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India I Equities

Property Report

28 January 2011

Property
Mumbai Property Demand high, but uncertain milieu
We lower our estimates owing to prevailing uncertainty, local regulatory & political changes, and price correction (already factored in). We revisit our construction cost estimates for highrises in Mumbai. Also, we lower our NAVs and factor in only paid-for projects as well as projects where land is already in possession.

Overweight Nifty/Sensex: 5604/18684

We remove some projects, given uncertainty. Although redevelopment entails long gestation, the current regulatory environment in the state increases uncertainty. To incorporate this, we remove projects won but where payment is pending and land is not yet in possession, along with some other projects (SRS, virgin land etc). Revisit construction costs. Based on our interaction with market participants (architects, consultants, developers and contractors), developers have under-estimated construction costs of high-rises in Mumbai and are likely to raise such costs in due course. Plan changes during execution, labor issues, equipment shortages and inexperience with high-rise constructions are key reasons for the rise in costs. We estimate a 7-12% negative impact on NAVs of real estate companies in our coverage. Sales order book high, but credit may get acute. In the past six quarters, Mumbai-based developers in our coverage have sold stock worth +`140bn and received +`38bn. However, they have big-ticket land/project acquisition plans, which is likely to make cash-flow management acute. Price corrections of 15-20% in Mumbai are imminent owing to the RBIs current stance to increase cost of debt and risk weights on commercial realty, as well as the high selling prices. Valuation and risks. Although we reduce our NAVs and price targets for Mumbai-based developers, we are positive on them on account of higher entry barriers, lower acquisition costs and mounting demand. Risks: political uncertainty, credit availability.
Sep'11 Target (`) Mar'12 Target (`) PE(x) FY12e PBV (x) FY12e Mar'12 NAV Option value `/Share

BSE Realty vs Sensex


130 120 110 100 90 80 70 May-10 Sep-10 Nov-10 Mar-10 Jan-10 Jul-10 Jan-11 BSE Realty Sensex

Sector valuation matrix


Company Rating Price (`)

HDIL DB Realty Ackruti City Peninsula Land

Buy Buy Buy Buy

156.0 157.0 238.0 59.5

377.0 564.0 831.0 78.0

234.0 299.0 421.0 81.0

6.8 5.1 7.3 5.5

0.6 0.9 0.9 1.0

288.0 374.0 566.0 81.0

151.6 158.4 329.0 -

Source: Bloomberg, Anand Rathi Research

Prices as of 27 Jan 11

Source: Bloomberg

Anand Rathi Financial Services, its affiliates and subsidiaries, do and seek to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1. Anand Rathi Research India Equities

28 January 2011

Mumbai Property Demand high, but uncertain milieu

We remove some projects, given uncertainty


Mumbai property developers, unlike peers in NCR and Bangalore, primarily use the rehabilitation/redevelopment route for development of property. This involves greater dependence on the regulatory and political machinery. Hence, project durations are lengthened and policy-dependent. Although we estimate longer gestation periods for such projects, given the current changes, we introduce further discounts in certain projects till clarity emerges on policies. Also, we remove from our valuation projects won but where payment is pending and land is not yet in possession, along with some other projects (SRS, virgin land etc). Such changes impact our NAVs and estimates for companies in our coverage. Introduce discounts
On developable area

53% of the organized developers in Mumbai follow the rehabilitation/ redevelopment route to property development

Mumbai-centered property developers largely follow the rehabilitation and redevelopment routes to property development As many as 53% of regulated developers follow this. Although developers are using different routes/schemes for the maximum possible developable area on a plot, approvals for some projects with the same area would be difficult to obtain, given changes in government stance and infrastructure bottlenecks. Such projects could decrease in future or higher premiums would require to be paid. Such delays are likely to increase costs. Given opaqueness in the sector and changes in recent government policies, we introduce a discount till further clarity emerges regarding disclosed projects of the developers.
On projects

We alter our position on development projects announced. We remove from our valuation projects won but where payment is pending and land is not yet in possession, given the potential for delays in land acquisition or in clearances/encroachments. Also, delay in some projects under construction, which could delay/affect rights to land parcels in future, have been removed from our project valuations.
Fig 1 Change in stance SRS / re-development / PPP projects
Company Project Earlier Now Remark

DB Realty Ackruti City HDIL Unitech DB Realty Ackruti City Orbit Corp

Bandra (E) Gov Colony Bandra (E) Gov Colony Airport 65 acres Various Mumbai projects PCMC Gujrat Biotech phase 3 Kilachand House

Development Value Development Value Development Value Development Value Development Value Development Value Development Value

Removed Removed Removed Removed Removed Removed

LoA got, premium not paid yet LoA got, premium not paid yet Delay in shifting, visibility on land not clear Little movement (Ex Golibar, Andheri, Jogeshwari projects) Phase 2 work slow; no visibility on Phase 3 Acquisition to be completed, under llegal process

Development Value Land under possession; approval delayed

Source: Anand Rathi Research

Further, for virgin-land projects, where land has already been acquired but launch visibility is distant, we alter our position to include a certain premium to book value vs. initial development schedules assumed, as done for non-Mumbai developers.

Anand Rathi Research

28 January 2011

Mumbai Property Demand high, but uncertain milieu

Fig 2 Change in stance: virgin land projects


Company Project Earlier Now Remark

DB Realty DB Realty Ackruti City HDIL HDIL DLF

Mira Road Sangamwadi Panvel, Uran Khalapur Vasai - Virar Kochi, Hyd HSIDC

Development Development Premium to book value Premium to book value Book Value Development

Premium to book value Book Value Premium to book value Premium to book value Book Value Book Value paid

Land conversion to be done; launch likely to be delayed Land acquisition still on; land conversion to be done in line with land sold recently in line with land sold recently JDA projects, money paid nil, minimum Land change to be done; 10% of total money paid

Source: Anand Rathi Research

Slum-rehabilitation projects and redevelopment projects in Mumbai also entail more litigation/legal cases than virgin-land projects in Mumbai or other cities. Although property development involves legal hassles, timely clearances are also an issue. Recent regulatory changes
Suburban FSI likely to go up

The government of Maharashta in its winter session in Dec 10 gave inprinciple clearance to increased FSI in suburban Mumbai, from 1 to 1.33. At the same time, it kept the cap of 2 on total development. Although, the official regulation paper has yet to come, this reduces demand for TDR (assuming same construction) by 0.33x. In addition to dependence on construction activity in Mumbai, prices of TDR would depend on the premium charged on FSI in micro-markets. We await clarity on this. Developers affected: HDIL, DB Realty
Rethinking on public parking schemes - DCR 33(24)

The government is also rethinking the higher FSI given in lieu of providing public parking to MCGM (Municipal Corporation of Greater Mumbai) free of cost. This re-consideration takes into account the infrastructure bottlenecks in south-central Mumbai, where most such schemes were cleared. Although projects in the approval stage are likely to be cleared, the area cleared and FSI awarded could change.
Tax exemption for FSI sales, post-rehabilitation

As per an amendment to Finance Bill 2010, slum-rehab projects cleared before Mar 08 and post-rehab FSI sales falling under Sec 80 I(B) would get complete tax benefits. Developers who could avail of such benefits are HDIL and Ackruti City.

Anand Rathi Research

28 January 2011

Mumbai Property Demand high, but uncertain milieu

Construction costs: underestimated


We re-visit our construction-cost estimates for high-rises planned in the city. Our interaction with architects, consultants, contractors and developers lead us to believe that most present project costs have been under-estimated by developers and are likely to be raised, as in the past. Plan changes during execution, labor issues, equipment shortages and lack of experience in high-rise constructions are the key reasons for rise in construction costs. Our NAVs for Mumbai developers, therefore, drop 7-12%. Evaluating cost pressures Looking at construction-cost hikes by developers recently and in the past two years, we met contractors, consultants, architects and developer teams to evaluate construction timelines and costs for proposed high-rises planned or to be constructed in the next few years. We believe developers today have under-estimated construction costs, which would need to be increased 40-90% in coming years.
Fig 3 Increase in construction costs as one goes higher
No of Floors Const Cost (`/ sqft)

Construction-cost estimates could rise 40-90% in the next few years

30 50 70 90 110 130
Source: Industry, Anand Rathi Research

3,000 4,750 6,500 8,250 10,000 11,750

Key reasons for increase in costs

Smaller plot size and large developable area are causing delay in obtaining approvals

Regulatory approvals are the biggest hindrance to starting construction. Equally, the time to finalize plans also leads to delays in construction and rise in prices. Lately, most large developers in Mumbai, particularly those with land parcels in South and South-Central Mumbai, have aimed at developing high-rises (towers of 60 floors and more). These require larger plots and an additional set of clearances. With limited space but higher FSI from other schemes, developers are planning higher developable area and high-rises. Although sellable area is likely to go up, costs of construction would also be higher. According to our interactions, key variables to construction are:

Consultancy. For high-rise construction, architects and consultants charge more, given the other issues such as wind-funnel tests, lifts, infrastructure needs (fire-fighting, water treatment etc) that come into play. Labor. Experienced and equipped labor is required but is scarce. Developers attract ex-pat workers, but these work on a single-project basis. Contractors. Since most developers outsource construction, given the more-than-a-dozen new projects, execution capacity of contractors has to be ramped up, notwithstanding capability. A few developers plan to secure foreign contractors.

Anand Rathi Research

28 January 2011

Mumbai Property Demand high, but uncertain milieu

Equipment/technology. Although new processes are being introduced to replace traditional structural work, their greater efficiency has yet to be proven. This would raise cost effectiveness. With the greater amount of work, such techniques are cheaper.

Fig 4 High-rises coming up in South-Central Mumbai


Company Project Height Proposed (mtrs) Floors Proposed Units

DB Realty DB Realty DB Realty DB Realty DB Realty DB Realty DB Realty DB Realty DB Realty DB Realty Orbit Corp Oberoi Realty Lodha Developers DLF Ackruti City IBREL IBREL IBREL Lokhandwala Prakash Mills Sri Ram Urban IBREL

Crown Heights Turf View Views Enclave 2 Park Enclave 3 Skyz Splendour Central Terraces Oasis World One NTC Mills H Mills Sky Sky Suites Forest Minerva NA Palace Royale Sky Blue

374 394 385 350 350 350 365 350 350 362 360 329 501 375* 250 365* 365* 365* 360* 370* 370* NA
*estimated

56 85 60 60 60 60 72 60 64 62 60 80 111 85 90 75 75 75 65* 80 80* 90*

450 264 300 NA NA 260 189 180 246 164 120 300 993 1,102 NA 110 300 315 334 320 NA 180

Source: Industry, Anand Rathi Research

Anand Rathi Research

28 January 2011

Mumbai Property Demand high, but uncertain milieu

Sales order-book high, but acquisitions to tighten purse


In the past six quarters, the top 4 Mumbai-based listed developers have sold stock worth +`140bn, with receivables of +`38bn. These developers have big-ticket land/project acquisition plans, which are likely to lead to acute cash-flow management. The current RBI stance to increase the cost of debt and risk weights on commercial realty would lessen liquidity. Higher selling prices have hit volumes, and corrections (15-20% in certain micro-markets) are imminent. Sales order book In comfortable zone Larger Mumbai-based developers have sold stock worth +`140bn; with receivables of +`38bn With the uptake in the market and lower prices in 1QFY10, most launched projects then were readily absorbed in the suburbs, with absorption in the island city being investor-led. Across markets, developers have been able to sell projects with higher level of investors in South-Central Mumbai than in Mumbai suburbs.
Fig 5 Sales order book of key Mumbai developers
Developer Sales Value (`m) Till 2QFY11 Cash Received (`m) 3QFY11e Sales Value (`m)

DB Realty HDIL Sunteck Realty Ackruti City Orbit Corp


Source: Anand Rathi Research.

54,582.0 50,000.0 8,618.0 16,800.0 11,335.0

14,820.0 9,820.0 3,430.0 5,395.0 4,957.0

9,000.0 7,500.0 3,500.0 1,500.0 1,500.0

Although we reiterate that there is little ready inventory in South-Central Mumbai at present and for the next two years, given the numerous highticket launches offering more units, we estimate prices in the region to correct the most vs. other sub-regions of the city. Although the western and central suburbs have also seen high price increases, the correction could be less, given differences in ticket size, and shifting of commercial activity towards the suburbs.
Fig 6 Blended average price rises across Mumbai micro-markets
Area (Mumbai) Price rise from March'09 to Dec'10

South South- Central Western Suburbs Central Suburbs


Source: Anand Rathi Research

15% 33% 21% 29%

Although the breakeven of Mumbai developers comes earlier than others (given low land costs), most developers are into land/project acquisitions. With credit becoming harder to come by, developers are likely to correct prices/arrest price hikes. Comfortable balance sheets At least till 2QFY11 With the equity raised in the past few quarters, and with good sales recoverables, the balance sheets of most Mumbai developers have been light, till recently. With the recent bribery issue naming property companies, the RBIs stance on raising weights on commercial loans and
Anand Rathi Research 6

28 January 2011

Mumbai Property Demand high, but uncertain milieu

rates, credit to developers could be difficult. Also, disbursements for sanctioned loans could be delayed.
Fig 7 Comfortable balance sheets at least till date
Developer Gross Debt - 2QFY11 (`bn) Net D/E (x) Repayment in 2HFY11 (`bn)

DB Realty HDIL Sunteck Realty Ackruti City Orbit Corp Oberoi Realty
Source: Anand Rathi Research.

7.0 41.3 5.7 18.1 9.2 -

0.1 0.3 0.9 1.0 1.0 NA

2.2 1.3 1.1 -

Fig 8 Developers
Developer Announced land acquisitions

DB Realty Ackruti City HDIL Orbit Corp HDIL


Source: Anand Rathi Research

Land Acquisitions worth `80bn planned Land Acquisitions worth `3.33bn planned Land acquisition for MIAL project worth `6bn planned Kilachand House Project investments worth `9bn

Anand Rathi Research

28 January 2011

Mumbai Property Demand high, but uncertain milieu

Company Section

Anand Rathi Research

Property

India I Equities

Update
Change in Estimates Target Reco

28 January 2011

HDIL
Looking beyond MIAL; maintain Buy
Though MIAL redevelopment has been steady, shifting of families has been delayed, raising risk for the 65 acres and phases 2&3. Of the funds raised from QIP, and land & FSI sales, we believe HDIL invested ~`9bn in three projects to further derisk MIAL. We rollover our NAV to Mar 12e, lowering it to `255; we trim our price target to `228, at 10% discount to NAV. Buy.

Rating: Buy Target Price: `228 Share Price: `156

MIAL project. Shifting of families in phase 1 is likely to lag due to issues at the government level (undecided cut-off dates of tenants) and resistance to shifting by some sections. This raises risk on the 65acre airport land and development of phases 2&3. Utilizing cash, de-risking business. The +`15bn cash built up on the balance sheet was used to acquire projects, investing `9bn in three projects. This would add another 47-50m sqft land bank (of which, 29m sqft would be in Mumbai City). As projects are large, we await further clarity before assigning value to them. Change estimates. Our NAV is impacted by removal of 65 acres of free-sale land in MIAL, part of phase 2, and phase 3 from valuation due to lack of land visibility and adding a discount to some under-construction slum-rehab projects in Mumbai. For now, the new acquisitions are taken at cost. Valuation and risks. Our Mar 12e NAV is `274 and target price is `247, which is at 10% discount to NAV. At CMP, the stock trades at 0.7x Mar 12e PBV. Key risk: slowdown in execution.

Key data
52-week high/low Sensex/Nifty 3-m average volume Market cap Shares outstanding Free float Promoters Foreign Institutions Domestic Institutions Public

HDIL IN/HDIL.BO `345/`152 18684/5604 US$27m `64bn/US$1405m 415m 61.4% 38.6% 39.3% 0.5% 21.6%

Key financials
Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Relative price performance


17,284 7,866 15.4 (52.0) 10.5 1.6 16.8 10.1 92.0 15,021 5,666 13.0 (15.5) 12.4 1.0 10.0 7.3 47.0 22,991 7,188 16.3 25.6 9.9 0.8 8.7 8.0 27.9
Prices as of 27 Jan 11

Sales (`m) Net profit (`m) EPS (`) Growth (%) PE (x) PBV (x) RoE (%) RoCE (%) Dividend yield (%) Net gearing (%)
Source: Company, Anand Rathi Research

26,262 10,094 22.9 40.4 7.0 0.6 9.9 10.3 19.4

22,560 9,565 21.7 (5.2) 7.4 0.6 8.4 8.9 21.3


Source: Bloomberg

450 400 350 300 250 200 150 Jan-10 Mar-10 Jul-10 Sep-10 May-10 Nov-10 Jan-11 HDIL Sensex

Anand Rathi Financial Services Limited does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1 Anand Rathi Research India Equities

28 January 2011

HDIL Looking beyond MIAL; maintain Buy

Quick Glance Financials and Valuations


Fig 1 Income statement (`m)
Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Fig 4 PE Band
22,991 53.1 11,660 9,722 42.3 724 76 414 2,147 7,188 25.6 7,188 16.3 16.5 26,262 14.2 10,449 14,238 54.2 1,166 109 497 3,365 10,094 40.4 10,094 22.9 23.1 22,560 (14.1) 7,510 13,696 60.7 1,170 273 500 3,188 9,565 (5.2) 9,565 21.7 22.3 1,400 1,200 1,000 40x 800 HDIL 600 400 200 0 Oct-07 Oct-08 Oct-09 Jan-08 Jan-09 Jan-10 Oct-10 Jan-11 Jul-07 Jul-08 Jul-09 Apr-08 Apr-09 Apr-10 Jul-10 32x 24x 16x 8x

Net sales Sales growth (%) - Op. expenses EBITDA EBITDA margins (%) - Interest - Depreciation + Other income - Tax PAT PAT growth (%) Consolidated PAT FDEPS (`/share) CEPS (`/share) DPS (`/share)

17,284 (27.4) 8,358 7,797 45.1 582 25 540 943 6,772 (52.0) 7,866 15.4 17.9 -

15,021 (13.1) 6,186 7,893 52.5 462 724 345 1,330 5,722 (15.5) 5,666 13.0 14.5 -

Source: Company, Anand Rathi Research

Source: Bloomberg, Anand Rathi Research

Fig 2 Balance sheet (`m)


Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Fig 5 Price-to-Book Band


3,588 66,840 70,429 41,017 63 0 111,509 4,638 2,429 96,513 7,918 111,509 358.8 47.0 4,150 89,731 93,881 36,217 63 0 130,161 5,050 2,429 112,684 9,998 130,161 415.0 27.9 4,410 104,928 109,338 35,562 63 0 144,963 6,323 2,429 121,856 14,355 144,963 441.0 19.4 4,410 114,493 118,903 36,423 63 0 155,389 14,050 2,429 127,779 11,131 155,389 441.0 21.3
1,200 1,000 800 HDIL 600 400 200 0 Jan-08 Jan-09 Jan-10 Jan-11
Jan-11

Share capital Reserves & surplus Shareholders fund Debt Def Tax Liab (net) Minority interests Capital employed Fixed assets Investments Working capital Cash Capital deployed No. of shares (m) Net Debt/Equity (%)

2,755 41,463 44,218 41,433 30 0 85,682 1,228 2,491 81,202 755 85,682 275.5 92.0

2.5x 2.0x 1.5x 1.0x 0.5x Jul-07 Jul-08 Jul-09 Oct-07 Oct-08 Oct-09 Jul-10
Nov-10

Source: Company, Anand Rathi Research

Source: Bloomberg, Anand Rathi Research

Fig 3 Cash flow statement (`m)


Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Fig 6 HDIL vs BSE Realty


7,188 88 7,276 16,171 (8,895) 489 (9,384) 16,264 (4,800) 0 2,081 7,918 9,998 10,094 109 10,203 9,172 1,032 1,382 (350) 5,363 (655) 4,357 9,998 14,355 9,565 273 9,838 5,923 3,915 8,000 (4,085) (0) 861 (3,224) 14,355 11,131
400 BSE Realty 350

Consolidated PAT + Non Cash Items Cash profit - Incr/(Decr) in WC Operating cash flow - Capex Free cash flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash flow + Opening cash Closing cash

7,866 5,666 635 690 8,501 6,355 19,775 15,311 (11,274) (8,956) 566 4,134 (11,840) (13,090) (63) 20,545 10,306 (416) 576 (62) (24) 0 (2,750) 7,163 3,505 755 755 7,918

300

250 HDIL 200

150 Jan-10 Jun-10 Aug-10 Sep-10 Mar-10 Feb-10 Jul-10 May-10 Dec-10 Apr-10 Oct-10

Source: Company, Anand Rathi Research

Source: Bloomberg

Anand Rathi Research

Oct-10

Apr-08

Apr-09

Apr-10

10

28 January 2011

HDIL Looking beyond MIAL; maintain Buy

MIAL: Shifting worries


Shifting of families in phase 1 is likely to lag due to issues at the government level (undecided cut-off dates of tenants etc) and resistance to shifting of families by some sections. This raises risk on the 65acre airport land and development of phases 2&3. Hence, we remove the aforementioned projects from our valuation. MIAL project
Phase 1: Shifting of families

Shifting of families is the responsibility of the MMRDA

Shifting of families in phase 1 of the MIAL project has been delayed by over a year. Initially to be completed before Feb 10, shifting of families has been since delayed to Apr 11 for want of water connections by local government agencies, legitimacy of families staying on MIAL land and conflict among government agencies regarding this, and resistance of certain societies to shift. We understand that shifting of the families is the responsibility of the MMRDA (a Government body). On the part of HDIL, it has handed over more than 9,000 units at its Kurla site (phase 1) to shift the tenants. Units under construction for phase 1 and part of phase 2 are 33,000. The delay is mainly owing to undecided cut-off dates of tenants and resistance to shifting by some sections.
TDR generation; right on 65 acres of land

TDR generation of up to 98% depends on construction milestones; 2% depends on defect liability, up to six months after shifting of families to rehab buildings. Hence, generation of TDR is largely independent of the shifting of families. TDR prices, we believe, depend on construction activity Although the official government rule has yet to come, we believe that the state government clearance in Dec 10 to amend FSI in suburban Mumbai from 1 to 1.33 would have little impact on TDR pricing. The cost of additional FSI (0.33x) would depend on how the government charges it with respect to the ongoing ready reckoner rates in each micro-market. We re-iterate that TDR prices depend on construction activity in Mumbai.
Fig 7 TDR generation and sales
FY09 FY10 FY11e FY12e FY13e FY14e

Generated Sold Avg SP


Source: Anand Rathi Research

5.6 2.0 1,100.0

4.8 6.8 2,150.0

4.3 4.7 2,700.0

3.3 2.5 2,400.0

7.3 4.9 2,200.0

2.9 5.1 2,500.0

We exclude value assigned to 65 acres of leasehold land since land has yet to be transferred to HDIL

In FY12, TDR sales would also depend on the amount of construction required for MIAL phase 2 and land conveyed to the SRA for subsequent locations. On the company selling the Andheri (E) land parcel recently, we await more clarity on phase 2 projects. We estimate that HDIL, postconstruction-commencement at Mahul, may also start rehab construction in the eastern suburbs, provided it gets some clarity regarding shifting of families in MIAL project. The 65 acres to be allotted to HDIL, on which it plans to develop 10m sqft of commercial space, depends on families shifting from encroached airport land. Given the delay/uncertainty in shifting, we exclude the 10m sqft development potential from our NAV.
11

Anand Rathi Research

28 January 2011

HDIL Looking beyond MIAL; maintain Buy

Utilizing cash, de-risking business


The +`15bn cash built up on the balance sheet has been used to acquire different projects, spending `9bn. This would add another 47-50m sqft to projects (of which, 29m sqft in Mumbai City). As the projects are large, we await further clarity before assigning further value to the projects. A comfortable balance sheet today
FSI / land sales

Over and above its recurring TDR and FSI sales (in Vasai and Virar), HDIL also sold 1m sqft of FSI in suburban Mumbai (the Siddharth Nagar project) and a land parcel in Andheri East (Popular Car Bazaar) for `14bn combined. This money would be realized in the next 2-4 quarters, provided certain redevelopment commitments and approval processes are fulfilled.
Fig 8 Land bought vs. land/FSI sales in the past few years
Period Projects acquired Amount (`bn) Area (m sqft)

3QFY11
Period

3 projects acquired
Land sold

9.0
Amount (`bn)

47-50
Area (m sqft)

Q3FY11 Q2FY11 Q2FY11 Q1FY11 FY10


Source: Company

Popular Car Bazaar FSI/TDR MMR/Mumbai FSI Sold (Siddharth Nagar) FSI/TDR MMR/Mumbai FSI/TDR MMR/Mumbai

8.0 2.9 6.0 3.0 17.0

0.4 1.0 1.0 1.1 6.5

With this, although the company has altered its original stance of selling FSI/land, realization from such high sales would keep it comfortable vs. Mumbai peers.
Adding to 2QFY11 cash

`36.5bn has been raised through

equity in the past 24 months

The aforementioned sales would add to the 2QFY11 cash balance, already high owing to the QIP (`11.5bn) and warrant premium (`1.78bn). This would have set HDIL as one of the better-placed listed large developers in connection with its balance sheet, with net D/E of 0.2x in Mar 11e.
Fig 9 Equity raised, post-IPO
Date Quarter Amount raised (`bn) Route

5.4 9-Sep-10 13-Sep-10 29-Jul-10 28-May-10 31-Mar-10 12-May-09


Source: Company

Warrant money to be received in next 12months Warrants Premium received (25% money received) QIP Warrant Conversion (Allotted in Jun 09) Warrant Conversion (Allotted in Jun 09) Warrant Conversion (Allotted in Jun 09) QIP

2Q11 2Q11 2Q11 1Q11 4Q10 1Q10

1.8 11.6 1.2 1.9 3.1 16.9

Anand Rathi Research

12

28 January 2011

HDIL Looking beyond MIAL; maintain Buy

Focusing on suburban residential projects From Mar 09 to Dec 10e, HDIL launched and sold stock in Mumbai suburbs worth `57bn. Its focus has been on suburban locations (as against the major focus of listed peers, of South-Central Mumbai) at a discount to its competitors. Its recent launch of entry-level housing in Palghar (the Mumbai Metropolitan Region) saw sales of ~`7bn (over 6,000 units).
Fig 10 Launched residential projects
Project Location Area (sq ft) Remark

Premier Residency Galaxy Metropolis Majestic Residency Park Harmony Meadows Whispering Towers Paradise City 1 Paradise City 2
Source: Company *Estimated

Kurla (W) Kurla (E) Andheri (W) Bhandup Virar (W) Goregaon (W) Goregaon (W) Mulund (W) Palghar Palghar

100,000 475,000 650,000 1,300,000 1,250,000 43,568 1,000,000 800,000 290000* 290000*

Const on; majority sold out Const on; majority sold out Const on; majority sold out Const on; 40% sold Const on; majority sold out Const on; majority sold out Const on; 70% sold Const on; 40% sold Const to start; 95% sold Const to start; 20% sold

According to its 2QFY11 presentation, HDIL plans to launch 27m sqft of residential projects in the next 2-3 quarters. Residential projects, usually requiring negative working capital, would add to its cash book.
Fig 11 Planned project launches
Project Location Area (sq ft) Remark

Ekta Nagar Palghar P3/4 Whispering Towers P2 Meadows P2 Daulat Premier Residency 2 Ghatkopar Kochi
Source: Company

Kandivili Palghar Mulund Goregaon (W) Santacruz Kurla Ghatkopar (E) Kochi

1,500,000 5000000* 800,000 3,600,000 800,000 800,000 509,457 6,299,640

Approvals Stage Approvals Stage Post substantial Phase 1 sales Post substantial Phase 1 sales Rehab on; legal issues

New mega projects acquired HDIL has recently acquired three projects (one slum rehab, one redevelopment and one virgin land). Investment in the acquisition is `9bn as of date.
Fig 12 New projects acquired: ~`9bn paid
Project Location Free-sale Redevelopment Remark

Malvani SRS SVP Nagar Biosar


Source: Company

Malad (W)

25-28m sqft

25,000 families 98 buildings -

Andheri (W) 4m sqft Biosar 18-20m sqft

3K' approval; 25% land premium paid; 67% stake acquired Prime western suburb property Affordable, Entry level housing to be launched

In the Malvani project at Malad, HDIL acquired a 67% stake in Lashkariya Construction. The project is to be developed over 70-80 acres, rehabilitating ~25,000 families. We understand the project has already received 3K approval from the state government and HDIL has paid a 25% premium to the SRA. It has estimated sellable area of 25-28m sqft.
13

Anand Rathi Research

28 January 2011

HDIL Looking beyond MIAL; maintain Buy

HDIL has also acquired redevelopment rights to SVP Nagar in Andheri (W) for 98 buildings and ~3,200 and 3,500 families. Management expects this to generate ~4m sqft of saleable area. The third land parcel acquired is ~400 acres at Boisar, a distant suburb in the MMR on the western side. We believe HDIL would launch an affordable/entry-level housing project here on the lines of the Palghar project launched in 3QFY11. We estimate this project to have a potential sellable area of 18-20m sqft. Management intends to launch it in the next six months.

With these three acquisitions, the company has maintained its focus on slum rehabilitation and the Mumbai suburban mass market. Although the aforementioned projects add between 47m and 50m sqft of sellable area, we await further clarity on launch plans and status of the SRS and redevelopment projects. Both are huge and could take 7-9 years.

Anand Rathi Research

14

28 January 2011

HDIL Looking beyond MIAL; maintain Buy

Change in estimates
Our NAV is impacted by removal of 65 acres of free-sale land in MIAL, part of phase 2, and phase 3 from valuation due to lack of land visibility and adding a discount to some under-construction slum-rehab projects in Mumbai. For now, the new acquisitions are taken at cost Valuation We have removed the 10m sqft development (from the 65 acres of MIAL land) from our development schedule, owing to delays or uncertainties in shifting pf families. The impact on our NAV would be 18% We remove MIAL phase 3 development schedule value on account of ongoing land acquisition (land payment) and clarity regarding phase 2 rehab construction. The impact on our NAV would be 13%
Fig 13 Valuation: Mar12e
NAV Mar12 (`m) (`/share)

Slum Rehab MIAL Project Rental Housing MMR (incl Mumbai) Other Cities Residual Land Hotels Net Debt 3 new projects still considered at cost Total
Source: Anand Rathi Research

39,860 32,716 10,664 18,819 7,435 14,272 821 (21,207) 9,000 120,881

90 74 24 43 17 32 2 (48) 21 255

For valuation, we have considered only visible projects in SRS

Fig 14 Optional value as of Mar '12


NAV Mar12 MIAL - part pf P2 MIAL P3 65 acre of MIAL
Source: Anand Rathi Research (`m) (`/share)

9,785.0 23,914.0 33,163.3

22.2 54.2 75.2

We have assumed development schedules for slum rehab schemes/ redevelopment schemes. To take into account uncertainties in certain projects, e.g., Bandra (E) SRS 1, we introduce a discount of 15%.
Fig 15 Slum projects with development uncertainty
Project Location Area (sqft) Value Discount Remark

Bandra (E) SRS 1 Bandra (E) SRS 2 Malad (E) BKC Dev Kammanwar Nagar Daulat Nagar

Bharat Nagar Malad (E) Off WE highway Vikroli Santacruz

1,882,756.0 159,074.0 117,205.0 350,000.0 350,000.0 800,000.0

13,200.0 1,186.0 479.0 1,780.0 490.0 4,106.0 15%

Environment clearance done, shifting issues Environment clearance done, shifting issues NA LoI received Redevelopment ongoing Transit const on

Source: Company Anand Rathi Research

Anand Rathi Research

15

28 January 2011

HDIL Looking beyond MIAL; maintain Buy

For planned (announced) launches in 2QFY11, we assume a development schedule other than JDAs, and JDAs where deposit has been paid. For its land bank in Vasai, Virar, and other cities, we assign a certain premium to book value of acquisition (as taken before). For our valuation, we have taken cost of equity as 19%, cost of debt as 13% and WACC of 15%. Risks Although we have taken into account delays in our MIAL assumptions, a change in government policy could affect the project and, hence, value. A slowdown in construction in Mumbai could affect the TDR market (9% contribution) Slowdown in sales

Anand Rathi Research

16

28 January 2011

HDIL Looking beyond MIAL; maintain Buy

Financials
HDIL is changing to the percentage-completion method of accounting from 1QFY12 HDIL follows the project-completion method of accounting. It is shifting to the percentage-completion method 1QFY12 onwards. We await further clarity on the threshold limit, and on percent of work on projects completed, in order to effect changes in our reporting format. FY11 Revenue recognized. In addition to TDR and FSI sales, we have estimated that HDIL would recognize revenue from the sale of FSI (of 1m sqft) in Siddharth Nagar, Goregaon (W) and from the sale of the Andheri (E) land parcel in FY11. Inventory. Given the companys accounting policy, all costs on projects not delivered would show in inventories. Besides, we believe HDIL has paid for other projects/land to be acquired and in acquisition/sanitization phases; e.g., BKC Developers, Novinon Land parcels acquisition, redevelopment project in Vikhroli etc., still to be announced for sale. Investment in this is likely to be over `15bn. Although such projects are likely to add more value, further clarity is required.
Fig 16 Inventories vs. customer advances
(`m) 140,000 120,000 100,000 80,000 15,000 60,000 40,000 20,000 0 FY11e FY12e FY13e FY09 FY10 10,000 5,000 0 (`m) 30,000 25,000 20,000

Cash increase is assuming no further land acquisition than announced

Inventory
Source: Company, Anand Rathi Research

Cust Advances

Cash (RHS)

Anand Rathi Research

17

28 January 2011

HDIL Looking beyond MIAL; maintain Buy

Fig 17 Income statement (`m)


Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Revenue - Op. expenses - Employee Costs - Other Administrative EBIDTA - Interest - Depreciation + Other income - Tax PAT + Minority Interests + Share of profit from Associates Consolidated PAT Dividend FDEPS (` / share) CEPS (` / share) DPS (` / share) BV (` / share) Shares outstanding Growth Rates Revenue (%) EBIDTA (%) Net PAT (%) Diluted EPS (%) FY10-13e Revenue CAGR (%) FY10-13e EBITDA CAGR (%) FY10-13e EPS CAGR (%) Margins EBIDTA (%) EBIT (%) Net Profit (%)
Source: Company, Anand Rathi Research

17,284 8,358 221 908 7,797 582 25 540 943 6,787 0 7,866 15.4 17.9 100.3 275.5 (27.4) (49.9) (51.9) (52.0)

15,021 6,186 285 658 7,893 462 724 345 1,330 5,722 0 5,666 13.0 14.5 159.7 358.8 (13.1) 1.2 (15.5) (15.5)

22,991 11,660 345 1,264 9,722 724 76 414 2,147 7,188 7,188 16.3 16.5 212.9 415.0 53.1 23.2 25.6 25.6

26,262 10,449 525 1,050 14,238 1,166 109 497 3,365 10,094 10,094 22.9 23.1 247.9 441.0 14.2 46.5 40.4 40.4

22,560 7,510 451 902 13,696 1,170 273 500 3,188 9,565 9,565 21.7 22.3 269.6 441.0 (14.1) (3.8) (5.2) (5.2) 14.5 20.2 19.1

45.1 45.0 45.5

52.5 47.7 37.7

42.3 42.0 31.3

54.2 53.8 38.4

60.7 59.5 42.4

Anand Rathi Research

18

28 January 2011

HDIL Looking beyond MIAL; maintain Buy

Fig 18 Balance sheet (`m)


Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Sources of Funds Share capital Reserves & surplus Shareholders fund Debt Deferred Tax Liab (net) Minority interests Capital employed Application of Funds Gross Fixed Assets Less: Depreciation Net Fixed Assets Capital Work in Progress Investments Goodwill Current Assets Inventories Debtors Loans and Advances Current Liab and Provisions Net Current Assets Working Capital Cash Capital deployed No. of shares (m) Net Debt/Equity (%)
Source: Company, Anand Rathi Research

2,755 41,463 44,218 41,433 30 0 85,682 654 56 598 152 2,491 478 69,128 1,669 17,077 6,693 81,957 81,202 755 85,682 275.5 92.0

3,588 66,840 70,429 41,017 63 0 111,509 1,937 107 1,830 217 2,429 2,591 87,567 2,030 15,649 8,761 104,431 96,513 7,918 111,509 358.8 47.0

4,150 89,731 93,881 36,217 63 0 130,161 2,426 183 2,243 217 2,429 2,591 97,823 6,897 30,711 22,775 122,682 112,684 9,998 130,161 415.0 27.9

4,410 104,928 109,338 35,562 63 0 144,963 3,808 292 3,516 217 2,429 2,591 108,908 7,879 34,039 28,998 136,211 121,856 14,355 144,963 441.0 19.4

4,410 114,493 118,903 36,423 63 0 155,389 11,807 565 11,242 217 2,429 2,591 122,791 3,384 37,803 36,227 138,910 127,779 11,131 155,389 441.0 21.3

Fig 19 Cash flow statement (`m)


Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Consolidated PAT + Depreciation + Deferred Tax + Other non cash Cash profit - Incr/(Decr) in WC Operating cash flow - Capex Free cash flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash flow + Opening cash Closing cash
Source: Company, Anand Rathi Research

7,866 41 9 585 8,501 19,775 (11,274) 566 (11,840) (63) 10,306 576 (24) (2,750) 3,505 755

5,666 724 27 (62) 6,355 15,311 (8,956) 4,134 (13,090) 20,545 (416) (62) 0 7,163 755 7,918

7,188 76 12 7,276 16,171 (8,895) 489 (9,384) 16,264 (4,800) 0 2,081 7,918 9,998

10,094 109 10,203 9,172 1,032 1,382 (350) 5,363 (655) 4,357 9,998 14,355

9,565 273 9,838 5,923 3,915 8,000 (4,085) (0) 861 (3,224) 14,355 11,131

Anand Rathi Research

19

28 January 2011

HDIL Looking beyond MIAL; maintain Buy

Fig 20 - Ratio analysis @`156


Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Valuations P/E P / BV M Cap / Sales EV / Sales EV / EBIDTA Dividend Dividend yield (%) Dividend payout (%) Leverage Net Debt / Equity Int Coverage Return Ratios ROE (%) ROCE (%)
Source: Company, Anand Rathi Research

10.5 1.6 2.6 4.8 10.6

12.4 1.0 3.8 5.9 11.2

9.9 0.8 2.9 3.9 9.3

7.0 0.6 2.7 3.4 6.3

7.4 0.6 3.1 4.2 6.9

92 13

47 16

28 13

19 12

21 11

16.8 10.1

10.0 7.3

8.7 8.0

9.9 10.3

8.4 8.9

Anand Rathi Research

20

Property

India I Equities

Update
Change in Estimates Target Reco

28 January 2011

DB Realty
A non-real-estate quarter; maintain Buy
In light of impact of recent events on DBRLs property business, we see some short-term credit issues. Three projects were softlaunched in Sep 10; the major projects under construction are debt free. We change estimates on removal/changes in some projects, in view of payments and regulatory approvals. Our Mar 12e NAV is `374 and we trim our price target to `299. Buy.

Rating: Buy Target Price: `299 Share Price: `157

Non real-estate issues; impact on business. In the past two months, DBRLs stock price sharply plunged, impacted by events related to telecom (same promoters, different company) and the loan-bribery issue. Other promoter company events do not have any quantitative impact on the balance sheet, but could affect sales. Recent government changes could lead to project delays. Balance sheet strong, but acquisitions to cause cash crunch. Debt was `7bn in Sep 10, with no scheduled principal repayments for FY11. Combined project debt of its 3 key projects is <`350m, with sales of +`33.5bn. But recent events could raise short-term credit issues, especially with huge project/land payments planned. Change estimates. We remove the Bandra (E) project, where premium has yet to be paid (impact on NAV: 16%). We shift Pune and Mira Road townships to residual land (land acquisition and clearance pending; impact on NAV: 9%). We re-visit our construction cost estimates (impact on NAV: 11%). Valuation and risks. Our Mar 12e NAV is `374 and target price is `299. At current market price, the stock trades at 0.9x Mar 12e PBV. Risks. Liquidity tightening, slowing sales, policy changes.

Key data
52-week high/low Sensex/Nifty 3-m average volume Market cap Shares outstanding Free float Promoters Foreign Institutions Domestic Institutions Public

DBRL IN/DBRL.BO `540/156 18684/5604 US$4.6m `38bn/US$834m 243.3m 35.9% 64.1% 6.3% 2.3% 27.3%

Key financials
Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Relative price performance


4,644 1,417 5.8 NA NA NA 18.7 12.9 142.8 9,512 2,520 10.4 77.9 15.2 1.3 14.1 15.1 16.7 14,630 3,912 16.1 55.2 9.8 1.1 13.2 16.7 0.3 40.1
Prices as of 27 Jan 11

Sales (`m) Net profit (`m) EPS (`) Growth (%) PE (x) PBV (x) RoE (%) RoCE (%) Dividend yield (%) Net gearing (%)
Source: Company, Anand Rathi Research

30,746 7,516 30.9 92.1 5.1 0.9 20.7 26.9 0.6 28.3

43,141 13,097 53.8 74.3 2.9 0.7 32.9 42.6 0.6 21.5
Source: Bloomberg

600 450 300 150 Jun-10

Sensex

DB Realty

Nov-10

May-10

Anand Rathi Financial Services Limited does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1 Anand Rathi Research India Equities

Dec-10

Mar-10

Aug-10

Sep-10

Feb-10

Jan-11

Jul-10

Oct-10

Apr-10

28 January 2011

D B Realty A non-real-estate quarter; maintain Buy

Quick Glance Financials and Valuations


Fig 1 Income statement (`m)
Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Fig 4 PE Band
14,630 53.8 7,521 6,583 45.0 571 88 1,659 4,265 57.3 3,912 16.1 16.4 0.5 30,746 110.1 17,008 12,847 41.8 861 94 4,043 7,849 84.0 7,516 30.9 31.3 1.0 43,141 40.3 17,205 24,729 57.3 764 120 8,107 15,738 100.5 13,097 53.8 54.3 1.0
800 700 600 500 400 300 200 100 0 Oct-10 Nov-10 Dec-10 Aug-10 Sep-10 Jun-10 May-10 Mar-10 Jan-11 Apr-10 Jul-10 5x 15x 10x 25x 20x

Net sales Sales growth (%) - Op. expenses EBITDA EBITDA margins (%) - Interest - Depreciation + Other income - Tax PAT PAT growth (%) Consolidated PAT FDEPS (`/share) CEPS (`/share) DPS (`/share)

4,644 NA 2,064 2,258 48.6 747 74 68 67 1,438 NA 1,417 5.8 6.1 -

9,512 104.8 5,470 3,655 38.4 726 96 291 413 2,712 88.5 2,520 10.4 10.7 -

Source: Company, Anand Rathi Research

Source: Bloomberg, Anand Rathi Research

Fig 2 Balance sheet (`m)


Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Fig 5 Price-to-Book Band


2,433 28,054 30,486 5,948 (2) 745 37,177 219 8,941 27,157 860 37,177 243 16.7 2,433 31,823 34,256 13,748 (2) 745 48,747 180 5,191 36,376 7,000 48,747 243 40.1 2,433 39,055 41,488 11,748 (2) 745 53,979 234 5,191 37,770 10,784 53,979 243 28.3 2,433 51,868 54,301 11,655 (2) 745 66,698 219 5,191 42,771 18,518 66,698 243 21.5
900 800 700 600 500 400 300 200 100 0 Aug-10 May-10 Sep-10 Mar-10 Oct-10 Apr-10 Jul-10 Nov-10 Dec-10 Jun-10 Jan-11
Dec-10 Jan-11

Share capital Reserves & surplus Shareholders fund Debt Def Tax Liab (net) Minority interests Capital employed Fixed assets Investments Working capital Cash Capital deployed No. of shares (m) Net Debt/Equity (%)

91 8,023 8,114 12,357 4 553 21,028 223 2 20,028 769 21,028 9 142.8

5x 4x 3x DBRL 2x 1x

Source: Company, Anand Rathi Research

Source: Bloomberg, Anand Rathi Research

Fig 3 Cash flow statement (`m)


Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Fig 6 DB Realty vs BSE Realty


3,912 88 4,000 9,219 (5,219) 49 (5,268) 142 (0) 7,800 (3,750) (0) 6,140 860 7,000 7,516 94 7,611 1,394 6,217 149 6,068 285 (2,000) 3,784 7,000 10,784 13,097 120 13,217 5,001 8,216 104 8,112 285 (93) 7,734 10,784 18,518
600 BSE Realty 500

Consolidated PAT +Non Cash Items Cash profit - Incr/(Decr) in WC Operating cash flow -Capex Free cash flow -Dividend + Equity raised + Debt raised -Investments -Misc. items Net cash flow +Opening cash Closing cash

1,417 77 1,494 9,131 (7,637) 150 (7,787) (585) 6,327 (1,783) 5 (268) 1,037 769

2,520 90 2,609 7,130 (4,520) 91 (4,611) 19,853 (6,409) 8,938 (5) 92 769 860

400 DB Realty 300

200

100 Feb-10 May-10 Apr-10 Jul-10 Oct-10 Nov-10 Aug-10 Sep-10 Mar-10 Jun-10

Source: Company, Anand Rathi Research

Source: Bloomberg, Anand Rathi Research

Anand Rathi Research

22

28 January 2011

D B Realty A non-real-estate quarter; maintain Buy

Non-real-estate issues; evaluating business impact


In the past two months, DBRLs stock price has reacted sharply to events related to telecommunications (same promoters, different company) and the loan-bribery issue. Other promoter company events, we believe, do not have any quantitative impact on the companys balance sheet, but could affect sales. Recent government changes in the state could result in project delays (as with other developers in Mumbai). Key events
Probe in 2G spectrum allotment DB Realty link

DBRLs link with other promoter companies is only the corporate guarantees provided by it

DBRL promoters run/own three businesses through separate entities real-estate under DB Realty, hospitality under D B Hospitality, and telecoms, a JV with Etisalat under Etisalat DB Telecoms (Pvt). DB Realty has provided corporate guarantees for loans taken by its group companies, of `14.7bn. These guarantees have been provided since the last two years, also pointed out as risks in our report Mumbai Property: The old order changeth, yielding place to new dated 4 Oct 10. Over and above this, the company has a minority stake in a hospitality project in DIAL.
Fig 7 Etilisat DB: Extract from FY10 balance sheet (`m)

`15.7bn, while liability to creditors is `19.8bn

Fixed assets include license fees of

Liabilities

FY09

FY10

Shareholders Funds Reserves & Surplus Net Worth Gross Debt D/E Net D/E Assets Fixed Assets Investments Cash & Equivalents Net CA
Source: Registrar of Companies (RoC)

2,527 40,792 43,318 3 0.00 (0.58)

2,527 40,780 43,307 575 0.01 (0.37)

The promoters in their personal capacity have provided guarantees of `16.75bn and US$138m each

17,933 1,095 25,340 43,321

43,033 16,458 43,882

In addition to the guarantee provided by the company, both managing directors have provided personal guarantees of `16.57bn and US$138m each in the telecoms and hospitality businesses respectively. The net worth of the telecoms company is `40bn and cash on its books is ~`15bn.The hospitality company has a net worth of `5.5bn, with debt of ~`1.5bn.

Anand Rathi Research

23

28 January 2011

D B Realty A non-real-estate quarter; maintain Buy

Fig 8 DB Hospitality: Extract from FY10 balance sheet (`m)


Liabilities FY09 FY10

Shareholders Funds Reserves & Surplus Net Worth Gross Debt D/E Net D/E Assets Fixed Assets Investments Cash & Equivalents Net CA
Source: RoC

494 5,044 5,538 1,321 0.24 0.23

494 5,018 5,512 3,904 0.71 0.69

2,456 1,469 28 2,908

4,608 1,623 112 3,185

Although the corporate guarantees provided by DBRL are huge, given its balance sheet, we believe there would be no material impact on the performance of the company nor a strain on its balance sheet. Loan bribery case DBRLs name also came up in the recent loan bribery event, for `1.88bn drawn from LIC Housing Finance through a market intermediary. The company has clarified its position regarding the issue. We believe this to be a non-event for DBRL. But, given the present environment, we believe credit would turn expensive and sanctions and disbursals would be difficult in the near term. Although the balance sheet is net cash (2QFY11) and DBRL has a sales order book of over `40bn, its huge project/land acquisition spending would slow down, given the low availability of credit and requirement of cash in hand for working capital.

Anand Rathi Research

24

28 January 2011

D B Realty A non-real-estate quarter; maintain Buy

Balance Sheet
Debt stood at `7bn as of Sep 10, with no scheduled principal repayments in FY11 and `1.96bn in FY12. The balance sheet in Nov 10 was largely net cash, and three key projects Orchid Crown, Orchid Heights and Orchid Turf View have combined project debt of less than `350m, with sales of over `35.2bn. Recent events could lead to near-term credit issues, given the huge project/land payments planned. Balance sheet not strained, but credit flow important With the `15bn raised though its IPO in 4QFY10, the company was net cash in Sep 10. Although it had no scheduled debt repayments in FY11 (after repaying `800m to IDFC as stated as the object of the IPO), it has, in addition, already repaid ~`3bn of debt as of Nov 10. Scheduled repayment in FY12 is ~`1.96bn.
Fig 9 Debt details
Project Debt on books (`m) From

Heights Woods

344.7 1,300.0 2,431.5 7,090.0


*as of Nov '10

Public Sector Banks Private Sector Bank MNCs, PSBs

Receivables from sold stock are ~`40bn; the current value of unsold stock is `86.5bn

Corporate Sanctioned to draw


Source: Company

Sales order book good In the past six quarters, till Sep 10, DBRL launched and sold stock worth ~`64bn. It also soft launched/launched a few projects in 3QFY11. We estimate DBRL to have sold stock worth +`9bn in 3QFY11.
Fig 10 Sales value vs. value realized
Project Value Sold (`m) Amount Received (`m) (%) Received

Mahul Nagar Orchid Woods Orchid Suburbia Orchid Ozone Orchid Crown Orchid Hills Orchid Heights Orchid Turf View
Source: Company

11,784.0 7,500.0 3,615.0 8,734.0 14,821.0 1,535.0 11,122.0 5,095.0

9,504.0 4,790.0 1,343.0 1,717.0 2,957.0 1,500.0 1,636.0 1,452.0

81% 64% 37% 20% 20% 98% 15% 28%

In 3QFY11, DBRL soft-launched/launched five projects in Pune and Mumbai. Certain projects are subsequent phases of the under-construction projects.

Anand Rathi Research

25

28 January 2011

D B Realty A non-real-estate quarter; maintain Buy

Fig 11 3QFY11: New projects launched


Project Location Launch price (`/ sqft)) ARG Estimate of Avg price (`/ sqft) Remark

Orchid Turfview - Wing D Paradise View Golf View Centre


Source: Company

Mahalaxmi Bandra (E) Mumbai Central Pune Pune

40,000 17,000 17,900 9,000 -

35,315 20,950 17,520 9,740 -

Tower A&B - const started Project acquired recently Rehab shifting to start Excavation started Construction started

We revise our sales and sales duration estimates for a few projects, as the launched prices are above our estimated average selling prices.
Fig 12 Changes in project assumptions
Project Previous avg SP (`/sqft) New Avg SP (`/ sqft) Remark

Turf View Golf View

35,315 5,870

37,500 9,740

Prolonged project sales; to sell till FY18 Launched at higher price and less units; project divided into phases

Source: Anand Rathi Research

Anand Rathi Research

26

28 January 2011

D B Realty A non-real-estate quarter; maintain Buy

Change in stance
We remove the Bandra (E) project from our valuation; the LoA has already been received but a premium of `8.02bn has yet to be paid (initially due in Sep 10; negative impact on NAV: 16%). We shift the Pune and Mira Road townships to residual land (as land acquisition and clearances are pending; impact on NAV: 9%). Also, we re-visit our construction cost estimates for all projects/Mumbai property industry (impact on NAV: 11%). Valuation
Fig 13 Valuation Mar 12
NAV Mar12 `m `/share

Ongoing Forthcomming Up-comming Hospitality Stake Net Debt Total


Source: Company, Anand Rathi Research

50,694 19,893 20,663 698 (965) 90,983

208 82 85 3 (4) 374

Value from under-construction visible projects is more than the current market price

Fig 14 Option value


NAV Mar12 Bandra (E) Gov Colony Mira Road & Pune
Source: Company, Anand Rathi Research `m `/share

28,888.2 9,633.1

118.8 39.6

We have removed the Bandra (E) government colony project from our valuation. The money, initially to be paid in Sep 10, has now been delayed to Feb 11. Also, the project sellable area of 8m sqft depends on Bandra (E) coming under the MMRDA influence zone and obtaining FSI, on payment of the premium. We believe the increase in FSI could take time even after the premium is paid vs. that guided by management earlier. We change the method for valuing the Mira Road (Orchid Acre) and Sangamwadi (Orchid Lawn) projects. Land acquisition in Sangamwadi is still ongoing and land conversion could delay the project from the original guidelines. Since the IPO filing, DBRL has raised construction cost estimates for a few of its under-construction projects on account of: extra fittings to be provided and inclusion of car-park construction costs. As these projects are high-rises, we believe the company had under-estimated construction costs.

Anand Rathi Research

27

28 January 2011

D B Realty A non-real-estate quarter; maintain Buy

Fig 15 - Increase in construction costs


(`m) Project Management guidance on est costs RHP Aug'10 Nov'10 (%) Increase AR estimates Avg Const costs (`/sqft)*

Ozone Woods Heights Suburbia Mahul Nagar Turf Corporate Park Centre Crown

6,254.3 5,421.0 5,064.5 4,709.5 8,538.6 6,753.7 4,724.8 1,348.8 5,670.6

7,375.0 7,331.0 11,215.0 5,514.0 8,539.0 12,870.0 4,725.0 1,349.0 12,069.0

6,852.0 6,435.0 10,031.0 4,986.0 8,539.0 10,760.0 4,725.0 1,349.0 10,615.0

9.6 18.7 98.1 5.9 0.0 59.3 0.0 0.0 87.2

2,589.6 5,084.3 8,455.9 5,433.7 940.9 6,410.5 3,901.0 2,615.2 6,433.3

Source: Company, Anand Rathi Research

*on total costs, including rehab, car parks construction

In our report Mumbai Property: The old order changeth, yielding place to new dated 4 Oct 10, our construction cost estimates were 7% more than the estimates of the company. With more high-rises using different development schemes, differentiated product offerings and our interaction with different market participants, we have increased our construction costs estimates for under-construction and planned projects. We believe that management could revise its construction cost estimates upwards after construction commences, as it has done recently.
Fig 16 - Difference between DB Realty and ARG estimated construction costs
RHP (`m) Nov'10 (`m) Increase in costs (%)

DB Realty Estimates ARG Estimates Difference between estimates


Source: Anand Rathi Research

167,766
Oct'10 (`m)

183,572
Jan'11 (`m)

9%
Increase in cost (%)

179,991 7%

213,943 17%

19%

Nine projects are being developed by securing higher FSI through the public parking schemes. Recently, the government of Maharastra decided to re-think DCR 33(24) relating to public parking schemes, especially for allotment in south-central Mumbai. Although DB Realty has secured primary approvals for all its projects and cancellation is unlikely, in certain projects the area could come down. We introduce a discount to account for this, till further clarity emerges.
Fig 17 - Status of public parking schemes
Project Status

Turf View Heights Crown Views West View Splendour Central Corporate Park Park Skyz Enclave
Source: Company, Anand Rathi Research

Approved by MCGM Approved by MCGM Approved by MCGM With MCGM for Final approval With MCGM for Final approval With MCGM for Final approval With MCGM for Final approval With MCGM for Final approval With MCGM for Final approval With MCGM for Final approval Approved by MCGM

Anand Rathi Research

28

28 January 2011

D B Realty A non-real-estate quarter; maintain Buy

Certain projects depend on securing higher FSI through the PPP format. Till approvals are obtained, we introduce a discount.
Fig 18 - PPP schemes yet to be cleared
Project Remark

Centre P2 Hill Park Mahal Pictures Gov Colony Orchid Town


Source: Company

Police Station clearance to be done; P1 (Golf View) and Centre 1 started Police housing - to be cleared Police Housing - to apply for it Premium yet to be paid Rental Housing; approval stage, some premium paid

We raise cost of debt by 100bps, resulting in an increase in WACC to 16%.

Anand Rathi Research

29

28 January 2011

D B Realty A non-real-estate quarter; maintain Buy

Financials
Fig 19 Income statement (`m)
Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Revenue - Op. expenses - Employee Costs - Other Administrative EBITDA - Interest - Depreciation + Other income - Tax PAT + Minority Interests + Share of profit from Associates Consolidated PAT Dividend FDEPS (` / share) CEPS (` / share) DPS (` / share) BV (` / share) Shares outstanding Growth Rates Revenue (%) EBITDA (%) Net PAT (%) Diluted EPS (%) FY10-13e Revenue CAGR(%) FY10-13e EBITDA CAGR (%) FY10-13e EPS CAGR (%) Margins EBITDA (%) EBIT (%) Net Profit (%)
Source: Company, Anand Rathi Research

4,644 2,064 36 286 2,258 747 74 68 67 1,438 22 0 1,417 5.8 6.1 33.4 9.1

9,512 5,470 53 334 3,655 726 96 291 413 2,712 192 (0) 2,520 10.4 10.7 125.3 243.3

14,630 7,521 88 439 6,583 571 88 1,659 4,265 353 3,912 142 16.1 16.4 0.5 140.8 243.3

30,746 17,008 123 769 12,847 861 94 4,043 7,849 332 7,516 285 30.9 31.3 1.0 170.6 243.3

43,141 17,205 129 1,079 24,729 764 120 8,107 15,738 2,641 13,097 285 53.8 54.3 1.0 223.2 243.3

NA (1,869.5) (752.0) (752.0)

104.8 61.9 77.9 77.9

53.8 80.1 55.2 55.2

110.1 95.2 92.1 92.1

40.3 92.5 74.3 74.3 65.5 89.1 73.2

48.6 47.0 30.5

38.4 37.4 26.5

45.0 44.4 26.7

41.8 41.5 24.4

57.3 57.0 30.4

Anand Rathi Research

30

28 January 2011

D B Realty A non-real-estate quarter; maintain Buy

Fig 20 Balance sheet (`m)


Year end 31 Mar FY09 FY10e FY11e FY12e FY13e

Sources of Funds Share capital Reserves & surplus Shareholders fund Preference Share Capital Debt Deferred Tax Liab (net) Minority interests Capital employed Application of Funds Gross Fixed Assets Less: Depreciation Net Fixed Assets Capital Work in Progress Goodwill Investments Current Assets Inventories Debtors Loans and Advances Other Current Assets Current Liab and Provisions Net Current Assets Working Capital Cash Capital deployed No. of shares (m) Net Debt/Equity (%)
Source: Company, Anand Rathi Research

91 8,023 8,114 12,357 4 553 21,028 301 92 208 15 2 10,578 426 12,442 3,418 20,797 20,028 769 21,028 9.1 142.8

2,433 28,054 30,486 5,948 (2) 745 37,177 310 129 181 37 8,941 13,195 3,058 18,554 7,649 28,018 27,157 860 37,177 243.3 16.7

2,433 31,823 34,256 13,748 (2) 745 48,747 397 217 180 5,191 17,418 4,478 24,284 9,803 43,376 36,376 7,000 48,747 243.3 19.7

2,433 39,055 41,488 11,748 (2) 745 53,979 545 311 234 5,191 19,710 5,142 26,854 13,936 48,554 37,770 10,784 53,979 243.3 2.3

2,433 51,868 54,301 11,655 (2) 745 66,698 650 431 219 5,191 25,034 12,765 27,289 22,317 61,289 42,771 18,518 66,698 243.3 (12.6)

Fig 21 Cash flow statement (`m)


Year end 31 Mar FY09 FY10e FY11e FY12e FY13e

Consolidated PAT + Non cash exp Cash profit - Incr/(Decr) in WC Operating cash flow - Capex Free cash flow - Dividend + Equity raised + Debt raised + Minority interests -Investments - Misc. items Net cash flow + Opening cash Closing cash
Source: Company, Anand Rathi Research

1,417 77 1,494 9,131 (7,637) 150 (7,787) (585) 6,327 (1) (1,783) 5 (268) 1,037 769

2,520 90 2,609 7,130 (4,520) 91 (4,611) 19,853 (6,409) 192 8,938 (5) 92 769 860

3,912 88 4,000 9,219 (5,219) 49 (5,268) 142 (0) 7,800 (3,750) (0) 6,140 860 7,000

7,516 94 7,611 1,394 6,217 149 6,068 285 (2,000) 3,784 7,000 10,784

13,097 120 13,217 5,001 8,216 104 8,112 285 (93) 7,734 10,784 18,518

Anand Rathi Research

31

28 January 2011

D B Realty A non-real-estate quarter; maintain Buy

Fig 22 Ratio Analysis @ `157


Year end 31 Mar FY09 FY10e FY11e FY12e FY13e

Valuations PE P/BV M Cap/Sales EV/Sales EV/EBIDTA Dividend Dividend yield (%) Dividend payout (%) Leverage Net Debt/Equity Int Coverage Return Ratios ROE (%) ROCE (%)
Source: Company, Anand Rathi Research

NA NA NA NA NA 142.8 1.8 18.7 12.9

15.2 1.3 4.0 3.6 9.4 16.7 1.9 14.1 15.1

9.8 1.1 2.6 2.7 6.0 0.3 2.9 19.7 2.5 13.2 16.7

5.1 0.9 1.2 1.1 2.6 0.6 3.1 2.3 2.2 20.7 26.9

2.9 0.7 0.9 0.6 1.1 0.6 1.5 (12.6) 2.2 32.9 42.6

Anand Rathi Research

32

Property

India I Equities

Update
Change in Estimates Target Reco

28 January 2011

Ackruti City
Premium land, but needs to be developed; retain Buy
Ackrutis project portfolio is premium among peers. Post a good FY10, launches slowed. Though collections from pre-sales have been good, 1HFY11 has seen debt rising by ~`5bn, largely used for stake additions and working capital. We now value the stock at Mar 12e NAV of `566 and trim our target price to `421. Buy.

Rating: Buy Target Price: `421 Share Price: `236

Premium land Execution is key. Compared with Mumbai peers, Ackrutis projects have an edge as regards location (Mumbai island city) and spread (Mumbai suburbs). We believe successful and timely project development would drive value. Growing debt may be a concern. In the past six quarters, Ackruti has sold property worth `16bn, realized debtors of `4bn, raised equity of `3bn and sold FSI/TDR of `3.1bn. But, debt also rose, by `5bn, mainly due to larger project additions and rehab construction. Although sanctioned debt for projects is `14.4bn, new project payments and stalling market volume are concerns. Change in estimates. Our NAV is impacted by removal of the Bandra (E) project (premium yet to be paid), the Gujarat Biotech Park phase-3 (nil progress), and SRS/virgin land projects. We also increase discount to 25% from 20%, accounting for recent events and their medium-term impact. Valuation and risks. Our Mar 12e NAV stands at `566 and price target at `421, which is at 25% discount to NAV. At CMP, the stock trades at 0.9x Mar 12e PBV. Key risk: Slowdown in sales.
Relative price performance
FY09 FY10 FY11e FY12 e FY13 e

Key data
52-week high/low Sensex/Nifty 3-m average volume Market cap Shares outstanding Free float Promoters Foreign Institutions Domestic Institutions Public

AKCL IN/ ACKR.BO `560/232 18684/5604 US$1.6m `17bn/US$373m 72.7m 17.5% 82.5% 2.2% 0.8% 14.5%

Key financials
Year end 31 Mar

Sales (`m) Net profit (`m) EPS (`) Growth (%) PE (x) PBV (x) RoE (%) RoCE (%) Dividend yield (%) Net gearing (%)
Source: Company, Anand Rathi Research

4,348 2,647 36.4 (12) 6.5 1.5 28.3 21.7 0.4 100.5

5,796 1,649 22.7 (38) 10.4 1.2 13.1 15.4 2.1 80.1

10,236 2,302 31.6 40 7.5 1.0 14.5 17.2 0.4 101.7

12,478 2,349 32.3 2 7.3 0.9 13.0 16.5 0.4 78.8

19,602 3,017 41.5 28 5.7 0.8 14.6 20.9 0.4 59.0


Source: Bloomberg

700 600 500 400 300 200 May-10 Jul-10 Sep-10 Mar-10 Nov-10 Jan-10 Jan-11 Ackruti City Sensex

Prices as of 27 Jan 11

Anand Rathi Financial Services Limited does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1 Anand Rathi Research India Equities

28 January 2011

Ackruti City Premium land, but needs to be developed; retain Buy

Quick Glance Financials and Valuations


Fig 1 Income statement (`m)
Year end 31 Mar FY09 FY10 FY11 e FY12 e FY13 e

Fig 4 PE Band
10,236 77 3,720 5,526 54.0 2,240 114 200 1,147 2,226 35.6 2,302 31.65 33.21 1.00 12,478 22 5,269 5,961 47.8 2,456 150 200 1,209 2,346 5.4 2,349 32.30 34.36 1.00 19,602 57 9,824 7,720 39.4 2,204 180 1,814 3,521 50.1 3,017 41.47 43.95 1.00
2,500 2,000 1,500 1,000 500 0 Dec-07 Dec-08 Dec-09 Dec-10 9x 7x 1,500 5x 1,000 3x 500 1x 0 Sep-07 Sep-08 Sep-09 Sep-10
Dec-10

Net sales Sales growth (%) - Op. expenses EBITDA EBITDA margins (%) - Interest - Depreciation + Other income - Tax PAT PAT growth (%) Consolidated PAT FDEPS (`/share) CEPS (`/share) DPS (`/share)

4,348 (2) (258) 4,095 94.2 1,402 57 200 232 2,603 (13.1) 2,647 36.39 37.20 1.00

5,796 33 1,314 3,825 66.0 1,680 71 385 817 1,641 (37.0) 1,649 22.67 24.37 5.00

Ackruti City

30x 24x 18x 12x 6x Sep-07 Sep-08 Sep-09 Sep-10 Jun-07 Jun-08 Jun-09 Mar-08 Mar-09 Mar-10 Mar-10 Jun-10 Jun-10

Source: Company, Anand Rathi Research

Source: Bloomberg, Anand Rathi Research

Fig 2 Balance sheet (`m)


Year end 31 Mar FY09 FY10 FY11 e FY12 e FY13 e

Fig 5 Price-to-Book Band


727 14,060 14,787 13,055 (50) 1 27,793 2,400 3,563 19,644 1,216 27,793 72.7 80.1 727 16,270 16,997 18,055 (50) 1 35,004 3,360 3,563 27,308 772 35,004 72.7 101.7 727 18,528 19,255 16,055 (50) 1 35,261 3,863 3,563 26,957 878 35,261 72.7 78.8 727 21,585 22,312 14,555 (50) 1 36,818 4,400 3,563 27,243 1,632 36,818 72.7 59
2,500 Ackruti City 2,000

Share capital Reserves & surplus Shareholders fund Debt Def Tax Liab (net) Minority interests Capital employed Fixed assets Investments Working capital Cash Capital deployed No. of shares (m) Net Debt/Equity (%)

667 9,741 10,408 10,569 (104) 2 20,875 982 3,025 15,135 110 20,932 72.7 99.9

Jun-07

Jun-08

Mar-08

Dec-07

Dec-08

Mar-09

Jun-09

Dec-09

Source: Company, Anand Rathi Research

Source: Bloomberg, Anand Rathi Research

Fig 3 Cash flow statement (`m)


Year end 31 Mar FY09 FY10 FY11 e FY12 e FY13 e

Fig 6 Ackruti City vs BSE Realty


2,302 114 2,416 7,663 (5,248) 105 (5,353) 91 0 5,000 (444) 1,216 772 2,349 150 2,499 (351) 2,850 653 2,197 91 0 (2,000) 106 772 878 3,149 180 3,329 266 3,063 718 2,345 91 0 (1,500) 754 878 1,632
600 BSE Realty 500

Consolidated PAT + Depreciation Cash profit - Incr/(Decr) in WC Operating cash flow - Capex Free cash flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash flow + Opening cash Closing cash

2,647 (53) 2,594 2,683 (89) 1,515 (1,605) 84 (78) 2,277 747 56 (293) 403 110

1,649 125 1,774 4,510 (2,736) 835 (3,571) 425 3,098 2,486 538 (56) 1,107 110 1,216

400

300 Ackruti City 200 Apr-10 May-10 Jul-10 Jan-10 Jun-10 Oct-10 Feb-10 Mar-10 Aug-10 Sep-10 Nov-10 Jan-11

Source: Company, Anand Rathi Research

Source: Bloomberg

Anand Rathi Research

Dec-10

34

28 January 2011

Ackruti City Premium land, but needs to be developed; retain Buy

Premium land execution the key


Compared with Mumbai peers, Ackrutis projects have an edge as regards location (Mumbai island city) and spread (Mumbai suburbs). We believe successful and timely project development would drive value Land differentiation
Spread and size

Ackrutis projects portfolio is spread across micro-markets in Mumbai, and concentrated in the central suburbs. We believe that the central suburbs of Mumbai and Bandra (E) would out-perform other markets in Mumbai on pricing in the next five years.
Fig 7 Projects across Mumbai
Company South South Central Central Bandra Western

Ackruti City DB Realty HDIL Sunteck Realty Oberoi Realty


Source: Company

0.2 0.1 -

4.8 9.3 0.1 3.6 2.1

16.2 0.9 14.5 6.1 3.2

2.8 10.0 2.4 1.5 -

6.2 20.1 10.1 2.5 14.6

Smaller projects at prime locations show brisk sales once launched

Also, its project sizes are smaller in South and South-Central Mumbai, and medium-to-large in the suburbs. This, we believe, could drive volume once such projects are launched.
Fig 8 Number of smaller projects across Mumbai
Company Number Residential Commercial

DB Realty Ackruti City HDIL Sunteck Realty Oberoi Realty


Source: Company

4 20 15 7 8

2 15 7 5 2

2 5 8 2 6

Launches need to pick up pace Ackruti did not launch any project in 3QFY11 FY10 saw residential and commercial sales of 2.16m sqft worth `8.4bn. Sales in 1HFY11 have been 0.94m sqft (ex TDR and FSI) for `8.7bn. Along with quick absorption of launched projects, the company has hiked prices, though accompanied by some volume slowdown.

Anand Rathi Research

35

28 January 2011

Ackruti City Premium land, but needs to be developed; retain Buy

Fig 9 Sales volume vs. sales value


(`m) 8,000 6,400 (msqft) 1.0 0.8 0.6 0.4 0.2 0.0 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11

1HFY11 sales (by value) have been higher than those in FY10 at sustained volume

4,800 3,200 1,600 0

Sales Value

Sales Volume (RHS)

Source: Company

Further, on the sales value receivables front, Ackruti has been comparatively better than peers, with as much as 40% recovered from sales already concluded. Since all launches follow construction-linked payment plans, execution of launched projects is well on track.
Fig 10 Sale value vs. sales value received
(`m) 80 (%) 45

60 30 40 15 20

0 Ackruti City DB Realty Sunteck Realty HDIL

Value Sold
Source: Companies

Value Received

(%) Received (RHS)

With launch plans of 6.9m sqft over the next 3-4 quarters, as per 2QFY11 guidance, the company did not launch any project in 3QFY11. We believe, however, that, in order to monetize its land parcels, launches would have to be brisk, as further price hikes would be difficult. Volumes in Mumbai have already slowed down and hence price points of new projects would be important.

Anand Rathi Research

36

28 January 2011

Ackruti City Premium land, but needs to be developed; retain Buy

Fig 11 Project launches planned


Project Name Location Area to be launched in m sqft

Residential Projects IVIL Phase I Ackruti Ruby Ackruti Swastik Mazgaon Ackruti Sea Breeze Jade Gardens Ackruti Gardenia Phase II Ackruti Lakewoods Ackruti Countrywoods Phase II Commercial Projects Zeus - PH I GSRTC - Geeta Mandir GSRTC - Adajan Hotel, Residential & (Service) Hindustan Mill
Source: Company

Ghatkopar Andheri(W) Chembur Mazgaon Hughes Road Peddar Road Mira Road Thane Kondhwa, Pune Mulund Ahmedabad Surat Prabhadevi

0.7 0.3 0.4 0.2 0.2 0.0 0.5 0.5 1.2 1.5 0.3 0.5 0.6

Anand Rathi Research

37

28 January 2011

Ackruti City Premium land, but needs to be developed; retain Buy

Growing debt may be a concern


In the past six quarters, Ackruti sold properties worth `16bn, realized debtors of `4bn, raised equity of `3bn and sold FSI/TDR of `3.1bn. Debt, however, has also risen, by `5bn, mainly on account of other construction and larger project additions. Although sanctioned debt for projects is `14.4bn, new project payments and stalling markets raise concerns. Balance sheet Debt has risen by `5bn in 1HFY11, mostly on project stake additions, investments in township projects, debtors from sales of FSI/development rights and working capital for rehabilitation. With sales slowing down in Mumbai and credit becoming dearer for developers, the increase in debt could be a cause of concern.
Fig 12 Growing debt: A red flag
(`m) 20,000 16,000 12,000 8,000 4,000 0 Dec-09 Sep-09 Sep-10 Mar-10 Jun-10 (%) 1.10 1.00 0.90 0.80 0.70 0.60

Gross debt
Source: Company

Cash

Net D/E (RHS)

But key near-term projects are well-funded

`14.4bn has been sanctioned for

project-specific construction

All residential under-construction projects being self-funded now, the focus is on new launches. Ackruti has sanctioned debt of ~`14.4bn for the new launches planned. This, we believe, could hasten the rehab and freesale construction process in the near future, provided project additions are arrested.
Fig 13 Sanctioned debt for new projects
Project Sanction (`m)

Textile Park Rising City Chembur Ruby H Mills Sion - Wadala P1


Source: Company

700 2,000 1,200 1,000 9,500 2,500

Anand Rathi Research

38

28 January 2011

Ackruti City Premium land, but needs to be developed; retain Buy

Change in stance
We change our NAV for Ackruti City, in line with Mumbai peers. We remove projects with little visibility (Gujarat Biotech Park, Culture Cricket academy; Bandra East; a few SRS projects) and where premium has not been paid for the land (Bandra East government colony project). This impacts our NAV by 47%. We also raise our discount to NAV to 25% from 20% earlier, to take into account recent events and their medium-term impact. Valuation We have removed the Bandra (E) government colony project where Ackruti City has obtained an LoA, but a premium of `3.33bn has yet to be paid. The payment, initially to be made in Sep 10, has now been delayed to Feb 11. The final sellable area of the project also depends on when the area obtains an FSI of 4. Negative impact on NAV: 21%. Gujarat Biotech Park: Progress on the biotech park SEZ has been slow in the past few quarters. Although phase 1 is complete and operational, phase 2 is seeing slow progress and land for phase 3 would be handed over to the company only on substantial development in phase 2. Negative impact on NAV: 18%. In certain SRS and virgin land projects in Mumbai, complete project acquisition has still to be achieved and is slow at present. We remove eight SRS projects totaling 2.1m sqft and a PPP project of over 0.28m sqft in Bandra (E) owing to nil visible progress and the negligible premium paid. Negative impact on NAV: 4%
Fig 14 Valuation: Mar12e
NAV Mar12 (`m) (`/share)

For valuation, we have considered only visible projects in SRS

SRS PPP Normal Projects SEZs Townships Investments at Cost Net Debt Total
Source: Anand Rathi Research

22,083 10,701 8,057 11,863 2,782 870 (15,177) 41,179

304 147 111 163 38 12 (209) 566

Fig 15 Optional Value - considered as on March'12


NAV Mar12 Bandra(E) Gov Colony Biotech Park P2 and 3 SRS, PPP projects
Source: Anand Rathi Research (`m) (`/share)

10,918 9,976 3,027

150 137 42

We have assumed a development schedule for slum rehab schemes/ redevelopment schemes where work has started, and debt has been sanctioned or drawn. We change our assumptions for the Hindustan Mills Project, from a sale model to a lease one (cash flows would now be back-ended). The company has received the important environmental clearance for the project and debt sanctioned is `9.5bn.
Anand Rathi Research 39

28 January 2011

Ackruti City Premium land, but needs to be developed; retain Buy

After changes in taxes applicable on slum rehab projects, Ackruti sold some projects to avail of higher tax benefits and upfront cash. For the residual township land, we have altered our market-value assumptions in line with recent land sales conducted by the company in the region. Risk

Slowdown in sales

Anand Rathi Research

40

28 January 2011

Ackruti City Premium land, but needs to be developed; retain Buy

Financials
Fig 16 Income statement (`m)
Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Recurring Revenue Revenue - Op. expenses - Employee Costs - Other Administrative EBIDTA - Interest - Depreciation + Other income - Tax PAT + Minority Interests + Share of profit from Associates Consolidated PAT Dividend FDEPS (` / share) CEPS (` / share) DPS (` / share) BV (` / share) Shares outstanding Growth Rates (%) Revenue EBIDTA Net PAT Diluted EPS FY10-13e Revenue CAGR FY10-13e EBITDA CAGR FY10-13e EPS CAGR Margins EBIDTA EBIT Net Profit
Source: Company, Anand Rathi Research

4,348 (258) 149 362 4,095 1,402 57 200 232 2,603 3 92 2,647 84 36.4 37.2 1.0 156.9 66.7 (2.3) 8.0 (11.6) (11.6)

5,796 1,314 141 517 3,825 1,680 71 385 817 1,641 0 36 1,649 425 22.7 24.4 5.0 203.3 72.7 33.3 (6.6) (37.7) (37.7)

10,236 3,720 273 716 5,526 2,240 114 200 1,147 2,226 (72) 148 2,302 91 31.6 33.2 1.0 233.7 72.7 76.6 44.5 39.6 39.6

12,478 5,269 374 873 5,961 2,456 150 200 1,209 2,346 (141) 145 2,349 91 32.3 34.4 1.0 264.7 72.7 21.9 7.9 2.1 2.1

19,602 9,824 588 1,470 7,720 2,204 180 200 1,882 3,653 (1,135) 630 3,149 91 43.3 45.8 1.0 306.8 72.7 57.1 29.5 34.0 34.0 50.1% 26.4% 24.1%

94.2 (543.9) 38.4

66.0 127.8 50.7

54.0 60.2 41.6

47.8 46.6 40.1

39.4 22.4 30.7

Anand Rathi Research

41

28 January 2011

Ackruti City Premium land, but needs to be developed; retain Buy

Fig 17 Balance sheet (`m)


Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Sources of Funds Share capital Reserves & surplus Shareholders fund Debt Deferred Tax Liab (net) Minority interests Capital employed Application of Funds Gross Fixed Assets Less: Depreciation Net Fixed Assets Capital Work in Progress Goodwill on consolidation Investments Current Assets Inventories Debtors Loans and Advances Other Current Assets Current Liab and Provisions Net Current Assets Working Capital Cash Capital deployed No. of shares (m) Net Debt/Equity (%)
Source: Company, Anand Rathi Research

667 9,741 10,408 10,569 (104) 2 20,875 760 110 650 331 1,624 3,025 6,106 4,517 6,153 741 2,383 15,244 15,135 110 20,875 66.7 100.5

727 14,060 14,787 13,055 (50) 1 27,793 1,574 162 1,411 989 969 3,563 7,903 3,208 11,216 479 3,160 20,861 19,644 1,216 27,793 72.7 80.1

727 16,270 16,997 18,055 (50) 1 35,004 2,563 290 2,273 1,088 3,563 9,264 3,201 15,702 526 1,386 28,080 27,308 772 35,004 72.7 101.7

727 18,528 19,255 16,055 (50) 1 35,261 3,106 440 2,666 1,196 3,563 11,260 5,067 14,603 632 4,604 27,835 26,957 878 35,261 72.7 78.8

727 21,585 22,312 14,555 (50) 1 36,818 3,705 621 3,084 1,316 3,563 12,239 2,539 16,063 821 4,440 28,855 27,223 1,632 36,818 72.7 57.9

Fig 18 Cash flow statement (`m)


Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Consolidated PAT + Depreciation + Deferred Tax Cash profit - Incr/(Decr) in WC Operating cash flow - Capex Free cash flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash flow + Opening cash Closing cash
Source: Company, Anand Rathi Research

2,647 57 (110) 2,594 2,683 (89) 1,515 (1,605) 84 (78) 2,277 747 56 (293) 403 110

1,649 71 53 1,774 4,510 (2,736) 835 (3,571) 425 3,098 2,486 538 (56) 1,107 110 1,216

2,302 114 2,416 7,663 (5,248) 105 (5,353) 91 0 5,000 (444) 1,216 772

2,349 150 2,499 (351) 2,850 653 2,197 91 0 (2,000) 106 772 878

3,149 180 3,329 266 3,063 718 2,345 91 (0) (1,500) 754 878 1,632

Anand Rathi Research

42

28 January 2011

Ackruti City Premium land, but needs to be developed; retain Buy

Fig 19 Ratio Analysis @ `236


Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Valuations P/E P / BV M Cap / Sales EV / Sales EV / EBIDTA Dividend Dividend yield Dividend payout Leverage Net Debt / Equity Int Coverage Return Ratios RoE RoCE
Source: Company, Anand Rathi Research

6.5 1.5 3.6 5.3 5.7 0.4 2.6 1.0 3 28.3 21.7

10.4 1.2 3.0 4.4 6.7 2.1 22.2 0.8 2 13.1 15.4

7.5 1.0 1.7 3.0 5.6 0.4 3.3 1.0 2 14.5 17.2

7.3 0.9 1.4 2.3 4.8 0.4 3.1 0.8 2 13.0 16.5

5.5 0.8 0.9 1.4 3.4 0.4 2.0 0.6 3 15.1 20.9

Anand Rathi Research

43

Appendix 1
Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Anand Rathi Ratings Definitions Analysts ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below. Ratings Guide Large Caps (>US$1bn) Mid/Small Caps (<US$1bn) Buy >20% >30% Hold 5-20% 10-30% Sell <5% <10%

Anand Rathi Research Ratings Distribution (as of 6 December 10) Buy Anand Rathi Research stock coverage (138) 69% % who are investment banking clients 5%

Hold 17% 4%

Sell 14% 0%

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