75.4

Chennai 12.7 8.3

Kochi 10.0 8.5

Total 91.0 92.2

Source: Company, Karvy Institutional Research Total Saleable area – 112mn sqft

Exhibit 3: Land bank positioning

Land bank Pricing

attractiveness

Overall Comments

Sobha

Largest land bank in amongst listed players and

attractive price positioning. Sobha is a top quartile

Prestige

A middling on land bank and top quartile on

pricing attractive. Overall a mid ‐ quartile

Puravankara

A mid‐quartile on land bank and pricing

attractive. Overall a mid ‐ quartile

Mantri A mid ‐ Quartile

Brigade

A middling


Puravankara is a mid‐quartile in Southern realty macro‐markets with well

positioned land bank and broad based presence in luxury & mid‐income

housing segment. Real estate regulatory bill & LARR will impact the southern

developers positively as they exercise strong regulatory compliance besides

property price increases on account of LARR shall augur well for profitability

for developers with historical land banks.

Successful foray into affordable housing

During August 2008, PPL through its 100% subsidiary ‘Provident Housing’

announced its foray into affordable housing. Since then it has launched projects

with a total area under development of 10.5mn sq ft and delivered 2.2mn sqft in

Bangalore & Chennai. PPL is targeting 30‐30% EBITDA margins under the

Provident brand (v/s 40‐45% under ‘Purva’ brand) and aims to expand to other

cities with 5mn sq ft of new launches planned over the next few quarters. This is

approximately ~48% of PPL’s total launch pipeline. PPL intends to take Provident

public over next few years.

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Puravankara

Key assumptions & estimates




Volume assumptions

Residential (mn sqft) 4.0 4.4 5.0 11.2 13.9 We expect volume mix to be 55% Purva brand and 45%

Provident brand

Total 4.0 4.4 5.0 11.2 13.9

We expect 12.5% CAGR in volume growth over FY13‐

15E, supported by balance inventory of 11mn sft & new

location launches of 10mn sqft. FY13‐15E volume growth

CAGR of 12.5% in line with realty market growth

Realization

Residential (Rs/sqft) 3,642 4,190 4,583 15.0 9.4 Expect increase blended realization (Purva+Provident) to

grow in line with change in product mix and inflation

Earnings forecast

Sales (Rs mn) 12459 13515 14996 8.5 11.0

Total revenue 12,459 13,515 14,996 8.5 11.0 We expect FY13‐15E sales CAGR of 9.6%

EBIDTA (Rs mn) 5,768 5,953 6,345 3.2 6.6

EBIDTA Margin (%) 46.3 44.0 42.3 (225.2) (173.8) Margins decline on account of increase in revenue share

from Provident housing

Net interest expense 2,317.9 2,139.1 2,140.9 (8) 0

Interest expense to reduce owing to fund raise of Rs1.9bn

being utilized to repay debt resulting in interest cost

savings

Avg .Interest rate (%) 15.2 14.0 14.0 (80bps) ‐ 100bps reduction in interest cost owing to monetary

policy recalibration

PAT (Rs mn) 2,434 2,613 2,870 7.3 9.8 Reduction in interest cost to result in net profits growth

being higher than EBIDTA growth

PAT Margin (%) 19.5 19.3 19.1 (20.5) (19.7) Profit margins decline lower than EBIDTA margins

decline owing to reduction in interest costs

EPS (Rs) 10.3 11.0 12.1 7.3 9.8

Cash flows forecast

CFO ‐ a (3,610) 2,900 1,183

CFI ‐ b 33 70 212

FCF ‐ a+b (3,576) 2,970 1,394

Strong positive free cash flow generation. Adjusted for

Interest expense, FCF is Rs819mn and (Rs756mn) for FY14E

and FY15E respectively

CFF‐c 5,179 (3,075) (2,497)


a+b+c 1602 (106) (1,103)


100

June 24, 2013

Puravankara


Consensus Karvy % divergence

Sales (Rs mn)

FY14E 14,849 13,515 (9.0)

FY15E 16,717 14,996 (10.3)

EBITDA (Rs mn)

FY14E 6,770 5,953 (12.1)

FY15E 7,965 6,345 (20.3)

Net profit (Rs mn)

FY14E 2,953 2,613 (11.5)

FY15E 3,802 2,870 (24.5)


Our estimates are significantly lower than consensus both at the topline and at the

bottomline level due to: (i) lower revenue recognition from under construction

projects (ii) lower EBIDTA margins on account of change in product mix in favour

of Provident housing and (iii) higher taxes v/s consensus owing to limited

inventory under 80I projects.

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June 24, 2013

Puravankara

Valuation

We initiate coverage on Puravankara Projects (PPL) with a valuation of

Rs137/share. Our valuation is based on 0.65x our end‐FY14E NAV forecast (see

exhibit 6). Our NAV calculation is based on the following methodology:

We have divided PPL’s entire land bank into residential projects (based on the


We have arrived at the sale price/sq ft and the anticipated sales volumes for

each project, based on our discussions with industry experts


estimates, which have been arrived at after discussions with industry experts

We have further deducted marketing and other costs that have been assumed

at 5% of sales revenue



WACC of 18% (cost of equity 22% based on beta of 2.1, cost of debt 15%,

debt/equity 0.6x). All the project level NAVs have then been summed up to

arrive at the GNAV of the company

From the GNAV, we have deducted the net debt as of FY14E to arrive at

RNAV

We give a 35% discount to RNAV to arrive at the final valuation of the

company.


Rs mn comments

Gross NAV 63,372NAV based on the methodology above

(see table on the left for more details)

Less Net debt 13,131 as on Mar‐14E

RNAV 50,241

Shares outstanding (mn) 237 as on May‐13 adjusted for IPP dilution

RNAV/share 212

Discount to NAV 35%

NAV/Share (Rs) 138


NAV by location

Location Gross NAV

(Rs mn)%

Bangalore 48,100 76

Chennai 5,147 8

Kochi 5,335 8

Hyderabad 324 1

Colombo 1,277 2

Coimbatore 1,747 3

Mysore 865 1

Kolkata 577 1

Total 63,372 100


102

June 24, 2013

Puravankara


In the exhibit 7 we highlight our sales and construction cost inflation assumptions.

We expect property price appreciation in line with WPI inflation i.e. 6%. We

forecast other costs including marketing, SGA and employee costs to be stable at

5% of sales.


Discount rate 14%




Tax rate (%) 33%


In exhibit 8 we highlight our sale price and construction cost forecasts. Our pricing

assumptions are moderate and at a 10‐15% discount to the current prevailing

prices.


Location Saleable area Sale price Construction Cost

mn sq ft Rs/sq ft Rs/sq ft

Bangalore 76 5,000 2,000

Chennai 14 3,700 1,800

Kochi 11 3,600 1,800

Hyderabad 4 3,200 1,800

Colombo 1 4,000 2,200

Coimbatore 2 3,400 1,600

Mysore 1 3,600 1,800

Kolkata 1 3,500 1,800

Total 112


103

June 24, 2013

Puravankara


Sensitivity to property prices

Exhibit 9 suggests that our model is sensitive to changes in assumptions regarding

property prices. For every 1% change in the base year property prices (exhibit 8 for




NAV/share (Rs) 101 120 138 156 174

Change in NAV (%) ‐26.8 ‐13.0 ‐ 13.0 26.1



In our base case we have assumed annual sales inflation of 5% (exhibit 7). For

every 100bps increase in the annual sale price inflation, the NAV would increase

by approximately 10%.



NAV/share (Rs) 112 125 138 151 165

Change in NAV (%) ‐18.8 ‐9.4 ‐ 9.4 19.6


Sensitivity of NAV to changes in construction cost inflation

In our base case scenario we have assumed cost inflation of 5% (exhibit 7). For

every 100bps increase in the construction cost inflation, the NAV would fall by

approximately 4%.

Exhibit 11: NAV sensitivity to change in construction cost inflation


NAV/share (Rs) 149 143 138 132 126

Change in NAV (%) 8.0 3.6 ‐ ‐4.3 ‐8.7



In our base case scenario we have assumed a discount rate of 18%. For every

100bps increase in the discount rate, the NAV would change by approximately 5%.


WACC rates (%) 16 17 18 19 20

NAV/share (Rs) 152 145 138 131 125

Change in NAV (%) 10.1 5.1 ‐ ‐5.1 ‐9.4


104

June 24, 2013

Puravankara

Relative valuation At Rs81, PPL is trading at 7.4x FY15E EPS, which is a discount of 25% to the

average P/E of the peer group. On P/BV, PPL is trading at a discount of 28% to the

average FY15E P/BV of peers and at 46% discount to its historical cross cycle

average P/BV of 1.3x. We believe that this discount is too high given, improvement

in balance sheet and strong launch pipeline.




DLF 175 39.8 21.7 1.0 1.0 15.9 12.9 6.4 7.6

Unitech 21 13.0 10.0 0.4 0.4 14.8 10.9 3.4 4.2

Oberoi Realty 200 9.4 6.3 1.4 1.1 6.1 3.9 15.5 19.6

HDIL 34 1.9 1.9 0.1 0.1 4.1 3.5 5.4 6.5




Omaxe 138 14.0 5.1 1.1 0.9 8.7 3.9 8.5 19.5

Anant Raj 54 7.4 7.2 0.4 0.4 8.4 7.6 5.0 5.4


Phoenix Mills 259 26.7 19.3 2.0 1.8 11.8 9.5 7.6 9.6

Kolte Patil 77 4.5 3.7 0.7 0.6 2.2 1.9 15.2 16.6

Average 14.4 9.9 1.1 1.0 9.1 7.0 9.8 12.1


Valuation charts

On FY15E P/E of 7.4x, PPL is trading at 49% discount to its historical cross cycle






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June 24, 2013

Puravankara

Key catalysts Strong launch pipeline may result in better sales booking: Over FY14E PPL has

planned 10.6mn sq ft of new launches with 5.5mn sq ft as part of the ‘Purva’ brand

and 5.1mn sq ft as part of the ‘Provident’ brand. Whilst we forecast FY14E annual

sales run rate from the existing projects to be maintained at ~2.5mn sqft the new

projects would contribute 1.9mn sqft in sales. Success of new launches will be a

key rerating trigger for PPL.

Launch mix in favor of Purva brand ‐ may result in margin expansion: PPL

develops premium housing projects under the ‘Purva’ brand and affordable

housing under the ‘Provident’ brand. Operating margins of the Purva brand are

~10% higher than that from Provident and with new launches tilted towards the

former; there could be upsides to our margin estimates.

Debt reduction using IPP and OFS funds: PPL has raised Rs3bn through IPP and

OFS and expect to utilize the proceeds for reducing debt. This shall help in interest

cost savings of Rs450mn and improve leverage ratios. PPL has guided to bring

down the net D/E ratio to 0.55x by FY14E from the current levels of 0.8x. This

remains a key re‐rating trigger for the stock.


Aggressive launch plans by developers may lead to oversupply

High unsold real estate inventory and aggressive launch plans (5x what they have

launched over the past 2‐3 years) of the real estate developers may cause an

oversupply situation in the Southern real estate market leading to an 8‐10% price

correction. For every 1% correction in the base residential prices (exhibit 19), our

NAV estimate will be negatively impacted by 2.6%.

High FSI assumptions may impact valuation estimate

PPL assumes a higher FSI (floor space index) of 2.4x for its land bank v/s 1.9x

assumed by Sobha Developers. The company attributes this to land bank

concentration in cities with high FSI. These assumptions may not materialize as

they are contingent to changes in local regulations. For every 1% decrease in

saleable area, our NAV estimate will be negatively impacted by 1.2%

Sustained liquidity tightening may result in cash flow pressures

At 0.8x net debt/equity, PPL will face the challenge of managing both debt

servicing and working capital investments for its new projects. Liquidity has

tightened for developers and PPL may be impacted on account of the cash flow

being squeeze. A 100bps increase in interest rates will lower our NAV estimates

by 4%. Whilst we estimate this risk to be largely mitigated by Rs3bn of fund

infusion as discussed above

Execution risks may results in margin volatility

Execution risks involve delays in meeting project delivery timelines for reasons

such as getting requisite approvals or shortage of materials/labour. This results in

cost overruns (PPL incurred Rs170mn of cost overruns for projects during 3QFY11)

and higher interest outgo on working capital loans. Whilst having a captive

construction company helps in better control on costs, PPL currently has limited

captive execution bandwidth largely focused on Bengaluru projects and has to

resort to sub‐contracting for projects in other cities. With forthcoming new

launches in Chennai, Kochi, Coimbatore, PPL is exposed to execution risks.

106

June 24, 2013

Puravankara


Exhibit 16: Profit & loss


Net sales 8,145 12,459 13,515 14,996

Growth (%) 36 53 8 11

EBITDA 3,894 5,768 5,953 6,345

EBITDA margin (%) 47.8 46.3 44.0 42.3

Growth (%) 38 48 3 7


EBIT 3,840 5,698 5,852 6,228

Net Interest 1,928 2,318 2,139 2,141

Other income 53 178 187 196

PBT 1,965 3,558 3,900 4,283

Taxes 607 1,124 1,287 1,414

Net profit 1,357 2,434 2,613 2,870

Margin (%) 16.7 19.5 19.3 19.1

EPS (Rs) 5.7 10.3 11.0 12.1




Share capital 1,067 1,067 1,186 1,186


Networth 16,873 18,995 23,183 25,706

Debt 9,965 17,859 15,359 15,359

Deferred tax liab. ‐ (2) (2) (2)

Sources of funds 26,838 36,853 38,541 41,064

Net block 726 869 918 921

Investments 1,233 1,442 1,442 1,442

Properties held for dev. 8,433 7,977 7,757 7,425

Current assets 23,766 30,410 38,183 44,493

Inventory 316 389 409 429

Sundry debtors 1,998 3,073 3,335 3,705

Cash & bank balance 732 2,334 2,228 1,125

Other current assets 17,007 20,787 28,112 34,961

Loans & advances 3,132 2,801 3,051 3,201

Other assets 580 1,027 1,049 1,072





107

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Puravankara



Net profit 1,431 2,434 2,613 2,870


Interest 1,884 2,403 2,150 2,150

Change in NWC ‐2,450 ‐8,518 ‐1,964 ‐3,954

Net cash from operations (a) 920 ‐3,610 2,900 1,183

(Inc)/dec in investments 50 ‐209 0 0

Capex ‐11 ‐213 ‐150 ‐120

Others (600) 455 220 332

Cash flow from inv. (b) ‐560 33 70 212

FCF (a+b) 359 ‐3,576 2,970 1,394

Inc/(dec) in capital ‐ (0) 1,922 ‐

Inc/dec in loans 1,648 7,894 (2,500) ‐

Others (249) (312) (347) (347)

Interest Paid (1,909) (2,403) (2,150) (2,150)

Financial cash flow ( c ) ‐509 5,179 ‐3,075 ‐2,497

Net inc/dec in cash (a+b+c) ‐150 1,602 ‐106 ‐1,103


Exhibit 19: Key Ratios

Y/E Mar FY12 FY13E FY14E FY15E

EBIDTA margin 47.8 46.3 44.0 42.3

EBIT margin 47.1 45.7 43.3 41.5





Current ratio (x) 3.2 7.9 3.9 3.4

Net debt/ Equity (x) 0.5 0.8 0.6 0.6



Y/E Mar FY12 FY13E FY14E FY15E

EPS (Rs) 5.7 10.3 11.0 12.1

Diluted EPS (Rs) 5.7 10.3 11.0 12.1

Book value per share 79 89 98 108

P/E (x) 16.3 14.2 7.9 7.4

P/BV (x) 1.0 0.9 0.8 0.7

EV/EBITDA (x) 7.3 6.0 5.4 5.3

EV/Sales (x) 4.4 3.5 2.8 2.4



Kolte Patil Developers

Bloomberg: KPDL INReuters: KOLT.BO BUY


India Research

COMPANY UPDATE

Recommendation

CMP: Rs77

Target Price: Rs180

Upside (%) 134%




Beta 1.0



Stock Performance (%) 1M 3M 12M CYTD

Absolute (6.4) 15.5 140.9 (12.1)

Rel. to Sensex (4.6) 17.0 114.9 (11.3)

Performance

Source: Bloomberg


022 6184 4311

[email protected]

Varun Chakri

022‐6184 4326

[email protected]

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Mar‐13

Sensex (LHS) Kolte Patil Developers

Saving the good news for next year

KPDL share has corrected 30% over past 6months whilst the underlying

business dynamics continue to remain strong with (i) new launches on

track (ii) new approvals picking pace; (iii) improvement in transparency &

(iv) strong earnings growth CAGR of 22% FY13‐15E; the correction present

good opportunity as KPDL has 5‐7% dividend yield at current prices and

strong cash‐flows support long term capital appreciation. We maintain our

BUY on KPDL with target of Rs180 per share (10% discount to NAV of

Rs200) offering 134% upside.

Savings good news for next year

After a robust FY13 results with profits crossing Rs1bn (3x FY12 Profits) mark

there are huge expectations building up on KPDL to deliver in FY14E. We see

fresh triggers playing out next year in FY14E with (i) 2.5‐3mnsqft of new

sales booking (~ Rs14bn in value terms) (ii) new approvals of 5‐6mn sqft (iii)

further strengthening in corporate governance, balance sheet & (iv) strong

earnings growth.

Focus on strengthening corporate governance, sharing profits

KPDL board has approved appointment of Deloitte Haskins & Sells as

statutory auditors subject to shareholders approvals and KPMG as internal

auditors. We see this as a progressive step towards improving transparency

and corporate governance. Besides this, KPDL is one of few realty companies

which has a stated dividend policy of distributing 15‐25% of annual profits

which at current price imply a 5‐7% dividend yield.

Strong balance sheet ‐ not pricing in premium valuation

Despite a strong balance sheet D/E‐0.1x (consolidated debt – Rs1,730mn, Net

debt Rs611mn), valuation are undemanding at 3.7x FY15EPS. KPDL has a

very conservative approach to debt which reflects in strong private equity

partnership with ICICI Venture, IL&FS & Portman Holdings, with no

guaranteed IRR’s structure (only plain vanilla equity). Besides KPDL’s new

land acquisition have been largely JDA’s.

Maintain our BUY stance: NAV Target of Rs180/share

We value KPDL on NAV based target of Rs180 (giving a 10% NAV discount).

At CMP the KPDL trades at 3.7xFY15E EPS.

Key Financials ‐ Consolidated



EBITDA 677 1,921 2,593 3,018

Adjusted PAT / Net profit 341 1,074 1,287 1,592

EPS (Rs) 4.5 14.2 17.0 21.0

RoCE (%) 5.2 12.9 15.0 16.3

RoE (%) 4.8 14.2 15.2 16.6

P/E (x) 17.1 5.4 4.5 3.7


109

June 24, 2013


Shareholding Pattern (%)

Source: BSE

Land bank* distribution (%)

Source: Company; * total gross saleable area – 53mn sqft

Promoters,

74.5

FII, 5.1DII, 0.5

Others , 19.9

Pune , 94

Bangalore , 2

Mumbai , 4

Company Background

Kolte‐Patil Developers Limited (KPDL) was incorporated on

November 25, 1991 as a private limited company engaged in

the business of a real estate development. The company has

key presence in the Pune market which accounts for about

94% land bank, Bangalore accounts for 2% & recent (FY13)

foray into Mumbai market accounts for 4% land bank. In the

Pune market KPDL enjoys 9‐11% market share. KPDL hit

the secondary market with the IPO offering (Rs125‐145 price

band) in Jan 2008. IPO was oversubscribed by 47x with

listing at Rs230/share. KPDL is a closely held Company

promoted by Mr Rajesh Patil, Mr Naresh Patil (looks after

Bangalore operation predominantly), Mr Milind Kolte & Ms

Sunita Kolte. With onset of financial meltdown KPDL exited

the commercial segment and now has 10:90 commercial and

residential mix. KPDL is a pure play residential focused now

and develops commercial properties at prime location only

to exit by selling out.


Rs. mn FY13 FY14E FY15E

Net sales 7,275 9,488 8,895

EBIDTA 1,921 2,593 3,018


Interest Expense 363 286 184

PBT 1,864 2,392 2,949

Tax 625 786 968

Adj. PAT 1,074 1,287 1,592

EPS (Rs) 14.2 17.0 21.0

DEPS (Rs) 14.2 17.0 21.0



Adj Net Margin % 14.8 13.6 17.9

Valuation Multiples

P/E (X) 5.4 4.5 3.7

EV/EBIDTA (X) 4.1 2.2 1.9

Cash Flow

Rs. mn FY13E FY14E FY15E

PBT 1,637 2,392 2,949


Others (430) (640) (960)

Change in Wkg Cap (1,146) 1,031 (1,884)

CF from Operations 109 2,839 166

Capex (113) (75) (83)

Others 281 141 176

CF from Investing 168 65 93

Change in Equity ‐ ‐ ‐

Change in Debt ‐ (1,200) ‐

Dividends & others (572) (543) (502)

CF from Financing (572) (1,743) (502)

Change in Cash (295) 1,161 (244)

Balance Sheet Rs. mn FY13E FY14E FY15E

Total Assets 11,893 12,042 13,704

Net Fixed Assets 625 645 666


Other Assets 766 766 766


Networth 7,945 8,975 10,249

Debt 2,282 1,082 1,082

Minority & Others 1,663 1,983 2,371

Deferred Tax 2 2 2


RoCE % 12.9 15.0 16.3

RoE % 14.2 15.2 16.6

Net Debt/Equity 0.3 (0.0) (0.0)

Equity/Total Assets 0.67 0.75 0.75

P/BV (x) 0.7 0.7 0.6

Note: All financials are consolidated

110

June 24, 2013



The only formidable play on the Pune realty market KPDL with gross saleable area of 53mnsqft and net saleable area of 30mn sqft is

the only formidable & listed play on Pune realty market. Amongst the realty

players, KPDL is the leader with 9‐10% market share in the Pune market, 2nd

biggest player enjoys a market share of ~5% (we estimate Pune market to have an

annual demand of 30,000 housing units and for ~1000sqft/average apartment area

the total market size is 30mn sqft). When compared to Pune, Bangalore (the IT

capital of India) is 60mn sqft market size, with Prestige Estates (PEPL IN) being the

largest company by market capitalization ($955mn) with 9‐10% market share,

Sobha developer 2nd highest market cap at $632mn & 5‐6% market share. In

comparison, KPDL has market capitalization of $98mn despite enjoying 9‐10%

market share. Pune’s economy is IT/ITES and Manufacturing (Auto/Auto Anc.)

driven and offers huge demographic dividend, KPDL has strong regional presence

close to these industrial/service corridor and being a quality/market leader offers a

robust proxy to the underlying realty demand.

Exhibit 1: Sales & Delivery

mn sqft FY11 FY12 FY13E FY14E

Sales 2 2.9 2.6 2.6

Delivery 0.5 1.7 2.5 2.2

Market Share (%) 8 9.5 7.8 7.6


We expect Pune Realty Market to grow at 15% CAGR FY12‐14E and KPDL market

share will remain in the 7‐9% over the same period.

Exhibit 2: Key townships in Pune Realty Market

Developers Township Name Location Land Area

(Acres)

Paranjape Blue Ridge Hinjewadi ‐ Phase 1 138

Kumar Urban Developers KUL Ecoloch Mahalunge, Baner Annexe, near

Hinjewadi IT Park Pune

110

DSK Kulkarni Sundarban Township Hadapsar, Near Magarpatta city 250

Kolte Patil Kolte Patil I Ven Township Hinjewadi ‐ Phase II 383

Sahara Home Sahara City Homes Dhanori Vishrantwadi Road Pune 107

Joint Venture of Avinash Bhosale &

Kumar Properties Megapolis Hinjewadi, Pune 150


In Exhibit 2 we highlight major townships projects across Pune. KPDL has the

biggest township under execution at Hinjewadi Phase II constituting 383acres of

free hold land. KPDL currently has Phase I of 147acres under execution with a

total saleable area of 3.2mnsqft (of which 80% is sold out). The prevailing prices in

the Hinjewadi Phase I is Rs5,200‐6,000/sqft and Hinjewadi Phase II is Rs4,300‐

4,500/sqft. KPDL expects to launch the new Block in the ‘Life Republic’ at

~Rs4,500‐5,000/sqft. With the recent proposal of increase in FSI from 0.5x to 1x for

‘Special Townships’ project in Maharastra (proposal listed for public discussion

final gazette to come by 1HFY14E), KPDL stands to be a major beneficiary. We

expect the FSI cost to be Rs500/sqft and increased saleable area (~8.9mn sqft) shall

add about Rs29/share to our GNAV.

111

June 24, 2013


Conservative on debt financing; high dividend payout KPDL has a very conservative approach on availing debt for funding growth. Our

interaction with the Promoters suggests a clear strategy of dissociating growth and

means of financing, with loan funds for expansion being the last option. Whilst

real estate investors are wary of increasing debt levels in the portfolio companies,

KPDL is one amongst few which has judiciously stayed away from the ‘greed

mirage’ of acquiring land parcels and utilizing projects cashflows to keep

servicing banks/financial institution. To show solidarity with its own philosophy,

KPDL has stated policy of distributing 15‐25% of annual profits as dividend and

utilize balance cash for land acquisition purpose. The preferred mode for land

acquisition would be JDA, JVs, Private Equity and lastly loan funds.

Exhibit 3: Debt: Equity ratio (%)

FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E

21.4 8.9 19.1 19.2 25.2 26.6 ‐2.8 0.0


Stable to improving corporate governance

Board quality and independence improving

Since its listing on December 13, 2007, promoter family representation as a

percentage of the board has remained at 50%.

Board/managerial compensation in line with earnings

Except for FY10 the direction of board compensation growth has been in line with

the PBT growth direction. Since FY10, the board’s compensation has remained

stable at 7‐9% of PBT. Managerial remuneration increased by 29.2% in FY11 v/s

earnings growth of 53.5%. Managerial remuneration declined by 16% in FY12,

directionally in‐line with earnings shrinkage of 39%.

Change in Statutory & Internal Auditors

In June‐13, KPDL board has approved appointment of Deloitte Haskins & Sells as

statutory auditors subject to shareholders approvals and KPMG as internal

auditors. We see this as a progressive step towards improving transparency and

corporate governance. In our interaction with the managements there has been the

intent to improve corporate governance & internal controls/best practices. In the

long term this shall augur well for the minority investors, especially in a sector

which is considered opaque.

Promoter Background

KPDL is a closely held Company promoted by Mr Rajesh Patil, Mr Naresh Patil

(looks after Bangalore operation predominantly), Mr Milind Kolte & Ms Sunita

Kolte. The Promoter Group holds 74.44%, FII’s hold 4.34% and 21.22% is held by

Public shareholders. The group started operations as civil contracting company

with projects in Jalgaon, a small town in Maharastra. Mr Rajesh Patil post his Civil

Engineering moved to Pune in 1989 and started undertaking Real estate projects.

The earlier focus was on 50:50 commercial and residential mix, with onset of

financial meltdown KPDL exited the commercial segment and now has 10:90

commercial and residential mix. KPDL is a pure play residential focused and

develops commercial properties at prime location only to exit by selling out.

112

June 24, 2013


Strong project pipeline lends visibility beyond FY15E

Projects under execution

KPDL has 8.1mn sqft of land bank currently under execution. The Company has

already achieved sales of 6.5 mnsqft which translates into execution order book of

Rs22bn with Rs13bn yet to be recognized on P&L. KPDL expects to deliver 8.1mn

sqft over 24‐30months.

Exhibit 4: Ongoing Projects

Projects Saleable Area in Sq. Ft Location KPDL Share %

Corolla Ph II 1,927,202 Pune 37

Life Republic Township 2,341,553 Pune 45

Downtown 850,000 Pune 51

Tuscan 415,000 Pune 51

Allura 528,440 Pune 100

Margosa Heights 709,963 Pune 51

Glitterati 475,000 Pune 100

City Bay 98,627 Pune 100

City Space 139,780 Pune 100

Green Groves LLP 64,200 Pune 70

Green Olive Venture 117,266 Pune 100

Utsava Raaga 196,020 Bangalore 100

Alyssa 43,000 Bangalore 100

Kormangala 198,000 Bangalore 100

TOTAL 8,104,051


Projects under approval stage

Exhibit 5: Future Projects

Projects Saleable Area in Sq. Ft Location KPDL Share %

Corolla PH 3 2,282,000 Pune 37

Life Republic Township PH 2 6,000,000 Pune 45

Downtown PH 2 1,509,300 Pune 51

Tuscan PH 2 350,000 Pune 51

Allura PH2 150,000 Pune 100

Margosa Heights PH 3 250,000 Pune 51

Jazz 600,000 Pune 100

Atria 150,000 Pune 100

Green Olive PH 2 119,397 Pune 100

GIGA Residency 430,000 Pune 51

Panvel MMRDA Rental housing 1,900,000 Panvel 55

TOTAL 13,740,697


KPDL has 13.7mn sqft of land bank currently under different stages of approval.

We expect these projects to approach launch stage over the period of next 12‐

18months.

113

June 24, 2013


Partnership & JV’s – has been the key game changer KPDL’s conservative approach to acquire debt for land acquisition has led to

private equity tie‐ups. Pre IPO, ICICI Ventures entered into a plain vanilla equity

JV for a 383acre land parcel in Hinjewadi Phase II. The KPIT (Kolte Patil I‐Ven

Township) has launched the Phase I of township on 147acres with a saleable area

of 3.2mn sqft which is 80% sold. Besides this KPDL has entered into a JV with

Portman Holdings (Portman has recently invested in Tata Housing project in

Bangalore) for two projects. IL&FS is a partner in another project. All the PE

investments are plain‐vanilla structure so this doesn’t bring guaranteed IRR/exit

risks to the balance sheet. These Partnership & JVs has been the biggest game

changer for the KPDL as it has helped Company aggregate historical land bank,

which should not have been possible with limited capital it had. KPDL is sitting on

huge inventory gains on historical land banks, which eventually shall lead to

fruitation as and when these land parcels move to launches and revenue

recognition.

Exhibit 6: Partnerships

Subsidiary Company name Shareholder Area Location Projects Saleable

area Structure

Shareholding

Structure

Associate ‐

Proportionate

consolidation

Corolla Realty ICICI Venture,

Kolte, Land lord 73 acres Wagholi Pune

Umang, IVY

Estate, 80 acres,

Wagholi Pune

Associate

37% KPDL, 37%

ICICI Venture, 26%

Mr Ishwar Goyal ‐

Land provider

Subsidiary

IVEN Township ‐

Life Republic ‐

Sylvan Acres

ICICI Venture + KPDL 400 acres Hinjewadi Life Republic JV

50% through Sylvan

(90% holding) , 50%

ICICI, 5% Manish

Doshi

Subsidiary Tuscan Portman + KPDL 12 acres Kharadi, Pune Tuscan 129,400 JV 51% KPDL, ICICI

sold 49% to Portman

Subsidiary KPRE ILFS + KPDL Kharadi, Pune JV 51% KPDL

Subsidiary Bell Flower Portman + KPDL 35 acres Mohamad

Wadi

Margosa,

Florence, NIBM

road pune

JV 50.00%

Partnership

Firm/JV Ankit Enterprises

KPDL + Rajesh Patil ‐

75% + 25%

Pimple Gurav,

Undri,

Wanowarie etc

JV 75% KPDL , 25%

Promoter group


114

June 24, 2013


Future Land bank – not considered in valuation Besides the 26.7mn sqft of land under execution and approval stage, KPDL has

potential future land bank with a saleable area of 37.3mn sqft. These parcels have

been acquired through a mix of JDA’s (joint development agreements) and owned

historical land bank. Strong execution in the ‘Life Republic’ (383acres Township

with ICICI Venture) has led to private Pharma, FMCG companies to enter into

JDA’s with KPDL for their land banks. In our valuation estimates we have not

considered the future land parcels as there is limited visibility on the launch front

and there is no major upfront investment, with most of these engagements

through a JV or JDA.

Exhibit 7: Future development potential

Particulars and

Location of

Land

Total Project

Area (In

Acres)

Saleable

Area (sq.ft)

Title/MOU/DAPA

/Saledeed/JV

Share of

KPDL

KPDLʹs

Share of Area

(in Acres)*

Status

Urse Township 475.00 15,000,000 DAPA 50% 237.50

Near to Lodha Township Contour 9, Urse

Township is in the BS. It’s a 50:50 Profit

sharing (launch target by FY14E end) with

Sanjivani Remidies a Pune based Pharma

firm

Ghotawade 70.17 3,228,529 JV 50% 35.09

This is a JV with Petroleum Company ‐

Vibhu. Earlier the KPDL had plans to make a

SEZ now they would be looking to want to

do residential project ( will target by

1QFY15E)

Jambhe

Township 383.00 8,341,740 JV 50% 118.50

JV with ICICI, 45% equity stake, we expect

the FSI increase from 0.5x to 1x may result in

the incremental addition of 10.3mn sqft to the

saleable area

Sadapur

(Lonavala) 101.00 4,000,000 MOU 33.33% 33.66

Rs160mn is the total deposit to be paid of

which paid Rs50mn. KPDL will have 34%

profit share in the township. This project is

with Kothari Products Limited

Lohgad

(Lonavala) 90.00 200,000 MOU 33.33% 30.00

Fursungi

Township 120.00 4,477,200 Saledeed/MOU 100% 120.00

Land acquisition started in 2009, 35acres sale

deed paid, remaining to be paid over 3 years

(Rs1,200mn is the total cost paid Rs400mn,

Rs800 mn to be paid over three years

Kalus‐Kharpudi 32.12 1,399,147 Saledeed 100% 32.12 Paid For

Kalus‐Kharpudi 11.52 501,811 Saledeed 100% 11.52 Paid For

Yavat (Vakhri) 6.50 225,627 Saledeed/POA 100% 6.50 Paid For

Total 1,289.3 37,374,055 698


115

June 24, 2013


Gross Net Asset Value – Rs191/share KPDL currently has 53mn sqft of gross saleable area as ongoing & planned and a

net area of 30mn sqft. We have valued the projects using the DCF Methodology

and arrive at Gross NAV of Rs191/share. We have valued projects which have next

5 years visibility with total Gross area of 26.7mn sqft and Net area of 15.1mn sqft.

Exhibit 8: Gross Net Asset Value – Rs191/share

Name Location

Sale

area

(mn sq ft)

Total

GNAV

(Rs mn)

KPDL

share

(%)

KDPL

GNAV

(Rs mn)

KDPL

Saleable

area (mn sqft)

NAV/

sqft

(Rs)

NAV/

share

(Rs)

Corolla Wagholi 4.4 2,097 37 776 1.6 477 10.2

Life Republic Hinjewadi 9.7 6,439 45 2,897 4.4 664 38.2

Downtown KPRE Kharadi 1.9 1,917 51 978 0.9 1,036 12.9

Tuscan Kharadi 1.0 709 51 362 0.5 706 4.8

Allura Undri ‐ NIBM 0.5 576 75 432 0.4 1,067 5.7

Margosa Heights Mohamad Wadi 1.0 287 51 146 0.5 290 1.9

Glitterati Aundh Annexe 0.5 289 100 289 0.5 628 3.8

Citybay Boat Club Road 0.1 215 100 215 0.1 2,180 2.8

City Space Viman Nagar 0.2 437 50 218 0.1 2,298 2.9

Green Groves LLP Kharadi Annexe 0.1 39 50 19 0.0 605 0.3

Green Olive Hinjewadi 0.3 288 60 173 0.2 908 2.3

Utsava Raaga Kannur Road 0.2 114 100 114 0.2 581 1.5

Kormangla Koramangla ‐ Block III 0.2 421 100 421 0.2 2,124 5.5

Jazz Aundh Annexe 0.9 1,190 100 1,190 0.9 1,352 15.7

Atria Pune 0.2 339 100 339 0.2 1,992 4.5

Giga Residency Viman Nagar 0.4 930 100 930 0.4 2,164 12.3

Hosur Road Bangalore 0.6 910 100 910 0.6 1,569 12.0

Aundh Pune 1.0 1,821 100 1,821 1.0 1,821 24.0

Kalyani Nagar Pune 0.6 1,291 100 1,291 0.6 2,151 17.0

Panvel Navi Mumbai 1.9 855 55 470 1.0 450 6.2

Bavdhan Pune 1.1 777 62 482 0.7 706 6.4

Grand Total 26.7 21,940 14,473 15.1 961 191.0


Life Republic Township ‐ Optional value can add Rs29/share

With the recent proposal of increase in FSI from 0.5 to 1 for Special Townships

project in Maharastra (Proposal listed for Public discussion final Gazette to come

by 1QFY14) KPDL, stands to be a major beneficiary. We expect the FSI cost to be

Rs500/sqft and shall add about Rs29/sqft to our NAV.

Exhibit 9: Life republic township ‐ has an optional value of Rs29/share

Name LocationSale area

(mn sq ft)

Total GNAV

(Rs mn)

KPDL

shares (%)

KDPL GNAV

(Rs mn)

KDPL Saleable

area (mn sqft)

GNAV/

Share (Rs)

Life Republic Hinjewadi 9.7 6,439 45% 2,897 4.4 38

Old Total 26.7 21,940 14,473 15.1 191

Life Republic ‐ Increase FSI Hinjewadi 8.9 4,924 45% 2,216 4.0 29

New Grand Total 35.6 26,864 16,689 220

Source: Karvy Research Estimate

116

June 24, 2013


Relative Valuation At Rs77, KPDL trades at 3.7x FY15E EPS, which is a discount of 63% to the average

P/E of the peer group. On P/BV, KPDL is trading at a discount of 40% to the

average FY15E P/BV of peers and at 10% premium to its historical cross‐cycle

average P/BV of 0.56x. We believe that these discounts are too high given the

relatively debt free balance sheet and strong free cash flows.

Exhibit 10: Peer group valuation



DLF 175 39.8 21.7 1.0 1.0 15.9 12.9 6.4 7.6

Unitech 21 13.0 10.0 0.4 0.4 14.8 10.9 3.4 4.2

Oberoi Realty 200 9.4 6.3 1.4 1.1 6.1 3.9 15.5 19.6

HDIL 34 1.9 1.9 0.1 0.1 4.1 3.5 5.4 6.5




Omaxe 138 14.0 5.1 1.1 0.9 8.7 3.9 8.5 19.5

Anant Raj 54 7.4 7.2 0.4 0.4 8.4 7.6 5.0 5.4


Phoenix Mills 259 26.7 19.3 2.0 1.8 11.8 9.5 7.6 9.6

Kolte Patil 77 4.5 3.7 0.7 0.6 2.2 1.9 15.2 16.6

Average 14.4 9.9 1.1 1.0 9.1 7.0 9.8 12.1


Valuation Charts On FY15E P/E of 3.7x, KPDL is trading at a 50% discount to its historical crosscycle






0

20

40

60

80

100

120

140

160

Apr‐09

Aug‐09

Dec‐09

Apr‐10

Aug‐10

Dec‐10

Apr‐11

Aug‐11

Dec‐11

Apr‐12

Aug‐12

Dec‐12

Apr‐13

(Rs)

1.5x

2.5x

4.5x

7.5x

0

20

40

60

80

100

120

140

160

180

200

Apr‐09

Aug‐09

Dec‐09

Apr‐10

Aug‐10

Dec‐10

Apr‐11

Aug‐11

Dec‐11

Apr‐12

Aug‐12

Dec‐12

Apr‐13

(Rs)

0.1x

0.5x

1x

1.5x

117

June 24, 2013


Key assumptions and estimates



FY13E FY14E FY15E FY14E FY15E

Volume assumptions

Residential (mn sqft) 2.7 2.6 3.6 (4) 39

Muted sales growth in FY14E to pick up during FY15E as we

expect final approvals from the Life Republic ‐ Phase II to

materialize

Residential (Rs/sqft) 4,808 5,000 5,500 4.0 10.0 Realization to increase as newer phases are being launched at 5‐

10% premium to existing prices

Total Sales 12,741 12,750 19,525 0.1 53.1 Sharp uptick in new sales during FY15E

Earnings forecast

Sales (Rs mn) 7,018 9,488 8,895 35 (6) Slower overall growth mainly on back ended launches

EBIDTA (Rs mn) 1,792 2,593 3,018 45 16

EBIDTA Margin (%) 25.5 27.3 33.9 179bps 661bps

FY14E margin increase on account of better realization, FY15E

increase on account of higher share from commercial property

sales

Net interest expense* 388 286 184 26 36 Expected to come down due to reduction in debt

Avg. interest rate (%) 17.0 13.2 8.5 Interest rates are expected to remain muted with a downward bias

PAT (Rs mn) 918 1,287 1,592 40 24

PAT Margin (%) 13.1 13.6 17.9 49bps 434bps Increase in PAT margins in line with overall estimates

EPS (Rs) 12.1 17.0 21.0 40 24

Cash flows forecast

CFO ‐ a 109 2,839 166

CFI ‐ b 168 65 93

FCF ‐ a+b 276 2,904 259 Free cash‐flow positive

CFF‐c (572) (1,743) (502)


a+b+c (295) 1,161 (244)


118

June 24, 2013


Valuation

We maintain our BUY rating on KPDL with a valuation of Rs180/share. Our

valuation is based on 0.9x our end‐FY14E NAV forecast (see exhibit 14). Our NAV

calculation is based on the following methodology:

We have divided KPDL’s entire land bank into residential projects (based on

the information given by the company)









WACC of 16% (cost of equity 18% based on beta of 1.5, cost of debt 14% &

debt/equity ratio of 0.2x). All the project level NAVs have then been summed

up to arrive at the NAV of the company


final valuation of the company


Rs mn Comments

Gross NAV 14,473 NAV based on the methodology above

Less Net debt (247) Net Debt as on Mar 14E

Current Investments 406 Investment in Marketable securities

NAV 15,126

Shares outstanding (mn) 76 As of Mar ‐13

NAV/share (Rs) 200

Discount to NAV 10%



119

June 24, 2013



In exhibit 15 we highlight our sales and cost inflation forecasts. We expect

property price appreciation in line with WPI inflation i.e. 6% and cost inflation of

slightly higher at 7%. We forecast other costs including marketing, SGA and

employees’ costs at 8% of sales. We have discounted the cash flows using 16% as

hurdle rate.


Assumptions %

Discount rate 16

Annual rate of inflation ‐ sales price 6

Annual rate of inflation ‐ cost of construction 7

Other costs ‐ marketing, SGA, employee cost (as % sales) 8

Tax rate 33




prevailing prices.


Location City Saleable area

mn sqft

Prices

Rs/sqft

Cost

Rs/sqft

Wagholi Pune 4.4 3,650 2,000

Hinjewadi Pune 10.0 4,500 2,200

Kharadi Pune 2.9 5,000 2,400

Undri‐NIBM Pune 0.5 5,000 2,400

Mohamad Wadi Pune 1.0 4,000 2,100

Aundh Annexe Pune 1.3 5,500 2,600

Boat Club Road Pune 0.1 9,000 3,200

Viman Nagar Pune 0.6 9,500 4,500

Aundh Pune 1.0 7,500 2,700

Kalyani Nagar Pune 0.6 8,000 2,700

Bavdhan Pune 1.1 4,800 2,100

Atria Pune 0.2 7,500 3,500

Panvel Navi Mumbai 1.9 5,500 2,500

Koramangla Block III Bangalore 0.2 7,000 2,100

Hosur Road Bangalore 0.6 6,000 2,300

Kannur Road Bangalore 0.2 3,100 1,800

Total 26.7


120

June 24, 2013







Exhibit 17: NAV sensitivity to change in base sale price


NAV/share (Rs) 126 153 180 206 233

Change in NAV (%) (29.9) (14.9) 0 14.4 29.4


Sensitivity of NAV to changes in sale inflation In our base case we have assumed annual sale price inflation of 6% (see exhibit 15).





NAV/share (Rs) 155 167 180 193 206

Change in NAV (%) (13.8) (7.1) 0 7.3 14.5


Sensitivity of NAV to changes in cost inflation In our base case we have assumed cost inflation to be 7% (see exhibit 15). For every


approximately 5%.



NAV/share (Rs) 195 188 180 171 162

Change in NAV (%) 8.4 4.7 0 (4.8) (9.9)






increase in the discount rate, the NAV would fall by 1.6%.


WACC rates (%) 14 15 16 17 18

NAV/share (Rs) 186.1 183.1 180 177.1 174.2

Change in NAV (%) 3.4 1.7 0 (1.6) (3.2)


121

June 24, 2013


Key Catalysts

Success of new launches

KPDL has planned 5‐6mn sq ft of new launches over FY14E with 80% of the

launches in Pune. Whilst we forecast the FY14E new sales run‐rate from the

existing projects to be ~1.5mn sq ft, we build in ~1.1mn sq ft addition from

proposed new launches over the course of FY14E. We believe that KPDL can

surprise the street on the upside with a sales number closer to ~3.0mn sq ft.

Locational clearance of Life Republic Township

KPDL is awaiting ‘locational clearance’ for the Phase II of the ‘Life Republic’

township encompassing an area of 200acres. Currently the Phase 1 – comprising

147acres has been launched, with residual inventory of 0.6mn sqft, (from total

saleable area of 3.2mn sqft) expected to be launched during 1HFY14E. The

approval of Phase II now becomes pertinent for the sales visibility beyond FY14E.

We expect the locational clearance to come by 2HFY14E and thereafter the launch

near 1QFY14E end.

Key Risks to our BUY stance

Oversupply situation in the Pune market may lead to a price correction

Pune is a crowded Township market with multiple developers vying for market

share. Whilst the end user prices still remain affordable at Rs3,500‐5,500/sqft any

volume oversupply situation may result in 10‐15% price correction. For every 1%

correction in base residential prices (exhibit 17), our NAV estimate for KPDL will

be negatively impacted by 2.9%.

Delays in new project approvals

Whilst we have sufficient visibility on the FY14E financial estimates, we are

cautious on the launch approvals for FY14E as any delays may results in

decelerating revenue estimates/profitability for FY15E.

High mortgage rates/slowdown in IT/ITES sector

Pune is typically an end user market with investors comprising about 25‐30% of

overall sales volumes. An end user market which is 60‐65% driven by IT/ITES

sector is highly sensitive to direction of IT/ITES job scenario & mortgage rates. A

negative direction could adversely impact the real estate sales.

122

June 24, 2013



Exhibit 21: Profit & Loss Statement



% growth 23% 192% 30% ‐6%

Operating expenditure 1,815 5,354 6,896 5,876

EBITDA 677 1,921 2,593 3,018

% growth ‐20% 184% 35% 16%


EBIT 656 1,862 2,538 2,957

Interest expenditure 263 363 286 184

Non‐operational income / Exceptional items 105 365 141 176

PBT 498 1,864 2,392 2,949

Tax 140 625 786 968

PAT / Net profit ‐ reported 358 1,239 1,607 1,981

Minority 17 165 319 388

Adjusted PAT / Net profit 341 1,074 1,287 1,592

% growth ‐29% 215% 20% 24%




Cash & equivalents 464 169 1,330 1,086

Debtors 443 1,123 1,556 1,512

Inventory 9,892 10,391 9,129 10,253

Loans & advances 2,429 2,794 3,353 4,861

Miscellaneous 357 357 357 357

Total Current Assets 13,585 14,833 15,725 18,069


Net current Assets 9,651 10,502 10,631 12,272

Investments 725 725 725 725

Gross Block 625 750 826 908

CWIP ‐ 12 ‐ ‐

Net Block 559 625 645 666

Miscellaneous 41 41 41 41

Total assets 10,977 11,893 12,042 13,704

Debt 2,282 2,282 1,082 1,082


Total liabilities 3,766 3,948 3,067 3,455

Shareholdersʹ equity 758 758 758 758

Reserves & surpluses 6,453 7,187 8,217 9,491

Total networth 7,211 7,945 8,975 10,249

Total liabilities & equity 10,977 11,893 12,042 13,704

Net debt (cash) 1,818 2,113 (247) (3)


123

June 24, 2013


Exhibit 23: Cash Flow Statement


PBT 341 1,637 2,392 2,949


Interest 263 388 286 184

Tax (285) (537) (786) (968)

(Incr) / decr in net working capital (140) (1,146) 1,031 (1,884)

Others (46) (281) (141) (176)

Cash flow from operating activities 154 109 2,839 166

(Incr) / decr in capital expenditure (125) (113) (75) (83)

(Incr) / decr in investments 59 ‐ ‐ ‐

Others 93 281 141 176

Cash flow from investing activities 27 168 65 93

Incr / (decr) in borrowings 263 ‐ (1,200) ‐

Dividend paid (130) (184) (257) (318)

Others (263) (388) (286) (184)

Cash flow from financing activities (130) (572) (1,743) (502)

Net change in cash 52 (295) 1,161 (244)

Closing cash balance 464 169 1,330 1,086


Exhibit 24: Key Ratios

Y/E March FY12 FY13E FY14E FY15E

EBITDA margin % 27.2 26.4 27.3 33.9

EBIT margin % 26.3 25.6 26.7 33.2

Net profit margin % 13.7 14.8 13.6 17.9

Dividend payout ratio (x) 0.4 0.2 0.2 0.2

Net debt: equity (x) 0.3 0.3 (0.0) (0.0)

Working capital turnover (x) 0.2 0.6 0.8 0.6

Gross block turnover (x) 4.0 9.7 11.5 9.8

RoCE % 5.2 12.9 15.0 16.3

RoE % 4.8 14.2 15.2 16.6



Y/E March FY12 FY13E FY14E FY15E

EPS (Rs) 4.5 14.2 17.0 21.0

Diluted EPS (Rs) 4.5 14.2 17.0 21.0

Book value per share (Rs) 95.2 104.9 118.4 135.3

P/E (x) 17.1 5.4 4.5 3.7

P/BV (x) 0.8 0.7 0.7 0.6

EV/EBITDA (x) 11.3 4.1 2.2 1.9

EV/Sales (x) 3.1 1.1 0.6 0.7


Institutional Equities Team Rangachari Muralikrishnan

Head – Institutional Equities /

Research / Strategy +91‐22 61844301 [email protected]

K. Anant Rao Head ‐ Sales‐Trading & Derivatives +91‐22 61844303 [email protected]

Uday Raval Karvy Inc. USA +1 212 2674334 [email protected]

INSTITUTIONAL RESEARCH

Analysts Industry / Sector Desk Phone Email ID

Amey Chalke Research Associate ‐ Pharmaceuticals +91 ‐22 61844325 [email protected]

Ankur Lakhotia Derivatives and Quant Associate +91 ‐22 61844327 [email protected]

Hatim Broachwala, CFA Banking +91‐22 61844329 [email protected]

Kruti Shah, CFA Economist +91‐22 61844320 [email protected]

Manoj Kumar Manish Derivatives and Quant Analyst +91‐22 61844343 [email protected]

Maruti Kadam Research Associate +91‐22 61844326 [email protected]

Mitul Shah Automobiles +91‐22 61844312 [email protected]

Parikshit Kandpal Infra / Real Estate / Strategy +91‐22 61844311 [email protected]

Rahul Sharma Pharmaceuticals +91‐22 61844310 [email protected]

Rahul Singh MidCap +91‐40‐44857911 [email protected]

Rajesh Kumar Ravi Cement & Logistics +91‐22 61844313 [email protected]

Rupesh Sankhe Power/Capital Goods +91‐22 61844315 [email protected]

Sagar Shah Media & Entertainment +91 22 61844316 [email protected]

Varun Chakri Research Associate +91 22 61844326 [email protected]

Vinay Nair Oil & Gas +91‐22 61844319 [email protected]

INSTITUTIONAL SALES

R. Sriram Sales +91‐22 61844340 [email protected]

Shabbir Dahodwala Sales (USA) +1‐212‐2674334 [email protected]

Tejash Gandhi Sales +91‐22 61844345 [email protected]

INSTITUTIONAL SALES TRADING & DEALING

Bhavesh Gandhi Institutional Dealer +91‐22 61844368 /69 [email protected]

Prashant Oza Institutional Dealer +91‐22 61844370 /71 [email protected]

Gurdarshan Singh Kharbanda Sales Trader +91‐22‐61844368 / 69 [email protected]

PRODUCTION

Asim Kumar Mohapatra Editor +91‐22 61844318 [email protected]

Vijayalaxmi L. Moolya Production +91‐22 61844328 [email protected]

For further enquiries please contact:

[email protected]

Tel: +91‐22‐6184 4300

Disclosures Appendix

Analyst certification

The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed herein

accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their)

compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this

research report.

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securities.

Karvy Stock Broking Limited Institutional Equities

Office No. 702, 7th Floor, Hallmark Business Plaza, Opp.‐Gurunanak Hospital, Mumbai 400 051

Regd Off : 46, Road No 4, Street No 1, Banjara Hills, Hyderabad – 500 034.

Karvy Stock Broking Research is also available on: Bloomberg ‐ KRVY <GO>, Thomson Publisher & Reuters.

Stock Ratings Absolute Returns Buy : > 15%Hold : 5‐15%Sell : < 5%

Documents

Myirisbreport.myiris.com/ksbl/DLFUNIVE_20130624.pdf · June 24, 2013 Institutional Equities Real Estate India Research THEME REPORT DLF BUY CMP (Rs) 175 Target Price (Rs) 248 Upside