CLSA Jan'18

India property
Sector outlook - Overweight
Abhinav Sinha
abhi.sinha@clsa.com
+91 22 6650 5069
29 January 2018
India
Property
BUY
Godrej Properties GPL IB

Market cap US$2.8bn
Price Rs822.95
Target Rs1,078.00
Up/downside +31%
Indiabulls Real Estate IBREL IS

Market cap US$1.7bn
Price Rs231.25
Target Rs311.00
Up/downside +34%
Oberoi Realty OBER IN

Market cap US$2.8bn
Price Rs528.15
Target Rs639.00
Up/downside +21%
Prestige Estates PEPL IN

Market cap US$1.8bn
Price Rs313.70
Target Rs393.00
Up/downside +25%
Sobha SOBHA IN
Market cap US$0.8bn
Price Rs552.00
Target Rs760.00
Up/downside +38%
SELL
DLF DLFU IB
Market cap US$7.1bn
Price Rs253.40
Real’ty shift
Target Rs176.00
Up/downside -31%
N-R
Mahindra Lifespace MLIFE IN

Market cap US$425m
Sunteck Realty SRIN IN
Sector landscape reaches for maturity

Market cap US$940m
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For important disclosures please refer to page 126.
India property
Contents
Executive summary ........................................................................................................ 3
Investment thesis............................................................................................................ 4
Accelerated sector organisation ................................................................................... 7
Affordability to drive housing uptick ......................................................................... 27
Normalised lease-returns to drive investment shift ................................................ 41
Rerating to continue as sector consolidates ............................................................. 49
Company profiles
DLF.................................................................................................................................. 57
Godrej Properties .......................................................................................................... 67
Indiabulls Real Estate .................................................................................................... 77
Mahindra Lifespace Developers .................................................................................. 87
Oberoi Realty ................................................................................................................. 91
Prestige Estates ........................................................................................................... 101
Sobha ............................................................................................................................ 111
Sunteck Realty ............................................................................................................. 121
Appendix: Rera impact on project cashflow ........................................................... 123
All prices quoted herein are as at close of business 25 January 2018, unless otherwise stated
Solid research foundations
2 abhi.sinha@clsa.com 29 January 2018

Executive summary India property
Real’ty shift
Organised developers’ India's fragmented property sector is undergoing a transformation, as far-reaching
residential sales set for reforms drive consolidation. These changes, combined with the most affordable
major scale-up house prices in decades, will drive real estate sales up from around US$55-60bn
in FY17CL, to US$140-150bn by FY24CL. Organised developers’ market share
could double, from 8-10% to 20% over the same period, delivering a sales Cagr of
30%. High-quality developers, with a greater focus on the residential market, will
benefit disproportionately from this cyclical upturn. Our top picks are Godrej
Properties, Sobha, Prestige Estates and Oberoi Realty.
Accelerated sector No listed developer currently achieves sales of US$1bn per annum in India’s
organisation US$100bn residential-housing market. This will change, as the Real Estate
Regulatory Act (Rera), in force since 2017, restricts the use of customer flows for
construction, tightens compliance and provides a major boost to transparency.
This legislation, along with homebuyers’ rising aspirations and brand
consciousness, is driving a shift towards larger developers. As weaker players exit,
quality players will benefit, doubling their market share to c.20% by FY24CL.
Affordability to drive Low house prices, decade-low mortgage rates and steady income growth have
housing uptick resulted in the best affordability for 15 years. This should drive a volume upturn,
with policy support as the trigger. Developers can address the affordable-housing
market too, as tax incentives and less competition make it viable. We expect
industry sales to more than double over FY17-24, to US$140-150bn. At the same
time, organised developers will enjoy a 30% sales Cagr, to reach US$25-30bn by
FY24CL, and cumulative sales of US$100bn in the next seven years.
Normalised lease-returns to India’s 500msf/US$75bn office market has already consolidated, with the top-
drive investment shift five developers controlling more than 20%. Lease-asset fundamentals are strong,
although high returns are behind us now that cap-rate compression has largely
played out. Large private equity money could turn to residential, where we see
capital needs of around US$10-15bn to fund the growth pickup.
Rerating to continue as The property sector is under-represented in India’s listed universe, with a
sector consolidates combined market-cap of 1%, compared to regional peer benchmarks of 3-5%.
Higher sales, market-share gains and new listings could lift the market cap to
US$100bn within five to seven years. We prefer names with higher residential
exposure, and Mumbai’s ongoing infrastructure upgrades make it the best locale.
Godrej Properties, Sobha, Prestige Estates and Oberoi Realty are our preferred
picks. We also have a BUY on Indiabulls Real Estate and a SELL on DLF.
Expect organised Sales and market share achieved by organised developers

developers to see a 30% 2,000 (Rsbn) Organised developers' presales Market share (RHS) (%) 25
sales Cagr in FY17-24CL
US$25-30bn
20
1,500
30% Cagr 15
1,000
10
500 US$5bn 5
0 0
FY17E FY18CL FY19CL FY20CL FY21CL FY22CL FY23CL FY24CL
Source: CLSA
29 January 2018 abhi.sinha@clsa.com 3

Investment thesis India property
Landscape transformed
India’s residential housing market remains highly fragmented, with larger/organised
A 30% sales Cagr for
organised developers is
developers (those with annual presales of Rs1bn or above) holding less than 10% of
likely medium term the market share. But this is now changing through reforms - primarily Rera (2017) -
and a shift in consumer preferences to developers with strong delivery track-records.
Consolidation should unfold, and we project that in the next five to seven years,
organised developers should double their market share to around 20%. In addition,
with residential affordability at its best level for decades, the market should also
more-than-double its current size, to US$140-150bn by FY24CL. Overall, we project
organised-developers’ sales to enjoy a 30% Cagr over FY17-24CL, likely creating a
US$100bn+ market-cap sector.
Organised developers: sales achieved and market share

Organised-developers’
2,000 (Rsbn) Organised developers' presales Market share (RHS) (%) 25
sales could hit Rs1.8tn+
by FY24CL US$25-30bn
20
1,500
30% Cagr 15
1,000
10
500 US$5bn 5
0 0
Source: CLSA
Sector to undergo major consolidation

In an addressable market of nearly US$55-60bn, there is no listed developer that
Organised sector’s
market share to double
currently averages US$1bn in annual presales. We estimate that the organised
in five to seven years residential sector’s market share is currently 8-10%, versus 20%+ for the top-five
commercial players. Residential should see the organised players’ market share
double, to 15-20% in next the next five to seven years.
Rera is a major force of change

Rera brings regulation to a previously chaotic sector. One significant change is that
Rera (2017) is a major
force for consolidation developers now secure construction of a new project by putting customer flows into
a managed account, and this is already beginning to cause serious working-capital
issues for unorganised players. Increased compliance costs and complexity, and
greater levels of monitoring will drive non-serious players out of the market.
Listed/large developers in the premium Office market has consolidated already

residential market
Listed Blackstone DLF QIA - RMZ
6% - Embassy 5% 4%
Large unlisted 6%
10% K Raheja
4%
Brookfield
3%
Ascendas
2%
Self
construction, Others Prestige
government, 73% 2%
small unlisted
84% Total leasable IBREL
office area: 500msf 1%
Source: CLSA, Listed property companies Source: CLSA, Companies

The customers are changing too

While Rera was driven out of customer demands, their aspirations are also rising,
Rising customer
aspirations are positive with a growing demand for better-quality houses, apartment complexes and
for branded players branded apartments. The lower end of the developer segment will find these
demands tough, further squeezing their margins.
Affordable housing project 50km from Mumbai Clubhouse at the project
Source: CLSA Source: CLSA
Financing costs and trust-factor are added advantages

The costs of leading developers’ financing have dipped to below 10%, as a result
Larger, listed
of supportive private equity and capital markets. Meanwhile, the unorganised
developers have big
financing-cost sector is still dealing with much higher costs of 18-24%.
advantages
Funding costs for listed players Typical funding costs across property sector
(%) Phoenix Sobha Godrej Properties 18 (%) 18-24
14 13 13 16
12
12 12
12 11 11 11 14 13-15
10 10 10 10
10 9
9 12
8
8 10 8.5-10
8
6
6
4
4
2 2
0 0
Mar 14 Mar 15 Mar 16 Mar 17 Sep 17 Large/listed players Medium/unlisted Small/unorganised
Source: CLSA, Companies Source: CLSA
Property cycle is set to revive

Improved affordability will drive the impending housing market’s recovery.
Government incentives
can push an affordable Affordability is at its best level for a decade, through a combination of weak
housing boom property prices, decade-low mortgage rates and steady income increases.
Incrementally, support has come from the government, in the form of affordable-
housing tax incentives (supply side) and credit-linked subsidies on home loans.
Affordability for a premium-category house Disbursements under gov’t subsidy scheme

Houses have not been
this cheap for 10 years 80 (%) 10 (Rsbn)
70 9
56 54 8
60
49
50 45 46 46 45 7
38 41 41
36 34 35 6
40 31 34
31 29
28 27
30 5
20 4
10 3
0 2
1
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
0
FY16 FY17 YTD FY18
Source: CLSA, HDFC, SBI Source: CLSA, Ministry of Finance

Incremental money shifts from lease to residential

Consolidation, low supply and cap-rate compression made lease assets a target for
Cap-rate compression is
now behind us private equity firms. Now that compression (linked to interest rates) has likely run
its course, disproportionate gains will be made in the residential sector, as it begins
to consolidate. We expect that new residential space will need US$10-15bn of
capital in the next five to seven years.
Implied cap rate for AIT SP Funding needs for housing over FY18-24
10 (%)
Equity finance
- Public markets (public/private) Profit
9 - Private equity (customer flows)
10-15%
- Structured/ 15-20%
8 quasi equity
Bridge finance
7 (debt/quasi debt)
10-15% Funding pattern
6 of US$100bn
Construction costs cumulative sales
5 (customer flows) by organised
developers
55-60%
4
Jan 10 May 11 Sep 12 Jan 14 May 15 Sep 16 Jan 18
Source: CLSA, Bloomberg Source: CLSA
Top picks
The property space is under-represented in India, with a market weight of just
Sector is under-
represented in the 1%, compared to 3-5% for peers. We envisage a scenario whereby the sector’s
markets market cap could reach US$100bn, up from its current sub-US$30bn level.
BSE Realty market cap and market weight Property sector weights across peers
120 (US$bn) BSE Realty Index mkt cap (LHS) (%) 6 MSCI AxJ 6
BSE Realty mkt cap as % India MSCI EM 3

100 5
MSCI India 0
80 4 India listed universe 1
MSCI Indonesia 2
60 3
MSCI Thailand 3
40 2
MSCI China 5
20 1 MSCI Singapore 19
MSCI Philippines 24
0 0
MSCI HK 26
Sep 07
Sep 08
Sep 09
Sep 10
Sep 11
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
(%) 0 1 2 3 4 5 6 7 8 9 10
Source: CLSA, Bloomberg Source: CLSA, Bloomberg, MSCI
We prefer residential-centric developers that are flexible enough to take

advantage of the sector’s opportunity. A Mumbai presence and a track-record of
strong execution are added positives. Our preferred picks are Godrej Properties,
Sobha, Prestige and Oberoi. Among lease-business restructuring stories, we have
a BUY on Indiabulls Real Estate (IBREL) and a SELL on DLF.
Property valuation matrix

Company Price Mkt cap ADTO PE (x) EV/Ebitda (x) PB (x) ROE (%) TP % Rec
(Rs) (US$m) (US$m) FY19 FY20 FY19 FY20 FY19 FY20 FY19 FY20 (Rs) Up/dn
DLF 253 7,103 37.2 71.2 61.4 18.1 17.3 1.8 1.8 2.6 3.0 176 (31) SELL
Godrej Prop 823 2,799 3.2 54.9 42.6 72.0 59.2 7.4 6.5 14.3 16.2 1,078 31 BUY
Indiabulls Real 231 1,716 43.0 24.3 20.3 15.7 13.1 2.3 2.1 10.0 10.6 311 34 BUY
Oberoi 528 2,828 2.5 20.2 19.0 14.7 12.0 2.5 2.2 12.9 12.2 639 21 BUY
Prestige 314 1,844 2.6 30.9 27.5 13.6 12.3 2.3 2.2 7.8 8.2 393 25 BUY
Sobha 552 831 6.9 22.2 18.7 11.5 9.4 1.8 1.6 8.2 9.1 760 38 BUY
Source: CLSA

Section 1: Accelerated sector organisation India property
We would like to thank Evalueserve for its help in preparing our research reports. Aniket Sethi (Cement, Oil & Gas); Bhavik Mehta (Autos, IT); Kamal Verma
(Banking & Financial Services); Kushal Shah (Midcaps) and Mihir Manohar (Capital Goods, Utilities, Power) provide research support services to CLSA.
Accelerated sector organisation

There is currently no listed developer achieving sales of US$1bn per annum (pa)
Weak hands exiting, post in India’s US$100bn+ residential market. Fragmentation is high, not just on a
regulatory changes
national level, but on a city level too. However, disruption - starting with
demonetisation in 2016 and institutionalised via the Real Estate Regulatory Act
(Rera) reform in 2017 - has triggered accelerated consolidation. Poor execution
by the developers has given way to widespread customer activism. Customer
preferences also have shifted towards better quality and branded developments.
Access to cheaper capital has become far more important as working capital
requirements rise. As weak hands exit, quality developers will flourish. We expect
that the organised sector should be able to more than double its market share of
the residential property market, to nearly 20% over the next five to seven years.
Residential markets have stayed fragmented

Consolidation hasn’t More than a decade after the first of India’s larger builders started listing, in
played out yet 2006, the residential real estate market has remained highly fragmented. After an
initial burst of expansionary activities in 2006-10, the larger and organised
developers limited their activities to the core and premium markets, and
competition came more from the unorganised segments, ie, developers with
limited track-records or projects.
Figure 1
India’s housing market spend: highly unorganised
Total expenditure on housing FY17: Rs7.0tn (US$110bn)
Developer addressable market: US$55-60bn in FY17
Market size Social: Rs3.3tn Affordable: Rs1.6tn Premium: Rs2.1tn
 Rural or urban poor  Urban or suburban areas  Concentrated in top-8-10

Key targeted housing with Rs2.0m-5.0m/unit cities
characteristics  Government supported  Small/locality-based  Medium-to-large-sized
 No private developers developers developers
Listed Large unlisted Listed Large unlisted Listed

0% 0% 1% 1% 6%
Large unlisted
10%
Market shares Self Self Self

construction, construction, construction,
government, government, government,
small unlisted small unlisted small unlisted
100% 98% 84%
Source: CLSA, MOSPI, NHB, Listed developers

Figure 2
8
BSE Realty index - A history and key developments in property sector
16,000
14,000
12,000
10,000
8,000
Section 1: Accelerated sector organisation

abhi.sinha@clsa.com
6,000
4,000
2,000
0
Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18
2005-2007 2008-mid09 2009-2011 2012-2015 2016-2017 2018 . . .
 First set of property listings  GFC-induced  Sharp price  Property prices and  Sales and pricing drop  Affordability
liquidity crisis appreciation volumes peak to drive
 Sharp price and volume post GFC  Rera implemented volumes
increases  Developers  Poor execution
delay  Property investors creates resentment,  Demonetisation,  Larger
 Developers indulge in major execution, drive sales customer activism anticorruption developers
landbanking and capex; suspend capex clean up sector to gain share
enjoy high valuations  Execution lags  Weak liquidity impacts
new launches capex; landbanking stops
 'Weak hands'  High inflation, interest
proliferate cost impacts profitability
India property
29 January 2018
Source: CLSA, Bloomberg

Overall spending on property in India in FY17 is estimated at Rs7.0tn (or

US$110bn, based on national accounts data). Of this, we estimate that about
Rs3.3tn was spent on social/rural housing (where the private sector does not
participate) and the remaining Rs3.7tn was spent on the market’s affordable and
premium segments. Organised players’ penetration is low, even in the premium
segment.
We estimate that FY17 presales for India’s top-12 listed developers amounted to
Rs153bn, which is less than 3% of the country’s total real-estate spending. No
listed developer has exceeded presales of US$1bn in the last five years. Godrej
The value market share of Properties has the highest residential presales in the listed space, at Rs35bn
the top-12 listed developers (US$550m) on a tr-12-month basis, as of September 2017. While some large
is estimated to be ~3% developers have yet to list, our checks of the largest - by major city - suggest that
nearly half are already listed. Overall, we estimate that the non-social segments
of the Indian housing market, listed and other larger/organised players had a
market share of around 7-10% over the last three years.
Figure 3
No listed developer has had Top-12 listed developers’ residential presales over FY15-17
presales of US$1bn in the 70 (Rsbn) FY15 FY16 FY17
last five years
60
50
Within premium residential,
we estimate a 5-7% market 40
share for these developers
30
20
10
0
DLF Godrej Oberoi Realty Sobha Prestige IBREL Next six
Properties Estates
Source: CLSA, Companies.
Lease asset ownership has shown consolidation already

High capital requirements The residential market’s lack of consolidation is in contrast to the changes seen in
have driven a consolidation the lease asset - ie, office and retail assets - market over the last few years. The
in lease-asset space initial build-out of lease assets (2006-10) was done by multiple developers, as the
prevalence of strata sales led to relatively easier liquidity. Although good quality
(Grade-A) leased office space in India is limited to 8-10 cities, we estimate that
listed/larger developers’ market share was closer to ~15% (~150-200msf
inventory) as of 2008.
Large PE infusion in office However, post GFC (the global financial crisis) an oversupply in office/retail
assets has driven assets - combined with tougher liquidity conditions - led to an incremental supply
consolidation reduction (excluding projects already underway). Several developers sold their
assets to private equities firms, and incremental supply is now controlled by the
PE firms and select large developers. The consolidation in office holdings suggests
that even as total Indian office space (Grade-A) expanded to around 500msf by
2017, nearly 30% is controlled by listed developers and select, large private
equity. Indeed, the top-five control more than 20% of India’s Grade-A office
stock.

Figure 4
We estimate that the top- Breakup of high-quality office property held by developers
five owners hold more than Blackstone - DLF QIA - RMZ
20% of Grade-A office stock Embassy 5% 4%
6%
K Raheja
4%
Brookfield
3%
Ascendas
2%
Prestige
Others 2%
73%
Total leasable
office area: IBREL
500msf 1%
Source: CLSA, Companies.
Figure 5
PE influx owns existing Marquee private equity deals over the last decade in lease-asset space
assets, controls new Investor Investee Value Year Description
supply via JVs (US$bn)¹
GIC DCCDL/DLF 1.4 2017 GIC acquires 33% stake in DLF’s main lease-
asset holding subsidiary DCCDL, which has
27msf operational-lease assets
CPPIB Phoenix Mills 0.3 2017 Mall platform created via acquiring stake in
Phoenix’s Bangalore mall-holding subsidiary
Brookfield Hiranandani 1.0 2016 Acquires entire 4.5msf of office, retail
Developers space in Powai
Brookfield Unitech 0.3 2014 Brookfield acquired Unitech's 40% share
of four assets in NCR, Kolkata
QIA RMZ 0.3 2013 JV to buy development assets across top cities
Blackstone Embassy Group na 2012 JV formed in 2012 has 18msf of operational
office assets and 13msf under construction
Blackstone DLF 0.2 2011 DLF sells 67% stake in Pune’s 25-acre SEZ
¹ Value is equity infused or as reported. Source: CLSA, Companies
China’s top-10 make up 22% of the residential market

With the largest developers steadily gaining market share, Top-10 developers in China: sales and market share
China’s experience has been different from India’s. The top- 2,500 (Rmbn) Top-10 developers' sales (LHS) (%) 25
10 developers accounted for 22% of residential property Top-10 developers' market share 22
21
sales in 2016, double the level of 11% in 2008. The top
2,000 21 20
developers have steadily utilised their balance-sheet
advantages and delivery capabilities to scale-up. In 2016, the 15
16
top-three developers together sold US$150bn of properties, 1,500 13

15
12
accounting for 11% of the market share. 11
10
1,000 10
As delivery capabilities and balance sheets start to matter
more in India, we would expect similar consolidation to
unfold. Assuming that a major Indian developer could reach a 500 5
3% market share during our forecast horizon, we would
expect it to record annual sales of US$5bn. The best 0 0
performance in India over the last four quarters was Godrej 2008 2009 2010 2011 2012 2013 2014 2015 2016
Properties, with US$550m. Source: Fang.com, Sina, CLSA

Rera is the agent of change

Rera brings property sector We believe the transformations that India’s office markets have already seen are
under regulation currently unfolding in the residential sector. A major slowdown in residential
property markets from 2013 onwards - combined with poor customer experience
with disorganised and unscrupulous developers - has driven significant
government reforms, the landmark one being the implementation of the Real
Estate Regulatory Act (Rera) in 2017.
Figure 6
Rera won wide political Rera timeline

acceptance and was passed
unanimously in both houses
14 August: December:
Indian National Cabinet 15 March: 1 May: Bill
Congress approved 20 Loksabha 1 May: Bill implemented
introduces bill amendments approves bill commences and effective
2013 2015 2015 2016 2016 2016 2016 2017 2017
July: Bill 10 March: 25 March: 19 April:

referred to Rajyasabha Bill receives Central
Rajyasabha approves bill assent of gov’t issues
president notification in
official gazette
Source: CLSA
Rera makes it more difficult Rera is customer driven, provides a major boost to transparency, increases
for smaller developers to working capital requirements, and significantly raises the property sector’s overall
operate, scale up entry barriers. Its aim - to increase customer confidence in purchasing under-
construction real estate projects - comes at a cost to developers: higher working
capital and the risk of significant liabilities. As a result, marginal players are
looking to completely exit the residential market, while mid-sized developers are
reducing their operational scale to core markets, where risks are more
manageable.
Easy money has gone

Clause restricting Rera protects customers in two important ways: developers must secure all
customer-inflow usage project approvals before launching any sales process, and 70% of all project
tightens liquidity cashflow - excluding land costs - must go on construction. Both these measures
make it tougher for developers to rotate capital into multiple projects. Prior to
Rera, developers used to front-load customer cashflow vis-à-vis the actual
construction-expenditure outgo.

Figure 7
Rera impact: With cashflow tightened, unscrupulous developers’ unbridled expansion plans have come to an end
Pre Rera cashflow:

Developers unchecked Project A
Could get
underfunded
Money partly diverted

Project B to other resi project
Customers Developer
of
project A Customer pays
to extent of
demand raised Money spent on
Project C land/leased assets
Banks verify
Post Rera cashflow:
construction progress
Developers working capital rise
Money released to
extent of progress
Customers Bank-monitored
Developer Project A
of account
project A
Customer pays
Raises demand Construction
to extent of Bank may not release for work done bills paid
demand raised money if demand raised
is higher than justified
by work done
Source: CLSA
Diverging customer However, with the release of 70% of customer inflow now tied to a project’s
inflow to expand is no progress, developers’ net inflow will become back-loaded. The practice of a
longer possible ‘prelaunch’ and sales without any significant construction used to generate equity
for a developer that was deployed into capex, like new land or lease-asset
projects. Post Rera’s implementation, this is no longer possible - developers have
had to prioritise their projects at hand and look to exit those where quick
monetisation is no longer possible.
IRR will decline and A look at how project cashflow will change for a standard real estate project
breakeven pushed back (1msf area, Rs6,000/sf selling price) can be seen in Figure 7. We estimate that
project IRR will decline by a third, and cashflow breakeven - in a good scenario
where land costs are paid and all properties are sold at launch - could be pushed
back by about 15-20%. A detailed calculation is presented in the Appendix.

Figure 8
29 January 2018
Select listed companies and their land banks¹ in major cities
Developer Area (msf)
DLF 133
Godrej Prop 20
Godrej Prop 23
IBREL c.50
Ganesh Housing 25

abhi.sinha@clsa.com
NCR
Oberoi c.15
Sunteck 9
Ahmedabad
IBREL 20 Kolkata
Godrej Prop 23 Developer Area (msf)
Godrej Prop 7
Mumbai
Kolte-Patil 25 Pune Developer Area (msf)
Godrej Prop 25 Godrej Prop 7
Oberoi 2 Hyderabad Prestige 4
DLF 15
Bangalore
Developer Area (msf) Developer Area (msf)
Prestige c.60 Prestige 6
Sobha 79 Chennai IBREL 2

Developer Area (msf) DLF 19
Godrej Prop 31 Kochi
Sobha 45 Sobha 40
India property
Puravankara 50
Godrej Prop 2
Brigade 38
Prestige 2
DLF 13
¹ Based on disclosure of forthcoming projects/land bank (in acres) as of Sep 17 or latest available. Source: CLSA, Companies
13
Figure 9
14
Top unlisted developers in India by major city of operation presence
Larger unlisted developers Developer
M3M
Ireo
Tata Housing
Amrapali
Supertech

abhi.sinha@clsa.com
NCR
Developer Ahmedabad Kolkata
Hiranandani
K Raheja Mumbai
Pune Developer
Tata Housing
Embassy
Wadhwa
RMZ
Omkar
Hyderabad Mantri
Tata Housing
Developer
Salarpuria
Panchshil Bangalore
Paranjpe
Chennai
Magarpatta Developer
Kochi VGN
India property
29 January 2018
BBCL
Vijay Shanthi
Source: CLSA, Companies

Figure 10
Project breakeven on Net cashflow to developer in a standard mid-income residential project

cashflow basis will be 2,500 (Rsm) Before regulation After regulation
back-loaded now
2,000
1,500
1,000
500
(500)
(1,000)
(1,500)
(2,000)
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Source: CLSA
Figure 11
Rera significantly tightens Rera’s impact on developers for key project aspects
standards across all
developer activities
Starting presales
 Compulsory registration
with Rera
 Need to seek all approvals
Selling standards  Slows project launches Use of cashflows
 Raises capital needs
 Need to declare titles,  70% of cash collections,

incumburances, court ex-land costs, need to be
cases and track-record kept in managed account
 Raises compliance costs  Utilise only for project
 Consistent ethical  Raises working capital
behaviour needed requirement
Impact on
Transparency
developers Penalties
 Need to declare titles,  Up to 10% of project costs

incumburances, court for not following rules
cases and track-record  Promoters may be
 Raises compliance costs Change in imprisoned
 Consistent ethical development plans  Project could be taken-
behaviour needed over by buyers
 Rigidity as consent needed

to change plans
 Raises legal due-diligence
requirements
 Future plans to be made
clear to customers
Source: CLSA, Rera Act
NCR highlights - Why customers needed protection

Buyers under significant The need for Rera was felt across the whole of India. The NCR (National Capital
stress Region) market saw customers facing the brunt of possibly the worst developer
practices, exacerbated by the region’s majorly investor-driven property market.
NCR has seen the two worst cases with two listed developers - Unitech and JP
Infratech - facing serious issues delivering projects on time. JP Infratech is
undergoing a bankruptcy resolution process.

Figure 12
Buyer protection under Rera
Penalty for project delays
 If a project gets delayed then the

developer will be liable to pay the
monthly interest on bank loans taken
for under-construction flats. Promoters have to execute a
registered conveyance deed
Buyers can claim possession
 The promoter must execute a registered

 The buyer can claim possession of the conveyancing deed in favour of the
unit and the association of buyers can allottee within specified timelines linked
collectively claim possession of the to completion.
common areas as declared by the real
estate developer.
Rera is Buyers consent needed
Antidiscriminatory clauses
consumer to make plan changes
centric  A buyer can also file a complaint against the developer

if he makes any additions and alterations in the
 The developer is not to restrict sale on sanctioned plans, layout plans and specifications and
the basis of caste or community. If this the nature of fixtures, fittings and amenities, etc,
happens, the buyer has the right to file without the previous consent of at least two-thirds
with the Rera authority. of the allottees, other than the promoter, who have
agreed to take apartments in a building.
Defect liability clauses Disclosure and transparency
 If a buyer finds any structural or workmanship  Buyers have the right to get project details, such as
defect within five years from the date of being cost of land, development agreement, sanctioned
handed the flat, the developer must rectify it plans, open spaces, cost of construction, covered
without further charge. Failure to do so means parking lots, phase-wise plans of development,
the buyer has the right to complain against project completion time, etc. These details will be
to the Rera authority. available on the respective state’s Rera website.
Source: CLSA, Rera Act
Launches in NCR down to A high proportion of investors as initial buyers - instead of end-users - implied
10% of previous peak that as long as the property cycle was strong, developers incrementally focused
on launches and presales, instead of execution. Consequent to the issues in NCR,
new-property launches are down by as much as 90%, compared to previous
peaks, and sales are down by more than two thirds. A proper rollout of Rera in
NCR remains important for its recovery as India’s largest housing market.
Mumbai at forefront of Rera change

Mumbai has led While Rera was a nationally applicable law, implementation was to be done by
Rera-adoption both in respective state governments - meaning there have been state-wide differences.
timeliness and quality Several states only published the legislation and started registering projects near
to the 31 July deadline, despite a ban from 1 May on launching unregistered
projects.

Figure 13
Key milestones in Rera adoption across states
Uttar Madhya
Maharashtra Gujarat Tamil Nadu Karnataka Punjab Haryana
Pradesh Pradesh
Rules
17 Apr 17 27 Oct 16 29 Oct 16 22 Oct 16 22 Jun 17 10 Jul 17 8 Jun 17 28 Jul 17
notified
Website
1 May 17 26 Jul 17 20 Jul 17 1 May 17 27 Jul 17 25 Jul 17 27 Jul 17 No website
launched
Authority
gets 24 May 17 17 Aug 17 7 Jun 17 1 May 17 10 Aug 17 na 13 Jul 17 26 Nov 17
chairman
12 Jul 17 4 Aug 17
First
3 May 17 na (first project (first project 31 Jul 17 10 Jul 17 23 Jul 17 15 Jul 17
project
registered) approved)
Source: CLSA, Rera authorities of respective states
More than 10,100 projects Maharashtra began to adopt Rera on 1 May, launching a functional web-portal. As
are Rera-registered across of mid-December, more than 10,100 residential projects statewide were
Maharashtra registered under the bill. The Mumbai metropolitan region (MMR, capital of
Maharashtra state) had more than 3,600 residential projects registered,
comprising over 400,000 apartments under various stages of development. While
several other states have also started their Rera websites, the disclosures
available under the Maharashtra Rera website are currently the most
comprehensive (see Figure 16).
Figure 14
MMR had more than Rera-registered projects in Maharashtra by location as of 10 December

400,000 apartments under Mumbai city
development 5%
Total : 10,175
Mumbai suburban
18%
Others
23%
Aurangabad
3%
Nagpur
Thane (Mumbai
3%
outskirts)
Nashik Pune 13%
6% 29%
Source: CLSA, MAHARERA website
Activity is resuming post Rera

Launches increase in Rera Property buyers have responded positively, as Rera approval and the availability
markets but stagnant of development details help boost confidence in projects. Early Rera
elsewhere implementation - compared to other states - implied that Maharashtra has taken
the lead in new project launches. In 2017’s July-to-September quarter, launches
in Mumbai and Pune were up 34% QoQ and 2% YoY, compared with launches in
the next top-eight cities rising 17% QoQ, but falling 21% YoY.

Figure 15
Mumbai and Pune’s Rera City-wise trend in new launches

implementation happened
ahead of other cities (units)
30,000 Mumbai, Pune Top cities ex Mumbai, Pune
25,000
20,000
Activity improved post
Rera implementation
15,000
10,000
5,000
0
4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17
Source: CLSA, REIS JLL
Rera implementation in scale-up stage

States at varying degrees of The implementation of Rera has not been uniform across all states. Several states
Rera implementation with large cities, like Haryana (Gurgaon), West Bengal (Kolkata) and Telangana
(Hyderabad), have yet to have a functional online mechanism for executing the
act. In addition, there are states like Karnataka (Bangalore), Tamil Nadu (Chennai),
etc, where the Rera websites are functional but the level of publically available
details is not yet up to the mark.
We understand that these are mostly timing issues and - due to consumer
demand for Rera staying high and the central government continuing its push for
full implementation - higher disclosure levels will soon be national. Nonetheless,
almost all states, despite nonfunctional Rera websites, have implemented Rera’s
clauses necessitating registration prior to any marketing, and protecting customer
inflow in ongoing projects.
Extensive anticorruption campaign is cleaning up the sector

Anticorruption campaign is Rera is part of an extensive anticorruption campaign that the Modi government
significant for property adopted when it came to power in 2014. Some of the key moves impacting the
property sector include demonetisation, GST (Goods and Services Tax) and the
Benami Property Act (2016).
Benami Act and increased Benami has also helped with the property market clean-up; the name refers to the
UID-based asset/account holding of personal property (whether a physical or financial asset) by someone
mapping should help further who is not the beneficial owner of the asset. The law permits the confiscation and
sale of Benami properties once authorities discover them. The government has
also kept on increasing its data-gathering efforts by the usage of UID (India’s
unique personal identification system) and other big-data measures, implemented
post demonetisation. Overall, a less-cash economy and continued anticorruption
measures are important drivers in the property sector’s clean up.

Figure 16
Rera implementation across states: Disclosures available from websites

States Maharashtra Uttar Madhya Gujarat Tamil Karnataka Telangana West Haryana Andhra
Pradesh Pradesh Nadu Bengal Pradesh
Project name      
Project type      
Registration number      
Litigations related to project      
Date of completion      
Est cost of construction      
Land area      
No website available
No website available
Apartment type      
Rera not notified
Website in Beta
Contractor details      
Real estate agent names      
Carpet area      
No. of apartments per category      
Number of booked apartments      
Legal title report      
Details of encumbrances      
Commencement certificates      
Copy of layout approval      
Pro forma of the allotment
letter and agreement for sale      
Source: CLSA, Respective state’s Rera websites
Figure 17
Multiple changes are driving Key sector clean-up steps and impact on buyers/developers
sector consolidation
Key issue Agent of change Customer benefit Developer impact
On time and Higher working

Project delivery Rera
assured delivery capital
Easy to compare
Higher compliance
Transparency Rera projects, avoid
requirements
false promises
Lower prices for Lower investor

Cash transactions Anticorruption campaign
end users demand
Lowers cash Evens

Tax avoidance GST, ready-reckoner rates
prevalence competitive field
Grievance Easier judicial

Rera Fear of law
redressal remedies
Source: CLSA

Demonetisation helped The Indian property sector, particularly the secondary market and land-buying
lower cash’s salience in the stage, had - alongside declared property values - a cash component, which helped
property sector with income-declaration and tax-payment avoidance. All locations in India have
predetermined (as per local governments) base property values. Any deal below
this value is unacceptable from a stamp-duty-payment perspective (usually 5-8%).
However, the market value in specific transactions could be much higher than the
base value, thus creating a tax-avoidance incentive. This acted to deter better
organised and/or clean dealmaking. However, demonetisation has led to a fall in
the level of cash in circulation, making these deals tougher. In addition, local
governments have increased their base values, despite property prices remaining
stagnant, narrowing the gap - and thus the incentive - to under-declare property
transaction values.
GST on property: Halfway done

The implementation of the landmark Goods and Services to take responsibility for input taxes will make their entire
Tax (GST) in July 2017 brought under-construction supply chain far more organised, as the prevalence of cash
apartments under its ambit. Taxation on an under- transactions will fall.
construction property was approximately 6% of service tax,
which was replaced with a 12% effective GST tax rate. However, GST’s property reform is only halfway through, on
However, builders are able to claim input taxes as credits. account of GST’s framework not including land. The
Ideally, GST is supposed to be tax neutral, but in reality government’s aim is to bring land under the purview of GST,
most developers have taken a small hit (1-2%) on their but it will face stiff resistance from local governments, as real
effective realisations. Given the weak property-pricing estate stamp duties are a major source of revenue for cities
cycle, the end result has been a proliferation of ‘GST free’ and state governments. However, if land transactions are
offers, with developers reducing their own net realisations. also included under GST, transparency in land deals will also
The major positive impact has been that forcing developers rise significantly.
Comparison of pre and post GST taxation regimes
Developer
Pre-GST Post-GST
Input services
Input services Input goods
and goods
Excise duty GST

Service taxes VAT
 ~30% on cement, paints  Varies between 5-28%
 ~15% on overheads  State specific rates,
 Lower rates on steel depending on the input
like marketing mostly within 5-15%
and other inputs good or service
Total input taxes Total input taxes

 Total tax between 4-8%  Property price could be
of property prices 2-3% lower than earlier
Tax on output Tax on output

 ~5-6% service tax  Actual rate is 18% but
 1%+ VAT 1/3rd abatement for land
 No offset of input taxes  Effective is 12%
Effective tax (pre-GST): 10-14% Effective tax (under GST): 12%
Post-tax cost of completed property is cheaper under GST than previous regime
Source: CLSA

Rising aspirations reflected in house purchases

Apartment complexes with Homes have become a symbol of growing Indian aspirations. This trend started in
amenities proliferated from the early 2000s in the luxury segment, when renowned developers began to
early 2000s employ new technology, resulting in faster construction times, lavish interiors,
landscape gardens and a large clubhouse - all inside one large land parcel. The
concept of having a city within a city has created landmark townships, like
Oberoi’s Garden City, DLF’s Gurgaon Golf Course Road townships, Sobha’s
Dream Acres township and IBREL’s ‘Blu’ Club & Estate project, to name but a few.
Aspirations have led to In the last decade, we have witnessed this concept being implemented in large
similar demands at the mid affordable townships, allowing MIG and LIG (middle-income group and lower-income
to lower-mid levels as well group) homebuyers to have access to aspirational homes in peripheral areas of large
cities. Providing additional amenities - sporting facilities, gymnasiums, jogging tracks,
clubhouses, amphitheatres, cafes, etc - inside a residential complex has now percolated
to the lower end of the market. This inspires homebuyers to shift to large townships
that have the critical mass to provide such amenities.
Figure 18 Figure 19
Aspirational developments Affordable housing project complex ~50km Clubhouse at the project
in affordable housing from Mumbai
projects in Mumbai
Source: CLSA Source: CLSA
Demand for larger As aspirations rise further, we are likely to witness large-scale projects being
townships to rise preferred to standalones, especially in locations where land is available in
abundance. We believe that developers would yield better returns by executing
such projects on a larger scale. Developers need multi-acre land parcels to
construct complexes where it is economically feasible to provide additional
amenities and open spaces. This also raises the working capital requirements,
which will already be strained under Rera.
Branded homes command higher pricing

The demand for premium housing remains strong, from an end-user perspective.
At the top end, luxury developments in Mumbai, NCR and Bangalore have
witnessed the entry of marquee international brands, such as Trump, Ritz-Carlton,
Four-Seasons Residences and Armani Residences. These brands command higher
premiums, and leading Indian developers utilise the names to sell parts of their
projects. Additionally, leading developers often command a premium, compared
to projects by smaller players, or those with limited track-records.
Figure 20
Premium pricing will be the Premiums charged by branded developers

distinguisher for branded Location Developer Project Price per Price projects by Premium
sf (Rs000) unbranded developers (%)
developers Goregaon (E), Mumbai Oberoi Esquire 23-25 15-18 30-40
Koramangala, Bangalore Prestige St. Johns Wood 10-12 8-10 20-25
Dasarahalli, Bangalore Sobha Moonstone 6.0-6.5 5.0-6.0 15-20
Sector 54, Gurgaon DLF Park Place 14-15 10-12 25-35
Hinjewadi, Pune Godrej Properties 24 (under construction) 5.0 4.5 10-15
Source: CLSA, 99Acres

Premium positioning, timely delivery, legacy, a good track-record, positive

customer experience, goodwill and success stories have helped some developers
command a premium on their residential projects, compared to their competitors.
These brands have set themselves apart from the pack by providing quality
housing in their area of operations, and will continue to maintain the gap between
them and new developers.
Difference in financing costs

Low funding costs and The cost of funding for listed developers is now near multi-year lows. Several
improved liquidity listed companies have reported blended costs of funding in the 9-10% range,
around 3-5ppts cheaper than their reported financing rates around three years ago.
Figure 21
Average cost of debt down Average cost of debt for select listed companies
by 3ppts for listed property 14 (%) Phoenix Sobha Godrej Properties
companies since Mar 15 12
13 13
12 12
12 11 11 11
10 10
10 10
10 9
9
8
8
0
Mar 14 Mar 15 Mar 16 Mar 17 Sep 17
But not for everyone While the average borrowing costs for large listed developers is around 8.5-10%,
unlisted but still larger or mid-sized developers are able to borrow at 13-15%, mostly
from the property-lending-focused NBFCs (nonbanking financial companies) that
usually do structured deals. However, the borrowing costs for the unorganised
building sector are still fairly high, at 18-24%, with most of the funding coming from
the informal markets.
Figure 22
Large players can leverage Range of indicative borrowing costs, based on the type of developer
balance sheet for further 18 (%) 18-24
expansion
16
14 13-15
12
10 8.5-10
0
Large/listed players Medium/unlisted Small/unorganised
Source: CLSA

Additional financing sources Additionally, the listed and larger developers have funding routes open via private
for larger developers equity deals (mostly for commercial assets), or equity markets (valuations at near
include PE, public markets 10-year highs). This suggests these brands have an opportunity to acquire quality
assets and gain scale, a decade on from the closure of residential developers’ last
strong PE funding route. With Rera, developers are limited to adding projects
using cashflow from presales. As such, the availability of cheaper and varied
sources of financing will be critical to keeping profitability levels remunerative
enough to develop and expand.
Opportune time to expand for developers

Weak property prices, Brands that survive the industry churn are in a great position to scale up. A weak
exiting weak hands give property market and exiting developers - further accelerated by India’s recently
scale up opportunities initiated bankruptcy process - have created an unprecedented asset-buying
opportunity for those with balance-sheet strength and/or the goodwill to attract
customers, as well as institutional money. We believe that not only will the
surviving developers gain market share, they can also expand inorganically via
project acquisitions.
Prolonged weakness in property pricing . . .

Property-price inflation Residential property markets have seen declining volumes and stable-to-declining
trailing CPI for the last prices since 2013. Average top-seven-city pricing (prime Grade-A properties)
four years shows that the pace of price appreciation over the last four years, from Sep 13 to
Sep 17, has witnessed a Cagr of less than 2%, compared with a Consumer Price
Inflation (CPI) increase of just over 4%. The weak price performance follows a
much sharper price Cagr seen during the prior four-year period, from Sep 09 to
Sep 13, of 12%, when CPI was comparatively higher, at 10%.
Figure 23
Prices have seen marginal YoY trend in Grade-A residential prices at prime locations for top-seven cities
declines over the last year 25 (% YoY)
20
15
10
5
0
(5)
(10)
(15)
(20)
Sep 07
Sep 08
Sep 09
Sep 10
Sep 11
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Mar 08
Mar 09
Mar 10
Mar 11
Mar 12
Mar 13
Mar 14
Mar 15
Mar 16
Mar 17
Source: CLSA, Cushman & Wakefield
. . . has impacted land pricing too

Land pricing has come off While weak property volumes, demonetisation and Rera have played a part in the
weak sentiment across land purchases, weak property pricing has also been an
important factor. Although land prices held up well till around 2015, land
transactions began to witness lower prices as deals declined. There are no clear
benchmarks available for India-wide land prices, recent land deals - and our talk
with industry participants - suggest that prices could be down by an average of
around 10-20%, with some distressed deals and/or weaker locations, such as
NCR, seeing even bigger corrections.

Figure 24
Recent land deals are Last few major land deals in Thane
happening at prices seen Buyer Seller Location Deal Deal value Area Price
several years back time (Rsm) (acres) (Rsm/acre)
Oberoi GSK Pharma Pokhran Rd Sep 17 5,550 60 93¹
Indiabulls Real Voltas Pokhran Rd Nov 14 2,360 7 327
Tata Housing KEC International Pokhran Rd Mar 14 2,117 7 290
Kalpataru Builders Bayer CropScience Kolshet Rd Mar 11 12,500 104 120

¹ Land is industrial use. After payment of conversion charges would cost about Rs120-130m/acre; same as deal from
six years ago. Source: CLSA, Companies
Quality of assets available is better as weaker developers shed projects

Larger developers have Sector consolidation and the weak trend in land prices suggest an improvement in
started acquiring sizeable both the quality and pricing of assets available for acquisition. This has triggered a
new projects recent wave of land/project acquisitions; Godrej Properties has been at the
forefront of this, adding 36msf - or nearly 30% - to its land bank in the last six
quarters. In 2017, Oberoi Realty also signed a major land deal in Thane, near
Mumbai, adding around 6msf, or 30%, to its existing land bank. Other companies
that have recently added projects include IBREL, Phoenix Mills and Sobha. For
several of these companies (IBREL, Phoenix, Oberoi), the new land acquisitions
have come through after long gaps.
Figure 25
Oberoi and Godrej have Land/project acquisitions by leading listed developers since FY15
added ~30% to their land
bank in last six quarters 30 (m sf) Oberoi Godrej Properties Phoenix IBREL
25
20
15
10
0
FY15 FY16 FY17 1HFY18
New business models for project additions are trust based

Buy-and-hold model of land The initial business development model for developers was via the ‘land
banking has incrementally banking’ model, wherein developers would directly purchase land from
lost salience landowners and retain it on their books. Developers that had listed prior to
2010 mostly followed this strategy. While the margins are higher in this model,
there are concerns about slow monetisation and low ROE. Several developers
currently facing tough situations were ones whose execution and monetisation
substantially lagged land banking, their balance sheets eventually unable to take
the strain of high asset bases.

Figure 26
Trustworthy developers Land acquisition models, based on parameters of ROE (Bubble size), flexibility and control
have higher ROE options
now to add projects Flexibility
Development
management
Profit
share Area
share
Private-
equity
platform
Direct land
acquisition
Control
Source: CLSA
Godrej Properties, Prestige From 2010 onwards, a few developers - primarily Godrej Properties and Prestige
built up scale via new forms Estates - began acquiring land via a joint-development model, which is relatively asset
of project additions light. Additionally, the landowner is often a locally knowledgeable/influential person
that can help seek local-authority approval. Over the last two to three years, the
asset-light model of project acquisition has accelerated, with more methods being
added, including development-management fees, profit-sharing and a PE/platform
approach to add new projects.
Figure 27
Expect more developers to Land/project acquisition models compared on various parameters

adopt non-land banking Model Developer preferring the model
approaches Direct land acquisition DLF, Oberoi, IBREL, Sobha
Private equity platform Phoenix, Godrej Properties
Area/revenue share Godrej Properties, Prestige Estates
Profit share/JV Godrej Properties, Sobha, Oberoi
Development management Godrej Properties
Source: CLSA
Organised developers’ market share set to double

Market share should hit The sector’s transformative changes, as highlighted above, are essentially aimed at
20% by FY24 boosting the confidence of customers buying under-construction property. The
developers have to pay for these confidence-boosting measures via a combination of
higher working-capital requirements, rising compliance costs and, ultimately, a fear of
the law. Not every developer is willing or capable to undergo the transformation.
Survivors are thus set to see market-share increases and by FY19CL, we expect an
increase in the exits of unorganised and partially organised players. We forecast that
the large/organised Indian developer space will double over the next seven years,
enjoying a market-share rise from 8-10% in FY17, to 17-20% by FY24CL.

Figure 28
26
Accelerated sector transformation
Rising aspirations Brand preference Funding issues Rera
 Homes perceived as  Customers willing to  Institutional liquidity  70% of cashflow

an lifestyle extension pay higher premium & lower borrowing are usage restricted
 Larger developments  Brand is rewarded by cost for large  Marketing without
preferred over higher sales run-rate developers (8-10%) approval is disallowed
standalone buildings  Smaller developers  Transparency,

abhi.sinha@clsa.com
face difficulty to add compliance &

projects (18-24%) accountability risen
Buyers prefer larger developers Smaller developers consolidate into larger

 Slower sales velocity for unknown developers  Volume premium for developers showing execution
as trust is lost  Inability to raise competitive finances for capex
 Pricing premium for branded properties of  Approval advantage with larger developers as ease
~20-30% improves large developer economics of business promoted at state/city level
 Smaller developer cannot offer lifestyle  Technology gaining prominence viz taller buildings,
products green building codes and faster execution
FY17 FY24
8-10% Market share gains for organised developers 17-20%
India property
29 January 2018
Source: CLSA
Section 2: Affordability to drive housing uptick India property
Affordability to drive housing uptick

Best affordability for Improved affordability is the key driver of our positive call on housing space.
over a decade to drive Years of weak property prices and more-than-a-decade lows in the current
housing uptick mortgage rates have made houses more affordable than in any time in over 10
years. Additionally, the government’s Housing for All programme has provided
further affordable-housing incentives for both demand and supply sides. We
believe that even as housing volumes improve across the board, affordable
housing can open up as a new segment for listed developers, adding another layer
of growth.
Improved housing affordability

Property price inflation has The housing market is seeing its best affordability levels for more than a decade.
been trailing income This improvement has been gradual, as house-price appreciation of around 2%
inflation for four years per annum for the last three years has substantially trailed per capita income
growth of around 8%. Meanwhile, mortgage interest rates are at 12-year lows of
8.3-8.4%.
Figure 29
Key assumptions: Affordability ratio for a Rs6.0m apartment
80 (%)
Property pricing
Cost in FY18: Rs6.0m 70
FY18: Flat
FY19: +2.5% 60 56
54
49
Household income 50 45 46
46 45
41 41
Income in FY18: Rs1.3m 40 36 38
34 35
34
FY18: +7.5% 31
28
31 29
27
FY19: +7.5% 30
Average mortgage rates 20

FY18: 8.5% 10
FY19: 8.5%
0
Assumed benefit of
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
Rs235,000 via CLSS
Source: CLSA, SBI, HDFC
Figure 30
Impact of 100bp mortgage Mortgage rates

rate change equal to 6% (%)
13
property price change in
affordability terms
12
11
10
9
12-year lows
8
7
Jan 04
Jan 05
Jan 06
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Jan 18
Source: CLSA, HDFC, SBI

We estimate that monthly mortgage payments are down by 10% since FY15 for a
similar property - a 2BHK (two-bedroom flat with hall and kitchen) - currently
costing Rs6.0m and located in a metro city suburb. However, if we adjust the
same on an income basis, then the monthly mortgage payment is actually 33%
lower.
Figure 31
In income-adjusted terms, Mortgage payment in nominal and income-adjusted terms for the same property
the property’s cost is 33% 50,000 (Rs) Monthly mortgage payment actual
lower than in FY15 Monthly mortgage payment - Income adjusted
45,000
40,000
35,000
30,000
25,000
20,000
FY15 FY16 FY17 FY18CL FY19CL
Source: CLSA, HDFC, SBI
Government support is an added trigger

Pmay’s urban housing Support for affordability further comes from the government’s incentives under
scheme targets 10-12m the Housing for All (Pradhaan Mantri Awas Yojana; or Pmay Urban) programs. The
affordable homes by FY22 government’s credit-linked subsidy scheme (CLSS) serves to reduce the effective
interest costs for new homeowners by reducing the outstanding principal on a
mortgage by around Rs235,000-267,000.
Figure 32
The subsidy scheme is Summary of government’s credit-linked subsidy scheme (CLSS)

most popular for
developer-sold houses EWS/LIG MIG 1 MIG 2
Size of house
60 Up to 120 Up to 150
(m²)
Household income limit

0.6 1.2 1.8
(Rsm pa)
Interest subsidy
6.5 4.0 3.0
(%)
Mortgage amount for

0.6 0.9 1.2
interest subsidy (Rsm)
Source: CLSA, Ministry of Housing
The incentive provided by the government is substantial (ie, around 5% or more)

when buying a house for Rs5m or less. We estimate that these incentives make
this ‘affordable’ housing segment the most affordable ever, and as such could
trigger potential customers’ decision to buy.

Figure 33
Key assumptions: Affordability ratio for a Rs3.0m apartment

60 (%)
Property pricing
Cost in FY18: Rs3.0m
FY18: Flat 50
FY19: +2.5% 41
39
40 36
34 34
Household income 32 30
33 32
30 30
Income in FY18: Rs0.9m 30 27
28
27 26
FY18: +7.5%; FY19: +7.5% 24 23
22 21
20
Mortgage rates
FY18/FY19: 8.5%
10
Assumed benefit of
Rs235,000 for principal 0
reduction via CLSS
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
Source: CLSA, SBI, HDFC
The government launched CLSS along with the main Pmay scheme in 2016.
Developers and lenders became attracted to CLSS from 2017, when Narendra
Modi increased the scheme to cover middle-income housing and expanded
income eligibility limits. As of December 2017, CLSS has seen nearly 80,000
houses financed (70,000 under LIG, 10,000 under MIG). A total of Rs16.2bn in
interest subsidies has been disbursed to date, with the major jump happening in
FY18.
Figure 34
Budgetary support for Interest subsidies from the central government¹

CLSS is rising 10 (Rsbn)
9
8
Budget for FY18 is Rs14bn,
enough to support 70,000 7
home purchases 6
5
4
3
2
1
0
FY16 FY17 YTD FY18
¹ FY18 data is Apr-Dec 2018. Total budget for FY18 is Rs15bn. Source: CLSA, Ministry of Housing
Inventories have started coming off

Pace of sales down 50% The slowdown in property-sector volumes since 2013 led to an inventory
from peak; pace of launches increase until 2015, as developers took time to catch up with slowing demand.
down 65% from peak Supply started falling off faster than demand from 2016, particularly post
demonetisation in November 2016. Rera’s rollout from mid-2017 further
constrained new launches. Across India’s top-eight residential markets, demand
has fallen by half from peak levels, while supply is down to about one third. This
has gradually reduced inventories and, as demand improves along with sector
consolidation, we expect the trend to gain strength in 2018.

Figure 35
Residential sales run-rate Residential property sales trend (tr-12 months, % YoY, top-seven cities)¹
on a tr-12-month basis 50 (% YoY)
down 50% from 2013 peak
40
30
20
10
0
(10)
(20)
(30)
(40)
(50)
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
¹ Top cities - NCR, MMR, Bangalore, Chennai, Hyderabad, Pune and Kolkata. Source: CLSA, JLL REIS
Figure 36
Residential launches run- Residential property launches trend (tr-12 months, % YoY, top-seven cities)¹
rate on a tr-12-month basis (% YoY)
60
down ~65% from 2013 peak
40
20
(20)
(40)
(60)
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
¹ Top cities - NCR, MMR, Bangalore, Chennai, Hyderabad, Pune and Kolkata. Source: CLSA, JLL REIS 3Q17
Figure 37
Residential inventories Residential inventory trend (% YoY, in units, top-seven cities)¹

(launched but not sold) have 50 (% YoY)
declined from mid-16
40
30
20
10
(10)
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
¹ Top cities - NCR, MMR, Bangalore, Chennai, Hyderabad, Pune and Kolkata. Source: CLSA, JLL REIS

Large affordable-housing opportunity opening up

Addressable market to The real estate market’s affordable segment (defined as a unit costing Rs2.0-
double for developers as 5.0m) has been underserved by the larger/listed developer space, as it offered
affordable grows fast lower profitability and high competition from unorganised developers. However,
as Rera drives a shakeout among smaller developers, and the government
provides incentives to both buyers and sellers, the segment will become more
attractive to larger developers.
We estimate (see CLSA’s Housing boom ahead) that India’s affordable-housing

market in FY17 was about Rs1.6tn (US$25bn), compared to Rs2.1tn (US$33bn)
for the premium market (units costing over Rs5.0m). However, volume
acceleration is likely higher in the affordable segment, for various reasons
including rising affordability and government support. We estimate that by FY24,
the affordable segment will expand in size to about 1.0m units per annum and
value to about Rs4.6tn - the same size as the premium segment. As such, the
addressable market for large developers should quadruple in seven years.
Figure 38
Property markets’ opportunity pyramid by price range: developers currently only serve the premium segment
House-price range Market size (Rstn) Market size (Rstn)
Opportunity set to
quadruple with Rs4.6tn
affordable push market
0.4m
Premium
>Rs5m Rs2.1tn
0.3m market
Rs4.6tn
Affordable 1.0m market
Rs2-5m Rs1.6tn
0.5m market
Social
Rs3.3tn
<Rs2m 5.7m market Rs7.6tn
9.5m market
FY17 FY24
houses added houses added
Number of Number of
houses: 6.5m houses: 10.9m
Source: CLSA, Census of India, MoSPI, RBI, NHB
Tax-benefits and cheaper land boost affordable economics

Affordable housing is The economics of affordable-housing projects have improved for developers as
great again low taxation creates an incentive for them to enter the segment and command
reasonable margins; the slump in land prices is an additional positive. In addition,
because affordable housing projects usually have lower specifications (fewer
floors per tower, etc), turnaround times and sellouts are faster. Overall,
developers now have the option of utilising the cost benefits to make a profitable
affordable foray without compromising on IRR or project margins.

Figure 39
Premium builders’ PAT Comparing economics of affordable housing project vs premium

margins in affordable are (Rs/sf unless¹) Affordable Affordable Premium Comment
similar to premium earlier now
Buyer's budget (Rsm)¹ 4.0 4.0 7.0 Assume average mid-income and premium
apartment budgets
Apartment size saleable (sf)¹ 900 900 1,250 Affordable apartment size of around 60sqm carpet
Selling price (Rs/sf) 4,444 4,444 5,600 Around 25% premium pricing on per/sf basis for
Lower development similar location
timelines for affordable Costs (Rs/sf)
could imply higher IRR Land cost 1,000 850 850 Land cost correction of 15% correction reflected
for both
Cost of construction 1,750 1,750 2,250 Mid-income construction specifications are lower
Other costs 500 500 600 Overheads about 20% higher for premium on
marketing costs
Interest cost (%)¹ 10.0 9.0 10.0 Lower cost for affordable due to infra status now
Interest during construction 650 558 925 Assume half funded via customer flows; four years
for affordable, five years for premium
Total construction costs 3,910 3,667 4,635
PBT margin 534 777 965
Tax rate (%)¹ 34.0 20.0 34.0 Assume MAT applicable for affordable project
PAT margin 353 622 637 Post-tax margins are similar now
Source: CLSA
Figure 40
Faster sell-through rates, Mumbai’s market distribution of configurations with sales achieved
higher volumes achieved in
affordable segment Property price 4BHK+
~44.6%
sold
3BHK
~48.9%
sold
2BHK
~49.6%
sold
1BHK
~50.2%
sold
1RK
~63.4%
sold
Apartment size
Note: Size of figure replicates amount of supply of particular configuration, Data updated up to 4 th October 2017.
Source: CLSA, JLL, MAHARERA
Affordable-segment forays have been sporadic so far

Limited success Another important aspect of the affordable-housing segment has been the lack of
any major brands so far. Most property companies/brands tend to be fairly
geographically limited; affordable has seen very few developers focus on brand
building. In fact, the efforts to build differentiated affordable-housing brands has
so far only been done by a few large developers, such as Sobha’s ‘Dream’ and
Purvankara’s ‘Provident housing’ brands.

Lack of scale Developers like Value Budget and Housing Corp (VBHC), XRBIA and Poddar
Housing have tried to scale up as affordable-focused developers, but most large
Indian cities have very limited competition in the space. However, growing
aspiration and existing developers’ poor track-records imply customers in the
affordable segment could be willing to pay more for a better branded product.
Figure 41
Some premium developers Housing developers’ existing affordable offerings

have tested the affordable Developer Development Location Description
segment potential
Premium developers with affordable offerings
Sobha - Dream Series 81 acres Bangalore Budget affordable homes
starting at Rs3.8m
Puravankara - Provident 344 acres Chennai & Bangalore Premium affordable 1, 2 & 3
BHK flats within Rs4m
Shapoorji Pallonji Real Estate - Joyville 803 acres NCR, Bangalore & Mumbai Affordable branded homes
starting at Rs2m
Tata Housing - New Haven na NCR, Bangalore, Branded low-budget homes
Mumbai, Chennai, starting at Rs1.8m
Pune & Ahmedabad
Mahindra Lifespaces - Happinest 93 acres Mumbai & Chennai Affordable branded homes
starting at Rs1.2m
Supertech - Basera 22 acres NCR Affordable living beginning
from Rs1.3m
Primarily-affordable Primarily affordable developers
presales run-rate currently Arihant Superstructures 12,500+ Mumbai & Jodhpur Budget affordable homes
below US$100m pa homes starting at Rs1.5m
Poddar Housing 112 acres Mumbai - MMR Affordable housing starting
at Rs1.2m
Value Budget Housing Corp 18,000+ NCR, Bangalore, Affordable homes starting at
homes Mumbai & Chennai Rs1.7m
XRBIA 166 acres Mumbai - MMR Low-cost affordable housing
in price range of Rs0.5-1m
Ashiana Housing 77 acres NCR, Kolkata, Affordable luxury 2 & 3
Jaipur, Jodhpur, BHK homes in Tier-2 cities
Halol & Jamshedpur starting at Rs2.4m
Source: CLSA
Developers are increasingly focused on affordable

Affordable housing should There were some new launches, tieups and announcements made in 2017 that
take share in new launches emphasised the affordable-housing aspect. We note that several of these
in 2018 initiatives have yet to materialise. This delay has arisen in part from management
focusing on existing projects, ensuring they comply with Rera. With this now
behind them, and new launches resuming, incremental supply from mid-2018 is
likely to start focusing on the affordable side.
Figure 42
Developers’ announced expansion plans for affordable housing since FY18

Developer New plans Location
Sobha 1.9msf affordable launch in pipeline for FY19 North Bangalore
Prestige Estates Targeting affordable/mid-income products through JV Bangalore, MMR,

Pune & NCR
Sunteck Realty Launch a new brand for affordable housing Thane, Raigad & Virar
Mahindra Scale up on pan-India level with footprints of 10msf after MMR, Chennai
Lifespaces JV with HDFC Capital
Kolte-Patil Launch pipeline lined up worth 5msf for next two years MMR, Bangalore & Pune
Ajmera Realty To develop 10,000 affordable homes in next decade MMR
Source: CLSA

Existing sub-Rs10m product Based on previous sales track-records, we believe that Godrej Properties, Sobha
may be extended to sub and Prestige can take advantage of the affordable segment. While we note that
Rs5m bracket these developers have limited presence in the sub-Rs5m segment, they still have
sub-Rs10m products accounting for more than a third of their FY17 presales,
which could be extended to lower price points - particularly as government
incentives make the segment more attractive.
Figure 43
Our estimates (ex-Sobha) of Sub-Rs10m unit presales as % of estimated FY17 residential sales
contribution of Rs10m units
80 (%)
to FY17 presales
70
60
50
40
30
20
10
0
Godrej Properties Sobha Prestige Oberoi Realty DLF
Investor demand to see selective recovery

Investor demand for Demand from property investors has gradually weakened since 2013, and almost
property has been weak for completely vanished since 2015-16. Investors in India are essentially counting on
around four years capital gains, ie, price appreciation. Housing rental yields, though improving over
the last two years (see Figure 47), are still fairly low at 2-3%, compared to the
post-tax mortgage rate of about 7%. Here, the Modi government’s emphasis on a
positive real rate and consequent inflation-targeting mechanism adopted by the
government and RBI boosted financial savings.
Figure 44
Investment in property, equity vs CPI¹ inflation
35 (US$bn) Net inflows in domestic MFs Annual CPI inflation (RHS) (%) 14
30 Property prices 12
stagnate but
25 Both investment domestic equity
property and investment booms 10
20 equity do well
15 8
Property prices rise
but domestic equity
10 6
investment suffers
5
4
0
2
(5)
(10) 0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
¹ CPI - Industrial workers before 2013. Source: CLSA, Amfi, Bloomberg, Mospi

Figure 45
Proportion of financial Financial savings as proportion of total vs CPI inflation

savings has risen from 40% 70 (%) Financial savings as % total Annual average inflation (RHS) (%) 12
in FY12 to 58% in FY17CL
60 10
50
8
40
6
30
4
20
10 2
0 0
FY12 FY13 FY14 FY15 FY16 FY17CL
Source: CLSA, MOSPI, RBI
Equities have seen Inflow into domestic mutual funds (DMF) has risen to as high as US$32bn in
significant inflow vs 2017, compared to around zero in 2010-13. The share of financial savings in total
property since 2014 annual savings has risen from 40% in FY12, to 54% in FY17. Essentially, the
property investor has, on the margin, turned to equities and other financial assets.
Nonetheless, with property prices now trailing inflation significantly for the last
three years, affordability has improved. In addition, the recent upturn in inflation
and bond yields could signify that the attractiveness of real assets may increase in
the next few quarters. As such, we would expect investor demand to gradually
improve from FY19.
Figure 46
Return of inflation can once Monthly CPI inflation trend

again make physical-asset 7 (% YoY)
ownership attractive
6
0
Apr 16
Sep 16
Dec 16
Apr 17
Sep 17
Aug 16
Aug 17
Jul 16
Oct 16
Jul 17
Nov 16
Oct 17
Nov 17
Feb 16
Mar 16
Feb 17
Mar 17
Jan 16
May 16
Jun 16
Jan 17
May 17
Jun 17
Source: CLSA, MOSPI
Rental yields improved, but some distance still

Rentals track income The slow Cagr in residential prices of around 2% over the last three years has
increases more than trailed rental income growth, which mostly follows income growth. Per capita
property prices income has grown by around 7-8% over the last three years, and we estimate that
rentals have seen a Cagr of around 5% during the same time (CPI housing,
reflecting rental increases, enjoyed a Cagr of 6.1% over 2014-17).

Figure 47
Yields average 3% across Rental yields for selected properties by listed developers
top metros, less than ~7%
post-tax property rate
Bangalore 3.4
Mumbai 2.9
Delhi-NCR 2.3
(%)
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

Source: CLSA, 99 Acres
Smaller ticket sizes Our checks on 40 properties over the metros of Mumbai, NCR and Bangalore
command higher yields reveal that rental yields are in the 2-4% range, with Bangalore the highest and
NCR the lowest. Smaller homes have higher rental yields, which are partly a
reflection of better supply-demand dynamics for the lower-ticket housing space.
Mumbai likely to be at forefront of investor demand

Significant infrastructure Our view is that as property-investor demand returns, Mumbai is likely to take the
boosts expand liveable lead. The reasons are detailed in our property report on the city. Being traditionally
areas of the city supply constrained, Mumbai’s property market never saw a major supply-demand
imbalance. Meanwhile, it is now witnessing a major infrastructure upgrade, with
around US$15bn of projects - including metro lines, a cross-sea bridge link and new
airport - under construction. Overall, the city is likely to witness an expansion of its
premium portions as travel times reduce. This should drive awareness in new
locations throughout the city and trigger investor interest.
Figure 48
Infrastructure development projects under construction

Project Description Cost Completion Status Funding
(US$bn) year agency
BKC-Chunabhatti Connector Flyover connecting Eastern Express Highway to BKC 0.0 2018 Under construction MMRDA
Navi Mumbai Metro - Phase 1 Elevated metro travel connecting CBD Belapur to Pendhar 0.5 2018 Under construction CIDCO
Metro Line 2A Connect Dahisar (northwest) to D.N. Nagar (west) 1.2 2019 Under construction ADB
Metro Line 7 - Phase 1 Connect Andheri (east) to Dahisar (east) 1.0 2019 Under construction ADB
BKC Elevated Road Elevated road to unclog traffic in suburbs 0.0 2019 Project awarded MMRDA
BKC-Sea Link Flyover connecting BKC directly to the Sea Link 0.0 2020 Project awarded & MMRDA
and Mahim soil testing
Metro Line 3 Underground line from south to west Mumbai 2.1 2021 Under construction JICA
Metro Line 2B Connect D.N. Nagar to Mandale (east) 1.2 2021 Project awarded ADB
Metro Line 4 Connect Wadala (central) to Kasavadavali (northeast) 2.3 2021 Project awarded AIIB
Navi Mumbai Airport - Phase 1 New airport to ease air traffic congestion 2.5 2021/22 Project awarded PPP
Mumbai Trans-Harbour Link Connect island city with mainland 2.8 2022/23 Project awarded JICA/Gov’t
Coastal Road - Phase 1 Decongest travel from western suburbs to south Mumbai 1.0 2021/22 Finalising bids & BMC
construction by Jan 18
Eastern Waterfront Project Sea transportation, marina, cruise terminal and 300-acre park na 2022/23 Consultant appointment MbPT
& bid floated
Navi Mumbai Corporate Park A 120-hectare people-friendly mixed land use corporate park na na RFQ/architecture CIDCO
design stage
Mumbai-Pune Expressway Elevated road and two tunnels between Khalapur and Khandala 0.6 na RFP/tender/ MSRDC
upgrade consultant finalisation
Total 14.8
Source: CLSA, MMRDA, BMC, Companies

New business districts Rising connectivity will lower travel times across Mumbai. The rise of new
should expand premium business districts, along with better infrastructure, is likely to trigger city
residential areas north/east expansion in terms of housing locations as well. We note that this has happened
in the past ~15 years as well. Until the early 2000s, the main business district was
restricted to South and Central Mumbai and hence premium residential areas
were limited to those near the airport. With the opening up of BKC in the 2000s,
premium residential areas have now spread about 15km northwards of the airport
and also much further in the eastern part of the city.
Figure 49 Figure 50
Mumbai’s key office/premium residential areas (2000) Mumbai’s key office/premium residential areas (current)
Premium residential:
expands north/east
Business district:
BKC
Premium residential:
south/west Mumbai
Business district:
Lower Parel
Business district: Business district:

Nariman Point Nariman Point
Source: CLSA, Google Maps Source: CLSA, Google Maps
Mumbai residential trends: avoided the boom-bust

Mumbai’s residential market has been relatively better off than other large
metros, such as NCR and Bangalore, over the past few quarters. This is partly an
outcome of supply constraints - over 2011-16, Mumbai saw an average launch of
33,000 units per year vs sales of 28,000 units. The current inventory of around
75,000 units equates to around three years of sales, which is better than the
four-year inventory in NCR and similar to the three-year inventory for Bangalore.
Mumbai also has done better than NCR, which has seen a major boom-bust cycle
with launches in 2016 down 88% from 2011 and sales down 55%.

Figure 51
Launches boomed in NCR Units launched in the top-three metros

and also Bangalore; Mumbai
stayed within range 160,000
(units) Mumbai NCR Bangalore
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
2010 2011 2012 2013 2014 2015 2016 9M17
Source: REIS JLL, CLSA
Figure 52
Mumbai’s units sold pa Units sold in the top-three metros

have also been far
more consistent 120,000 (units) Mumbai NCR Bangalore
100,000
80,000
60,000
40,000
20,000
0
2010 2011 2012 2013 2014 2015 2016 9M17
Source: REIS JLL, CLSA
Organised brands to see 30% sales Cagr, to Rs1.8tn+ by FY24CL

One-two impact of As highlighted, the property market has been weak for several years and much-
market-share gains and improved affordability should trigger a turnaround in volumes. We expect
market recovery property sales nationwide to see a Cagr of around 14% over FY17-24CL (for full
details, see Housing boom ahead). Within this, the addressable market segments -
affordable and premium - should grow to Rs9.2tn by FY24CL. Volume (10% Cagr)
drives the bulk of this forecast, with pricing (3% Cagr) secondary.

Figure 53
We forecast combined 14% Housing market sales by segment (dotted lines represent organised sector’s addressable market)
Cagr in affordable/premium
sales over FY17-24CL
FY24 4.6 4.6
FY17 1.6 2.1

Rs2.0m-Rs5.0m
Rs5.0m+
FY12 1.8 2.5
(Rstn)
0 1 2 3 4 5 6 7 8 9 10
Source: CLSA
A 30% Cagr likely if market- As market-share gains unfold for organised property developers, sales could rise
share doubling, overall much faster. Our forecast of organised developers’ market-share doubling in the
market growth combine next five years implies their sales to rise at around 30% Cagr over FY17-24CL.
This suggests the organised sector will reach sales of Rs1.8tn (US$28.3bn) by
FY24CL. Even a smaller increase in market share of 50% implies listed universe
sales would enjoy a Cagr of 23%.
Figure 54
Organised developers’ Organised companies’ achieved presales and market share

presales could hit Rs1.8tn+
by FY24CL 2,000 (Rsbn) Organised developers' presales Market share (RHS) (%) 25
1,800 US$25-30bn
1,600 20
1,400
1,200 30% Cagr 15
1,000
800 10
600
US$5bn
400 5
200
0 0
Source: CLSA

Figure 55
40
City-wise housing market: current conditions and prognosis (size of the circle represents market opportunity)
CLSA estimate of current market conditions

Good Fair Poor
Change in launches &
sales since their peak % change % change
in launches in sales
(85) (70)
NCR
Section 2: Affordability to drive housing uptick

abhi.sinha@clsa.com
% change % change
(45) (35)
Kolkata
% change % change
Mumbai in launches in sales
(70) (75)
Pune
% change % change
Hyderabad % change % change
(20) (5) in launches in sales
Bangalore (30) (50)
% change % change Chennai % change % change

in launches in sales in launches in sales
India property
(50) (20) (80) (50)
29 January 2018
Source: CLSA, JLL, Knight Frank

Section 3: Normalised lease-returns to drive investment shift India property
Normalised lease-returns to drive investment shift

Good demand-supply but India’s 500msf/US$75bn office market has already seen consolidation, with the
cap-rate compression is top-five developers’ market share exceeding 20%. The lease-asset cycle has
now behind us followed a different trajectory, with markets doing much better since 2014 as a
supply crunch gradually reduced vacancy levels. A higher capital requirement in
lease assets has already driven a consolidation here, with the largest office
holders in India being global real estate PE companies and sovereign/pension
funds. We believe that while the incremental demand-supply situation still
favours landlords, capital appreciation should now be limited to rental growth as
cap-rate compression is behind us. With disproportionate returns in commercial
property a thing of the past, big money could flow to residential space, where
Rera will drive higher working-capital needs.
Lease-asset fundamentals stay firm

Rentals are only now The lease-asset market has been following a different cycle, compared to
reaching 2007’s peak residential markets. While both lease rentals and residential prices peaked prior
to GFC and were similarly impacted (down about 40%), the subsequent recovery
in residential prices did not play out in lease rentals due to a major supply-
demand imbalance. This prompted fewer investments in fresh lease-asset
capacity; as a result, the supply-demand situation improved from 2014 onwards
in both office and retail assets.
Figure 56
Lease rentals have only now Grade-A office rentals at major office micromarkets
touched the previous peaks
in preferred locations 140 (Rs/sf/mth) Gurgaon prime (Cybercity) Bangalore (ORR)
120
100
80
60
40
20
0
Dec 06 Oct 08 Jul 10 May 12 Feb 14 Dec 15 Sep 17
Supply constraints driving rentals

Absorption rates at 90%+ The demand-side of lease assets, particularly offices, has been largely consistent
since 2016 at the 30-35msf level over the last few years. The improvement in lease-asset
fundamentals has been supply led - incremental absorption rates increased to
90% in 2016, and further to 95% in 2017, as compared to 80% for the prior four-
year period.

Figure 57
Demand levels have been Office supply and absorption trends in top-eight¹ cities
consistent, but incremental
supply has fallen off 45 (msf) Supply Absorption Absorbed (RHS) (%) 100
40 95
90
35
85
30
80
25
75
20
70
15
65
10
60
5 55
0 50
2012 2013 2014 2015 2016 2017
¹ NCR, MMR, Bangalore, Chennai, Pune, Hyderabad, Kolkata, Ahmedabad. Source: CLSA, Cushman & Wakefield
Figure 58
Nationwide vacancy rates Average Grade-A vacancy rates in top-six¹ office markets
are at 12%, lower than 20%
four years ago 25 (%)
20
20 18
18
17
15 14
12
10
0
Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Sep 17
¹ NCR, MMR, Bangalore, Chennai, Pune, Hyderabad. Source: CLSA, Cushman & Wakefield
Select micromarkets have As incremental absorption rates have increased, vacancy rates have declined
3-5% vacancy ranges with across most Indian cities, but are still averaging about 12%. Within these cities,
good rental growth preferred micromarkets have emerged as key office destinations; here, occupancy
rates have shrunk from double digits to mid-to-low single digits. Important
micromarkets - like Cybercity in Gurgaon and Sarjapur-ORR in Bangalore - have
seen vacancy rates in low-single digits, spurring higher rental growth.

Figure 59
29 January 2018
India’s key office locations and status
India’s office market
Stock Vacancy Rent/

(msf) (%) psfpm
99 27 78
Section 3: Normalised lease-returns to drive investment shift

abhi.sinha@clsa.com
Stock Vacancy Rent/

(msf) (%) psfpm NCR
13 37 35
Ahmedabad Kolkata
Stock Vacancy Rent/
(msf) (%) psfpm
Stock Vacancy Rent/
79 18 122 (msf) (%) psfpm
Pune 34 38 50
Mumbai
Stock Vacancy Rent/

(msf) (%) psfpm Stock Vacancy Rent/
Hyderabad (msf) (%) psfpm
44 8 63
38 7 51
Bangalore
Stock Vacancy Rent/
(msf) (%) psfpm Stock Vacancy Rent/
(msf) (%) psfpm
118 6 67
Chennai
India property
44 8 53

43
Figure 60
Preferred locations seeing Office Grade-A vacancy rates in important micromarkets

very low vacancies 5.5 (%)
5.0
Three locations account for
~100msf/20%+ of total 4.5
Grade-A office stock 4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Gurgaon Cybercity Bangalore - ORR Hyderabad - Madhapur
Incremental supply to remain disciplined

Supply spurt is unlikely to The large supply spurt seen in the early part of this decade was due to easy
repeat anytime soon liquidity conditions for developers, and comparatively high capital values for lease
assets. With both these situations reversed, we believe that incremental supply is
likely to remain disciplined.
Figure 61
Major influx of PE in office Key private equity deals in the leased asset space
space owns existing assets, Investor Investee Value¹ Year Description
controls new supply via JVs (US$bn)
GIC DCCDL/DLF 1.4 2017 GIC acquires 33% stake in DLF’s main lease
asset holding subsidiary, DCCDL, which has
27msf operational lease assets
Blackstone Carvinal Group 0.3 2017 Mall cum Hotel portfolio, earlier developed
and owned by L&T
CPPIB Phoenix Mills 0.3 2017 Mall platform created via acquiring stake in
Phoenix’s Bangalore mall
QIA - RMZ Adarsh Project 0.2 2017 Acquisition of assets & development rights
backed by QIA
Brookfield Hiranandani Developers 1.0 2016 Acquires entire 4.5msf of office & retail
space in Powai
RMZ Essar Biz Park 0.4 2016 Asset located in Mumbai BKC district
GIC Sheth Developers 0.2 2016 GIC buys 50% stake in Viviana Mall, Thane
Blackstone HCC 0.2 2015 100% control in 1.1msf commercial property
in Mumbai
Brookfield Unitech 0.3 2014 Brookfield acquired Unitech's 40% share
for four assets in NCR & Kolkata
QIA RMZ 0.3 2013 JV to buy development assets across top cities
Blackstone Embassy Group na 2012 JV formed in 2012 has 18msf operational and
13msf under construction office assets
Blackstone DLF 0.2 2011 DLF sells 67% stake in 25-acre SEZ, Pune
¹ Equity value or EV as disclosed. Source: CLSA
Lower liquidity post Rera to One of the most important developments in the lease-asset space is the
make it tougher for lease- emergence of global PE funds as the largest holders or partners to India’s major
asset supply to come up lease-asset developers. This suggests we should expect a disciplined approach to
future supply decisions. Also, tougher liquidity conditions, particularly post Rera,
imply that smaller developers will struggle to come up with adequate surplus to
use building speculative lease assets.

Figure 62
Leading listed office Leading listed developers’ ongoing office developments

developers have little space Developer Area under construction Private equity partner Estimated delivery
under construction (msf)
Prestige Estates 4.9 None but likely¹ 1-3 years
Brigade 4.7 GIC 3-5 years
DLF 4.1 GIC 1-2 years
Indiabulls Real 3.7 None but likely¹ 3-5 years
NESCO 1.7 None 1-2 years
Godrej Properties 0.0 APG (residential) na
Phoenix Mills 0.0 CPPIB (malls) na
Oberoi Realty 0.0 None na
Sobha 0.0 None na
Total 19.1
¹ Both companies have mentioned plans to raise capital via partnering with PE/large funds. Source: CLSA, Companies
Cap-rate compression largely played out

Cap rates declined by The high yields on offer were a key driver of high PE interest in Indian lease
around 3% in 3-4 years to assets. Around three to five years ago, lease assets offered capitalisation rates of
reach ~8% in 2017 around 11% due to high inflation (9.3% average in FY12-14) and yields on 10-
year bonds were as high as 9%. As inflation dropped to an average 5.1% over
FY15-17 and 10-year-bond yields fell to below 7% in 2016-17, cap rates also
shrunk. Large deals by listed developers (DLF for office assets and Phoenix Mills
for rental assets) were done in the 7-8% range.
Figure 63
Cap rates lower over Indian government’s benchmark 10-year-paper yields

2015-17 as inflation,
benchmark yields cooled off 10.0 (%)
9.5
9.0
8.5
8.0
7.5
7.0
Cap rates of 11-13%
6.5
6.0
Cap rates of 8-10%
5.5
5.0
Apr 09
Sep 09
Dec 10
Apr 14
Sep 14
Dec 15
Aug 12
Aug 17
Jul 10
Jul 15
Nov 08
Oct 11
Nov 13
Oct 16
Feb 10
Mar 12
Feb 15
Mar 17
Jan 08
Jun 08
May 11
Jan 13
Jun 13
May 16
Jan 18
AIT SP is a proxy Indian office space does not yet have any listed REITs, which makes the tracking
in the absence of any of benchmark yields difficult. In Figure 64, we track the yield of Ascendas India
India-listed REITs Trust, a Singapore-listed business trust that has only Indian office space as its
assets. The yield has declined from an average of 7.1% during 2010-13, to 5.4%
during 2016-17, partly reflecting the cap-rate compression associated with Indian
lease assets.

Figure 64
Yield has fallen for Indian Implied gross yield for Ascendas India Trust (AIT SP)
office assets listed in
Singapore 10 (%)
4
Jan 10 May 11 Sep 12 Jan 14 May 15 Sep 16 Jan 18
Figure 65
Benchmark cap rates have Deals and benchmarks on capitalisation rates

compressed to 8-9%, from Location Buyer Seller Deal value Area Rent² Implied cap Transaction
11-12% a few years ago (Rsbn)¹ (msf) (Rs/sf/mth) rate (%) date
Bombay Dyeing Worli Axis Bank Bombay Dyeing 7.9 0.4 175 11.2 Jun 10
Peepul Tree Properties, Tata Realty Kotak Realty Fund 5.3 0.7 85 13.6 Mar 11
Goregaon IT Park Infra Ltd
Sea breeze, Near Century Ask Group Reliance Urban 1.8 0.1 200 10.9 Jul 11
Bazaar, Prabhadevi Infrastructure fund
FIFC BKC Citigroup TCG Urban etc 10.0 0.3 300 10.9 Apr 12
DLF Corporate park, Indigo Pepsi 0.5 0.04 125 11.1 Jan 14
MG Rd Gurgaon
Infinity Technology Park, Xander Tata Realty 6.5 0.8 85 12.2 Jun 14
Malad, Mumbai
SP Infocity IT Park, Shapoorji Faery Estates 14.0 c.3 65 12.5 Jun 15
Chennai Pallonji
Godrej BKC Abbott Godrej Prop 14.8 0.4 275 10.3 Oct 15
Hiranandani, Powai Brookfield Hiranandani 67.0 4.5 108 8.7 Oct 16
DLF Cybercity and others GIC DLF 356.2 27+ - 8.0 Dec 17
¹ EV of transaction; ² Benchmark rent at the location for comparable asset then. Source: CLSA
We assume no further However, we believe that cap-rate compression is now over, and that interest
reduction in RBI’s rates, as well as inflation, have bottomed out. Also, bond yields have already
benchmark lending rates moved up by around 80-90bps from their 6.5% low. As such, cap-rate
compression is unlikely to be a return driver for lease assets going forward.
Figure 66
Capital value appreciation Rental and capital value growth over Sep 14 – Sep 17
for lease assets has been Bangalore - ORR Gurgaon - Cybercity Mumbai - Lower parel
exaggerated over last three Rentals (Rs/sf/mth)
years due to cap rate Sep-14 55 81 160
compression Sep-17 80 117 176
Rental growth (% Cagr) 13.0 13.2 3.2
Benchmark cap rates (%)
Sep-14 11 11 11
Sep-17 8 8 8
Implied capital values (Rs/sf)
Sep-14 6,022 8,813 17,488
Sep-17 11,949 17,570 26,415
Capital value growth (% Cagr) 25.7 25.9 14.7

Residential real estate to now see good private equity flows?

Previous experience in The first burst of private equity money entering Indian real estate in 2005-08 was
residential real estate directed towards the residential market, including portfolio investments done
wasn’t great when most projects were still essentially at the stage of land banking. The returns
on these investments were not high, due to a low pace of execution and some
unscrupulous promoters. The second stage of private equity, however, has had a
better track-record as a result of partnerships with developers, and holding office
assets for relatively good returns.
Figure 67
Still a genuine need post Project cashflow comparison, pre-and-post Rera

Rera to fill up the capital
requirement gap 2,500 (Rsbn) Cumulative inflows post Rera Cumulative inflows pre Rera
2,000
1,500
1,000 Cost of land recovered
500
(500)
(1,000) Net project surplus is

delayed by an year
(1,500)
(2,000)
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Source: CLSA
Post Rera cashflow is Residential real estate is now ready for another round of capital raising, and
delayed by one year on private money can again play an important role. The key factor here is that Rera
average (as highlighted in Section 1) makes it tough for developers to rotate money out of
projects. In Figure 67, we can see cashflow pre-and-post Rera for a 1msf project
with a sale price of Rs6,000/sf, 100% sold at launch (see the Appendix for
details). Assuming land costs to be 25% of project (Rs1,500/sf), cashflow recovery
in the post Rera scenario is now delayed by a year. Because banks are not allowed
to lend for land purchases, developers must use alternative sources of capital,
opening up an opportunity for PE to step in.
A capital requirement of US$10-15bn over FY18-24

Presales of US$100bn for As projected in Section 2, we expect organised developers’ sales to see a Cagr of
organised developers would 30% over FY17-24, which implies cumulative sales of US$100bn in FY18-24CL.
need funding for land As explained above, cashflow is approximately one year delayed post Rera - the
main cause of higher financing requirements. We estimate that over FY18-24,
developers will be able to receive about 75% of sales, or US$75bn of cashflow,
from customers. The remaining US$25bn would have to be met via a mix of debt
and equity financing. With banks prohibited from issuing loans for land purchases,
we assume that US$10-15bn will be met by equity, either private or public.

Figure 68
We see Rera and affordable Capital may head the residential way
expansions as the main
triggers
FY18-24 organised developer pre-sales: US$100bn
Change Impact
 Higher working capital requirement boosts demand

Rera  Ring fencing of cashflow by law
 Private equity partners’ obligations may rise (a negative)
 Opportunities to acquire assets at cheaper prices

Consolidation  Market share gains for preferred organized developers
New  Developers venturing out of comfort zone, ie, affordable

opportunities  New geographies also possible with JDA/JV models
 Cap rate compression played out in leased assets

Higher returns  Residential property prices at four to five-year lows
Requirement for capital: US$10-15bn
Source: CLSA
Figure 69
Expect ~US$10-15bn equity Estimated funding pattern for organised segment’s US$100bn in sales over FY18-24
requirement from organised
residential developers Equity finance Profit
(public/private) (customer flows)
10-15% 15-20%
- Public markets
- Private equity
- Structured/quasi equity
Bridge finance
(debt/quasi debt) Funding pattern of
10-15% US$100bn cumulative
sales by organised
developers
Construction costs
(customer flows)
55-60%
Source: CLSA

Section 4: Rerating to continue as sector consolidates India property
Rerating to continue as sector consolidates

Sector market cap is far The property sector is under-represented in India, with less than US$30bn, or
below peers about 1% market-cap share, compared to regional peer benchmarks of 3-5%. As
consolidation unfolds over next five to seven years, and the prominence of
organised developers rises, the sector’s market cap could reach US$100bn. A
low base in property sales, sector profitability and major scale-up opportunities
imply that very high sales increases for well-positioned developers are possible.
This business discontinuity is tough to capture in P&L as of now, but is likely to
be rewarded as higher multiples in the early part of the cycle. A near doubling
of realty indices over the last 12 months notwithstanding, we believe that
property stocks can still deliver good returns as the Indian property revival
takes root.
We prefer Godrej, Sobha, We are BUYers of Godrej Properties, Sobha and Oberoi for their housing
Oberoi and Prestige exposure. Due to the ongoing progress of their business restructurings, Prestige
Estates and IBREL are seen as attractive mixes of lease assets and residential. Our
sole negative rating in the sector is on DLF, where fundamentals are significantly
trailing implied recovery, meaning a valuation catch-up is highly likely.
Property sector is under-represented in Indian markets

Combined mkt cap of top- The Indian property sector’s representation in the listed universe is currently thin,
30 listed property compared to international peers. The real estate sector accounts for 3% of MSCI
companies under US$30bn Emerging Markets Index and 5% of MSCI China. Comparatively, India does not
currently have any property stock on MSCI India. The total market capitalisation
of all the listed real estate stocks is less than US$30bn, or just about 1% of India’s
total market cap.
Figure 70
Compared to peers, the Weight of real estate sector in benchmark indices

Indian property sector is
under-represented
MSCI AxJ 6
MSCI EM 3
MSCI India 0
India listed universe 1
MSCI Indonesia 2
MSCI Thailand 3
MSCI China 5
MSCI Singapore 19
MSCI Philippines 24
MSCI HK 26
(%) 0 1 2 3 4 5 6 7 8 9 10
Source: CLSA, MSCI, Bloomberg

BSE Realty index is still While property stocks have outperformed the market in the last 12 months, total
slightly less than 1% of the market capitalisation of the representative BSE Realty index is still slightly less
total stocks listed on BSE
than 1% of the total stocks listed on BSE. The initial burst of excitement in
property stocks took property stocks’ market cap to more than 5% in late 2007.
In five years, assuming Indian market caps reach US$4tn, from their current
US$2.5tn (a 10% Cagr, the same as nominal GDP), a 2.5% weight for the property
sector should imply US$100bn. This will be driven by a higher market share for
existing listed property stocks, and possible new listings.
Figure 71
A 5% share of total market India’s real estate sector: market-cap trend

cap would imply US$125bn
for the sector currently 120 (US$bn) BSE Realty Index mkt cap (LHS) (%) 6
BSE Realty mkt cap as % India
100 5
80 4
60 3
40 2
20 1
0 0
Sep 07
Sep 08
Sep 09
Sep 10
Sep 11
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Sector valuations appear stretched after big rally . . .

Stocks at upper end of After property indices and several stocks doubled over 2017, sector valuations
valuation bands posted are at the upper end of their long-term valuation bands. The sector currently
strong rally last year trades at 38x 1-year forward earnings, 10% higher than its last 10-year 1sd (one
standard deviation) levels.
Figure 72
Stocks are trading above Property stocks¹: one-year forward PE ratio chart over 10 years
the 1sd levels on a PE basis,
similar to Nifty 50 (x)
45
40
35 +1sd34.42x
30 avg28.95x
25
-1sd23.48x
20
15
10
Jan 08 Sep 09 May 11 Jan 13 Sep 14 May 16 Jan 18
¹ Property stocks covered by CLSA India, added as of listing date; Source: CLSA

The one-year forward price-to-book ratio of 2.3x is lower than 1sd levels, and
about 30% higher than the average 1.8x levels. We note, however, that this is in
the context of 10% lower-than-average ROE of 6.3%.
Figure 73
Stocks are trading below Property stocks¹: one-year forward PB ratio chart over 10 years
1sd levels on a PB basis, 9 (x)
again similar to Nifty
8
7
6
5
4
3 +1sd2.75x
2 avg1.82x
1 -1sd0.88x
0
¹ Property stocks covered by CLSA India, added as of listing date; Source: CLSA
. . . but this is on a suppressed earnings base

Earnings profiles have been We note the high valuations come on a supressed earnings base, wherein the
weak over the long run profitability (FY17) of covered companies was down 22% from the levels seen
five years ago, and at their lowest for 10 years. This is a reflection of the overall
weak property markets. If we exclude DLF from our coverage, then profitability
growth over last seven years (FY10-17) would still be weak, at 8%. This list does
have a bias towards survivors, as previously large property companies like
Unitech and JP Infra are currently lossmaking.
Figure 74
Sector profitability would Total net profit of property stocks under our coverage¹
lower with companies like (Rsbn) Net profit of property stocks covered (Rsbn)
Unitech and JP Infra 90 85 35
Net profit ex DLF (RHS)
80
30
70
25
60
51
50 20
37
40 32 15
27 26
30 22 25
20 21 20 21
19 10
20
5
10
0 0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
¹ DLF, Oberoi Realty, Prestige, Godrej Properties, Sobha, Indiabulls Real, Phoenix. Source: CLSA
Presales is the right matrix We also note that since Indian accounting standards’ led revenue recognition for
to track ongoing projects starts only after 25% of construction costs are incurred (around
four to eight quarters after launch), any successful new launches - ie, an upturn in
the cycle - will take some time to reflect. We would, in such a scenario, prefer to
track presales for stock performance and, as such, also benchmark our valuations
to normalised presales levels.

Multiple approaches to valuations

Traditional DCF-NAV We note that the preferred method to value property stocks would have been on
approach is not seen as a a DCF-NAV or simply PE basis. However, there are limitations. As highlighted
benchmark above, earnings are on a cyclical low and unlikely to reflect, in the near future, the
extent of any presales recovery. Also, given the issue of limited land bank
disclosures by most large land holders, and also the fast project churn method by
developers seeking project additions via the joint-development route, the DCF-
NAV methodology is limited in applicability. We instead adopt a sum of the parts
(SoTP) approach to derive valuations for our coverage universe, which assigns
‘continuing’ valuations for the residential market and tries to capture individual
companies’ quirks, such as high-priced city-centric land (not captured in
continuing value) or high-visibility leased assets.
Figure 75
Description of our valuation methodologies
Valuation methodologies
DCF-NAV Continuing Combination

Applicability Applicability Applicability
 Clear cut, limited land-  No single/major project but  Companies with mix of
bank/high-value projects relatively larger land bank high-value projects and
large land banks
 Preferably operational or  Proven ability over a cycle
easily identifiable proxy Pros: Best capture for multi-
Pros: Easy to evaluate a
segmented/large land-bank
Pros: Captures high value steady-state/normalised run
companies; gives adequate
projects fully, traditionally rate for residential business
room for growth
acceptable method
Cons: High-value projects not opportunities
Cons: Limited growth capture captured, large land banks
Cons: Several moving parts
particularly when projects are may get undervalued
being added; land bank Example: DLF, Godrej, IBREL
Example: Sobha, Prestige
disclosures and comparative
benchmarks could be limited
Example: Oberoi, Phoenix
Source: CLSA
The winners: prefer residential developers with flexibility, execution

Large opportunity, but The characteristics of any upcoming housing boom will be different this time, as the
developers need to scale-up winners will stand out due to their execution ability and business-model flexibility.
Sector consolidation and a profitable affordable segment are opening up major new
opportunities. To take advantage, developers would need to be quick and flexible in
their approach, as new products, locations and pricing points emerge. Godrej
Properties and Prestige have already demonstrated flexibility in their project
selections. Meanwhile, Sobha and Oberoi have great execution skills, with Sobha’s
affordable push likely to help drive volumes higher. IBREL and DLF also have good
execution, but it is their leasing businesses that are responsible for much of the
current buzz surrounding them.

Figure 76
Volume push is likely to be Developer business models

rewarded
Quick churn
Godrej
Properties
Prestige
High Premium
volumes pricing
Sobha
IBREL
Oberoi
DLF
Land banking
Note: Size of the circle replicates the amount of residential sales from FY15-1HFY18. Source: CLSA
Preferred picks: Godrej, Sobha, Prestige, Oberoi

Residential heavy, flexibility As highlighted above and in previous section, we prefer developers with a
and Mumbai presence are portfolios that are residential - and Mumbai - heavy. As such, our top picks are
key criteria Godrej Properties, Sobha, Oberoi and Prestige Estates. We have a BUY on IBREL
for its ongoing value-boosting restructuring exercise. Our sole negative rating in
the sector is on DLF, where fundamentals are significantly trailing implied
recovery, meaning that a valuation catch-up is highly likely. A valuation matrix for
the stocks under coverage is below. In our notes on the companies in the
following pages, we detail our thoughts, valuations and target-price
methodologies.
Figure 77
Property valuation
Company Price Mkt cap ADTO PE (x) EV/Ebitda (x) PB (x) ROE (%) TP % Rec
(Rs) (US$m) (US$m) FY19 FY20 FY19 FY20 FY19 FY20 FY19 FY20 (Rs) Up/dn
DLF 253 7,103 37.2 71.2 61.4 18.1 17.3 1.8 1.8 2.6 3.0 176 (31) SELL
Godrej Prop 823 2,799 3.2 54.9 42.6 72.0 59.2 7.4 6.5 14.3 16.2 1,078 31 BUY
Indiabulls Real 231 1,716 43.0 24.3 20.3 15.7 13.1 2.3 2.1 10.0 10.6 311 34 BUY
Oberoi 528 2,828 2.5 20.2 19.0 14.7 12.0 2.5 2.2 12.9 12.2 639 21 BUY
Prestige 314 1,844 2.6 30.9 27.5 13.6 12.3 2.3 2.2 7.8 8.2 393 25 BUY
Sobha 552 831 6.9 22.2 18.7 11.5 9.4 1.8 1.6 8.2 9.1 760 38 BUY
Source: CLSA
Stocks should more than double in five years

Upcycle should be multiyear We strongly believe in longer-term market-share gains and property upcycle, and
in the property sector that most property stocks should be able to benefit from the same. The last few
months’ rally in property stocks, and current low earnings base, imply optically
high multiples. We see that even over five years, most of these stocks should
double, with reasonable assumptions of growth and lower-multiple benchmarks
than current target multiples.

Expect minor margin We do not bake in significant gains on margins for developers, as most of the
improvement, some growth is linear in nature, to the extent that property prices may not rise
moderation of multiples substantially for existing land parcels. High growth (a topline Cagr of around 20%)
will drive some margin gains on the SG&A (selling, general and administrative
expenses) front. Given the nature of business models, we believe Godrej
Properties and Sobha have the highest potential long-term growth.
Figure 78
Calculation: preferred picks’ five-year target prices

Company CMP Current Five-yr target Current Target Current Target Five-yr %
(Rs) presales presales margins margins benchmark benchmark target upside
benchmark benchmark (%) (%) multiples multiples price (p)
(Rsbn) (Rsbn) (x) (x)
Godrej Properties 823 76 158 6.0% 6.5% 40x 35x 1,910 132
(ex Vikhroli) (ex Vikhroli) PAT PAT Earnings Earnings
Sobha 552 29 60 35% 37.5% 8.5x 7.5x 1,630 195
Ebitda (ex-land) Ebitda (ex-land) EV/Ebitda EV/Ebitda
Prestige 314 45 83 25% 25% 8.0x 7.0x 754 140
Ebitda (ex-land) Ebitda (ex-land) EV/Ebitda EV/Ebitda
Oberoi 528 One-yr fwd Five-yr fwd na na 30% premium 15% premium 887 67
NAV Rs492 NAV Rs771 to NAV to NAV
Source: CLSA

India property
Company profiles
DLF ................................................................................................................................. 57
Godrej Properties ......................................................................................................... 67
Indiabulls Real Estate ................................................................................................... 77
Mahindra Lifespace Developers ................................................................................. 87
Oberoi Realty ................................................................................................................ 91
Prestige Estates .......................................................................................................... 101
Sobha ............................................................................................................................ 111
Sunteck Realty ............................................................................................................ 121
All prices quoted herein are as at close of business 25 January 2018, unless otherwise stated

India property
Notes

DLF
Rs253.40 - SELL
Abhinav Sinha Major reset in progress

abhi.sinha@clsa.com Limited chance of residential surprise as upside is priced in
+91 22 6650 5069
DLF operates India’s largest property-lease franchise with Rs30bn in segmental
income in FY18. It is utilising the rental stream to deleverage its balance sheet.
However, DLF’s residential business is struggling, with a weak NCR property
market dragging presales. While other developers are set to increase sales in the
recovering residential market, DLF’s priority is to sell down its large inventory,
limiting upside. The stock’s high valuation factors in the company’s restructuring
upside, leading us to prefer other developers like Godrej Properties.
29 January 2018 Lease-asset monetisation drives deleveraging

DLF is monetising lease assets to deleverage its balance sheet. Its promoter is
India selling a 33% stake in asset-holding subsidiary DLF Cyber City Developers to
Property private-equity firm GIC, proceeds from which will be rerouted to DLF. Along with
a capital infusion from a planned equity issue, DLF will record Rs120bn in net
Reuters DLF.BO cashflow from its office-monetisation programme. Its deleveraging exercise
Bloomberg DLFU IB should help DLF break even on its Rs30bn per annum negative cashflow run rate.
Priced on 25 January 2018 Residential business has lost traction
CNX Nifty @ 11,069.7
From a peak of Rs70bn in residential presales in FY10, DLF is down to nearly zero
12M hi/lo Rs270.55/134.95 as it struggles with the national capital region’s (NCR) weak property market. By
mid-2018, DLF will have Rs140bn in unsold residential inventory (90% in NCR).
12M price target Rs176.00 Despite a potential upcoming sales revival, management plans to sell future
±% potential -31%
projects only after they reach a mature stage of development.
Shares in issue 1,784.1m
Free float (est.) 25.1% NCR recovery important
An NCR property revival will need to take place before DLF can provide upside
Market cap US$7,103m surprise on residential volume. A very low base implies that volumes should
3M ADV US$37.2m
improve YoY, but DLF has an abundance of inventory in various pockets of India,
which is likely to limit its recovery pace.
Foreign s'holding 16.7%
Upside is mostly priced in
Major shareholders We appreciate DLF’s balance sheet restructuring and believe it solidifies its status
Promoter 75.0%
FIIs 16.7%
as India’s top lease-asset owner, while laying out a path for future growth. We
separately value DLF’s residential inventory, high-visibility landbank (at
development value), lease assets (based on the price of a 33% stake that is being
sold to private-equity investor) and long-gestation landbank to arrive at our
SOTP-based Rs176 target, which is below its current Rs253 market price. We see
Stock performance (%) a limited chance of upside surprise in its NCR-based residential business.
1M 3M 12M
Absolute 3.4 39.3 85.1 Financials
Relative (2.0) 29.6 43.8
Year to 31 March 16A 17A 18CL 19CL 20CL
Abs (US$) 3.9 42.5 98.1
Revenue (Rsm) 99,256 82,212 77,624 83,561 87,913
300 (Rs) DLF (LHS) (%) 220
Rel to Nifty Ebitda (Rsm) 39,972 34,333 34,870 38,428 40,379
200
250 Net profit (Rsm) 5,029 2,855 2,926 6,347 7,367
180 EPS (Rs) 2.8 1.6 1.6 3.6 4.1
200 160 CL/consensus (13) (EPS%) - - 80 115 105
140
EPS growth (% YoY) (11.3) (43.3) 2.5 116.9 16.1
150
PE (x) 89.8 158.3 154.5 71.2 61.4
120
100 Dividend yield (%) 0.8 0.8 0.8 0.8 0.9
100 PB (x) 1.9 1.8 1.8 1.8 1.8
50 80 ROE (%) 2.0 1.2 1.2 2.6 3.0
Jan 16 Sep 16 May 17 Jan 18
Net debt/equity (%) 89.7 101.0 114.2 113.0 113.8
Source: Bloomberg Source: CLSA
DLF - SELL India property
Financials at a glance
Year to 31 March 2016A 2017A 18CL (% YoY) 19CL 20CL
Profit and loss (Rsm)
Revenue 99,256 82,212 77,624 (5.6) 83,561 87,913
Cogs (ex-D&A) (45,579) (34,658) (28,959) (30,705) (31,834)
Gross Profit (ex-D&A) 53,678 47,555 48,665 2.3 52,856 56,079
SG&A and other expenses (13,706) (13,222) (13,795) (14,428) (15,700)
Op Ebitda 39,972 34,333 34,870 1.6 38,428 40,379
Depreciation/amortisation (7,659) (5,725) (5,809) (5,998) (6,211)
Op Ebit 32,313 28,608 29,061 1.6 32,430 34,167
Net interest inc/(exp) (26,798) (29,798) (31,460) (30,068) (30,478)
Other non-Op items 6,714 7,193 6,579 (8.5) 6,705 6,835
Profit before tax 12,229 6,003 4,180 (30.4) 9,068 10,525
Taxation (5,642) (2,293) (1,254) (2,720) (3,157)
Profit after tax 6,587 3,710 2,926 (21.1) 6,347 7,367
Minority interest 11 68 0 0 0
Net profit 5,029 2,855 2,926 2.5 6,347 7,367
Adjusted profit 5,029 2,855 2,926 2.5 6,347 7,367
Cashflow (Rsm)
Operating profit 32,313 28,608 29,061 1.6 32,430 34,167
Depreciation/amortisation 7,659 5,725 5,809 1.5 5,998 6,211
Working capital changes 128,811 (47,836) 235 6,249 (1,680)
Other items (123,139) (2,786) (25,804) (4,993) (5,475)
Net operating cashflow 45,643 (16,289) 9,301 39,684 33,223
Capital expenditure (3,976) (3,438) (11,169) (11,567) (9,533)
Free cashflow 41,667 (19,726) (1,868) 28,118 23,691
M&A/Others (33,084) (14,891) (24,881) (23,363) (23,642)
Net investing cashflow (37,060) (18,329) (36,050) (34,929) (33,175)
Increase in loans (10,308) 39,389 7,447 (81.1) (5,000) -
Dividends (4,281) (4,282) (4,282) (4,282) (4,817)
Net equity raised/other 13,141 6,464 - - -
Net financing cashflow (1,448) 41,571 3,165 (92.4) (9,282) (4,817)
Incr/(decr) in net cash 7,136 6,954 (23,584) (4,526) (4,769)
Exch rate movements 0 0 0 0 0
Balance sheet (Rsm)
Cash & equivalents 35,642 42,595 19,011 (55.4) 14,485 9,715
Accounts receivable 34,868 37,193 14,232 (61.7) 14,352 15,268
Other current assets 257,766 288,601 326,138 13 328,447 335,093
Fixed assets 240,107 237,820 243,181 2.3 248,749 252,071
Investments 18,204 10,490 10,490 0 10,490 10,490
Intangible assets 10,179 10,110 10,110 0 10,110 10,110
Other noncurrent assets 20,538 16,498 18,148 10 18,602 19,067
Total assets 617,305 643,307 641,310 (0.3) 645,235 651,813
Short-term debt - - - - -
Accounts payable 63,039 59,950 53,955 (10) 56,652 59,485
Other current liabs 59,681 44,368 42,274 (4.7) 46,436 47,631
Long-term debt/CBs 252,633 292,022 299,469 2.6 294,469 294,469
Provisions/other LT liabs 0 0 0 0 0
Shareholder funds 240,691 245,728 244,373 (0.6) 246,438 248,989
Minorities/other equity 1,261 1,239 1,239 0 1,239 1,239
Total liabs & equity 617,305 643,307 641,310 (0.3) 645,235 651,813
Ratio analysis
Revenue growth (% YoY) 29.8 (17.2) (5.6) 7.6 5.2
Ebitda margin (%) 40.3 41.8 44.9 46.0 45.9
Ebit margin (%) 32.6 34.8 37.4 38.8 38.9
Net profit growth (%) (11.2) (43.2) 2.5 116.9 16.1
Op cashflow growth (% YoY) 133.7 (135.7) nm 326.7 (16.3)
Capex/sales (%) 4.0 4.2 14.4 13.8 10.8
Net debt/equity (%) 89.7 101.0 114.2 113.0 113.8
Net debt/Ebitda (x) 5.4 7.3 8.0 7.3 7.1
ROE (%) 2.0 1.2 1.2 2.6 3.0
ROIC (%) 3.7 3.8 4.1 4.4 4.6
Source: CLSA, Company

Sales at decade-low levels

Presales at all-time lows Annualised presales run rate
since the company’s 2007 90 (Rsbn) Residential sales Commercial sales Area sold (RHS) (m ft²) 16
listing
80 14
70 12
60
10
50
8
40
6
30
20 4
10 2
0 0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
Sales should improve from a very low base

Negative sales imply Quarterly and annualised presales run rate
cancellations were higher 30 (Rsbn) Presales (LHS) Presales trailing 4Q (Rsbn) 60
than gross new sales, partly
due to DLF’s suspensions of 25 50
new sales due to Real
Estate Regulation and 20 40
Development Act rollout
15 30
10 20
5 10
0 0
(5) (10)
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
Delivery track record particularly good in a spotty NCR market

DLF has done well in Annual project delivery
execution and can deliver 16 (msf) Development Annuity
another c.10msf in FY18
14
12
10
8
13
6 11
12
10
4
2 3
4
2
0
FY10 FY11 FY12 FY13 FY14 FY15 FY16

Operations have scaled down considerably

Due to its Rs140bn in Area under execution
residential inventory, new 70 (msf) Development Annuity
launches are unlikely in
the near term 60
50
40
30
20
10
0
Mar 14 Mar 15 Mar 16 Mar 17 Sep 17 Mar 18CL
¹ Gross size and income. Source: CLSA, Company
Rental income could sustain a 10% Cagr

Robust lease-income Lease income portfolio size¹ and income
performance with a 13% 40 (Rsbn) Lease income (LHS) Area leased year end (m ft²) 40
Cagr over FY11-17
35 35
30 30
25 25
20 20
15 15
10 10
5 5
0 0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18CL FY19CL FY20CL
Long-term revenue and profitability

FY17-20CL Cagrs: Revenue and net profit since listing
Revenue: 2.2% 160 (Rsbn) Revenue Net profit (RHS) (Rsbn) 90
Net profit: 37.2%
140 80
120 70
Profits to rise faster than 60
revenue on rising share of 100
lease income and better 50
80
margin mix for residential 40
developments 60
30
40 20
20 10
0 0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL

Valuation charts
PE at top end due to PE: One-year forward PE on then-consensus earnings
expectations that (x) PE: 1Y fwd Average +1sd -1sd
100
deleveraging will drive
EPS upgrade 90
80
70
60
50
40
30
20
10
0
EV/Ebitda is above 1sd EV/Ebitda: One-year forward EV/Ebitda on then-consensus numbers

35 (x) EV/Ebitda: 1Y fwd Average +1sd -1sd
30
25
20
15
10
0
Source: CLSA
PB is below 1sd levels; PB: One-year forward PB on then-consensus book value

however ROE is quite low 8 (x) PB: 1Y fwd Average +1sd -1sd
at 3%
7
0
Source: CLSA

SOTP-based One-year forward target: Rs176

DLF’s September 18CL SOTP value in a post DCCDL deleveraging scenario
Item Value (Rsbn) Comment
(I) Development company (devco)
(A) - Value of inventory
Value of devco inventory from ongoing projects 140 90%+ will completed by Mar 2018; based on mgmt estimates
Post tax discount value of inventory (a) 98 Assume cash received over five years; 12% discount rate
(B) - Value of high visibility land
Golf course land 75 15msf, valued at 5,000/sf (c.500m/acre)
Delhi land - SBM Land project 20 Same value as PE partner paid for 50%
Total value of high-visibility land (B) 95
EV of 'high-visibility' devco (C = A + B) 193
Value of rental assets outside DCCDL (D) 69 Rs5.5bn lease income @ 8% cap rate - same as DCCDL
Value of non-prime landbank (E) 63 Valuing @Rs400/sf (Rs35m/acre) for 205msf
(ex DCCDL and ongoing); c.Rs20bn land charges outstanding
Total EV of DLF assets ex-DCCDL (C + D + E = F) 324
Less ex DCCDL total net debt prior to dilution 229 Rs268bn at Sep 17; less c.Rs54bn net debt at DCCDL; add
Rs15bn negative cashflow until inventory construction
Add back cash infusion on dilution 150 Post-deal inflow via promoters and others
Equity value of DLF ex DCCDL post deal (I) 245
(II) - DCCDL
Add 66.66% equity value of DCCDL - 203 Rs302bn transaction equity value less Rs30bn debt for purchase
valued one-year fwd (II) of promoter stake; assume 12% growth in one year
Equity of DLF, including DCCDL (I + II = III) 448
No. of current equity shares (m) 1,784
New shares assuming equity raise as above (m) 690 Infusion at Rs217.25/share for Rs150bn
Post raise share count (m) 2,474
DLF's post DCCDL deal SOTP (Rs/share) 181 Post-deal target for Mar 2019
3-month discounted back (3%) target (Rs/share) 176 Post-deal target for Dec 2018
Note: DCCDL= DLF Cyber City Developers. Source: CLSA
Valuation details
We value DLF using a SOTP methodology, separately valuing its annuity and
development businesses. We view the annuity unit as a sum of rental arm DLF
Cyber City Developers (DCCDL) and non-DCCDL assets. We value its
development division on land and completed inventory, and assess DCCDL based
on the value at which a 33% stake has being sold to private-equity investor. DLF
would need to improve its development company’s business outlook in order to
justify a rerating, in our view.
Investment risks
As DLF derives roughly equal value from its annuity and development-company
businesses, the outlook for the commercial and residential-property sectors pose an
important risk factor. In addition to the macro risks associated with a property
company (eg, interest rates and discretionary demand), DLF's large exposure to the
National Capital Region makes the area’s outlook another important risk variable.
DLF has had variety of issues impact its stock, including court cases on capital-
market access, business conduct as well as other regulatory/land acquisition-
related issues where negative outcomes can impact its share-price movement.

Detailed financials
Year to 31 March 2014A 2015A 2016A 2017A 18CL 19CL 20CL
Revenue 82,980 76,487 99,256 82,212 77,624 83,561 87,913
Cogs (ex-D&A) (38,803) (32,845) (45,579) (34,658) (28,959) (30,705) (31,834)
Gross Profit (ex-D&A) 44,177 43,642 53,678 47,555 48,665 52,856 56,079
Research & development costs 0 0 0 0 0 0 0
Selling & marketing expenses (13,565) (9,916) (10,553) (9,938) (10,479) (10,863) (11,868)
Other SG&A - - - - - - -
Other Op Expenses ex-D&A (5,759) (3,488) (3,152) (3,283) (3,316) (3,565) (3,832)
Op Ebitda 24,852 30,237 39,972 34,333 34,870 38,428 40,379
Depreciation/amortisation (6,629) (5,448) (7,659) (5,725) (5,809) (5,998) (6,211)
Op Ebit 18,223 24,789 32,313 28,608 29,061 32,430 34,167
Interest income 0 0 0 0 0 0 0
Interest expense (24,633) (23,039) (26,798) (29,798) (31,460) (30,068) (30,478)
Net interest inc/(exp) (24,633) (23,039) (26,798) (29,798) (31,460) (30,068) (30,478)
Associates/investments - - - - - - -
Forex/other income - - - - - - -
Asset sales/other cash items 14,915 5,194 6,714 7,193 6,579 6,705 6,835
Provisions/other non-cash items - - - - - - -
Asset revaluation/Exceptional items - - - - - - -
Profit before tax 8,506 6,945 12,229 6,003 4,180 9,068 10,525
Taxation 836 (1,581) (5,642) (2,293) (1,254) (2,720) (3,157)
Profit after tax 9,342 5,364 6,587 3,710 2,926 6,347 7,367
Preference dividends 71 (34) (1,569) (923) 0 0 0
Profit for period 9,413 5,330 5,018 2,787 2,926 6,347 7,367
Minority interest 565 333 11 68 0 0 0
Net profit 9,979 5,663 5,029 2,855 2,926 6,347 7,367
Extraordinaries/others (3,516) (260) (1,967) 4,293 0 0 0
Profit avail to ordinary shares 6,462 5,402 3,062 7,148 2,926 6,347 7,367
Dividends (4,167) (4,274) (4,281) (4,282) (4,282) (4,282) (4,817)
Retained profit 2,295 1,128 (1,219) 2,866 (1,356) 2,066 2,551
Adjusted profit 9,979 5,663 5,029 2,855 2,926 6,347 7,367
EPS (Rs) 5.7 3.2 2.8 1.6 1.6 3.6 4.1
Adj EPS [pre excep] (Rs) 5.7 3.2 2.8 1.6 1.6 3.6 4.1
Core EPS (Rs) 5.7 3.2 2.8 1.6 1.6 3.6 4.1
DPS (Rs) 2.0 2.0 2.0 2.0 2.0 2.0 2.3
Profit and loss ratios

Growth (%)
Revenue growth (% YoY) 6.8 (7.8) 29.8 (17.2) (5.6) 7.6 5.2
Ebitda growth (% YoY) (5.4) 21.7 32.2 (14.1) 1.6 10.2 5.1
Ebit growth (% YoY) (0.4) 36.0 30.3 (11.5) 1.6 11.6 5.4
Net profit growth (%) 30.9 (43.3) (11.2) (43.2) 2.5 116.9 16.1
EPS growth (% YoY) 27.8 (44.6) (11.3) (43.3) 2.5 116.9 16.1
Adj EPS growth (% YoY) 27.8 (44.6) (11.3) (43.3) 2.5 116.9 16.1
DPS growth (% YoY) 0.0 0.0 0.0 0.0 0.0 0.0 12.5
Core EPS growth (% YoY) 27.8 (44.6) (11.3) (43.3) 2.5 116.9 16.1
Margins (%)
Ebitda margin (%) 29.9 39.5 40.3 41.8 44.9 46.0 45.9
Ebit margin (%) 22.0 32.4 32.6 34.8 37.4 38.8 38.9
Net profit margin (%) 12.0 7.4 5.1 3.5 3.8 7.6 8.4
Core profit margin 12.0 7.4 5.1 3.5 3.8 7.6 8.4
Op cashflow margin 16.6 25.5 46.0 (19.8) 12.0 47.5 37.8
Returns (%)
ROE (%) 3.8 2.1 2.0 1.2 1.2 2.6 3.0
ROA (%) 3.1 2.9 2.7 2.8 3.2 3.5 3.7
ROIC (%) 4.1 3.9 3.7 3.8 4.1 4.4 4.6
ROCE (%) 4.1 5.7 7.3 6.2 5.9 6.4 6.7
Other key ratios (%)
Effective tax rate (%) (9.8) 22.8 46.1 38.2 30.0 30.0 30.0
Ebitda/net int exp (x) 1.0 1.3 1.5 1.2 1.1 1.3 1.3
Exceptional or extraord. inc/PBT (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Dividend payout (%) 34.9 62.9 70.9 124.9 121.9 56.2 54.5

Balance sheet (Rsm)

Cash & equivalents 29,579 28,506 35,642 42,595 19,011 14,485 9,715
Accounts receivable 107,191 112,584 34,868 37,193 14,232 14,352 15,268
Inventories 184,886 176,105 168,342 199,491 212,478 212,514 216,841
Other current assets 3,256 3,871 89,424 89,110 113,660 115,933 118,252
Current assets 324,911 321,066 328,276 368,389 359,381 357,284 360,076
Fixed assets 237,170 243,790 240,107 237,820 243,181 248,749 252,071
Investments 3,754 5,205 18,204 10,490 10,490 10,490 10,490
Goodwill 11,968 12,058 10,179 10,110 10,110 10,110 10,110
Other intangible assets 0 0 0 0 0 0 0
Other noncurrent assets 67,220 80,505 20,538 16,498 18,148 18,602 19,067
Total assets 645,024 662,623 617,305 643,307 641,310 645,235 651,813
Short-term loans/OD - - - - - - -
Accounts payable 66,802 64,393 63,039 59,950 53,955 56,652 59,485
Accrued expenses - - - - - - -
Taxes payable 0 0 0 0 0 0 0
Other current liabs 60,918 59,853 59,681 44,368 42,274 46,436 47,631
Current liabilities 127,720 124,246 122,719 104,317 96,229 103,089 107,116
Long-term debt/leases/other 241,331 262,941 252,633 292,022 299,469 294,469 294,469
Convertible bonds 0 0 0 0 0 0 0
Provisions/other LT liabs 0 - 0 0 0 0 0
Total liabilities 369,052 387,187 375,353 396,340 395,698 397,558 401,586
Share capital 3,563 3,564 3,567 3,568 3,568 3,568 3,568
Retained earnings 270,386 270,125 237,123 242,160 240,805 242,870 245,421
Reserves/others 0 0 0 0 0 0 0
Shareholder funds 273,949 273,689 240,691 245,728 244,373 246,438 248,989
Minorities/other equity 2,023 1,747 1,261 1,239 1,239 1,239 1,239
Total equity 275,972 275,436 241,952 246,967 245,612 247,677 250,228
Total liabs & equity 645,023 662,623 617,305 643,307 641,310 645,235 651,813
Total debt 241,331 262,941 252,633 292,022 299,469 294,469 294,469
Net debt 211,753 234,435 216,991 249,427 280,458 279,984 284,754
Adjusted EV 600,489 622,576 634,251 672,824 699,590 695,828 700,395
BVPS (Rs) 153.8 153.7 134.9 137.7 137.0 138.1 139.6
Balance sheet ratios

Key ratios
Current ratio (x) 2.5 2.6 2.7 3.5 3.7 3.5 3.4
Growth in total assets (% YoY) (0.2) 2.7 (6.8) 4.2 (0.3) 0.6 1.0
Growth in capital employed (% YoY) (5.1) 3.2 (1.4) 9.5 5.8 0.2 1.3
Net debt to operating cashflow (x) 15.4 12.0 4.8 (15.3) 30.2 7.1 8.6
Gross debt to operating cashflow (x) 17.5 13.5 5.5 (17.9) 32.2 7.4 8.9
Gross debt to Ebitda (x) 9.7 8.7 6.3 8.5 8.6 7.7 7.3
Net debt/Ebitda (x) 8.5 7.8 5.4 7.3 8.0 7.3 7.1
Gearing
Net debt/equity (%) 76.7 85.1 89.7 101.0 114.2 113.0 113.8
Gross debt/equity (%) 87.4 95.5 104.4 118.2 121.9 118.9 117.7
Interest cover (x) 0.7 1.1 1.2 1.0 0.9 1.1 1.1
Debt Cover (x) 0.1 0.1 0.2 (0.1) 0.0 0.1 0.1
Working capital analysis
Inventory days 1,699.5 2,005.8 1,379.2 1,936.9 2,596.2 2,526.0 2,461.4
Debtor days 452.3 524.4 271.1 160.0 120.9 62.4 61.5
Creditor days 651.9 729.0 510.2 647.6 717.8 657.4 665.8
Working capital/Sales (%) 202.0 220.1 171.2 269.4 314.5 286.9 276.7
Capital employed analysis
Sales/Capital employed (%) 19.3 17.2 22.6 17.1 15.3 16.4 17.0
EV/Capital employed (%) 139.4 140.1 144.7 140.2 137.7 136.7 135.8
Working capital/Capital employed (%) 38.9 37.9 38.8 46.2 48.1 47.1 47.1
Fixed capital/Capital employed (%) 55.1 54.8 54.8 49.6 47.9 48.9 48.9
Other ratios (%)
EV/OCF (x) 43.7 31.9 13.9 (41.3) 75.2 17.5 21.1
EV/FCF (x) 18.3 83.4 15.2 (34.1) (374.5) 24.7 29.6
EV/Sales (x) 7.2 8.1 6.4 8.2 9.0 8.3 8.0
Capex/depreciation (%) 288.4 221.5 51.9 60.1 192.3 192.8 153.5

Cashflow (Rsm)
Operating profit 18,223 24,789 32,313 28,608 29,061 32,430 34,167
Operating adjustments - - - - - - -
Depreciation/amortisation 6,629 5,448 7,659 5,725 5,809 5,998 6,211
Working capital changes (13,836) (8,440) 128,811 (47,836) 235 6,249 (1,680)
Interest paid /other financial expenses - - - - - - -
Tax paid 836 (1,581) (5,642) (2,293) (1,254) (2,720) (3,157)
Other non-cash operating items 1,902 (682) (117,497) (493) (24,550) (2,273) (2,318)
Net operating cashflow 13,755 19,534 45,643 (16,289) 9,301 39,684 33,223
Capital expenditure 19,118 (12,068) (3,976) (3,438) (11,169) (11,567) (9,533)
Free cashflow 32,872 7,466 41,667 (19,726) (1,868) 28,118 23,691
Acq/inv/disposals 6,357 (1,451) (13,000) 7,715 - - -
Int, invt & associate div (9,717) (17,844) (20,084) (22,605) (24,881) (23,363) (23,642)
Net investing cashflow 15,757 (31,363) (37,060) (18,329) (36,050) (34,929) (33,175)
Increase in loans (24,672) 21,610 (10,308) 39,389 7,447 (5,000) -
Dividends (4,167) (4,274) (4,281) (4,282) (4,282) (4,282) (4,817)
Net equity raised/(buybacks) 7,238 (6,579) 13,141 6,464 - - -
Net financing cashflow (21,601) 10,757 (1,448) 41,571 3,165 (9,282) (4,817)
Incr/(decr) in net cash 7,911 (1,072) 7,136 6,954 (23,584) (4,526) (4,769)
Exch rate movements 0 0 0 0 0 0 0
Opening cash 21,668 29,579 28,506 35,642 42,595 19,011 14,485
Closing cash 29,579 28,507 35,642 42,596 19,011 14,485 9,716
OCF per share (Rs) 7.9 11.0 25.6 (9.1) 5.2 22.2 18.6
FCF per share (Rs) 18.9 4.2 23.4 (11.1) (1.0) 15.8 13.3
Cashflow ratio analysis

Growth (%)
Op cashflow growth (% YoY) (30.3) 42.0 133.7 (135.7) nm 326.7 (16.3)
FCF growth (% YoY) 26.8 (77.3) 458.1 (147.3) - - (15.7)
Capex growth (%) - - (67.1) (13.5) 224.9 3.6 (17.6)
Capex/sales (%) 23.0 15.8 4.0 4.2 14.4 13.8 10.8
Capex/op cashflow (%) 139.0 61.8 8.7 (21.1) 120.1 29.1 28.7
Operating cashflow payout ratio (%) 25.3 18.2 7.8 - 38.4 9.0 12.1
Cashflow payout ratio (%) 30.3 21.9 9.4 - 46.0 10.8 14.5
Free cashflow payout ratio (%) 12.7 57.2 10.3 - - 15.2 20.3
DuPont analysis
Ebit margin (%) 22.0 32.4 32.6 34.8 37.4 38.8 38.9
Asset turnover (x) 0.1 0.1 0.2 0.1 0.1 0.1 0.1
Interest burden (x) 0.5 0.3 0.4 0.2 0.1 0.3 0.3
Tax burden (x) 1.1 0.8 0.5 0.6 0.7 0.7 0.7
Return on assets (%) 3.1 2.9 2.7 2.8 3.2 3.5 3.7
Leverage (x) 2.4 2.4 2.5 2.6 2.6 2.6 2.6
ROE (%) 3.5 1.9 2.5 1.5 1.2 2.6 3.0
EVA® analysis
Ebit adj for tax (Rsm) 20,015 19,146 17,404 17,681 20,343 22,701 23,917
Average invested capital (Rsm) 489,750 494,319 472,703 463,322 500,742 516,376 520,832
ROIC (%) 4.1 3.9 3.7 3.8 4.1 4.4 4.6
Cost of equity (%) 14.5 14.5 14.5 14.5 14.5 14.5 14.5
Cost of debt (adj for tax) (%) 13.2 9.3 6.5 7.4 8.4 8.4 8.4
Weighted average cost of capital (%) 13.9 12.3 11.1 11.5 11.9 11.9 11.9
EVA® /IC (%) (9.8) (8.4) (7.4) (7.6) (7.8) (7.5) (7.3)
EVA® (Rsm) (48,228) (41,446) (34,857) (35,435) (39,174) (38,674) (37,988)

Notes

Godrej Properties
Rs822.95 - BUY
Abhinav Sinha Housing the nation

abhi.sinha@clsa.com Set to emerge as largest developer by presales
+91 22 6650 5069 Godrej Properties has emerged as India’s sole nationwide property developer
after adopting its parent company’s professional management skills and
consumer-first philosophy. Presales are surging and likely to reach new highs in
FY18 as it embarks on new project additions in anticipation of upcoming demand
growth. Godrej’s project buildouts have low capital intensity, complementing its
rapid presales rate and delivery capabilities, making it our top sector BUY.
Strong nationwide presence; able to leverage group resources

Godrej has emerged as the only nationwide residential-property brand after most
29 January 2018
Indian developers abandoned their domestic expansion plans amid the slow real-
India estate market. Its 145msf landbank and Rs50bn in gross FY18CL presales is
divided across major cities, including Mumbai (comprising about 50%), National
Property Capital Region, Bangalore and Pune. It has access to a large (500+ acre) land
parcel in Mumbai, is backed by the solid reputation of its parent - Godrej Group -
Reuters GODR.BO
Bloomberg GPL IB and has a sound management philosophy, making it a unique developer.
Priced on 25 January 2018 Excellent project addition model

CNX Nifty @ 11,069.7 Godrej has emerged as a pioneer in using joint ventures (JVs) to develop its
nationwide project additions with smaller partners who receive a share of the
12M hi/lo Rs880.95/324.90
profits or management fees. Over the past six quarters, it added 36msf, with
12M price target Rs1,078.00 nearly half of the land coming from its JV associates. At the same time, it reduced
±% potential +31% gearing, highlighting Godrej’s low capital intensity and high ROE operating model.
Shares in issue 216.5m
Volume push expected to gather momentum
Free float (est.) 25.1%
Godrej has adopted its parent firm’s consumer-oriented mindset which implies
Market cap US$2,799m that its products and home-selling prices are designed to sell quickly. Its 1HFY18
presales were 40% higher than all of FY17 as it was able to quickly adapt to
3M ADV US$3.2m
regulatory changes and gain market share. Meanwhile, its highly flexible product
Foreign s'holding 8.4% portfolio enables it to gain opportunities in the affordable-housing segment.
Major shareholders Top pick

Godrej Industries & Family 74.9% We believe Godrej’s high corporate governance, professional management and
FIIs 8.4%
on-time delivery track record will see it become India’s leading national
residential-property company. We forecast 65% gross presales Cagr over FY17-
20 to Rs90bn, but are below consensus EPS as we build in slower commercial
property sales. Our SOTP-based Rs1,078 target (based on normalised profitability
to December 2019 presales and group land value) implies 31% upside.
Stock performance (%)
1M 3M 12M
Relative 11.5 13.2 96.8 Year to 31 March 16A 17A 18CL 19CL 20CL
Abs (US$) 18.3 24.4 171.1 Revenue (Rsm) 21,226 15,829 15,331 15,840 14,834
1,000 (Rs) (%) 220
Godrej Prop Ebitda (Rsm) 1,366 2,504 1,413 2,804 3,358
900 RelIndex (RHS) 200 Net profit (Rsm) 1,585 2,066 1,894 3,240 4,176
800 EPS (Rs) 7.9 9.6 8.8 15.0 19.3
180
700
160
CL/consensus (12) (EPS%) - - 72 86 78
600 EPS growth (% YoY) (17.2) 20.4 (8.3) 71.1 28.9
140
500 PE (x) 103.7 86.1 94.0 54.9 42.6
120
400 Dividend yield (%) 0.0 0.0 0.2 0.3 0.4
300 100 PB (x) 9.3 8.9 8.3 7.4 6.5
200 80 ROE (%) 8.8 11.0 9.1 14.3 16.2
Jan 16 Sep 16 May 17 Jan 18 Net debt/equity (%) 164.0 174.6 149.5 116.5 90.2
Godrej Properties - BUY India property
Profit & Loss (Rsm)
Revenue 21,226 15,829 15,331 (3.2) 15,840 14,834
Cogs (ex-D&A) (17,342) (10,809) (10,811) (9,632) (7,731)
Gross Profit (ex-D&A) 3,884 5,020 4,520 (10) 6,209 7,103
Op Ebitda 1,366 2,504 1,413 (43.6) 2,804 3,358
Depreciation/amortisation (143) (147) (151) (163) (175)
Op Ebit 1,224 2,357 1,263 (46.4) 2,642 3,183
Net interest inc/(exp) (406) (1,015) (1,526) (1,400) (1,440)
Other non-Op items 1,295 1,254 2,000 59.5 1,350 1,400
Profit before tax 2,112 2,596 1,737 (33.1) 2,592 3,143
Taxation (679) (777) (522) (779) (945)
Profit after tax 1,433 1,819 1,215 (33.2) 1,813 2,199
Minority interest 151 247 678 174.6 1,427 1,977
Net profit 1,585 2,066 1,894 (8.3) 3,240 4,176
Adjusted profit 1,585 2,066 1,894 (8.3) 3,240 4,176
Cashflow (Rsm)
Operating profit 1,224 2,357 1,263 (46.4) 2,642 3,183
Depreciation/amortisation 143 147 151 2.5 163 175
Working capital changes 4,219 (7,527) 1,578 1,361 (269)
Other items (8,152) (2,202) (1,432) (752) (407)
Net operating cashflow (2,567) (7,225) 1,559 3,413 2,682
Capital expenditure 243 (79) (100) (100) (100)
Free cashflow (2,324) (7,304) 1,459 3,313 2,582
M&A/Others 1,295 1,254 2,000 59.5 1,350 1,400
Net investing cashflow 1,538 1,175 1,900 61.7 1,250 1,300
Increase in loans (1,203) 6,103 235 (96.1) - -
Dividends 0 0 (506) (633) (759)
Net equity raised/other 0 0 - 0 0
Net financing cashflow (1,203) 6,103 (271) (633) (759)
Incr/(decr) in net cash (2,232) 53 3,189 5,901.4 4,031 3,223
Exch rate movements - - - - -
Balance sheet (Rsm)
Cash & equivalents 4,722 4,775 7,963 66.8 11,994 15,217
Accounts receivable 1,719 2,218 2,520 13.6 2,604 2,438
Other current assets 55,298 59,848 57,624 (3.7) 58,841 65,399
Fixed assets 1,072 1,021 973 (4.7) 914 845
Investments 2,974 3,938 4,000 1.6 4,000 4,000
Intangible assets 0 0 0 0 0 0
Other noncurrent assets 0 0 - 0 -
Total assets 65,784 71,799 73,081 1.8 78,354 87,899
Accounts payable 14,418 11,928 11,058 (7.3) 13,603 19,615
Other current liabs 56 69 595 764.7 712 823
Provisions/other LT liabs 0 0 0 0 0
Shareholder funds 17,648 20,037 21,428 6.9 24,039 27,461
Minorities/other equity 0 0 0 0 0
Total liabs & equity 65,785 71,799 73,081 1.8 78,354 87,899
Ratio analysis
Revenue growth (% YoY) 15.2 (25.4) (3.2) 3.3 (6.4)
Ebitda margin (%) 6.4 15.8 9.2 17.7 22.6
Ebit margin (%) 5.8 14.9 8.2 16.7 21.5
Net profit growth (%) (17.0) 30.4 (8.3) 71.1 28.9
Op cashflow growth (% YoY) nm nm nm 118.9 (21.4)
Capex/sales (%) 1.1 0.5 0.7 0.6 0.7
Net debt/equity (%) 164.0 174.6 149.5 116.5 90.2
Net debt/Ebitda (x) 21.2 14.0 22.7 10.0 7.4
ROE (%) 8.8 11.0 9.1 14.3 16.2
ROIC (%) 1.8 3.5 1.8 3.8 4.6

Presales set for a record year

Presales forecast is based Long term presales¹ trend
on existing projects, but set 100 (Rsbn) Residential sales (m ft²) 14
to rise as landbank expands
90 Commercial sales
12
80 Total area sold (RHS)
70 10
60
8
50
6
40
30 4
20
2
10
0 0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18CL FY19CL FY20CL
¹ Gross sales. Source: CLSA, Company
Sales diversified across India with Mumbai as base

Over the past seven years, Sales breakdown by city
50% of sales have come (Rsbn) Mumbai NCR Bangalore Ahmedabad Kolkata Pune Others/nondisclosed
from Mumbai, 16% from 60
NCR, 10% from Bangalore
and 24% from other cities 50
40
30
20
10
0
FY12 FY13 FY14 FY15 FY16 FY17 1HFY18
Presales have surged

Godrej’s presales to Quarterly and annualised presales run rate
accelerate amid a pickup (Rsbn) Presales (LHS) Presales trailing 4Q (Rsbn)
25 60
in launches
50
20
40
15
30
10
20
5
10
0 0
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18

Robust project-addition pace

Project additions have Pace of project additions
gathered pace as 20 (m ft²)
developers exit projects 18
18
18
16
13
14
12
10
10
8
8 7 7
6
4
2
0
Project deliveries are matching sales

Godrej delivered 15msf of Annual project deliveries
projects over FY14-17, 7 (m ft²)
establishing a reputable
6.0
execution track record 6
5 4.6
4 3.5
2
1.0
1
0
FY14 FY15 FY16 FY17

Revenue: (2.1%) 25 (Rsbn) Revenue Net profit (RHS) (Rsbn) 4.5
Net profit: 26.4%
4.0
20 3.5
Due to accounting-
standard change from FY16, 3.0
joint-venture projects are 15
2.5
captured at the net
profit level 2.0
10
1.5
5 1.0
0.5
0 0.0

Valuation charts
Rising PE due to value PE: One-year forward PE on then-consensus earnings
ascribed to Mumbai land
60 (x) PE: 1Y fwd Average +1sd -1sd
50
40
30
20
10
0
Feb 10 Jun 11 Oct 12 Feb 14 May 15 Sep 16 Jan 18
EV/Ebitda is not a true EV/Ebitda: One-year forward EV/Ebitda on then-consensus numbers

reflection of valuation, due 50 (x) EV/Ebitda: 1Y fwd Average +1sd -1sd
to Ind AS accounting shift
which led to a change in 45
how earnings are reported 40
in some of its profit-sharing
agreements 35
30
25
20
15
10
5
0
Source: CLSA
PB slightly elevated on PB: One-year forward PB on then-consensus book value

accounting-change impact 8 (x) PB: 1Y fwd Average +1sd -1sd
and higher ROE
7
0
Source: CLSA

SOTP-based one-year forward target: Rs1,078

We forecast that presales Godrej Properties’ SOTP valuation
will achieve a 20% Cagr SOTP valuation
over FY18-20
Sale business
Dec 2019 presales (Rsbn) - ex Vikhroli 76.4 FY18 estimate of Rs50bn; Vikhroli
(Mumbai) valued separately
Assume steady state PAT margin (%) 6.0 Fee/JV model projects have about 8-9%
pretax margins
Steady-state PAT (Rsbn) 4.6
We assign a target multiple Target PAT (x) 40.0 Seen as similar to consumer discretionary on
similar to consumer- low-cycle earnings with high corporate
discretionary stocks in India governance (Indian consumer discretionaries/
housing proxies trading at 40-50x)
Equity value business - ex Vikhroli (Rsbn) 183
Per share value of business ex Vikhroli (A) (Rs) 847
Value of Vikhroli land
Assume annual development (msf) 1.00 Have about 50-100msf
Average sales price (Rs/sf) 21,000 Trees project selling price
Revenue share of GPL (%) 10 As per agreement
Annual revenue to GPL (Rsbn) 2.1
Costs incurred (% of revenue) 1.5 Sales and marketing costs only
Net annual PAT stream to GPL (Rsm) 1.2 30% tax rate assumed
Target PAT (x) 40.0 Same as above
Large group-owned land EV of Vikhroli land (Rsbn) 50 Assuming midpoint of c.750 acres land
area in Vikhroli has high implies c.Rs667m/acre
long-term visibility Per share value of Vikhroli (B) (Rs) 231
SOTP value for Godrej Properties (A+B) 1,078
Source: CLSA
Valuation details
We value Godrej Properties based on an SOTP-based approach wherein we value
its normalised earnings on Dec 19CL presales at 40x PAT (as it is likely to sustain
high multiples, given low-cycle earnings and affordable-housing upside) and add
the value of the development potential for its Vikhroli (Mumbai) land parcel, ie,
Rs231 per share, assuming 1msf steady-state sales per annum, as recently
demonstrated by the success of its Trees project).
Investment risks
Godrej is a nationwide residential-property developer with a relatively heavy
exposure to Mumbai (comprising 50% of presales). Key risks to the company's
business are therefore macro variables (eg, interest rates and discretionary
demand) that impact residential real-estate demand. Its Mumbai exposure also
implies that it needs to carefully assess the city's property demand. Also, given
Mumbai’s volatile regulatory environment, approval delays for projects are an
important risk element.

Detailed financials
Revenue 12,382 18,431 21,226 15,829 15,331 15,840 14,834
Cogs (ex-D&A) (8,381) (14,864) (17,342) (10,809) (10,811) (9,632) (7,731)
Research & development costs - - - - - - -
Selling & marketing expenses - - - - - - -
Other SG&A (332) (608) (2,068) (2,041) (2,602) (2,863) (3,149)
Other Op Expenses ex-D&A (253) (386) (450) (475) (504) (542) (596)
Op Ebitda 3,416 2,572 1,366 2,504 1,413 2,804 3,358
Depreciation/amortisation (58) (100) (143) (147) (151) (163) (175)
Op Ebit 3,358 2,472 1,224 2,357 1,263 2,642 3,183
Interest expense (45) (47) (406) (1,015) (1,526) (1,400) (1,440)
Net interest inc/(exp) (45) (47) (406) (1,015) (1,526) (1,400) (1,440)
Associates/investments 160 835 1,295 1,254 2,000 1,350 1,400
Asset sales/other cash items - - - - - - -
Taxation (1,111) (904) (679) (777) (522) (779) (945)
Profit after tax 2,363 2,356 1,433 1,819 1,215 1,813 2,199
Preference dividends - - - - - - -
Minority interest (768) (447) 151 247 678 1,427 1,977
Net profit 1,594 1,909 1,585 2,066 1,894 3,240 4,176
Extraordinaries/others 0 0 0 0 0 0 0
Dividends (466) (466) 0 0 (506) (633) (759)
Retained profit 1,128 1,443 1,585 2,066 1,388 2,607 3,417
Adjusted profit 1,594 1,909 1,585 2,066 1,894 3,240 4,176
EPS (Rs) 8.6 9.6 7.9 9.6 8.8 15.0 19.3
Core EPS (Rs) 8.6 9.6 7.9 9.6 8.8 15.0 19.3
DPS (Rs) 2.2 2.0 0.0 0.0 2.0 2.5 3.0

Growth (%)
Revenue growth (% YoY) 19.4 48.9 15.2 (25.4) (3.2) 3.3 (6.4)
Ebitda growth (% YoY) 19.5 (24.7) (46.9) 83.3 (43.6) 98.4 19.7
Ebit growth (% YoY) 19.3 (26.4) (50.5) 92.6 (46.4) 109.2 20.5
Net profit growth (%) 15.2 19.7 (17.0) 30.4 (8.3) 71.1 28.9
EPS growth (% YoY) 5.0 11.1 (17.2) 20.4 (8.3) 71.1 28.9
Adj EPS growth (% YoY) 5.0 11.1 (17.2) 20.4 (8.3) 71.1 28.9
DPS growth (% YoY) 132.8 (7.2) (100.0) - - 25.0 20.0
Core EPS growth (% YoY) 5.0 11.1 (17.2) 20.4 (8.3) 71.1 28.9
Margins (%)
Ebitda margin (%) 27.6 14.0 6.4 15.8 9.2 17.7 22.6
Ebit margin (%) 27.1 13.4 5.8 14.9 8.2 16.7 21.5
Op cashflow margin (64.8) (60.2) (12.1) (45.6) 10.2 21.5 18.1
Returns (%)
ROE (%) 9.9 10.5 8.8 11.0 9.1 14.3 16.2
ROA (%) 4.2 2.6 1.2 2.4 1.2 2.4 2.7
ROIC (%) 6.8 4.2 1.8 3.5 1.8 3.8 4.6
ROCE (%) 10.0 5.8 2.6 4.6 2.3 5.0 6.1
Effective tax rate (%) 32.0 27.7 32.1 29.9 30.1 30.0 30.0
Exceptional or extraord. inc/PBT (%) - - - - - - -
Dividend payout (%) 25.0 20.9 0.0 0.0 22.8 16.7 15.5

Balance sheet (Rsm)

Inventories 37,268 47,271 39,231 39,661 33,573 30,690 33,088
Current assets 60,212 71,733 61,738 66,841 68,108 73,439 83,054
Fixed assets 1,046 1,156 1,072 1,021 973 914 845
Investments - - 2,974 3,938 4,000 4,000 4,000
Goodwill 209 742 0 0 0 0 0
Other noncurrent assets - - 0 0 - 0 -
Total assets 61,467 73,630 65,784 71,799 73,081 78,354 87,899
Other current liabs 590 646 56 69 595 712 823
Convertible bonds - - - - - - -
Provisions/other LT liabs 0 - 0 0 0 0 0
Share capital 991 997 1,081 1,082 1,082 1,082 1,082
Reserves/others - 0 0 - 0 0 0
Minorities/other equity 2,031 2,279 0 0 0 0 0
Total equity 19,965 20,748 17,648 20,037 21,428 24,039 27,461
Total debt 25,710 34,865 33,662 39,765 40,000 40,000 40,000
Net debt 17,000 27,911 28,940 34,990 32,037 28,006 24,783
Adjusted EV 170,567 193,424 190,303 209,024 206,008 201,977 198,754
BVPS (Rs) 97.0 92.7 88.4 92.7 99.1 111.2 127.0

Key ratios
Current ratio (x) 3.8 4.0 4.3 5.6 5.8 5.1 4.1
Growth in total assets (% YoY) 31.4 19.8 (10.7) 9.1 1.8 7.2 12.2
Growth in capital employed (% YoY) 21.5 31.6 (4.3) 18.1 (2.8) (2.7) 0.4
Net debt to operating cashflow (x) (2.1) (2.5) (11.3) (4.8) 20.5 8.2 9.2
Gross debt to operating cashflow (x) (3.2) (3.1) (13.1) (5.5) 25.6 11.7 14.9
Net debt/Ebitda (x) 5.0 10.9 21.2 14.0 22.7 10.0 7.4
Gearing
Net debt/equity (%) 85.2 134.5 164.0 174.6 149.5 116.5 90.2
Interest cover (x) 74.9 52.3 3.0 2.3 0.8 1.9 2.2
Debt Cover (x) (0.3) (0.3) (0.1) (0.2) 0.0 0.1 0.1
Inventory days 1,516.0 1,038.0 910.3 1,332.0 1,236.3 1,217.7 1,505.5
Debtor days 116.0 113.2 75.0 45.4 56.4 59.0 62.0
Creditor days 639.1 400.0 334.6 444.8 388.0 467.3 784.1
Other ratios (%)
EV/OCF (x) (21.3) (17.4) (74.1) (28.9) 132.1 59.2 74.1
EV/FCF (x) (19.8) (17.1) (81.9) (28.6) 141.2 61.0 77.0
EV/Sales (x) 13.8 10.5 9.0 13.2 13.4 12.8 13.4
Capex/depreciation (%) 1,033.2 184.7 171.6 54.8 67.8 63.1 59.0

Cashflow (Rsm)
Depreciation/amortisation 58 100 143 147 151 163 175
Working capital changes (6,149) (11,051) 4,219 (7,527) 1,578 1,361 (269)
Interest paid /other financial expenses (45) (47) (406) (1,015) (1,526) (1,400) (1,440)
Tax paid (1,111) (904) (679) (777) (522) (779) (945)
Other non-cash operating items (4,136) (1,663) (7,067) (410) 616 1,427 1,977
Net operating cashflow (8,025) (11,094) (2,567) (7,225) 1,559 3,413 2,682
Capital expenditure (596) (185) 243 (79) (100) (100) (100)
Free cashflow (8,621) (11,279) (2,324) (7,304) 1,459 3,313 2,582
Acq/inv/disposals - - - - - - -
Int, invt & associate div 160 835 1,295 1,254 2,000 1,350 1,400
Net investing cashflow (436) 650 1,538 1,175 1,900 1,250 1,300
Increase in loans 8,930 9,155 (1,203) 6,103 235 - -
Dividends (466) (466) 0 0 (506) (633) (759)
Net equity raised/(buybacks) 7,000 - 0 0 - 0 0
Net financing cashflow 15,464 8,689 (1,203) 6,103 (271) (633) (759)
Incr/(decr) in net cash 7,003 (1,755) (2,232) 53 3,189 4,031 3,223
Exch rate movements - - - - - - -
Opening cash 1,707 8,710 6,954 4,722 4,775 7,963 11,994
Closing cash 8,710 6,955 4,722 4,775 7,963 11,994 15,217
OCF per share (Rs) (43.4) (55.7) (12.9) (33.4) 7.2 15.8 12.4
FCF per share (Rs) (46.6) (56.6) (11.6) (33.8) 6.7 15.3 11.9

Growth (%)
Op cashflow growth (% YoY) (1,157.3) nm nm nm nm 118.9 (21.4)
FCF growth (% YoY) (1,652.6) - - - - 127.0 (22.1)
Capex growth (%) 192.6 (69.0) (231.7) - 25.9 0.0 0.0
Capex/sales (%) 4.8 1.0 1.1 0.5 0.7 0.6 0.7
Capex/op cashflow (%) (7.4) (1.7) (9.5) (1.1) 6.4 2.9 3.7
Operating cashflow payout ratio (%) - - - - 27.7 15.8 24.2
Cashflow payout ratio (%) - - - - 32.4 18.5 28.3
Free cashflow payout ratio (%) - - - - 34.7 19.1 29.4
DuPont analysis
Ebit margin (%) 27.1 13.4 5.8 14.9 8.2 16.7 21.5
Asset turnover (x) 0.2 0.3 0.3 0.2 0.2 0.2 0.2
Tax burden (x) 0.7 0.7 0.7 0.7 0.7 0.7 0.7
Return on assets (%) 4.2 2.6 1.2 2.4 1.2 2.4 2.7
Leverage (x) 3.1 3.3 3.6 3.7 3.5 3.3 3.2
ROE (%) 13.4 11.6 7.5 9.7 5.9 8.0 8.5
EVA® analysis
Ebit adj for tax (Rsm) 2,284 1,787 830 1,652 883 1,848 2,227
ROIC (%) 6.8 4.2 1.8 3.5 1.8 3.8 4.6
Cost of equity (%) 14.5 14.5 14.5 14.5 14.5 14.5 14.5
EVA® /IC (%) (7.7) (10.3) (12.7) (11.0) (12.7) (10.7) (9.9)
EVA® (Rsm) (2,601) (4,421) (5,860) (5,214) (6,407) (5,221) (4,754)

Notes

Indiabulls Real Estate
Rs231.25 - BUY
Abhinav Sinha Improving visibility

abhi.sinha@clsa.com Ongoing restructuring, Mumbai exposure offer value
+91 22 6650 5069 Indiabulls Real Estate (IBREL) has established a clear strategy in which it will
consolidate its office business into a separate asset-holding unit. It has
meanwhile gained delivery credentials across its residential business, primarily in
Mumbai and the National Capital Region. With most of its value coming from our
preferred micro-market of Mumbai, IBREL is well placed to benefit from a
property-market upturn and we are BUYers to our Rs311 target.
Lease income set to double

IBREL’s Rs7bn lease-income portfolio is set to double to Rs14bn by FY21 through
29 January 2018
three means: restructuring its portfolio to increase its lease-asset area, acquiring
India brownfield assets and rental increases. More than 50% of its lease income is likely
to come from the central Mumbai office market which is a unique high-value
Property exposure among listed developers.
Reuters INRL.NS
Restructuring to unlock value
Bloomberg IBREL IS
The company plans to expand its lease-income business expansion by monetising
Priced on 25 January 2018 its office assets and consolidating them into a single entity. It acquired the
CNX Nifty @ 11,069.7 outstanding 45% stake in its Singapore-listed, business-focused Indiabulls
Properties Investment Trust in 4Q17. The company also recently purchased two
12M hi/lo Rs266.15/75.40
office buildings in prime Gurgaon locations, setting the stage for the creation of a
12M price target Rs311.00 lease-asset platform in the near term.
±% potential +34%
Residential business has high near-term visibility
IBREL has sold 54% of its 34msf ongoing residential projects. Of these, 20msf -
Free float (est.) 63.1%
including 3msf in high-visibility Central Mumbai (80% sold) - is due for delivery in
Market cap US$1,716m FY20-21. We estimate a net surplus of Rs50bn+ will accrue from these projects
which will provide balance-sheet support. Over the longer term, a key factor will
3M ADV US$43.0m
be its project portfolio in Gurgaon, where the resolution of Dwarka Expressway
Foreign s'holding 31.7% delays and better investor demand may be upside catalysts.
Major shareholders Can surprise if investor demand improves

Sameer Gehlaut and family 36.9% IBREL’s development-company portfolio offers exposure to investor-preferred
FIIs 27.6%
locations in Mumbai’s outskirts (eg, near the city’s upcoming second airport and
trans-ocean sea link) and Gurgaon. We are more confident on the former where
we believe the company’s volume-led push can provide upside surprise. Our
Rs311 SOTP-based target - using an 8% cap rate and 12%/14% discount rate for
high visibility/other properties - implies 34% upside.
1M 3M 12M
Relative (2.2) 4.1 120.6 Year to 31 March 16A 17A 18CL 19CL 20CL
350 (Rs) Indiabulls Real Est (%) 450
Rel to Nifty (RHS)
Ebitda (Rsm) 8,977 6,454 12,186 11,956 13,827
400
300 Net profit (Rsm) 2,959 3,969 4,382 4,525 5,335
350 EPS (Rs) 7.1 9.1 9.2 9.5 11.2
250
200
300 CL/consensus (2) (EPS%) - - 98 88 105
250 EPS growth (% YoY) 20.9 29.0 1.4 3.3 17.9
150
200 PE (x) 32.8 25.4 25.0 24.3 20.6
100 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
150
50 100 PB (x) 2.4 2.5 2.6 2.3 2.1
0 50 ROE (%) 5.3 9.9 10.5 10.0 10.6
Indiabulls Real Estate - BUY India property
Revenue 29,595 23,203 43,026 85.4 37,311 41,062
Cogs (ex-D&A) (16,410) (11,914) (25,491) (19,739) (20,917)
Op Ebitda 8,977 6,454 12,186 88.8 11,956 13,827
Depreciation/amortisation (695) (714) (1,020) (1,162) (1,319)
Op Ebit 8,282 5,739 11,166 94.5 10,794 12,508
Other non-Op items 1,372 5,240 2,200 (58) 2,400 2,400
Profit before tax 4,643 5,371 6,109 13.8 6,856 8,083
Taxation (1,420) (1,826) (2,077) (2,331) (2,748)
Profit after tax 3,223 3,545 4,032 13.8 4,525 5,335
Minority interest (264) 424 350 (17.5) 0 0
Net profit 2,959 3,969 4,382 10.4 4,525 5,335
Adjusted profit 2,959 3,969 4,382 10.4 4,525 5,335
Cashflow (Rsm)
Depreciation/amortisation 695 714 1,020 42.9 1,162 1,319
Working capital changes (29,278) 4,191 2,406 (42.6) 12,967 9,107
Other items 11,193 (4,012) (22,011) (7,757) (16,047)
Net operating cashflow (9,108) 6,633 (7,419) 17,167 6,888
Free cashflow (31,245) (7,623) (13,898) 7,599 (2,400)
M&A/Others 1,108 5,664 (7,450) 2,400 2,400
Increase in loans 30,136 4,218 13,410 218 (10,000) -
Dividends 0 0 0 0 0
Net equity raised/other 0 (2,258) 7,937 0 -
Net financing cashflow 30,136 1,960 21,347 989.4 (10,000) 0
Incr/(decr) in net cash (1) 0 (1) (1) 0
Balance sheet (Rsm)
Other current assets 103,709 95,302 78,686 (17.4) 81,083 87,921
Fixed assets 24,338 37,880 43,338 14.4 51,743 59,711
Investments 4,957 3,420 3,420 0 3,420 3,420
Intangible assets 0 0 0 0 0
Other noncurrent assets 0 0 - - 0
Total assets 181,222 185,676 186,537 0.5 184,032 197,236
Other current liabs 69 92 172 86.8 149 164
Provisions/other LT liabs 3 0 - - -
Minorities/other equity 8,328 7,109 150 (97.9) 150 150
Ratio analysis
Revenue growth (% YoY) 13.8 (21.6) 85.4 (13.3) 10.1
Ebitda margin (%) 30.3 27.8 28.3 32.0 33.7
Ebit margin (%) 28.0 24.7 26.0 28.9 30.5
Net profit growth (%) 19.3 34.1 10.4 3.3 17.9
Op cashflow growth (% YoY) nm nm (211.9) nm (59.9)
Capex/sales (%) 74.8 61.4 15.1 25.6 22.6
Net debt/equity (%) 154.8 175.1 210.5 171.4 142.0
Net debt/Ebitda (x) 8.3 12.9 7.4 6.8 5.4
ROE (%) 5.3 9.9 10.5 10.0 10.6
ROIC (%) 6.2 3.1 5.7 5.6 6.6

Mumbai driven presales

Good performance of Annual presales
central Mumbai residential 60 (Rsbn) Value sales Area sold (RHS) (m ft²) 7
projects supported
FY16-17 sales 6
50
5
40
4
30
3
20
2
10 1
0 0
Sales trend has been steady

Possible acceleration in Quarterly and annualised presales run rate
presales run rate if 18 (Rsbn) Presales (LHS) Presales trailing 4Q (Rsbn) 45
investment demand picks
up in Mumbai and Gurgaon 16 40
14 35
12 30
10 25
8 20
6 15
4 10
2 5
0 0
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
Good visibility on near-term cashflow

Central Mumbai cashflow Net cashflow from ongoing projects¹
should be realisable over Others
next 18-24 months 6%
Mumbai - Central
28%
NCR
29%
Net surplus on ongoing

projects (Sep 2017):
Rs127bn
Mumbai - MMR
37%
¹ Ex-London project. Note: MMR=Mumbai metropolitan region. Source: CLSA, Company

Ongoing business restructure

Office business and high Proposed post-reorganisation structure
value central Mumbai land
will be consolidated into
one entity which will have
IBREL
high monetisation potential
100% 100%
IBCAL All other projects/land

Completed office space Ongoing residential development
(I) IPIT (Mumbai): 3.3m ft² (I) Blu (Mumbai): 1.4m ft²
(II) Chennai: 1.9m ft² (II) Other Mumbai: 15.5m ft²
(III) NCR: 11.5m ft²
Planned office space
(IV) London: 0.14m ft²
(I) IPIT (Mumbai): 0.8m ft²
(V) All thers: 3.8m ft²
(II) Blu (Mumbai): 0.8m ft²
(III) Gurgaon: 1.6m ft²
Land
Ongoing resi development (I) Land bank: 1,046 acres
(I) IPIT (Mumbai): 1.6m ft² (Gurgaon, Mumbai, Chennai)
Rentals set to double

New office construction in Lease income portfolio size¹ and income
central Mumbai and 18 (Rsbn) Central Mumbai Chennai Gurgaon
Gurgaon, along with rental
hikes, should double lease 16
income in five years 14
12
10
8
6
4
2
0
FY17 FY18CL FY19CL FY20CL FY21CL FY22CL FY23CL

FY17-20CL Cagrs: Revenue and net profit since its listing
Net profit: 8.7%
40 5
35
4
Net profit increase 30
to be partly driven by 25 3
rising lease income 20 2
15
1
10
5 0
0 (1)
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL

Valuation charts
PE climbed to +1sd as the PE: One- year forward PE on then-consensus earnings
stock rerated on business- (x)
50 PE: 1Y fwd Average +1sd -1sd
restructuring hopes
45
40
35
30
25
20
15
10
5
0
EV/Ebitda is below EV/Ebitda: One-year forward EV/Ebitda on then-consensus numbers

average levels 60 (x) EV/Ebitda: 1Y fwd Average +1sd -1sd
50
40
30
20
10
0
Source: CLSA
PB surge driven by PB: One-year forward PB on then-consensus book value

business-restructuring 3.0 (x) PB: 1Y fwd Average +1sd -1sd
process which should
improve capital efficiency
2.5
2.0
1.5
1.0
0.5
0.0
Source: CLSA

SOTP-based one-year forward target: Rs311

Ongoing projects include Indiabulls Real Estate SOTP
Rs35bn net receivables SOTP
from high visibility central
Development business (Rsbn)
Mumbai location
Ongoing projects 91 Net inflows of Rs127bn (ex-London
project) discounted at 12-14%,
depending upon visibility
Landbank 15 1,010 acres land in Gurgaon,
Mumbai metropolitan region and
Chennai; valued at Rs15m/acre
Other office spaces include Value of development co 107
c.1.5m sf+ being developed Annuity business
in central Mumbai
IPIT¹ office 85 8% cap rate, discount rate of 12% for
under-construction assets
Other office spaces 40 New construction at 8% cap, 12% discount
Less net debt on IPIT 42
Less pending payments for IPIT stake acquisition 7 These are to be paid by Oct 2019
Total equity value of annuity 77
London project has Add value of London project 17 At acquisition cost, adjusted for hotel
gained some visibility Ebitda stream
with completed sales Less debt outside annuity business 53
worth Rs4bn
Net equity value 148
Value per share (Rs) 311 1Y fwd target
¹ Indiabulls Properties Investment Trust. Source: CLSA
Valuation details
We value IBREL using a SOTP methodology. We use the benchmark valuations of
an 8% cap rate and 12%/14% discount rate of for high visibility (central Mumbai
residential and office)/other properties. We value ongoing projects using a DCF-
NAV approach and its landbank and London project at book.
Investment risks
IBREL's projects have a greater exposure to central Mumbai (40%+ of NAV),
where performance - as a residential and office market - can pose risks to its
stock. For the remainder, the majority valuation comes from Gurgaon, where land
is located along the Dwarka Expressway. Though we do not expect an imminent
improvement in the Gurgaon market, timely resolution (2HFY19) of Dwarka’s
issues and an improvement in housing demand are important risk variables for the
company.

Detailed financials
Year to 31 March 2015A 2016A 2017A 18CL 19CL 20CL
Revenue 26,012 29,595 23,203 43,026 37,311 41,062
Cogs (ex-D&A) (17,689) (16,410) (11,914) (25,491) (19,739) (20,917)
Gross Profit (ex-D&A) 8,322 13,185 11,290 17,535 17,572 20,145
Research & development costs - - - - - -
Selling & marketing expenses - - - - - -
Other SG&A (2,005) (3,064) (3,675) (4,042) (4,244) (4,775)
Other Op Expenses ex-D&A (604) (1,144) (1,161) (1,306) (1,371) (1,543)
Op Ebitda 5,713 8,977 6,454 12,186 11,956 13,827
Depreciation/amortisation (197) (695) (714) (1,020) (1,162) (1,319)
Op Ebit 5,516 8,282 5,739 11,166 10,794 12,508
Interest income 0 0 0 0 0 0
Interest expense (3,361) (5,011) (5,608) (7,256) (6,338) (6,825)
Net interest inc/(exp) (3,361) (5,011) (5,608) (7,256) (6,338) (6,825)
Associates/investments 1,354 1,372 5,240 2,200 2,400 2,400
Forex/other income - - - - - -
Asset sales/other cash items - - - - - -
Provisions/other non-cash items - - - - - -
Asset revaluation/Exceptional items - - - - - -
Profit before tax 3,510 4,643 5,371 6,109 6,856 8,083
Taxation (795) (1,420) (1,826) (2,077) (2,331) (2,748)
Profit after tax 2,715 3,223 3,545 4,032 4,525 5,335
Preference dividends - - - - - -
Profit for period 2,715 3,223 3,545 4,032 4,525 5,335
Minority interest (234) (264) 424 350 0 0
Net profit 2,481 2,959 3,969 4,382 4,525 5,335
Extraordinaries/others 0 0 0 0 0 0
Profit avail to ordinary shares 2,481 2,959 3,969 4,382 4,525 5,335
Dividends 0 0 0 0 0 0
Retained profit 2,481 2,959 3,969 4,382 4,525 5,335
Adjusted profit 2,481 2,959 3,969 4,382 4,525 5,335
EPS (Rs) 5.8 7.1 9.1 9.2 9.5 11.2
Adj EPS [pre excep] (Rs) 5.8 7.1 9.1 9.2 9.5 11.2
Core EPS (Rs) 5.8 7.1 9.1 9.2 9.5 11.2
DPS (Rs) 0.0 0.0 0.0 0.0 0.0 0.0

Growth (%)
Revenue growth (% YoY) - 13.8 (21.6) 85.4 (13.3) 10.1
Ebitda growth (% YoY) - 57.1 (28.1) 88.8 (1.9) 15.7
Ebit growth (% YoY) - 50.1 (30.7) 94.5 (3.3) 15.9
Net profit growth (%) - 19.3 34.1 10.4 3.3 17.9
EPS growth (% YoY) nm 20.9 29.0 1.4 3.3 17.9
Adj EPS growth (% YoY) nm 20.9 29.0 1.4 3.3 17.9
DPS growth (% YoY) - - - - - -
Core EPS growth (% YoY) nm 20.9 29.0 1.4 3.3 17.9
Margins (%)
Ebitda margin (%) 22.0 30.3 27.8 28.3 32.0 33.7
Ebit margin (%) 21.2 28.0 24.7 26.0 28.9 30.5
Net profit margin (%) 9.5 10.0 17.1 10.2 12.1 13.0
Core profit margin 9.5 10.0 17.1 10.2 12.1 13.0
Op cashflow margin (131.3) (30.8) 28.6 (17.2) 46.0 16.8
Returns (%)
ROE (%) 3.5 5.3 9.9 10.5 10.0 10.6
ROA (%) 2.5 3.3 2.1 4.0 3.8 4.3
ROIC (%) 8.1 6.2 3.1 5.7 5.6 6.6
ROCE (%) 4.5 6.8 4.5 8.4 8.2 9.7
Effective tax rate (%) 22.7 30.6 34.0 34.0 34.0 34.0
Ebitda/net int exp (x) 1.7 1.8 1.2 1.7 1.9 2.0
Exceptional or extraord. inc/PBT (%) - - - - - -
Dividend payout (%) 0.0 0.0 0.0 0.0 0.0 0.0

Balance sheet (Rsm)

Cash & equivalents 10,036 15,152 10,831 16,755 15,843 22,316
Accounts receivable 1,594 33,067 38,242 44,338 31,943 23,867
Inventories 60,141 80,901 78,286 64,170 61,567 58,405
Other current assets 39,343 22,807 17,016 14,516 19,516 29,516
Current assets 111,113 151,928 144,376 139,779 128,869 134,104
Fixed assets 2,389 24,338 37,880 43,338 51,743 59,711
Investments 54,947 4,957 3,420 3,420 3,420 3,420
Goodwill 0 0 0 0 0 0
Other intangible assets 0 0 0 0 0 0
Other noncurrent assets 0 0 0 - - 0
Total assets 168,450 181,222 185,676 186,537 184,032 197,236
Short-term loans/OD - - - - - -
Accounts payable 35,861 43,018 43,955 35,760 38,753 46,607
Accrued expenses - - - - - -
Taxes payable 0 0 0 0 0 0
Other current liabs 806 69 92 172 149 164
Current liabilities 36,667 43,087 44,047 35,932 38,902 46,771
Long-term debt/leases/other 59,736 89,872 94,090 107,500 97,500 97,500
Convertible bonds - - - - - -
Provisions/other LT liabs 12 3 0 - - -
Total liabilities 96,415 132,962 138,137 143,432 136,402 144,271
Share capital 850 838 872 949 949 949
Retained earnings 70,853 39,094 39,558 42,005 46,530 51,865
Reserves/others 0 - 0 0 - 0
Shareholder funds 71,703 39,933 40,430 42,955 47,480 52,815
Minorities/other equity 332 8,328 7,109 150 150 150
Total equity 72,035 48,260 47,539 43,105 47,630 52,965
Total liabs & equity 168,450 181,222 185,676 186,537 184,032 197,236
Total debt 59,736 89,872 94,090 107,500 97,500 97,500
Net debt 49,701 74,721 83,259 90,745 81,657 75,184
Adjusted EV 92,095 175,026 187,743 197,228 188,140 181,667
BVPS (Rs) 168.7 95.3 92.7 90.5 100.0 111.3

Key ratios
Current ratio (x) 3.0 3.5 3.3 3.9 3.3 2.9
Growth in total assets (% YoY) - 7.6 2.5 0.5 (1.3) 7.2
Growth in capital employed (% YoY) - 1.0 6.4 2.3 (3.4) (0.9)
Net debt to operating cashflow (x) (1.5) (8.2) 12.6 (12.2) 4.8 10.9
Gross debt to operating cashflow (x) (1.7) (9.9) 14.2 (14.5) 5.7 14.2
Gross debt to Ebitda (x) 10.5 10.0 14.6 8.8 8.2 7.1
Net debt/Ebitda (x) 8.7 8.3 12.9 7.4 6.8 5.4
Gearing
Net debt/equity (%) 69.0 154.8 175.1 210.5 171.4 142.0
Gross debt/equity (%) 82.9 186.2 197.9 249.4 204.7 184.1
Interest cover (x) 1.6 1.7 1.0 1.5 1.7 1.8
Debt Cover (x) (0.6) (0.1) 0.1 (0.1) 0.2 0.1
Inventory days 1,240.9 1,568.6 2,438.5 1,019.9 1,162.5 1,046.8
Debtor days 22.4 213.7 560.9 350.3 373.1 248.0
Creditor days 740.0 877.3 1,332.3 570.7 688.9 744.8
Working capital/Sales (%) 247.6 316.6 385.7 202.4 198.7 158.3
Sales/Capital employed (%) 21.4 24.1 17.7 32.1 28.9 32.0
EV/Capital employed (%) 75.7 142.3 143.5 147.4 145.5 141.8
Working capital/Capital employed (%) 52.9 76.2 68.4 65.1 57.3 50.7
Fixed capital/Capital employed (%) 2.0 19.8 29.0 32.4 40.0 46.6
Other ratios (%)
EV/OCF (x) (2.7) (19.2) 28.3 (26.6) 11.0 26.4
EV/FCF (x) (2.9) (5.6) (24.6) (14.2) 24.8 (75.7)
EV/sales (x) 3.5 5.9 8.1 4.6 5.0 4.4
Capex/depreciation (%) 1,061.5 3,186.0 1,995.9 634.8 823.0 704.0

Cashflow (Rsm)
Operating profit 5,516 8,282 5,739 11,166 10,794 12,508
Operating adjustments - - - - - -
Depreciation/amortisation 197 695 714 1,020 1,162 1,319
Working capital changes (29,346) (29,278) 4,191 2,406 12,967 9,107
Interest paid / other financial expenses (3,361) (5,011) (5,608) (7,256) (6,338) (6,825)
Tax paid (795) (1,420) (1,826) (2,077) (2,331) (2,748)
Other non-cash operating items (6,368) 17,624 3,422 (12,678) 912 (6,474)
Net operating cashflow (34,157) (9,108) 6,633 (7,419) 17,167 6,888
Capital expenditure 2,089 (22,137) (14,257) (6,478) (9,567) (9,288)
Free cashflow (32,067) (31,245) (7,623) (13,898) 7,599 (2,400)
Acq/inv/disposals - - - (10,000) - -
Int, invt & associate div 1,120 1,108 5,664 2,550 2,400 2,400
Net investing cashflow 3,210 (21,029) (8,593) (13,928) (7,167) (6,888)
Increase in loans 30,947 30,136 4,218 13,410 (10,000) -
Dividends 0 0 0 0 0 0
Net equity raised/(buybacks) 0 0 (2,258) 7,937 0 -
Net financing cashflow 30,947 30,136 1,960 21,347 (10,000) 0
Incr/(decr) in net cash 0 (1) 0 (1) (1) 0
Exch rate movements - - - - - -
Opening cash 10,036 15,152 10,831 16,755 15,843 22,316
Closing cash 10,036 15,151 10,831 16,755 15,842 22,316
OCF per share (Rs) (80.4) (21.7) 15.2 (15.6) 36.2 14.5
FCF per share (Rs) (75.5) (74.5) (17.5) (29.3) 16.0 (5.1)

Growth (%)
Op cashflow growth (% YoY) - nm nm (211.9) nm (59.9)
FCF growth (% YoY) - - - - - (131.6)
Capex growth (%) - - (35.6) (54.6) 47.7 (2.9)
Capex/sales (%) 8.0 74.8 61.4 15.1 25.6 22.6
Capex/op cashflow (%) (6.1) (243.0) 214.9 (87.3) 55.7 134.8
Operating cashflow payout ratio (%) - - 0.0 - 0.0 0.0
Cashflow payout ratio (%) - - 0.0 - 0.0 0.0
Free cashflow payout ratio (%) - - - - 0.0 -
DuPont analysis
Ebit margin (%) 21.2 28.0 24.7 26.0 28.9 30.5
Asset turnover (x) 0.2 0.2 0.1 0.2 0.2 0.2
Interest burden (x) 0.6 0.6 0.9 0.5 0.6 0.6
Tax burden (x) 0.8 0.7 0.7 0.7 0.7 0.7
Return on assets (%) 2.5 3.3 2.1 4.0 3.8 4.3
Leverage (x) 2.3 2.9 3.8 4.1 4.1 3.8
ROE (%) 3.8 5.4 7.4 8.9 10.0 10.6
EVA® analysis
Ebit adj for tax (Rsm) 4,266 5,749 3,788 7,369 7,124 8,255
Average invested capital (Rsm) 66,800 92,413 122,702 128,903 128,148 125,297
ROIC (%) 8.1 6.2 3.1 5.7 5.6 6.6
Cost of equity (%) 12.5 12.5 12.5 12.5 12.5 12.5
Cost of debt (adj for tax) (%) 7.7 6.9 6.6 6.6 6.6 6.6
Weighted average cost of capital (%) 9.9 9.4 9.2 9.2 9.2 9.2
EVA® /IC (%) (1.8) (3.2) (6.1) (3.5) (3.7) (2.6)
EVA® (Rsm) (945) (2,949) (7,528) (4,518) (4,694) (3,300)

Notes

Mahindra Lifespace
Rs517.15 - N-R
Abhinav Sinha Affordable push

abhi.sinha@clsa.com Good delivery track record and affordable prices
+91 22 6650 5069 Over the past two decades, Mahindra Lifespace has steadily executed
developments across nine cities, delivering projects totalling 14msf. It is growing
its presence in the industrial-park subsector and runs an affordable-housing
division which recently partnered with HDFC Capital to create an Rs5bn
investment platform that will build more homes for middle-income citizens. The
company could expand in various real-estate segments through acquisitions or
joint-development deals.
Established execution track record with national presence

29 January 2018
Mahindra Lifespace is Mahindra & Mahindra group’s real-estate development
India arm. It has been in the business for over 20 years with project developments in
nine cities across India. The company has so far completed 14msf of residential
Property projects in Mumbai (3msf), Pune (2msf), National Capital Region (3msf), Chennai
(4msf) and others (2msf), generating a reputable execution track record in the
Reuters MALD.BO
Bloomberg MLIFE IN mid-to-premium residential segment.
Priced on 25 January 2018 More affordable-housing offerings

CNX Nifty @ 11,069.7 In 2014, Mahindra Lifespace launched Happinest - a unique affordable-housing
division which has since completed nearly 1msf in developments with unit prices
12M hi/lo Rs538.25/320.38
at Rs1.0-2.5m. To expand its offerings in the segment, the company partnered
Shares in issue 410.5m with HDFC Capital in October 2017 to create a joint-venture co-investment
Free float (est.) 16.8% platform that will invest about Rs5bn to develop 5-10msf of affordable homes.
Market cap US$425m
Ramping up industrial-park developments
3M ADV US$0.1m The company has two large industrial townships/special economic zones in
Chennai and Jaipur that run under the Mahindra World City brand, covering a
Foreign s'holding 23.5% total of 4,500 acres. Mahindra Lifespace is developing two new industrial parks in
Major shareholders
Ahmedabad and Chennai, collectively covering 532 acres. It addition, it has a
Mahindra & Mahindra 51.5% US$50m investment commitment from International Finance Corp to further
scale up its industrial-park business.
Opportunities in residential segment

Mahindra Lifespace has averaged about 1msf/Rs6bn per annum in residential
presales over the past five years. It currently has about 4msf of ongoing and
another 4msf of forthcoming residential projects. The company has a track record
of delivering residential housing across a diverse geography. It is meanwhile
growing its presence in the affordable-housing space for which it has an
investment platform to share costs and risks.
1M 3M 12M
Absolute 8.9 19.0 47.2
Relative 3.2 1.4 14.4 Financials
Abs (US$) 9.7 11.4 57.5
Year to 31 March 15A 16A 17A 18IBES 19IBES
600 (Rs) Mahindra Lifespace (%) 110
Rel to Nifty (RHS) 105
Revenue (Rsm) 10,861 8,262 7,622 6,889 6,608
550
100 Net profit (Rsm) 2,662 931 1,022 1,314 1,616
500
95 EPS (Rs) 60.43 21.12 24.85 22.60 29.50
90
EPS growth (% YoY) 186.2 (15.0) 10.0 (23.4) -
450 85
80 PE (x) 8.6 24.5 20.8 22.9 17.5
400
75 Dividend yield (%) 2.2 1.1 1.2 1.1 1.5
70
350 ROAE (%) 19.5 6.1 6.1 6.9 7.5
65
300 60
PB (x) - - - - -
Jan 16 Sep 16 May 17 Jan 18 Net gearing (%) - - - - -
Source: Bloomberg Source: IBES
Mahindra Lifespace - N-R India property
Sales averaging 1msf/year

Presales run rate started Presales
improving in FY15-16 from
10 (Rsbn) Annual presales Area sold (RHS) (msf) 1.6
new launches but
demonetisation made a 9 1.4
negative impact in 2HFY17 8
1.2
7
6 1.0
5 0.8
4 0.6
3
0.4
2
1 0.2
0 0.0
Source: Company
Quarterly presales at six-quarter high in 2QFY18

Presales recovery has likely Quarterly and trailing presales
started and new launches
3.5 (Rsbn) Presales value Trailing 4Q presales (RHS) (Rsbn) 12
can improve the situation
3.0 10
2.5
8
2.0
6
1.5
4
1.0
0.5 2
0.0 0
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
Source: Company
Reputable delivery track Units completed and delivered

record 2,000 (No. of units)
1,739
1,800
1,600
1,400
1,200
1,000 875
823
800
541
600 447
400 264
200
0
FY13 FY14 FY15 FY16 FY17 1HFY18
Source: Company

Sales evenly split across geographies

Mahindra Lifespace has a Sales breakdown of ongoing projects: Rs15bn total as of Sep 2017
wide geographical presence Bangalore Mumbai
18% Metropolitan
Region
20%
Pune
National Capital 17%
Region
29%
Chennai Nagpur
2% 14%
Source: Company
Industrial townships have scaled up over time

World City townships Leasing status of company’s two main industrial townships
generated about Rs0.6bn pa 2,500 (acres) Leasable area Leased area
in recurring lease and
facility income over the 2,033
past four quarters 2,000
1,500
1,141
1,080
1,000
736
500
0
Mahindra World City Chennai Mahindra World City Jaipur
Source: Company
Profit and loss

Accounting-standard P&L
change in FY16 led to 14 (Rsbn) Revenue PAT
several projects being
directly consolidated at 12 11.5
earnings level
10
8.3
7.7
8 7.3 7.6
6.9
4
2.7 2.8
2 1.2 1.4
1.0 1.1
0.9
0.3
0
Source: Company

Notes

Oberoi Realty
Rs528.15 - BUY
Abhinav Sinha Gearing up

abhi.sinha@clsa.com Low leverage and project additions pave way for new opportunities
+91 22 6650 5069
Oberoi’s strong track record as a premium Mumbai developer means it is well
positioned to benefit from what we believe is India’s most attractive property
market. Its conservative approach (with 0.3x gearing) is giving way to dynamism
as it looks to add large new projects, build new lease assets and accelerate sales.
Oberoi is able to charge a premium for its projects and has a high probability of
new additions, despite the property cycle’s current low point, which implies that
it can sustain its premium to NAV, particularly if property prices begin to rise.
29 January 2018 Expanding at the right time

Oberoi is a premium developer brand due to its product quality and execution
India track record. It specialises in building large townships in land-starved Mumbai
with a 20msf city-centric project portfolio concentrated in five major sites. Its
Property
Thane parcel, purchased last year, adds 6-8msf to its development potential.
Reuters OEBO.NS Oberoi has maintained steady prices over the past four years despite new project
Bloomberg OBER IN completions, achieving good sales velocity in otherwise stagnant markets.
Priced on 25 January 2018 Scope to gear up further

At just 0.3x, Oberoi’s gearing (including its Thane land-parcel purchase last year)
12M hi/lo Rs555.25/307.65 is the lowest among peers. It also has an ungeared lease income stream of Rs2bn
and has started work on two new malls, funded from its own cashflow. Oberoi’s
12M price target Rs639.00
well timed new launches, steady execution and pragmatic pricing have helped in
±% potential +21%
achieving good sales velocity in otherwise weak premium property markets.
Free float (est.) 2.9% Well suited to capitalise on Mumbai infra upgrade
Nearly 99% of Oberoi’s NAV comes from Mumbai, which we believe is India’s
Market cap US$2,828m
most attractive city from a real-estate perspective as it is undergoing an
3M ADV US$2.5m accelerated and far-reaching infrastructure upgrade. Oberoi is well positioned to
capture opportunities in the metropolis, which represents 90% of its portfolio.
Major shareholders
NAV premium can sustain
Oberoi family 72.5% We do not expect Oberoi to enter the affordable-housing segment, due to its
FIIs 24.7% premium product offering. It also has a high likelihood of adding new project
additions and could experience an upturn in Mumbai’s pricing environment, which
would lead the stock to trade at a premium to NAV. However, we are below
consensus in FY19-20 due to a slower rise in lease income. Our Rs639 target is a
30% premium to its one-year forward NAV and implies 23.5x Dec 19CL earnings.
1M 3M 12M
Relative 6.1 7.1 32.4 Year to 31 March 16A 17A 18CL 19CL 20CL
600 (Rs) Oberoi Realty (%) 170
Ebitda (Rsm) 6,763 5,701 10,581 11,996 12,973
550 Rel to Nifty (RHS) 160
Net profit (Rsm) 4,356 3,786 8,252 8,866 9,435
500 150
EPS (Rs) 13.1 11.2 24.3 26.1 27.8
450 140 CL/consensus (21) (EPS%) - - 108 72 66
400 130 EPS growth (% YoY) 36.0 (15.1) 117.7 7.4 6.4
350 120 PE (x) 40.2 47.3 21.7 20.2 19.0
300 110 Dividend yield (%) 0.4 0.4 0.4 0.4 0.4
250 100 PB (x) 3.3 3.1 2.8 2.5 2.2
200 90 ROE (%) 8.7 6.8 13.5 12.9 12.2
Oberoi Realty - BUY India property
Revenue 14,161 11,137 23,358 109.7 24,917 27,421
Cogs (ex-D&A) (6,297) (4,372) (11,573) (11,555) (12,945)
Op Ebitda 6,763 5,701 10,581 85.6 11,996 12,973
Op Ebit 6,273 5,206 10,063 93.3 11,468 12,436
Net interest inc/(exp) (68) (56) (139) (526) (1,082)
Other non-Op items 428 473 275 (41.9) 280 400
Taxation (2,293) (1,868) (3,389) (3,729) (3,906)
Profit after tax 4,340 3,754 6,810 81.4 7,493 7,848
Minority interest 16 31 1,442 4,493.9 1,373 1,587
Net profit 4,356 3,786 8,252 118 8,866 9,435
Adjusted profit 4,356 3,786 8,252 118 8,866 9,435
Cashflow (Rsm)
Depreciation/amortisation 490 495 519 4.8 528 538
Working capital changes 9,168 (3,251) (22,182) (5,746) 11,359
Other items (15,034) (3,307) (3,528) (4,255) (4,988)
Net operating cashflow 897 (857) (15,128) 1,995 19,345
Capital expenditure 1,608 (772) (2,217) (5,645) (7,304)
Free cashflow 2,505 (1,629) (17,345) (3,650) 12,041
M&A/Others 444 504 1,717 240.5 1,653 1,987
Net investing cashflow 2,051 (268) (499) (3,992) (5,317)
Increase in loans (4,450) 3,819 12,506 227.4 2,500 (3,500)
Dividends (817) (817) (817) (817) (817)
Net equity raised/other 3,245 - - - -
Net financing cashflow (2,022) 3,003 11,689 289.3 1,683 (4,317)
Incr/(decr) in net cash 927 1,878 (3,939) (314) 9,710
Balance sheet (Rsm)
Other current assets 45,828 51,179 62,434 22 71,676 77,124
Fixed assets 10,258 10,545 12,242 16.1 17,359 24,126
Investments 13,766 16,018 16,018 0 16,018 16,018
Other noncurrent assets 0 0 - - 0
Total assets 74,838 84,541 95,697 13.2 109,955 132,222
Other current liabs 43 37 37 (0.7) 42 46
Provisions/other LT liabs 0 0 0 0 -
Shareholder funds 53,411 57,260 64,694 13 72,742 81,360
Ratio analysis
Revenue growth (% YoY) 53.5 (21.4) 109.7 6.7 10.0
Ebitda margin (%) 47.8 51.2 45.3 48.1 47.3
Ebit margin (%) 44.3 46.7 43.1 46.0 45.4
Net profit growth (%) 37.3 (13.1) 118.0 7.4 6.4
Op cashflow growth (% YoY) nm (195.5) nm nm 869.5
Capex/sales (%) 11.4 6.9 9.5 22.7 26.6
Net debt/equity (%) 1.3 4.6 29.5 30.1 10.7
Net debt/Ebitda (x) 0.1 0.5 1.8 1.8 0.7
ROE (%) 8.7 6.8 13.5 12.9 12.2
ROIC (%) 8.8 8.3 12.0 10.5 10.9

Sales likely to gain traction

New launches and pick-up Long term presales¹
in sales velocity of existing 45 (Rsbn) Value sales Area sold (RHS) (msf) 2.5
projects likely to drive sales
improvement from FY19 40
35 2.0
30
1.5
25
20
1.0
15
10 0.5
5
0 0.0
¹ Oberoi’s net share. Source: CLSA, Company
Pricing has been flat for four years

Prices remain flat, despite Average realisation at key projects
construction progress 30 (Rs '000/sf) Exquisite Esquire Prisma Eternia Sky City
25
20
15
10
5
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
Presales are off lows

2QFY18 presales were the Quarterly and annualised presales run rate
best in seven quarters (Rsbn) Presales (LHS) Presales trailing 4Q (Rsbn)
20 35
18
30
16
14 25
Project launch-
12 20
driven spike
10
8 15
6 10
4
5
2
0 0
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18

Rental scale-up ahead as vacant spaces are occupied

Lease income stream has Lease income and area under lease
good near-term visibility as 3.5 (Rsbn) Value rent (LHS) Area on rent (msf) 1.6
office vacancies drop
3.0 1.4
1.2
2.5
1.0
2.0
0.8
1.5
0.6
1.0
0.4
0.5 0.2
0.0 0.0
Good visibility on near-term revenue

P&L is understated, Unbooked revenue (ie, sold but not recognised)
with Rs37bn in unbooked 45 (Rsbn)
revenue, pending
project completions 40
35
Sky City launch
30
25 Eternia/
Enigma launch
20
15
10
5
0
Sep 14
Dec 14
Sep 15
Dec 15
Sep 16
Dec 16
Sep 17
Mar 15
Mar 16
Mar 17
Jun 14
Jun 15
Jun 16
Jun 17

Net profit: 35.6%
9
25
8
7
20
6
15 5
4
10
3
2
5
1
0 0

Valuation charts
PE near peak, but not high PE: One-year forward PE on then-consensus earnings
on absolute basis
16
14
12
10
0
Nov 10 Jan 12 Mar 13 Jun 14 Aug 15 Oct 16 Jan 18
EV/Ebitda is at a peak EV/Ebitda: One-year forward EV/Ebitda on then-consensus numbers
12
10
0
Source: CLSA
PB is near peak levels, PB: One-year forward PB on then-consensus book value

but ROE set to rise to 3.0 (x) PB: 1Y fwd Average +1sd -1sd
near-teen levels
2.5
2.0
1.5
1.0
0.5
0.0
Source: CLSA

NAV buildup Dec 2018: Rs491/share

Our Rs639 target implies Given Oberoi’s high visibility on revenue and its clear property-valuation
23.5x December benchmarks, we have calculated a one-year forward NAV of Rs491/share. Our
19CL earnings basic assumptions are a 12% discount rate (14% cost of equity, 10% debt, 50-50
mix). We assume 0-3% pricing appreciation over FY18-19 and at a standard 7%
rate (given current 10-year yields at 7.3%) over the longer term. Our Rs639 target
is a 30% premium to its one-year forward NAV of Rs491 and implies 23.5x
December 19CL earnings. The stock can trade higher than its NAV, given its
robust balance sheet. There is also a chance of NAV-accretive acquisition
possibilities as it has demonstrated in its recently seen in its 2017 Thane land-
parcel purchase, which could add about 10% to its NAV.
Key assumptions One-year forward NAV breakdown by project

Discount rate: 12%
600 (Rs/share)
Cap rate: 8%
51 67
500
62
400 75
59
300
102
7 491
200
99
100
105
0
Yielding Goregaon Andheri Worli Mulund Borivali Thane Others Net debt NAV
assets - unsold leftover (Dec 18)
Goregaon
Source: CLSA
Valuation details
We value Oberoi using a DCF-NAV approach. The company has high visibility and
concentrated land parcels in Mumbai which have clear valuation benchmarks. The
stock can trade higher than its NAV, given Oberoi’s robust balance sheet and
potential of entering accelerated development platforms which provide NAV-
accretive acquisition possibilities. Our Rs639 target is a 30% premium to its one-
year forward NAV, given upside opportunities in the residential segment.
Investment risks
As Oberoi is a high-end residential developer, it is vulnerable to macro risks
pertaining to the segment (eg, interest rates and discretionary demand. It has a
large exposure to Mumbai (comprising nearly 99% of its portfolio) which has
complicated development rules that often lead to unforeseen and prolonged
approval delays, which are another source of risk.

Detailed financials
Revenue 7,985 9,227 14,161 11,137 23,358 24,917 27,421
Cogs (ex-D&A) (2,896) (3,148) (6,297) (4,372) (11,573) (11,555) (12,945)
Other SG&A (298) (414) (531) (423) (466) (535) (589)
Other Op Expenses ex-D&A (442) (526) (571) (642) (738) (830) (913)
Op Ebitda 4,348 5,138 6,763 5,701 10,581 11,996 12,973
Op Ebit 4,076 4,735 6,273 5,206 10,063 11,468 12,436
Interest expense (3) (18) (68) (56) (139) (526) (1,082)
Net interest inc/(exp) (3) (18) (68) (56) (139) (526) (1,082)
Associates/investments 571 175 428 473 275 280 400
Taxation (1,533) (1,721) (2,293) (1,868) (3,389) (3,729) (3,906)
Profit after tax 3,111 3,171 4,340 3,754 6,810 7,493 7,848
Minority interest 0 0 16 31 1,442 1,373 1,587
Net profit 3,111 3,171 4,356 3,786 8,252 8,866 9,435
Dividends (768) (790) (817) (817) (817) (817) (817)
Retained profit 2,343 2,381 3,539 2,969 7,434 8,049 8,617
Adjusted profit 3,111 3,171 4,356 3,786 8,252 8,866 9,435
EPS (Rs) 9.5 9.7 13.1 11.2 24.3 26.1 27.8
Core EPS (Rs) 9.5 9.7 13.1 11.2 24.3 26.1 27.8
DPS (Rs) 2.0 2.0 2.0 2.0 2.0 2.0 2.0

Growth (%)
Revenue growth (% YoY) (23.8) 15.6 53.5 (21.4) 109.7 6.7 10.0
Ebitda growth (% YoY) (29.0) 18.2 31.6 (15.7) 85.6 13.4 8.1
Ebit growth (% YoY) (30.1) 16.2 32.5 (17.0) 93.3 14.0 8.4
Net profit growth (%) (38.4) 1.9 37.3 (13.1) 118.0 7.4 6.4
EPS growth (% YoY) (38.4) 1.9 36.0 (15.1) 117.7 7.4 6.4
Adj EPS growth (% YoY) (38.4) 1.9 36.0 (15.1) 117.7 7.4 6.4
DPS growth (% YoY) 0.0 0.0 2.4 (2.3) 0.0 0.0 0.0
Core EPS growth (% YoY) (38.4) 1.9 36.0 (15.1) 117.7 7.4 6.4
Margins (%)
Ebitda margin (%) 54.5 55.7 47.8 51.2 45.3 48.1 47.3
Ebit margin (%) 51.1 51.3 44.3 46.7 43.1 46.0 45.4
Op cashflow margin (66.4) (114.6) 6.3 (7.7) (64.8) 8.0 70.5
Returns (%)
ROE (%) 7.3 7.0 8.7 6.8 13.5 12.9 12.2
ROA (%) 5.1 4.9 5.6 4.4 7.5 7.4 6.9
ROIC (%) 7.7 6.7 8.8 8.3 12.0 10.5 10.9
ROCE (%) 11.6 10.3 11.8 9.1 14.0 12.9 13.5
Ebitda/net int exp (x) 1,391.3 291.5 99.0 102.3 76.1 22.8 12.0
Dividend payout (%) 21.1 20.7 15.6 17.9 8.2 7.7 7.2

Balance sheet (Rsm)

Accounts receivable 862 828 1,122 1,058 3,200 3,413 3,756
Inventories 16,491 34,817 33,392 37,664 40,919 44,160 47,608
Current assets 40,679 57,793 50,813 57,979 67,437 76,578 92,079
Fixed assets 11,537 10,753 10,258 10,545 12,242 17,359 24,126
Investments 0 0 13,766 16,018 16,018 16,018 16,018
Goodwill 2,654 2,654 0 0 0 0 0
Other noncurrent assets - 0 0 0 - - 0
Total assets 54,870 71,200 74,838 84,541 95,697 109,955 132,222
Other current liabs 789 841 43 37 37 42 46
Long-term debt/leases/other 761 9,016 4,565 8,385 20,891 23,391 19,891
Provisions/other LT liabs 220 242 0 0 0 0 -
Share capital 3,282 3,282 3,393 3,395 3,395 3,395 3,395
Minorities/other equity 0 0 0 0 0 0 0
Total equity 43,964 46,343 53,411 57,260 64,694 72,742 81,360
Total debt 761 9,016 4,565 8,385 20,891 23,391 19,891
Net debt (4,733) 6,079 702 2,643 19,088 21,902 8,692
Adjusted EV 163,744 178,830 161,493 164,696 179,218 176,487 156,073
BVPS (Rs) 133.9 141.2 161.2 168.8 190.5 214.2 239.6

Key ratios
Current ratio (x) 4.1 3.7 3.0 3.1 6.7 5.5 3.0
Growth in total assets (% YoY) 3.7 29.8 5.1 13.0 13.2 14.9 20.3
Growth in capital employed (% YoY) 27.0 33.6 3.2 10.7 39.9 13.0 (4.9)
Net debt to operating cashflow (x) - (0.6) 0.8 (3.1) (1.3) 11.0 0.4
Gross debt to operating cashflow (x) (0.1) (0.9) 5.1 (9.8) (1.4) 11.7 1.0
Net debt/Ebitda (x) - 1.2 0.1 0.5 1.8 1.8 0.7
Gearing
Net debt/equity (%) (10.8) 13.1 1.3 4.6 29.5 30.1 10.7
Interest cover (x) 1,304.4 268.7 91.8 93.4 72.4 21.8 11.5
Debt Cover (x) (7.0) (1.2) 0.2 (0.1) (0.7) 0.1 1.0
Inventory days 1,823.4 2,974.5 1,976.9 2,966.1 1,239.2 1,343.7 1,293.7
Debtor days 31.6 33.4 25.1 35.7 33.3 48.4 47.7
Creditor days 1,226.7 1,385.3 915.2 1,489.3 456.3 376.8 630.3
Other ratios (%)
EV/OCF (x) (30.9) (16.9) 180.0 (192.2) (11.8) 88.5 8.1
EV/FCF (x) (28.3) (17.5) 64.5 (101.1) (10.3) (48.4) 13.0
EV/sales (x) 20.5 19.4 11.4 14.8 7.7 7.1 5.7
Capex/depreciation (%) 182.7 94.5 328.2 156.0 427.1 1,068.7 1,358.8

Cashflow (Rsm)
Working capital changes (8,172) (13,998) 9,168 (3,251) (22,182) (5,746) 11,359
Interest paid / other financial expenses (3) (18) (68) (56) (139) (526) (1,082)
Tax paid (1,533) (1,721) (2,293) (1,868) (3,389) (3,729) (3,906)
Other non-cash operating items 62 21 (12,673) (1,382) 0 0 0
Net operating cashflow (5,299) (10,578) 897 (857) (15,128) 1,995 19,345
Capital expenditure (496) 381 1,608 (772) (2,217) (5,645) (7,304)
Free cashflow (5,795) (10,197) 2,505 (1,629) (17,345) (3,650) 12,041
Int, invt & associate div 571 175 444 504 1,717 1,653 1,987
Net investing cashflow 74 556 2,051 (268) (499) (3,992) (5,317)
Increase in loans 761 8,255 (4,450) 3,819 12,506 2,500 (3,500)
Dividends (768) (790) (817) (817) (817) (817) (817)
Net equity raised/(buybacks) - - 3,245 - - - -
Net financing cashflow (7) 7,465 (2,022) 3,003 11,689 1,683 (4,317)
Incr/(decr) in net cash (5,232) (2,557) 927 1,878 (3,939) (314) 9,710
Opening cash 10,725 5,494 2,937 3,863 5,742 1,803 1,489
Closing cash 5,493 2,936 3,864 5,741 1,803 1,489 11,199
OCF per share (Rs) (16.1) (32.2) 2.7 (2.5) (44.5) 5.9 57.0
FCF per share (Rs) (17.7) (31.1) 7.6 (4.8) (51.1) (10.7) 35.5

Growth (%)
Op cashflow growth (% YoY) nm nm nm (195.5) nm nm 869.5
FCF growth (% YoY) - - - (165.0) - - -
Capex growth (%) (53.1) (176.7) - - 187.1 154.7 29.4
Capex/sales (%) 6.2 4.1 11.4 6.9 9.5 22.7 26.6
Capex/op cashflow (%) (9.4) (3.6) 179.2 (90.1) (14.7) 282.9 37.8
Operating cashflow payout ratio (%) - - 75.6 - - 34.0 3.5
Cashflow payout ratio (%) - - 91.0 - - 41.0 4.2
Free cashflow payout ratio (%) - - 32.6 - - - 6.8
DuPont analysis
Ebit margin (%) 51.1 51.3 44.3 46.7 43.1 46.0 45.4
Asset turnover (x) 0.1 0.1 0.2 0.1 0.3 0.2 0.2
Tax burden (x) 0.7 0.6 0.7 0.7 0.7 0.7 0.7
Return on assets (%) 5.1 4.9 5.6 4.4 7.5 7.4 6.9
Leverage (x) 1.3 1.4 1.5 1.4 1.5 1.5 1.6
ROE (%) 7.3 7.0 8.7 6.8 11.2 10.9 10.2
EVA® analysis
ROIC (%) 7.7 6.7 8.8 8.3 12.0 10.5 10.9
Cost of equity (%) 14.5 14.5 14.5 14.5 14.5 14.5 14.5
Cost of debt (adj for tax) 7.7 7.5 7.5 7.7 7.7 7.7 7.7
EVA® /IC (%) (6.8) (7.8) (5.7) (6.2) (2.5) (4.0) (3.6)
EVA® (Rsm) (2,380) (3,609) (2,639) (2,631) (1,376) (2,956) (2,764)

Notes

Prestige Estates
Rs313.70 - BUY
Abhinav Sinha Refreshing restructure

abhi.sinha@clsa.com Corporate reorganisation will create long-term growth
+91 22 6650 5069 Prestige’s presales have more than halved since FY15 as property markets
weakened. Meanwhile management attention was diverted towards
implementing a longer-term growth structure. Its efforts are set to bear fruit as
it prepares to launch co-investment platforms. Its strong execution track record,
volume-led approach to home sales and joint-development model for project
acquisitions means it is well positioned to capitalise on a property upturn. Its
unique Bangalore-based leased-asset portfolio lends high long-term visibility.
High volume capability and robust mid-income product sales

29 January 2018
Prestige’s rapid residential scale-up from Rs14bn presales in FY11 to a peak
India Rs44bn in FY15 stemmed from a robust Bangalore market and its mid-income
(sub-Rs10m) product offering. Sales have since halved amid declining new
Property launches, spurred by Prestige’s effort to reduce inventory. However, it maintains
a solid delivery track record. It also has the ability to scale up via joint-
Reuters PREG.NS
Bloomberg PEPL IN development agreements with landowners, providing flexible expansion options.
Priced on 25 January 2018 Strong lease income scale-up

Prestige has more than doubled its Bangalore-heavy leased-asset portfolio over
12M hi/lo Rs345.00/159.90 the past three years. The company has Rs7bn in annualised lease income, with its
January 2018 acquisition of CapitaLand’s India mall portfolio adding another 10%.
12M price target Rs393.00 It has projects underway that will double lease income over the next three years.
±% potential +25%
Shares in issue 375.0m New expansion plans with better capital efficiency
Free float (est.) 30.0% With 1.1x gearing and capex plans lined up for its next leg of lease-asset buildout,
Prestige has been working to improve its capital efficiency. It completed its
Market cap US$1,844m
business reorganisation; management has announced plans to raise capital and
3M ADV US$2.6m create co-investment platforms in the office and affordable-housing segments.
Prestige recently increased its stakes in its mall portfolio and a large land parcel in
Foreign s'holding 26.4% Bangalore, signalling that its platforms will be finalised in the coming months.
Major shareholders
Razack family 70.0% Near-term turnaround as new launches gain pace
FIIs 26.4% Prestige’s presales run rate fell to a multiyear low of sub-Rs20bn in 2QFY18.
However, we expect a near-term turnaround as it expands its affordable-housing
offerings amid a pickup in new launches. The company has demonstrated
competence in pursuing a volume-led growth strategy which we expect to
continue. Our SOTP-based Rs393 target - which separately values its annuity and
Stock performance (%) development businesses - suggests 25% upside.
1M 3M 12M
Relative (1.4) 1.6 47.9
Year to 31 March 16A 17A 18CL 19CL 20CL
Abs (US$) 4.6 11.7 103.7
Revenue (Rsm) 55,310 47,745 51,459 53,425 56,199
400 (Rs) (%) 140
Prestige Estates Ebitda (Rsm) 10,662 9,198 11,137 12,345 13,539
130
350 Rel to Nifty (RHS) Net profit (Rsm) 4,204 2,578 3,520 3,814 4,281
120
300
EPS (Rs) 11.2 6.9 9.4 10.2 11.4
110
CL/consensus (15) (EPS%) - - 100 95 101
250 100 EPS growth (% YoY) 26.8 (38.7) 36.5 8.3 12.3
200
90 PE (x) 28.0 45.6 33.4 30.8 27.5
80 Dividend yield (%) 0.4 0.4 0.5 0.6 0.7
150
70 PB (x) 2.8 2.6 2.5 2.3 2.2
100 60 ROE (%) 10.5 6.0 7.6 7.8 8.2
Jan 16 Sep 16 May 17 Jan 18
Net debt/equity (%) 102.9 112.2 126.2 123.1 118.8
Prestige Estates - BUY India property
Revenue 55,310 47,745 51,459 7.8 53,425 56,199
Cogs (ex-D&A) (40,087) (33,541) (34,441) (34,611) (35,313)
Op Ebitda 10,662 9,198 11,137 21.1 12,345 13,539
Depreciation/amortisation (1,274) (1,637) (1,847) (2,157) (2,424)
Op Ebit 9,388 7,561 9,290 22.9 10,187 11,115
Other non-Op items 1,004 872 850 (2.5) 900 1,000
Taxation (2,291) (1,600) (2,031) (2,265) (2,485)
Profit after tax 4,639 3,673 4,520 23.1 4,814 5,281
Minority interest (435) (1,095) (1,000) (1,000) (1,000)
Net profit 4,204 2,578 3,520 36.5 3,814 4,281
Adjusted profit 4,204 2,578 3,520 36.5 3,814 4,281
Cashflow (Rsm)
Depreciation/amortisation 1,274 1,637 1,847 12.8 2,157 2,424
Working capital changes (5,932) (1,860) (7,149) 1,928 2,134
Other items (12,247) (5,739) (4,259) (7,273) (7,834)
Net operating cashflow (7,517) 1,599 (271) 6,999 7,839
Free cashflow (12,873) (7,246) (10,330) (2,021) (1,621)
M&A/Others 1,004 872 850 (2.5) 900 1,000
Increase in loans 11,809 4,046 8,590 112.3 2,500 2,500
Dividends (540) (540) (675) (900) (1,013)
Net equity raised/other 0 0 0 0 0
Net financing cashflow 11,269 3,506 7,915 125.8 1,600 1,488
Incr/(decr) in net cash (600) (2,868) (1,565) 479 867
Balance sheet (Rsm)
Other current assets 96,565 98,834 101,669 2.9 99,030 99,819
Fixed assets 43,895 51,106 59,318 16.1 66,180 73,216
Investments 2,898 3,448 1,087 (68.5) 1,087 1,087
Intangible assets 3,069 3,069 3,069 0 3,069 3,069
Other noncurrent assets 0 0 - - -
Total assets 164,688 170,481 178,823 4.9 183,957 193,256
Other current liabs 1,422 2,124 2,259 6.4 2,484 2,597
Provisions/other LT liabs 1,906 2,124 2,124 0 2,124 2,124
Minorities/other equity 2,266 2,114 2,114 0 2,114 2,114
Ratio analysis
Revenue growth (% YoY) 61.7 (13.7) 7.8 3.8 5.2
Ebitda margin (%) 19.3 19.3 21.6 23.1 24.1
Ebit margin (%) 17.0 15.8 18.1 19.1 19.8
Net profit growth (%) 26.8 (38.7) 36.5 8.3 12.3
Op cashflow growth (% YoY) nm nm (117.0) nm 12.0
Capex/sales (%) 9.7 18.5 19.5 16.9 16.8
Net debt/equity (%) 102.9 112.2 126.2 123.1 118.8
Net debt/Ebitda (x) 4.3 5.7 5.6 5.2 4.9
ROE (%) 10.5 6.0 7.6 7.8 8.2
ROIC (%) 7.7 5.6 6.1 6.0 6.3

Sales pickup ahead

Presales forecast based on Long-term presales¹
existing projects, but will (Rsbn) Value sales Area sold (RHS) (m ft²)
50 8
rise as landbank expands
45 7
40
6
35
30 5
25 4
20 3
15
2
10
5 1
0 0
¹ Prestige’s net share. Source: CLSA, Company
Current presales run rate at a six-year low

Mid-income segment Sales breakdown by segment
accounts for 80% of 50 (Rsbn) Mid-income residential High-end residential Commercial
Prestige’s residential
presales 45
40
35
30
25
20
32
15
26
10 20 20
16 15
5
2
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17
New launches can help presales trend higher

We expect presales to rise Quarterly and annualised presales run rate
as new launches resume 20 (Rsbn) Presales (LHS) Presales trailing 4Q (Rsbn) 50
in 2018
18 45
16 40
14 35
12 30
10 25
8 20
6 15
4 10
2 5
0 0
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18

Current residential portfolio is at a mature stage

Residential project portfolio Cash collected and cost incurred for portfolio projects
under execution is nearly 90 (%) Amount collected as % resales Cost incurred as % to be spent
75% complete in terms of
execution and cash 80
collection 70
60
50
40
30
20
10
0
Sep 12
Dec 12
Sep 13
Dec 13
Sep 14
Dec 14
Sep 15
Dec 15
Sep 16
Dec 16
Sep 17
Mar 13
Mar 14
Mar 15
Mar 16
Mar 17
Jun 12
Jun 13
Jun 14
Jun 15
Jun 16
Jun 17
Rent could double again in three years

Lease income scale-up has Lease income and area under lease
good visibility due to (Rsbn) Value rent Area on rent (RHS) (m ft²)
12 14
project completions, stake
acquisitions and robust 12
demand in Bangalore 10
10
8
8
6
6
4
4
2 2
0 0

FY17-20CL Cagr: Revenue and net profit since listing
Revenue: 4.4% 60 (Rsbn) Revenue Net profit (RHS) (Rsbn) 4.5
Net profit: 18.4%
4.0
50
3.5
FY16 revenue jump caused
by an accounting change, 40 3.0
which did not impact
2.5
profitability 30
2.0
20 1.5
We expect profit to rise
faster than revenue on 1.0
rising share of lease income 10
0.5
0 0.0

Valuation charts
PE at the top end PE: One-year forward PE on then-consensus earnings
30
25
20
15
10
0
Dec 10 Feb 12 Apr 13 Jun 14 Sep 15 Nov 16 Jan 18
EV/Ebitda is near peak EV/Ebitda: One-year forward EV/Ebitda on then-consensus numbers
18
16
14
12
10
8
6
4
2
0
Source: CLSA
PB slightly below peak PB: One-year forward PB on then-consensus book value

levels; we expect ROE to 3.0 (x) PB: 1Y fwd Average +1sd -1sd
remain at 9-10%
2.5
2.0
1.5
1.0
0.5
0.0
Source: CLSA

SOTP-based one-year forward target: Rs393

We do not yet factor in high Prestige SOTP-based target price
in sales, given weak Sale business
launches over the past
Development Ebitda (Rsbn) 11.3 Back to FY15 sales level @25% margin (same as
two years
normalised margins for current portfolio)
EV/Ebitda (x) 8.0 Pegged at current multiples and slight (5%) discount
to Sobha, which has a more premium franchise
EV of sales business (Rsbn) 90.0
Exit rate for FY18 lease Annuity business
income will be Rs7.7bn Ebitda Dec 2019 (Rsbn) 8.6 Dec 2019 rental estimate Rs10.1bn
Cap rate (%) 8.0 As per large recent benchmark transactions (DLF’s
sale of a 33% of DCCDL); Prestige’s office
portfolio is high quality
Lease business EV (Rsbn) 107.2
Total value
Some value upside can Total EV (Rsbn) 197.2
come from hotels as the Add value of hotels business (Rsbn) 11.2 Hotels at Dec 2018 book value; portfolio is partly
properties open up under construction
Sep 2018 net debt (Rsbn) (61.1) Dec 2018 consolidated net debt, excluding
partner share
Equity value (Rsbn) 147.3
Value per share (Rs) 393 Dec 2018 target
Note: DCCDL=DLF Cyber City Developers. Source: CLSA
Valuation details
We value Prestige using a sum-of-the parts methodology, separately assessing its
annuity and development businesses. We value the annuity unit by applying an
8% cap rate as the benchmark. We also assign 8x EV/Ebitda to development unit
Ebitda where we assume the division will realise FY15 presales levels. We add the
value of the hotel business at book.
Investment risks
With Prestige deriving roughly 53% of its value from annuity and 42% from its
development unit, the outlook for commercial and residential property is
important. Apart from the macro risk associated with a property company (eg,
interest rates and discretionary demand), Prestige's high exposure to Bangalore
makes the city’s outlook an important variable. As Bangalore is a technology-
industry-driven city, its performance remains an important driver for Prestige's
property demand.

Detailed financials
Revenue 25,492 34,198 55,310 47,745 51,459 53,425 56,199
Cogs (ex-D&A) (15,215) (20,265) (40,087) (33,541) (34,441) (34,611) (35,313)
Other SG&A (1,464) (1,704) (2,531) (2,073) (2,508) (2,759) (3,173)
Other Op Expenses ex-D&A (1,610) (2,290) (2,030) (2,933) (3,373) (3,710) (4,174)
Op Ebitda 7,203 9,939 10,662 9,198 11,137 12,345 13,539
Depreciation/amortisation (893) (1,397) (1,274) (1,637) (1,847) (2,157) (2,424)
Op Ebit 6,311 8,542 9,388 7,561 9,290 10,187 11,115
Associates/investments 975 986 1,004 872 850 900 1,000
Taxation (1,750) (2,647) (2,291) (1,600) (2,031) (2,265) (2,485)
Profit after tax 3,245 3,667 4,639 3,673 4,520 4,814 5,281
Minority interest (72) (351) (435) (1,095) (1,000) (1,000) (1,000)
Net profit 3,173 3,316 4,204 2,578 3,520 3,814 4,281
Extraordinaries/others (30) 7 67 121 0 0 0
Dividends (614) (721) (540) (540) (675) (900) (1,013)
Retained profit 2,529 2,603 3,731 2,159 2,845 2,914 3,269
Adjusted profit 3,173 3,316 4,204 2,578 3,520 3,814 4,281
EPS (Rs) 9.1 8.8 11.2 6.9 9.4 10.2 11.4
Core EPS (Rs) 9.1 8.8 11.2 6.9 9.4 10.2 11.4
DPS (Rs) 1.5 1.5 1.2 1.2 1.5 2.0 2.3

Growth (%)
Revenue growth (% YoY) 30.9 34.2 61.7 (13.7) 7.8 3.8 5.2
Ebitda growth (% YoY) 24.4 38.0 7.3 (13.7) 21.1 10.8 9.7
Ebit growth (% YoY) 23.5 35.3 9.9 (19.5) 22.9 9.7 9.1
Net profit growth (%) 9.7 4.5 26.8 (38.7) 36.5 8.3 12.3
EPS growth (% YoY) 4.0 (2.5) 26.8 (38.7) 36.5 8.3 12.3
Adj EPS growth (% YoY) 4.0 (2.5) 26.8 (38.7) 36.5 8.3 12.3
DPS growth (% YoY) 18.5 0.0 (20.0) 0.0 25.0 33.3 12.5
Core EPS growth (% YoY) 4.0 (2.5) 26.8 (38.7) 36.5 8.3 12.3
Margins (%)
Ebitda margin (%) 28.3 29.1 19.3 19.3 21.6 23.1 24.1
Ebit margin (%) 24.8 25.0 17.0 15.8 18.1 19.1 19.8
Op cashflow margin (7.9) (24.2) (13.6) 3.3 (0.5) 13.1 13.9
Returns (%)
ROE (%) 11.1 9.8 10.5 6.0 7.6 7.8 8.2
ROA (%) 4.8 4.6 4.4 3.1 3.7 3.8 4.0
ROIC (%) 7.7 7.5 7.7 5.6 6.1 6.0 6.3
ROCE (%) 11.7 12.7 11.4 8.0 8.8 8.9 9.3
Dividend payout (%) 16.5 17.0 10.7 17.5 16.0 19.7 19.7

Balance sheet (Rsm)

Inventories 25,362 42,599 67,148 66,919 61,577 55,659 52,890
Current assets 58,099 84,141 114,826 112,858 115,349 113,621 115,884
Fixed assets 29,791 33,280 43,895 51,106 59,318 66,180 73,216
Investments 1,007 1,087 2,898 3,448 1,087 1,087 1,087
Goodwill 4,520 5,040 3,069 3,069 3,069 3,069 3,069
Other noncurrent assets 8 9 0 0 - - -
Total assets 93,424 123,558 164,688 170,481 178,823 183,957 193,256
Provisions/other LT liabs 70 21 1,906 2,124 2,124 2,124 2,124
Share capital 3,500 3,750 3,750 3,750 3,750 3,750 3,750
Minorities/other equity 2,990 3,975 2,266 2,114 2,114 2,114 2,114
Total equity 32,782 42,181 44,265 46,754 49,599 52,513 55,781
Total debt 31,541 40,556 52,364 56,410 65,000 67,500 70,000
Net debt 26,093 33,120 45,529 52,443 62,598 64,619 66,252
Adjusted EV 127,331 145,425 152,716 150,795 163,096 162,592 162,093
BVPS (Rs) 85.1 101.9 112.0 119.0 126.6 134.4 143.1

Key ratios
Current ratio (x) 2.0 2.1 1.7 1.7 1.9 1.8 1.8
Growth in capital employed (% YoY) 19.4 27.9 19.2 10.5 13.1 4.4 4.2
Net debt to operating cashflow (x) (12.9) (4.0) (6.1) 32.8 (230.7) 9.2 8.5
Gross debt to operating cashflow (x) (15.6) (4.9) (7.0) 35.3 (239.6) 9.6 8.9
Net debt/Ebitda (x) 3.6 3.3 4.3 5.7 5.6 5.2 4.9
Gearing
Net debt/equity (%) 79.6 78.5 102.9 112.2 126.2 123.1 118.8
Interest cover (x) 2.8 2.7 2.7 2.4 2.6 2.5 2.6
Debt Cover (x) (0.1) (0.2) (0.1) 0.0 0.0 0.1 0.1
Inventory days 513.0 612.0 499.6 729.5 680.9 618.2 561.0
Debtor days 115.6 94.9 70.2 82.1 75.7 78.5 78.0
Creditor days 572.7 591.6 469.8 695.4 651.3 628.4 631.0
Other ratios (%)
EV/OCF (x) (63.1) (17.6) (20.3) 94.3 (601.2) 23.2 20.7
EV/FCF (x) (17.7) (10.8) (11.9) (20.8) (15.8) (80.5) (100.0)
EV/Sales (x) 5.0 4.3 2.8 3.2 3.2 3.0 2.9

Cashflow (Rsm)
Depreciation/amortisation 893 1,397 1,274 1,637 1,847 2,157 2,424
Working capital changes (5,098) (12,285) (5,932) (1,860) (7,149) 1,928 2,134
Interest paid / other financial expenses (2,290) (3,214) (3,462) (3,160) (3,589) (4,008) (4,348)
Tax paid (1,750) (2,647) (2,291) (1,600) (2,031) (2,265) (2,485)
Other non-cash operating items (84) (66) (6,494) (979) 1,361 (1,000) (1,000)
Net operating cashflow (2,019) (8,273) (7,517) 1,599 (271) 6,999 7,839
Capital expenditure (5,167) (5,144) (5,356) (8,845) (10,059) (9,020) (9,460)
Free cashflow (7,186) (13,417) (12,873) (7,246) (10,330) (2,021) (1,621)
Int, invt & associate div 975 986 1,004 872 850 900 1,000
Net investing cashflow (4,192) (4,158) (4,352) (7,973) (9,209) (8,120) (8,460)
Increase in loans 6,153 9,014 11,809 4,046 8,590 2,500 2,500
Dividends (614) (721) (540) (540) (675) (900) (1,013)
Net equity raised/(buybacks) 0 6,125 0 0 0 0 0
Net financing cashflow 5,539 14,418 11,269 3,506 7,915 1,600 1,488
Incr/(decr) in net cash (673) 1,987 (600) (2,868) (1,565) 479 867
Opening cash 6,121 5,448 7,436 6,835 3,967 2,402 2,881
Closing cash 5,449 7,436 6,835 3,967 2,402 2,881 3,748
OCF per share (Rs) (5.8) (22.1) (20.0) 4.3 (0.7) 18.7 20.9
FCF per share (Rs) (20.5) (35.8) (34.3) (19.3) (27.5) (5.4) (4.3)

Growth (%)
Op cashflow growth (% YoY) nm nm nm nm (117.0) nm 12.0
FCF growth (% YoY) - - - - - - -
Capex growth (%) (23.5) (0.5) 4.1 65.2 13.7 (10.3) 4.9
Capex/sales (%) 20.3 15.0 9.7 18.5 19.5 16.9 16.8
Capex/op cashflow (%) (256.0) (62.2) (71.2) 553.2 (3,707.9) 128.9 120.7
Operating cashflow payout ratio (%) - - - 28.1 - 10.7 10.8
Cashflow payout ratio (%) - - - 33.8 - 12.9 12.9
Free cashflow payout ratio (%) - - - - - - -
DuPont analysis
Ebit margin (%) 24.8 25.0 17.0 15.8 18.1 19.1 19.8
Asset turnover (x) 0.3 0.3 0.4 0.3 0.3 0.3 0.3
Tax burden (x) 0.6 0.6 0.7 0.7 0.7 0.7 0.7
Return on assets (%) 4.8 4.6 4.4 3.1 3.7 3.8 4.0
Leverage (x) 2.7 2.9 3.3 3.7 3.6 3.6 3.5
ROE (%) 10.3 9.8 10.7 8.1 9.4 9.4 9.8
EVA® analysis
ROIC (%) 7.7 7.5 7.7 5.6 6.1 6.0 6.3
Cost of equity (%) 14.5 14.5 14.5 14.5 14.5 14.5 14.5
EVA® /IC (%) (4.2) (4.0) (4.3) (6.5) (6.1) (6.1) (5.8)
EVA® (Rsm) (2,239) (2,653) (3,510) (6,089) (6,394) (7,043) (7,006)

Notes

Sobha
Rs552.00 - BUY
Abhinav Sinha Set to scale

abhi.sinha@clsa.com Ready to match presales record
+91 22 6650 5069
Due to its strong execution track record, Sobha is one of India’s most highly
regarded residential-property brands. It expanded into the lower-tier real-estate
segment in 2014 via its Dream Acres township in Bangalore. As the property
cycle picks up, Sobha will be well placed to utilise its large and diverse landbank
and strike opportunities in the affordable-housing segment. With 30% YoY sales
growth, Sobha is set to achieve record sales in the near term, outpacing industry
recovery. It is our preferred pick on India’s housing-recovery theme.
29 January 2018 Strong brand and execution track record

Sobha is regarded as a high-quality residential developer with an excellent
India delivery record. Over the past 10 years, it has sold 32msf of residential projects
Property and delivered 33msf. The stable Bangalore real-estate market accounts for about
70% of presales; the company also has a presence in Gurgaon, Pune and the
Reuters SOBH.NS southern markets of Chennai and Kerala. Sobha also executes contractual
Bloomberg SOBHA IN projects for other companies, which enhances its growth potential.
Priced on 25 January 2018
More affordable-housing project launches in FY19
Sobha expanded to the affordable-housing segment in 2014 via its Dream Acres
12M hi/lo Rs627.85/258.45 township in Bangalore. The project comprises most of its inventory in the Rs5-7m
bracket and accounted for nearly 30% of Sobha’s sales in FY17. It has also
12M price target Rs760.00
±% potential +38%
adopted new technologies to accelerate execution. Management recently said it
will launch another 2msf in affordable-housing projects in FY19.
Free float (est.) 43.9% Sales already surging near record
Sobha’s presales dipped to a five-year low of Rs18.7bn in FY17 but have since
Market cap US$831m
improved at a rate that is ahead of the industry, rising 30% YoY in 9MFY18 to
3M ADV US$6.9m Rs17bn. We expect it to end FY18 near to its all-time high of Rs23.4bn set in
FY14. Sobha’s good project mix and ability to quickly adapt to new regulations
are driving its sales surge.
Major shareholders
Promoter 56.1% Major scale-up potential as property market improves
FIIs 28.7% Sobha is well positioned for sales growth. It will launch new developments amid
an improving property market, giving it the potential to expand sales faster than
our forecast 13% Cagr over FY18-20. Our SOTP-based Rs760 target values its
residential unit using 8.5x EV/Ebitda while we assess the contracting business at
the FY18 execution rate. The stock is among our top residential-property picks.
1M 3M 12M
Absolute (9.6) 3.0 113.4 Financials
Relative (14.3) (4.2) 65.9 Year to 31 March 16A 17A 18CL 19CL 20CL
Abs (US$) (9.1) 5.3 128.4 Revenue (Rsm) 19,566 22,462 26,388 31,722 36,341
700 (Rs) Sobha (LHS) (%) 180
Net profit (Rsm) 1,381 1,608 1,974 2,396 2,843
650 Rel to Nifty
160 EPS (Rs) 14.1 16.5 20.5 24.9 29.5
600
550 CL/consensus (16) (EPS%) - - 101 100 101
140
500 EPS growth (% YoY) (42.0) 17.5 23.9 21.4 18.6
450 120 PE (x) 39.2 33.4 26.9 22.2 18.7
400 Dividend yield (%) 0.4 0.5 0.5 0.5 0.6
100
350
FCF yield (%) 0.1 2.6 1.9 11.7 7.1
300
80
250
PB (x) 2.1 2.0 1.9 1.8 1.6
200 60 ROE (%) 5.5 6.2 7.2 8.2 9.1
Sobha - BUY India property
Revenue 19,566 22,462 26,388 17.5 31,722 36,341
Cogs (ex-D&A) (15,136) (18,264) (21,258) (25,695) (29,436)
SG&A and other expenses 0 - - - -
Op Ebitda 4,429 4,198 5,131 22.2 6,027 6,904
Op Ebit 3,832 3,560 4,496 26.3 5,333 6,151
Other non-Op items 343 386 370 (4.1) 390 400
Taxation (1,188) (970) (1,036) (1,349) (1,611)
Profit after tax 1,350 1,479 1,924 30.1 2,296 2,743
Minority interest 30 129 50 (61.3) 100 100
Net profit 1,381 1,608 1,974 22.8 2,396 2,843
Adjusted profit 1,381 1,608 1,974 22.8 2,396 2,843
Cashflow (Rsm)
Depreciation/amortisation 597 638 634 (0.6) 694 753
Working capital changes (559) (1,543) (2,417) 2,498 1,497
Other items (662) (831) (986) (1,249) (1,511)
Net operating cashflow 3,209 1,823 1,728 (5.2) 7,276 6,890
Capital expenditure (3,181) (410) (705) (1,064) (3,137)
Free cashflow 27 1,413 1,023 (27.6) 6,212 3,753
M&A/Others (1,508) (817) (1,536) (1,688) (1,798)
Increase in loans 1,215 417 2,000 380.1 31 -
Dividends (232) (290) (318) (347) (376)
Net equity raised/other 182 (521) - - -
Net financing cashflow 1,165 (395) 1,682 (316) (376)
Incr/(decr) in net cash (316) 202 1,170 479.9 4,207 1,580
Exch rate movements 0 0 0 0 0
Balance sheet (Rsm)
Other current assets 42,649 50,960 51,344 0.8 51,649 53,448
Fixed assets 6,181 5,952 6,022 1.2 6,393 8,777
Investments 294 0 0 0 0 0
Other noncurrent assets 23,964 23,611 26,016 10.2 26,521 26,807
Total assets 80,687 88,930 94,525 6.3 101,594 109,098
Accounts payable 23,144 28,824 30,113 4.5 33,831 37,294
Other current liabs 7,819 9,158 9,807 7.1 11,078 12,651
Long-term debt/CBs 21,803 22,219 24,219 9 24,250 24,250
Provisions/other LT liabs 2,274 2,283 2,283 0 2,283 2,283
Ratio analysis
Revenue growth (% YoY) (19.8) 14.8 17.5 20.2 14.6
Ebitda margin (%) 22.6 18.7 19.4 19.0 19.0
Ebit margin (%) 19.6 15.8 17.0 16.8 16.9
Net profit growth (%) (42.0) 16.5 22.8 21.4 18.6
Op cashflow growth (% YoY) nm (43.2) (5.2) 321.0 (5.3)
Capex/sales (%) 16.3 1.8 2.7 3.4 8.6
Net debt/equity (%) 79.3 77.7 76.1 57.1 47.9
Net debt/Ebitda (x) 4.6 4.9 4.2 2.9 2.3
ROE (%) 5.5 6.2 7.2 8.2 9.1
ROIC (%) 4.4 4.4 5.8 6.6 7.7

Sales set for rebound from a low base

Presales set to rise from Long-term presales¹
five-year low in FY17 35 (Rsbn) Annual presales Area sold (RHS) (msf) 4.5
30 4.0
30
26
3.5
25 23 23
22
21
20
3.0
19
20 17 2.5
15 2.0
11
9 1.5
10
6 1.0
5 3
0.5
0 0.0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
¹ Sobha’s net share. Source: CLSA, Company
Core Bangalore market has held up over the long term

Bangalore comprises Sales breakdown by geography
two-thirds of Sobha’s 4.5 (msf) Bangalore Chennai Kerala Gurgaon Pune & others
long-term sales
4.0
3.5
3.0
2.5
2.0
1.5
2.6 2.5 2.6 2.7
2.3 2.4 2.4 2.4 2.3
1.0 2.1
1.4
0.5
0.3
0.0
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
Presales pickup already visible

Presales up 22% YoY in Quarterly and annualised presales run rate
3QFY18 and at a 15-quarter 7 (Rsbn) Presales (LHS) Presales trailing 4Q (Rsbn) 30
high of Rs23bn
6 25
5
20
4
15
3
10
2
1 5
0 0
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18

Contracting business
Contracting business Contractual business revenue and contribution
accounts for one-third of 9 (Rsbn) Contracts - business revenue Contracts as % total revenues (RHS) (%) 45
revenue and is a steady
source of cashflow 8 40
generation 7 35
6 30
5 25
4 20
3 15
2 10
1 5
0 0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
Delivery track record has been consistent

Over the past 10 years, Project completions in real estate and contractual segments
Sobha has delivered 34msf 12 (msf) Real estate Contractual
each of real estate and
contractual projects
10
0
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 1HFY18

FY17-20CL Cagrs: Revenue and net profit
Revenue: 17.4% 40 (Rsbn) Revenue Net profit (RHS) (Rsbn) 3.0
Net profit: 20.9%
35
2.5
30
2.0
25
20 1.5
15
1.0
10
0.5
5
0 0.0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL

Valuation charts
PE near all-time peak, but PE: One-year forward PE on then-consensus earnings
reflect low-cycle earnings
25
20
15
10
0
EV/Ebitda is above EV/Ebitda: One-year forward EV/Ebitda on then-consensus numbers

1sd, but off from peak (x) EV/Ebitda: 1Y fwd Average +1sd -1sd
16
14
12
10
0
Source: CLSA
PB is near 1sd level PB: One-year forward PB on then-consensus book value
6 (x) PB: 1Y fwd Average +1sd -1sd
0
Source: CLSA

SOTP one-year forward target: Rs760

We build in a 13% sales Sobha’s one-year forward target-price calculation
Cagr over FY18-20CL Sales business
following a record year for
Development Ebitda (Rsbn) 10.0 Dec 2019 presales of Rs29bn at 35% margin
transactions
(ex-land). Implies 13% Cagr in presales over FY18-20
EV/Ebitda (x) 8.5 Same as current multiple; we expect valuations to
hold steady, give the possibility of upside surprise
in residential sales
Contracting business is seen EV of sales business (Rsbn) 85.4
as a steady generator of Contracting business
free cashflow . . .
Contracting Ebitda (Rsbn) 1.0 Rs8bn per annum at 12.5% margin
EV/Ebitda (x) 6.0 Pure contracting business; valued at c.25%
discount to core real-estate business
EV of contracting business (Rsbn) 6.0
Total EV (Rsbn) 91.4
. . . which we value at the Less net debt (Rsbn) 18.3 Dec 18CL consol net debt
FY18 execution rate Equity value (Rsbn) 73.1
Value per share (Rs) 760 Dec 2018 target
Source: CLSA
Valuation details
We value Sobha using a sum-of-the-parts methodology. We value its residential
business using 8.5x EV/Ebitda, given its projected presales. The multiple captures
upside potential, given that presales are recovering from a five-year low. We
value the contracting business at the FY18 execution rate and on an EV/Ebitda
approach.
Investment risks
Sobha is primarily a premium-end residential developer and macro risks pertaining
to the residential-property market (eg, interest rates and discretionary demand)
are the most pertinent to the company. Its high exposure to Bangalore (70-80%
of its portfolio) means that the city’s outlook an important risk variable. Bangalore
is a technology-industry-driven market and its performance remains an important
driver of Sobha's sales.

Detailed financials
Revenue 21,734 24,406 19,566 22,462 26,388 31,722 36,341
Cogs (ex-D&A) (15,709) (18,233) (15,136) (18,264) (21,258) (25,695) (29,436)
Research & development costs 0 0 0 0 0 0 0
Selling & marketing expenses 0 0 0 0 0 0 0
Other SG&A - - - - - - -
Other Op Expenses ex-D&A - - - - - - -
Op Ebitda 6,025 6,173 4,429 4,198 5,131 6,027 6,904
Op Ebit 5,335 5,450 3,832 3,560 4,496 5,333 6,151
Associates/investments - - - - - - -
Asset sales/other cash items 103 149 343 386 370 390 400
Taxation (1,368) (1,277) (1,188) (970) (1,036) (1,349) (1,611)
Profit after tax 2,336 2,439 1,350 1,479 1,924 2,296 2,743
Preference dividends 0 0 0 0 0 0 0
Minority interest 14 (59) 30 129 50 100 100
Net profit 2,350 2,380 1,381 1,608 1,974 2,396 2,843
Dividends (803) (827) (232) (290) (318) (347) (376)
Retained profit 1,547 1,553 1,149 1,318 1,657 2,050 2,467
Adjusted profit 2,350 2,380 1,381 1,608 1,974 2,396 2,843
EPS (Rs) 24.0 24.3 14.1 16.5 20.5 24.9 29.5
Core EPS (Rs) 24.0 24.3 14.1 16.5 20.5 24.9 29.5
DPS (Rs) 7.0 7.0 2.0 2.5 2.8 3.0 3.3
Profit & loss ratios

Growth (%)
Revenue growth (% YoY) 16.6 12.3 (19.8) 14.8 17.5 20.2 14.6
Ebitda growth (% YoY) 9.9 2.5 (28.2) (5.2) 22.2 17.5 14.6
Ebit growth (% YoY) 9.1 2.2 (29.7) (7.1) 26.3 18.6 15.3
Net profit growth (%) 8.2 1.3 (42.0) 16.5 22.8 21.4 18.6
EPS growth (% YoY) 8.2 1.3 (42.0) 17.5 23.9 21.4 18.6
Adj EPS growth (% YoY) 8.2 1.3 (42.0) 17.5 23.9 21.4 18.6
DPS growth (% YoY) 0.0 0.0 (71.4) 27.3 8.0 9.1 8.3
Core EPS growth (% YoY) 8.2 1.3 (42.0) 17.5 23.9 21.4 18.6
Margins (%)
Ebitda margin (%) 27.7 25.3 22.6 18.7 19.4 19.0 19.0
Ebit margin (%) 24.5 22.3 19.6 15.8 17.0 16.8 16.9
Op cashflow margin 16.9 (10.6) 16.4 8.1 6.5 22.9 19.0
Returns (%)
ROE (%) 10.6 10.1 5.5 6.2 7.2 8.2 9.1
ROA (%) 6.5 6.1 2.9 2.5 3.2 3.4 3.7
ROIC (%) 9.4 8.7 4.4 4.4 5.8 6.6 7.7
ROCE (%) 33.9 29.9 18.1 15.7 19.2 24.1 29.1
Exceptional or extraord. inc/PBT (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Dividend payout (%) 29.2 28.8 14.2 15.4 13.4 12.1 11.0

Balance sheet (Rsm)

Inventories 24,273 27,284 42,649 50,960 51,344 51,649 53,448
Other current assets 0 0 0 0 0 0 0
Current assets 31,486 35,826 50,249 59,368 62,487 68,680 73,514
Fixed assets 3,660 3,596 6,181 5,952 6,022 6,393 8,777
Investments 0 0 294 0 0 0 0
Goodwill 0 0 0 0 0 0 0
Other noncurrent assets 19,850 22,861 23,964 23,611 26,016 26,521 26,807
Total assets 55,095 62,362 80,687 88,930 94,525 101,594 109,098
Convertible bonds 0 0 0 0 0 0 0
Provisions/other LT liabs 1,010 1,631 2,274 2,283 2,283 2,283 2,283
Share capital 981 981 981 963 963 963 963
Reserves/others - 0 0 0 - - 0
Minorities/other equity 88 148 0 0 0 0 0
Total equity 23,002 24,465 25,648 26,445 28,101 30,151 32,618
Total debt 14,044 20,588 21,803 22,219 24,219 24,250 24,250
Net debt 12,888 18,814 20,346 20,561 21,391 17,214 15,634
Adjusted EV 66,695 72,568 73,729 72,924 73,397 69,600 65,234
BVPS (Rs) 233.7 248.0 261.5 274.6 291.8 313.1 338.7

Key ratios
Current ratio (x) 1.8 2.3 1.6 1.6 1.6 1.5 1.5
Growth in capital employed (% YoY) 3.7 27.3 7.9 6.2 0.3 (11.2) 2.9
Net debt to operating cashflow (x) 3.5 (7.3) 6.3 11.3 12.4 2.4 2.3
Gross debt to operating cashflow (x) 3.8 (8.0) 6.8 12.2 14.0 3.3 3.5
Net debt/Ebitda (x) 2.1 3.0 4.6 4.9 4.2 2.9 2.3
Gearing
Net debt/equity (%) 56.0 76.9 79.3 77.7 76.1 57.1 47.9
Interest cover (x) 3.1 2.9 2.3 2.4 2.4 2.6 2.8
Debt Cover (x) 0.3 (0.1) 0.1 0.1 0.1 0.3 0.3
Inventory days 502.9 516.1 843.2 935.4 878.3 731.5 651.6
Debtor days 105.4 95.9 120.4 104.7 104.2 105.3 107.7
Creditor days 144.9 133.7 356.0 519.3 506.0 454.2 441.0
Other ratios (%)
EV/OCF (x) 18.2 (28.2) 23.0 40.0 42.5 9.6 9.5
EV/FCF (x) 26.9 (22.4) 2,715.6 51.6 71.7 11.2 17.4
EV/Sales (x) 3.1 3.0 3.8 3.2 2.8 2.2 1.8

Cashflow (Rsm)
Working capital changes (1,365) (8,093) (559) (1,543) (2,417) 2,498 1,497
Interest paid / other financial expenses - - - - - - -
Tax paid (996) (656) (545) (960) (1,036) (1,349) (1,611)
Other non-cash operating items - 0 (117) 129 50 100 100
Net operating cashflow 3,664 (2,576) 3,209 1,823 1,728 7,276 6,890
Capital expenditure (1,182) (658) (3,181) (410) (705) (1,064) (3,137)
Free cashflow 2,482 (3,234) 27 1,413 1,023 6,212 3,753
Acq/inv/disposals 2 - (294) 294 - - -
Int, invt & associate div (1,597) (1,716) (1,215) (1,111) (1,536) (1,688) (1,798)
Net investing cashflow (2,777) (2,374) (4,690) (1,227) (2,240) (2,752) (4,934)
Increase in loans 257 6,544 1,215 417 2,000 31 -
Dividends (803) (827) (232) (290) (318) (347) (376)
Net equity raised/(buybacks) 0 (149) 182 (521) - - -
Net financing cashflow (546) 5,568 1,165 (395) 1,682 (316) (376)
Incr/(decr) in net cash 341 618 (316) 202 1,170 4,207 1,580
Exch rate movements 0 0 0 0 0 0 0
Opening cash 815 1,156 1,774 1,457 1,659 2,829 7,036
Closing cash 1,155 1,774 1,457 1,659 2,829 7,036 8,616
OCF per share (Rs) 37.4 (26.3) 32.7 18.8 17.9 75.6 71.5
FCF per share (Rs) 25.3 (33.0) 0.3 14.5 10.6 64.5 39.0

Growth (%)
Op cashflow growth (% YoY) 63.4 (170.3) nm (43.2) (5.2) 321.0 (5.3)
FCF growth (% YoY) 92.4 (230.3) - 5,106.0 (27.6) 507.0 (39.6)
Capex growth (%) 24.1 (44.3) 383.2 (87.1) 72.1 51.0 194.7
Capex/sales (%) 5.4 2.7 16.3 1.8 2.7 3.4 8.6
Capex/op cashflow (%) 32.2 (25.6) 99.2 22.5 40.8 14.6 45.5
Operating cashflow payout ratio (%) 18.7 - 6.1 13.6 15.3 4.0 4.5
Cashflow payout ratio (%) 21.9 - 7.2 15.9 18.4 4.8 5.5
Free cashflow payout ratio (%) 32.4 - 853.3 20.5 31.1 5.6 10.0
DuPont analysis
Ebit margin (%) 24.5 22.3 19.6 15.8 17.0 16.8 16.9
Asset turnover (x) 0.4 0.4 0.3 0.3 0.3 0.3 0.3
Tax burden (x) 0.6 0.7 0.5 0.6 0.7 0.6 0.6
Return on assets (%) 6.5 6.1 2.9 2.5 3.2 3.4 3.7
Leverage (x) 2.3 2.5 2.9 3.3 3.4 3.4 3.4
ROE (%) 10.5 10.3 5.4 5.7 7.1 7.9 8.7
EVA® analysis
ROIC (%) 9.4 8.7 4.4 4.4 5.8 6.6 7.7
Cost of equity (%) 14.5 14.5 14.5 14.5 14.5 14.5 14.5
Cost of debt (adj for tax) 7.6 7.9 6.4 7.2 7.8 7.6 7.6
EVA® /IC (%) (2.8) (3.5) (7.4) (7.7) (6.5) (5.6) (4.5)
EVA® (Rsm) (1,022) (1,450) (3,439) (3,726) (3,276) (2,820) (2,229)

Notes

Sunteck Realty
Rs406.00 - N-R
Abhinav Sinha Mumbai mix

abhi.sinha@clsa.com Focus on business-centre-linked developments
+91 22 6650 5069
Sunteck Realty has emerged as a developer of premium property around
Mumbai’s business hubs, which have spread out across the city along with new
infrastructure projects. Having completed 1.5msf of premium residential space in
Mumbai’s CBD, the company is planning a 6msf mixed-used development at an
emerging business hub. A low-geared balance sheet and surplus cashflow also
means it can pursue opportunities in the affordable-housing space via project
acquisitions.
29 January 2018 Significant Mumbai presence

Sunteck has a significant Mumbai city presence, delivering 1.8msf of projects since
India 2014. It also has 2.1msf of ongoing and 4.4msf of upcoming developments in the
Property city. Its projects so far have been largely in the premium residential segment,
though the upcoming pipeline includes 2.7msf of commercial space.
Reuters SUNT.NS
Bloomberg SRIN IN Business-centre-linked developments a core strategy . . .
Mumbai has seen a gradual northward shift of business hubs from its southern
Priced on 25 January 2018
CNX Nifty @ 11,069.7 end and Sunteck has established itself as a premium developer in the Bandra
Kurla Complex (BKC), which is now seen as the Central Business District (CBD).
12M hi/lo Rs422.50/119.05 The company acquired land parcels in BKC starting in 2006, partly with the help
of private equity/quasi-equity money. Its BKC residential development, totalling
Free float (est.) 33.3% about 1.5msf of saleable area, is almost complete with some 0.4msf of inventory
worth approximately Rs15bn still available for sale.
Market cap US$940m
US$3.1m
. . . and more in the pipeline
3M ADV
Of Sunteck’s 6.7msf of ongoing and upcoming projects (including 0.2msf) -
Foreign s'holding 17.3% outside of Mumbai) it is developing 5.7msf at another upcoming business hub
called Oshiwara Development Centre (ODC). About 2.6msf at ODC will be lease
Major shareholders
Khetan Family 66.8%
assets, providing a future rental-income stream. ODC is close to existing office
spaces in Western Mumbai suburbs and as such it is a well-established location.
Low-geared balance sheet to drive new project additions

Following an Rs5.0bn equity issuance in October 2017, Sunteck has net debt of
Rs4.8bn, implying 0.2x net gearing. With about Rs15bn of inventory at BKC to be
monetised, the balance sheet can accommodate lease-asset developments as well
as new project/land acquisitions. Management intends to deploy about Rs10bn in
affordable housing, which would mean acquiring new land, as most of its current
land is earmarked for premium/commercial developments.
1M 3M 12M
Absolute (3.9) 10.7 238.5
Relative (8.9) 2.9 163.1 Financials
Abs (US$) (3.1) 13.1 262.3
Year to 31 March 16A 17A 18IBES 19IBES 20IBES
450 (Rs) (%) 300
Sunteck (LHS)
Revenue (Rsm) 7,849 9,522 10,614 11,597 9,649
400 Rel to Nifty
250 Net profit (Rsm) 1,611 2,040 2,149 2,691 2,300
350
EPS (Rs) 13.44 17.01 16.90 21.40 16.60
300 200
EPS growth (% YoY) (21.0) 0.6 (21.0) 28.9 -
250
150 PE (x) 30.2 23.9 24.0 19.0 24.5
200
Dividend yield (%) 0.3 0.5 0.4 0.9 -
150
100
100
ROAE (%) 10.4 11.9 9.6 1.0 0.8
50 50
PB (x) 3.0 2.9 2.2 2.0 1.9
Jan 16 Sep 16 May 17 Jan 18 Net gearing (%) 66.55 45.30 14.39 30.05 -
Source: Bloomberg Source: IBES
Sunteck Realty - N-R India property
Sales concentrated in key Mumbai projects

Nearly 90% of presales over Presales by location
FY14-1HFY18 come from
7 (Rsbn) BKC projects ODC project Other locations
two main locations: Bandra
Kurla Complex (BKC) and
6
Oshiwara Development
Centre (ODC)
5
0
FY14 FY15 FY16 FY17 1HFY18
Source: Company
Quarterly presales held up well during demonetisation, Rera

Launch of fresh inventory at Quarterly and trailing 4Q presales
ODC residential can
3.0 (Rsbn) Total presales value Trailing 4Q presales (RHS) (Rsbn) 8
increase presales
7
2.5
6
2.0
5
1.5 4
3
1.0
2
0.5
1
0.0 0
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
Source: Company
Mumbai residential area to be sold by status of project¹ P&L
(Rsbn) Revenue PAT

Completed 10 9.3
9.5
13%
9
8
7
6
Upcoming 4.8
5
51%
4
3.0
3 2.4
Ongoing 2.0
36% 2 1.5
1.0
0.7
1 0.2
0
Total Mumbai residential area to be sold : 3.4m ft² FY14 FY15 FY16 FY17 1HFY18
¹ Does not include projects in landbank stage. Source: Company

Source: Company PPD document (Oct 17)

Appendix India property
Appendix: Rera impact on project cashflow

Cashflow to developers Below, we simulate the cashflow of a mid-income residential project, with the key
restricted post Rera assumptions detailed below. The practice was to upfront the cashflow so that a
project, after the cost of land, would breakeven within 18-24 months of launch,
assuming a sellout. Post Rera, 70% of all cashflow, ex-land costs, are deemed to
be construction costs. All incremental cashflow is thus allowed to be withdrawn
to the above limited extent only which suppresses the project IRR and increases
working-capital requirements.
Key assumptions: Project cashflow and returns for a standard mid-income project
(Rsm) Comment
1m sf project in city- Total selling price 6,000 Assume 1msf project @Rs6,000/sf
suburb with a standard Land cost 1,500 Land in city suburb
land-construction cost Construction 2,500 Cost for a mid-end apartment project
mix of 35:65
Margin 2,000 This is the developer’s gross margin
100% sell-out at launch Sold at launch (%) 100

Standard cashflow profile Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
First three years since Construction costs (%) 0 10 20 20 25 25
project launch account Customer inflow (%) 0 20 30 25 15 10
for 50% of construction Cashflow currently
costs but 75% of (Rsm)
customer collections Outflow (land + const) (1,500) (250) (500) (500) (625) (625)
Customer collections = Developer Inflow - 1,200 1,800 1,500 900 600
Net inflow to developer (1,500) 950 1,300 1,000 275 (25)
The 70% amount to be put
in managed account is to be Cumulative inflow to developer (1,500) (550) 750 1,750 2,025 2,000
given to developer as IRR Prior to regulation (%) 53
construction progresses (Rsm)
Outflow (land + const) (1,500) (250) (500) (500) (625) (625)
Customer collections - 1,200 1,800 1,500 900 600
As the land cost proportion Inflow to developer
rises, the decline in IRR will
(A) 30% of collections - 360 540 450 270 180
lessen as we presume land
(B) 70% based on completion - 368 814 984 1,024 1,011
costs to be 100% paid in
either case before Net inflow to developer (1,500) 478 854 934 669 566
project launch Cumulative inflow now (1,500) (1,023) (169) 766 1,434 2,000
IRR post regulation (%) 36
Source: CLSA

India property
Notes

Important disclosures India property
Companies mentioned
Abbott India (N-R) L&T Realty (N-R)
AIT (N-R) M3M India Ltd. (N-R)
Ajmera Realty (N-R) Magarpatta Township Development & Construction
Amrapali Group (N-R) Company Limited (N-R)
APG (N-R) Mahindra Lifespace (N-R)
Arihant Superstructures Ltd (N-R) Mantri Developers Ltd (N-R)
Ashiana Housing Ltd (N-R) NESCO Ltd (N-R)
Axis Bank (AXSB IB - RS590.2 - BUY) Oberoi Realty (OBER IN - RS507.0 - BUY)
Bayer CropScience (N-R) Omkar Realtors and Developers Pvt Ltd (N-R)
BBCL Ltd (N-R) Panchsil Realty Ltd (N-R)
Blackstone Group (N-R) Paranjpe Schemes Ltd (N-R)
Bombay Dyeing (N-R) Peepul Tree Properties (N-R)
Brigade Corporation India (N-R) Phoenix Mills (PHNX IN - RS606.8 - BUY)
Brigade Enterprises (N-R) Poddar Housing and Development Ltd (N-R)
Brookfield (N-R) Prestige Estates (PEPL IN - RS310.8 - BUY)
Canada Pension Plan Investment Board (N-R) Puravankara (N-R)
DLF (DLFU IB - RS249.3 - SELL) Qatar Investment Authority (N-R)
Embassy Group (N-R) RMZ Corp (N-R)
Faery Estates (N-R) Sattva Group Ltd (N-R)
Ganesh Housing Corporation (N-R) Shapoorji Pallonji and Company (N-R)
GIC Private Limited (N-R) Sobha (SOBHA IS - RS535.9 - BUY)
Godrej Prop (GPL IB - RS822.2 - BUY) Sunteck (N-R)
GSK India (N-R) Supertech Ltd. (N-R)
HDFC (HDFC IB - RS1,900.5 - BUY) TATA Housing Development Co. Ltd. (N-R)
Hiranandani Developers Ltd. (N-R) TCG Urban (N-R)
Indiabulls Real Est (IBREL IS - RS241.4 - BUY) The Wadhwa Group (N-R)
IndiGo (N-R) Unitech (N-R)
IREO Projects Ltd (N-R) Value Budget and Housing Corp Ltd (N-R)
JP Infratech (N-R) VGN Property Developers Ltd (N-R)
K Raheja Corp (N-R) Vijay Shanthi Developers Ltd (N-R)
KEC Intl (N-R) Voltas (VOLT IS - RS618.2 - SELL)
Kolte-Patil Developers (N-R) Xander Advisors India (N-R)
Kolte-Patil Developers Ltd (N-R) XRBIA Developers Ltd (N-R)
Analyst certification
The analyst(s) of this report hereby certify that the views expressed in this research report accurately reflect my/our
own personal views about the securities and/or the issuers and that no part of my/our compensation was, is, or will
be directly or indirectly related to the specific recommendation or views contained in this research report.

Important disclosures
The policy of CLSA and CL Securities Taiwan Co., Ltd. (“CLST”) is upside/downside, but those where the Research Head/Strategist
to only publish research that is impartial, independent, clear, fair, believes there is the highest likelihood of positive/negative
and not misleading. Regulations or market practice of some returns. The list for each market is monitored weekly.
jurisdictions/markets prescribe certain disclosures to be made
for certain actual, potential or perceived conflicts of interests Overall rating distribution for CLSA/CLST only Universe:
relating to a research report as below. This research disclosure Overall rating distribution: BUY/Outperform - CLSA: 64.69%;
should be read in conjunction with the research disclaimer as set CLST only: 61.43%, Underperform/SELL - CLSA: 35.31%; CLST
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India property

Sector outlook - Overweight

Godrej Properties GPL IB

Indiabulls Real Estate IBREL IS

Oberoi Realty OBER IN

Prestige Estates PEPL IN

Mahindra Lifespace MLIFE IN

Sunteck Realty SRIN IN

Sector landscape reaches for maturity

Accelerated sector organisation ................................................................................... 7

Affordability to drive housing uptick ......................................................................... 27

Normalised lease-returns to drive investment shift ................................................ 41

Rerating to continue as sector consolidates ............................................................. 49

Appendix: Rera impact on project cashflow ........................................................... 123

Solid research foundations

2 abhi.sinha@clsa.com 29 January 2018

Expect organised Sales and market share achieved by organised developers

29 January 2018 abhi.sinha@clsa.com 3

Organised developers: sales achieved and market share

Sector to undergo major consolidation

Rera is a major force of change

Listed/large developers in the premium Office market has consolidated already

Source: CLSA, Listed property companies Source: CLSA, Companies

4 abhi.sinha@clsa.com 29 January 2018

The customers are changing too

Affordable housing project 50km from Mumbai Clubhouse at the project

Source: CLSA Source: CLSA

Financing costs and trust-factor are added advantages

Source: CLSA, Companies Source: CLSA

Property cycle is set to revive

Affordability for a premium-category house Disbursements under gov’t subsidy scheme

Source: CLSA, HDFC, SBI Source: CLSA, Ministry of Finance

29 January 2018 abhi.sinha@clsa.com 5

Incremental money shifts from lease to residential

Source: CLSA, Bloomberg Source: CLSA

BSE Realty mkt cap as % India MSCI EM 3

80 4 India listed universe 1

Source: CLSA, Bloomberg Source: CLSA, Bloomberg, MSCI

We prefer residential-centric developers that are flexible enough to take

Property valuation matrix

6 abhi.sinha@clsa.com 29 January 2018

Accelerated sector organisation

Residential markets have stayed fragmented

India’s housing market spend: highly unorganised

Total expenditure on housing FY17: Rs7.0tn (US$110bn)

Developer addressable market: US$55-60bn in FY17

Market size Social: Rs3.3tn Affordable: Rs1.6tn Premium: Rs2.1tn

 Rural or urban poor  Urban or suburban areas  Concentrated in top-8-10

Listed Large unlisted Listed Large unlisted Listed

Market shares Self Self Self

Source: CLSA, MOSPI, NHB, Listed developers

29 January 2018 abhi.sinha@clsa.com 7

BSE Realty index - A history and key developments in property sector

Section 1: Accelerated sector organisation

2005-2007 2008-mid09 2009-2011 2012-2015 2016-2017 2018 . . .

Source: CLSA, Bloomberg

Overall spending on property in India in FY17 is estimated at Rs7.0tn (or

Lease asset ownership has shown consolidation already

29 January 2018 abhi.sinha@clsa.com 9

Source: CLSA, Companies.

China’s top-10 make up 22% of the residential market

top-three developers together sold US$150bn of properties, 1,500 13

10 abhi.sinha@clsa.com 29 January 2018