Buy Orbit Corporation

Rs595 In A Different Orbit

Urmik Chhaya Nirav Parikh ,CFA
91-22-6639 9176 91-22-6639 9147
urmik.chhaya@alchemyonline.com nirav.parikh@alchemyonline.com

Reuters code ORCP.BO Investment Positives

Bloomberg code ORB IN h Niche focus with huge market opportunity
Shares o/s 36.27mn
Mkt Cap Rs22bn / US$0.5bn Orbit Corporation Ltd (OCL) primarily focuses on
52 week high/low Rs629/90 redevelopment of existing properties in the island city of
Avg daily trading volume 3.83mn shares Mumbai (Mahim-Colaba). The redevelopment undertaken by
BSE Sensex 17777
it primarily involves construction of new buildings, wherein a
set percentage of houses are given back to existing tenants
Nifty 5209
and the balance are for free sale. The re-developed property
Shareholding pattern (%)
is targeted towards high end customers.
Promoters 60.5
Flls 4.2 h Huge market opportunity
Banks/FIs/MFs 4.5 Currently, there are 19,642 buildings which are old and
Public/Others 30.8 dilapidated (50-200 years old) in Mumbai. Currently, the
market potential stands at 6,386 units which fall under
Performance (%) 1m 3m 12m MTD
different categories/wards that are available for
Absolute 24.3 109.8 NA 14.6
redevelopment. (Refer Table 2)
Relative to Sensex 8.2 75.6 NA 11.4
h Ability to monetize projects
Share Price Movement
The ability to monetize projects is the key differentiator for a
(Rs)
700 real estate company, since the industry is highly capital
600 intensive. With the recent monetization of its Kalina project,
500 the company has once again displayed its ability to monetize
400
300
projects, early.
200
100
0
Concerns
May-07
Apr-07

Aug-07
Jun-07

Jul-07

Sep-07

Why we did this report h Long gestation period

¾ Niche player in real estate.
The redevelopment projects normally have a longer gestation
period due to the nature of projects and the process involved.
¾ Is not a land bank story.
Negotiations with tenants may take a longer time, thus
resulting in fluctuations in earnings

How are we different?

Valuations
¾ The company has been valued on a P/E basis rather
than NAV due to its specific characteristics. At Rs594.9, Orbit Corporation trades at P/E of 9.9x and 6.1x on
FY08E and FY09E basis. Initiate coverage with a BUY and a
target price Rs775/share at which the stock will trade at 8x PER
Key triggers
on FY09E.
¾ Larger number of projects getting bunched in FY08 &
Financial
FY09. Highlights Financial Highlights (Rs mn)
Y/E March FY06 FY07 FY08E FY09E

Net Sales (Rs Mn) 7.2 1915.0 9002.0 14150.7

EBIDTA (Rs Mn) 35.9 740.0 4293.7 6931.8

EBIDTA (%) 38.6 47.7 49.0

Net Profit (Rs Mn) 1.1 572.2 2739.1 4395.8

EPS (Rs) (Fully Diluted) 0.1 21.1 60.4 96.9

EPS Growth (%) 41568.8 286.7 160.5

Bloomberg code ASSB <GO>

Alchemy

Contents
Investment positives ...................................................................................................................... 3

Niche focus with huge market opportunity ..................................................................................... 3

Huge market opportunity ............................................................................................................... 3

Ability to execute and monetize projects (Kalina project)............................................................... 4

Ability to monetize projects ............................................................................................................ 4

Market re-rating of the stock after the transaction.......................................................................... 5

Less vulnerable to interest rates cycle........................................................................................... 5

Concerns ....................................................................................................................................... 5

Long gestation period .................................................................................................................... 5

Valuation methodology .................................................................................................................. 6

Strategy and outlook...................................................................................................................... 6

Annexure I ..................................................................................................................................... 7

2

Key Elements
Features of Scheme
Identification of Property
Ownership Strategy
Redevelopment Area/Tenement
Tenant Rehabilation Strategy
80I (b) Tax Benefits
Discounted BMC Development
Charges
Relative Acquisition Cost
Value Realization
Source: Company
Orbit Corporation
Investment positives
NICHE FOCUS WITH HUGE MARKET OPPORTUNITY
h Orbit Corporation Ltd (OCL) is primarily focused on redevelopment of existing
properties in the island city of Mumbai (Mahim-Colaba). The redevelopment
undertaken by it primarily involves construction of new buildings, wherein a set
percentage of houses are given back to existing tenants and the balance is for free
sale. The re-developed property is targeted towards high end customers.
HUGE MARKET OPPORTUNITY
h The company primarily operates under three regulations of DCR (Development
Control Regulations) namely regulations 33(6), 33(7) and 33 (10).
Table 1: DCR Regulations
33(6) 33(7) 33(10)
Existing Built Up Area available for Higher of 2.5 times of plot area available for Maximum of 2.5 times of Plot area
development irrespective of applicable FSI development or 50% of the rehabilitation available for redevelopment or 3 times
for the plot size area as incentive Plot area incase of dense projects
Preferably in the CRZ zone All other parts of the Island City Slums situated over large areas
Direct Ownership Direct Ownership/Joint Development Development Agreement
Minimum 225SFT upto a Maximum of
Existing Built Up Area 750 sq.ft per tenement Only 225 SFT self contained Apts
Complete buyout of tenancy rights No buyout No buyout
Available Available Available
Available Available Available
High Low Low
Very High High Low
h Understanding 33 (7) – This section is dynamic in terms of Floor Space Index FSI).
Under this scheme, the area to be developed can be 2.5x the size of the plot or 50%
of rehabilitation as incentives. However, this option is dependent on the number of
tenants. The numbers of tenants determine incentives for developers. (Refer Table
1).
3
Alchemy

Table 2: Section 33(7)

Case A
Tenants not selling out
Particulars Case I Case II
Area (Sq ft) (A) 10000 10000
FSI (B) 2.5 2.5
Tenants (C ) 100 20
Min SFT/Tenant (D) 225 225
Area to be provided to existing tenant (C x D) 22500 4500
Area that can be developed (2.5 FSI) (A x B) 25000 25000
Incentive @ 2.5 times Plot 2500 20500
Incentive @ 50% of rehab area (SFT) 11250 2250
Effective FSI @ 2.5x plot (SFT) 2.50 2.50
Effective FSI @ 50% of rehab area 3.38 0.68
Case B
Tenants selling out
Particulars Case I Case II
Area (Sq ft) (A) 10000 10000
FSI (B) 2.5 2.5
Tenants (C ) 100 20
(% of tenants selling out) (D) 40% 40%
Min SFT/Tenant (E) 225 225
Area available for tenants (E x C) 22500 4500
Area of tenants selling out (SFT) (C x D x E) 9000 1800
Area to be provided to existing tenant 13500 2700
Area that can be developed (2.5 FSI) (A x B) 25000 25000
Incentive @ 2.5 FSI 2500 20500
Incentive @ 50% of rehab area (SFT) 20250 4050
Incentive @ 50% of rehab area in Case A (SFT) 11250 2250
Source: Alchemy

Table 3: Market potential and addressable market

Ward Total Redeveloped Under Process Potential
Dilapidated Bldgs Under Construction NOC Obtained
A 936 9 5 8 914
D 2747 71 53 53 2570
F&G North 2056 212 93 93 1658
F&G South 1336 35 31 31 1239
Open Plots
Total 7075 327 182 185 6381
Source: Company

ABILITY TO EXECUTE AND MONETIZE PROJECTS (KALINA PROJECT)

OCL, till date, has executed one project (Shivam – Babulnath, South Mumbai) and has
16 more projects under execution. The project was completed in March 2005 and
average realization per unit was Rs17.4mn (Average size of unit 1860 sq.ft.) Two other
projects, namely Orbit WTC (Bandra Kurla Complex, Suburbs) and Orbit Plaza (BKC,
Suburbs) have already been pre-sold to the extent of 100% and 86.7%, respectively (For
further details, refer to project details -- Annexure I).
ABILITY TO MONETIZE PROJECTS
The ability to monetize projects is the key differentiator for a real estate company, since
the industry is highly capital intensive. Also, for a niche player like OCL, whose
segment area has high gestation period with gradual lock up of capital, monetizing
capital at the early stage of a project is highly beneficial.

4
 Orbit Corporation

Kalina project (Orbit WTC)

OCL through its SPV – Orbit Shelters Pvt Ltd, acquired a property located at Kalina,
Santacruz, Mumbai, from Ambuja Cements Ltd for Rs3.33bn. A bridge loan of Rs2bn
was raised for funding this acquisition. This property has been sold for Rs8.07bn and is
expected to be delivered in March 2009.With the property already pre-sold, the
company intends to pay off the debt raised. Thus, the company has already monetized
the project.

Table 4: Kalina deal structure

Particulars (Rs mn)
Debt 2000
Equity 1500
Land Cost 3330
Stamp Duty 170
Development Cost 1500
TDR 250
Total Cost 5250
Sale Price 8070
Profit 2820
Source: Company

Market re-rating of the stock after the transaction

Chart 1: Re-rating after the Kalina deal
700

600

500 Acquisition of
Kalina Property
(Rs)

400

300
Pre-selling of Kalina
200
Property to JSW group
100
May-07
Apr-07

Aug-07
Jun-07

Jul-07

Sep-07

Source: Alchemy

LESS VULNERABLE TO INTEREST RATES CYCLE

OCL primarily operates in a segment which is less vulnerable to the interest rate cycle.
This is due to the fact that both regulations under DCR i.e. 33(6) and 33(7) are primarily
meant for high end users. This is evident from average realizations for properties already
sold by OCL.

Concerns
LONG GESTATION PERIOD
The redevelopment projects normally have a longer gestation period due to the nature of
projects and the process involved. Negotiations with tenants may take a longer time,
thus resulting in fluctuations in earnings.

5
Alchemy

Valuation methodology
Real estate companies are primarily valued using present value approach where in free
cash flows are discounted using an appropriate discount rate. However, this approach
will not be appropriate for company like OCL.

The NAV approach is more appropriate for companies having large land banks and this
approach is expected to be utilized over a period of time. However, OCL, which
operates in a niche segment and relies on redevelopment – valuations are highly project
sensitive. The price/earnings multiple would be appropriate for a company like OCL.
For continued momentum in earnings, the call would be on macro opportunity and
ability of the management to capitalize on it. In OCL, the macro opportunity is
significant and its management has certainly shown its ability to capitalize on it.

Valuation
At Rs594.9, Orbit Corporation trades at P/E of 9.9x and 6.1x based on FY08E and
FY09E. Initiate coverage with a BUY and target price Rs775/share at which the stock
will trade at 8x PER on FY09E.

Strategy and outlook

OCL will continue to focus on redevelopment of properties. The company expects 70%
of its projects to be of redevelopment and 30% through open plots. The company
intends to go for block development which will expedite the process of tenant
rehabilitation and enable the company to go in for larger projects. The company plans to
develop the concept of studio apartments, thus targeting working couples. Under the
concept of studio apartments (these will developed in areas which were previously
industrial area in South Mumbai – primarily Lower Parel), all household services are
provided by developers to customers (since target customers are working couples).
Average size of these apartments will be 700-1,000 sq ft.

6
PROJECT DETAILS
Expected Total Area of Construction Project Type
Completion
Location Est Est Total Land Construction Est.Avg Parking No Res/Commercial
Saleble Builtup Est Acquisition Cost Realisation/ Rates of
Area Area Cost Cost (B) sq ft (Per Parkings
(A+B) (A) Parking)
Projects (sq ft) (sq ft) (Rs mn) (Rs mn) (Rs mn) (Rs) (Rs.)
Napeansea
Orbit Arya Road December 2008 65000 108500 1341.2 696.1 645.1 45000 1500000 120 Residential
Orbit Heights Tardeo Road June 2008 82500 190500 696.7 52.9 643.8 24000 900000 180 Residential
Orbit Eternia Lower Parel December 2008 25000 84000 185.6 23.9 161.7 18000 800000 100 Residential
Orbit Enclave Prathna Samaj March 2010 23000 67000 171.2 12 159.2 27000 700000 60 Residential
Hafeez Contractor House Lower Parel December 2009 226200 493111 1674.6 570 1104.6 45000 700000 150 Commercial
Napeansea
Orbit Haven Road March 2010 35000 71800 457.3 213.5 243.8 18000 1500000 72 Residential
Orbit Grand Lower Parel June 2009 48000 137500 295.9 63.4 232.5 50000 700000 150 Residential
Napeansea
Villa Orb Road March 2008 52500 91300 1127.6 765 362.6 50000 1500000 72 Residential
Orbit Ambrosia Altamount Road December 2009 34000 62800 516.6 270 246.6 40000 1500000 72 Residential
Orbit View Worli Sea Face March 2010 35000 63800 701.5 450 251.5 18000 1000000 72 Residential
Bandra Kurla
Orbit Plaza Complex December 2007 75000 110000 419.5 170 249.5 22000 800000 100 Commercial
Gokuldas Devji Wadi Tardeo September 2009 14375 39575 111.8 50.3 61.5 20000 800000 20 Residential
New Breach
Jensen Veneers Candy Rd March 2010 10500 17500 96.2 36.8 59.4 18000 800000 20 Residential
Iqbal Manzil & Daruwala Chawl Lower Parel December 2009 25000 68400 254.5 75 179.5 20000 800000 60 Residential
Napeansea
Munkund Mansion Road March 2010 52500 81300 1140.0 900 240 50000 1500000 72 Residential
Bandra Kurla
Orbit WTC Complex March 2009 333000 493000 5250.0 3500 1750 25000 800000 400 Commercial

Source: Company, Alchemy

Note: 1) Parking is not part of FSI calculations
 Orbit Corporation

ANNEXURE I
Income Statement Rs.mn Cash Flow Rs.mn
(Rs mn) FY06 FY07 FY08E FY09E (Rs Mn) FY06 FY07 FY08E FY09E
Net Sales 7.2 1915.0 9002.0 14150.7 EBIT 36.1 749.6 4280.5 6898.6
Operating Expenses -29.8 1170.6 4702.3 7212.9 Less : Tax 1.2 76.7 1386.1 2224.4
EBIDTA 35.9 740.0 4293.7 6931.8 Net Operating Profit
34.9 672.9 2894.5 4674.2
EBIDTA (%) 38.6 47.7 49.0 after Tax
Depreciation 1.8 8.2 30.9 51.0 Change in Working
-2078.2 -460.3 4551.6 2485.4
Capital
EBIT 36.1 749.6 4280.5 6898.6
Add: Depreciation 1.8 8.2 30.9 51.0
Interest 33.8 100.7 155.3 278.4
Operating Cash Flow -2041.5 220.7 7477.0 7210.6
Profit Before Tax 2.3 648.9 4125.2 6620.2
Capex -20.8 -29.3 -100.0 -100.0
Provision for Tax 1.2 76.7 1386.1 2224.4 Free Cash Flow
-2062.3 191.4 7377.0 7110.6
Profit After Tax 1.1 572.2 2739.1 4395.8

Balance Sheet Rs.mn Ratios

Y/E March (Rs mn.) FY06 FY07 FY08E FY09E FY07 FY08E FY09E
Sources of Funds Profitability
Equity Share Capital 216.0 271.7 362.7 453.7 EBIDTA margin (%) 38.6 47.7 49.0
Reserves & Surplus 770.5 1760.6 5306.4 14180.8 Net Margin (%) 29.9 30.4 31.1
Less: Misc Exp not ROE (%) 38.1 71.4 43.3
2.5 14.4 9.4 4.4
written off
Shareholders Funds 983.9 2018.0 5659.8 14630.1 ROCE (%) 27.1 77.7 56.4

Application Money
23.0 1001.0
Pending Allotment Leverage
Minority Interest 0 1.5 1.5 1.5
Debt/Equity Ratio (x) 0.5 0.3 0.2
Loan Funds 595.6 917.9 1417.9 2767.9
Secured Loans 439.7 763.1 1263.1 2613.1
Valuation Ratios
Unsecured Loans 155.9 154.8 154.8 154.8
PER (x) 8.7 5.4
Total Capital Employed 1602.5 3938.4 7079.2 17399.6
EV/EBIDTA (x) 4.8 3.8

Application of Funds
Per Share Data (Rs)
Fixed Assets 23.3 42.5 111.5 172.3
EPS 21.1 60.4 96.9
Gross Block 27.2 54.2 154.2 254.2
Less: Depreciation 4.0 11.8 42.8 81.9
Net Block 23.2 42.4 111.5 172.3
Capital WIP 0.1 0.1
Investments 0.6 0.6 0.6 0.6
Current Assets 2008.4 5680.4 13461.3 25743.8
Inventories 1205.4 1672.7 4076.3 6276.8
Sundry Debtors 55.1 1085.3 3000.7 4716.9
Cash & Bank Balances 154.7 1831.8 5119.47 13177.20
Loans and Advances 593.3 1090.5 1264.9 1572.8
Current Liabilities 430.0 1785.0 6494.1 8517.1
Current Liabilities 424.7 1702.3 5095.33 6276.83
Provisions 5.3 82.7 1398.76 2240.27
Net Current Assets 1578.43 3895.3 6967.2 17226.7
Total Capital Employed 1602.5 3938.4 7079.2 17399.6

Source: Company, Alchemy

7
 Alchemy

Sales
Arun Singh arun@alchemyonline.com 91-22-6639 9125
Dealing
Chetan Chitroda chetan@alchemyonline.com 91-22-6639 9134

Disclosure of interest statement

Analyst holding of the stock NO
Firm holding of the stock NO
Owners holding of the stock YES

Disclaimer
This report is not a solicitation or offer to buy or sell any securities or related financial products. The information and commentaries are also not meant to be
endorsements or offerings of any securities, options, stocks or other investment vehicles. The report is intended for general circulation and does not take into account the
specific investment objectives, financial situation or particular needs of any particular person. The securities discussed in this report may not be suitable for all investors.
The appropriateness of any particular investment or strategy whether opined on or referred to in this report or otherwise will depend on an investor’s circumstances and
objectives and should be independently evaluated and confirmed by such investor, and advice should be sought from a financial adviser concerning the suitability of the
investment or strategy, taking into account the specific investment objectives, financial situation or particular needs of the investor, before the investor makes a
commitment to deal in an investment or implement a strategy.
Investment ideas and/or corporations discussed in this website may have a high level of volatility. High volatility investments may experience sudden and large falls in
their value causing losses when the investment is realised. Those losses may equal the original investment. Some investments may not be readily realisable and it may be
difficult to sell or realise those investments. Similarly, it may prove difficult to obtain reliable information about the value and risks to which such an investment is
exposed. Neither us nor any of our affiliates shall assume any legal liability or responsibility for any incorrect, misleading or altered information contained in this report.
Past performance is not necessarily indicative of future results and there can be no assurance that any investment will achieve comparable results or its investment
objectives. Investors may not get back the full amount invested and the net asset value of the investment will fluctuate. Exchange rate fluctuations may affect the return to
investors.
Alchemy Share and Stock Broker Pvt. Ltd., their respective affiliate companies, associates, directors and/or employees may have investments in securities or derivatives
of securities of companies mentioned in this report, and may make investment decisions that are inconsistent with the views expressed in this report.

ALCHEMY SHARE & STOCK BROKERS PVT. LTD.

Navsari Building, 4th Floor, 240 Dr D. N. Road, Fort, Mumbai: 400 001. India
(Tel): 91-22-6639 9100 (Fax): 91-22-2203 3575