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Abhinav Sinha
abhi.sinha@clsa.com
+91 22 6650 5069
29 January 2018
India
Property
BUY
Sobha SOBHA IN
Market cap US$0.8bn
Price Rs552.00
Target Rs760.00
Up/downside +38%
SELL
DLF DLFU IB
Market cap US$7.1bn
Price Rs253.40
Real’ty shift
Target Rs176.00
Up/downside -31%
N-R
www.clsa.com
Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com
For important disclosures please refer to page 126.
India property
Contents
Executive summary ........................................................................................................ 3
Investment thesis............................................................................................................ 4
Company profiles
DLF.................................................................................................................................. 57
Godrej Properties .......................................................................................................... 67
Indiabulls Real Estate .................................................................................................... 77
Mahindra Lifespace Developers .................................................................................. 87
Oberoi Realty ................................................................................................................. 91
Prestige Estates ........................................................................................................... 101
Sobha ............................................................................................................................ 111
Sunteck Realty ............................................................................................................. 121
All prices quoted herein are as at close of business 25 January 2018, unless otherwise stated
Real’ty shift
Organised developers’ India's fragmented property sector is undergoing a transformation, as far-reaching
residential sales set for reforms drive consolidation. These changes, combined with the most affordable
major scale-up house prices in decades, will drive real estate sales up from around US$55-60bn
in FY17CL, to US$140-150bn by FY24CL. Organised developers’ market share
could double, from 8-10% to 20% over the same period, delivering a sales Cagr of
30%. High-quality developers, with a greater focus on the residential market, will
benefit disproportionately from this cyclical upturn. Our top picks are Godrej
Properties, Sobha, Prestige Estates and Oberoi Realty.
Accelerated sector No listed developer currently achieves sales of US$1bn per annum in India’s
organisation US$100bn residential-housing market. This will change, as the Real Estate
Regulatory Act (Rera), in force since 2017, restricts the use of customer flows for
construction, tightens compliance and provides a major boost to transparency.
This legislation, along with homebuyers’ rising aspirations and brand
consciousness, is driving a shift towards larger developers. As weaker players exit,
quality players will benefit, doubling their market share to c.20% by FY24CL.
Affordability to drive Low house prices, decade-low mortgage rates and steady income growth have
housing uptick resulted in the best affordability for 15 years. This should drive a volume upturn,
with policy support as the trigger. Developers can address the affordable-housing
market too, as tax incentives and less competition make it viable. We expect
industry sales to more than double over FY17-24, to US$140-150bn. At the same
time, organised developers will enjoy a 30% sales Cagr, to reach US$25-30bn by
FY24CL, and cumulative sales of US$100bn in the next seven years.
Normalised lease-returns to India’s 500msf/US$75bn office market has already consolidated, with the top-
drive investment shift five developers controlling more than 20%. Lease-asset fundamentals are strong,
although high returns are behind us now that cap-rate compression has largely
played out. Large private equity money could turn to residential, where we see
capital needs of around US$10-15bn to fund the growth pickup.
Rerating to continue as The property sector is under-represented in India’s listed universe, with a
sector consolidates combined market-cap of 1%, compared to regional peer benchmarks of 3-5%.
Higher sales, market-share gains and new listings could lift the market cap to
US$100bn within five to seven years. We prefer names with higher residential
exposure, and Mumbai’s ongoing infrastructure upgrades make it the best locale.
Godrej Properties, Sobha, Prestige Estates and Oberoi Realty are our preferred
picks. We also have a BUY on Indiabulls Real Estate and a SELL on DLF.
30% Cagr 15
1,000
10
500 US$5bn 5
0 0
FY17E FY18CL FY19CL FY20CL FY21CL FY22CL FY23CL FY24CL
Source: CLSA
Landscape transformed
India’s residential housing market remains highly fragmented, with larger/organised
A 30% sales Cagr for
organised developers is
developers (those with annual presales of Rs1bn or above) holding less than 10% of
likely medium term the market share. But this is now changing through reforms - primarily Rera (2017) -
and a shift in consumer preferences to developers with strong delivery track-records.
Consolidation should unfold, and we project that in the next five to seven years,
organised developers should double their market share to around 20%. In addition,
with residential affordability at its best level for decades, the market should also
more-than-double its current size, to US$140-150bn by FY24CL. Overall, we project
organised-developers’ sales to enjoy a 30% Cagr over FY17-24CL, likely creating a
US$100bn+ market-cap sector.
30% Cagr 15
1,000
10
500 US$5bn 5
0 0
FY17E FY18CL FY19CL FY20CL FY21CL FY22CL FY23CL FY24CL
Source: CLSA
0
FY16 FY17 YTD FY18
Implied cap rate for AIT SP Funding needs for housing over FY18-24
10 (%)
Equity finance
- Public markets (public/private) Profit
9 - Private equity (customer flows)
10-15%
- Structured/ 15-20%
8 quasi equity
Bridge finance
7 (debt/quasi debt)
10-15% Funding pattern
6 of US$100bn
Construction costs cumulative sales
5 (customer flows) by organised
developers
55-60%
4
Jan 10 May 11 Sep 12 Jan 14 May 15 Sep 16 Jan 18
Top picks
The property space is under-represented in India, with a market weight of just
Sector is under-
represented in the 1%, compared to 3-5% for peers. We envisage a scenario whereby the sector’s
markets market cap could reach US$100bn, up from its current sub-US$30bn level.
BSE Realty market cap and market weight Property sector weights across peers
120 (US$bn) BSE Realty Index mkt cap (LHS) (%) 6 MSCI AxJ 6
MSCI Indonesia 2
60 3
MSCI Thailand 3
40 2
MSCI China 5
20 1 MSCI Singapore 19
MSCI Philippines 24
0 0
MSCI HK 26
Sep 07
Sep 08
Sep 09
Sep 10
Sep 11
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
(%) 0 1 2 3 4 5 6 7 8 9 10
We would like to thank Evalueserve for its help in preparing our research reports. Aniket Sethi (Cement, Oil & Gas); Bhavik Mehta (Autos, IT); Kamal Verma
(Banking & Financial Services); Kushal Shah (Midcaps) and Mihir Manohar (Capital Goods, Utilities, Power) provide research support services to CLSA.
Figure 1
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18
First set of property listings GFC-induced Sharp price Property prices and Sales and pricing drop Affordability
liquidity crisis appreciation volumes peak to drive
Sharp price and volume post GFC Rera implemented volumes
increases Developers Poor execution
delay Property investors creates resentment, Demonetisation, Larger
Developers indulge in major execution, drive sales customer activism anticorruption developers
landbanking and capex; suspend capex clean up sector to gain share
enjoy high valuations Execution lags Weak liquidity impacts
new launches capex; landbanking stops
'Weak hands' High inflation, interest
proliferate cost impacts profitability
India property
29 January 2018
We estimate that FY17 presales for India’s top-12 listed developers amounted to
Rs153bn, which is less than 3% of the country’s total real-estate spending. No
listed developer has exceeded presales of US$1bn in the last five years. Godrej
The value market share of Properties has the highest residential presales in the listed space, at Rs35bn
the top-12 listed developers (US$550m) on a tr-12-month basis, as of September 2017. While some large
is estimated to be ~3% developers have yet to list, our checks of the largest - by major city - suggest that
nearly half are already listed. Overall, we estimate that the non-social segments
of the Indian housing market, listed and other larger/organised players had a
market share of around 7-10% over the last three years.
Figure 3
No listed developer has had Top-12 listed developers’ residential presales over FY15-17
presales of US$1bn in the 70 (Rsbn) FY15 FY16 FY17
last five years
60
50
Within premium residential,
we estimate a 5-7% market 40
share for these developers
30
20
10
0
DLF Godrej Oberoi Realty Sobha Prestige IBREL Next six
Properties Estates
Source: CLSA, Companies.
Large PE infusion in office However, post GFC (the global financial crisis) an oversupply in office/retail
assets has driven assets - combined with tougher liquidity conditions - led to an incremental supply
consolidation reduction (excluding projects already underway). Several developers sold their
assets to private equities firms, and incremental supply is now controlled by the
PE firms and select large developers. The consolidation in office holdings suggests
that even as total Indian office space (Grade-A) expanded to around 500msf by
2017, nearly 30% is controlled by listed developers and select, large private
equity. Indeed, the top-five control more than 20% of India’s Grade-A office
stock.
Figure 4
We estimate that the top- Breakup of high-quality office property held by developers
five owners hold more than Blackstone - DLF QIA - RMZ
20% of Grade-A office stock Embassy 5% 4%
6%
K Raheja
4%
Brookfield
3%
Ascendas
2%
Prestige
Others 2%
73%
Total leasable
office area: IBREL
500msf 1%
Figure 5
PE influx owns existing Marquee private equity deals over the last decade in lease-asset space
assets, controls new Investor Investee Value Year Description
supply via JVs (US$bn)¹
GIC DCCDL/DLF 1.4 2017 GIC acquires 33% stake in DLF’s main lease-
asset holding subsidiary DCCDL, which has
27msf operational-lease assets
CPPIB Phoenix Mills 0.3 2017 Mall platform created via acquiring stake in
Phoenix’s Bangalore mall-holding subsidiary
Brookfield Hiranandani 1.0 2016 Acquires entire 4.5msf of office, retail
Developers space in Powai
Brookfield Unitech 0.3 2014 Brookfield acquired Unitech's 40% share
of four assets in NCR, Kolkata
QIA RMZ 0.3 2013 JV to buy development assets across top cities
Blackstone Embassy Group na 2012 JV formed in 2012 has 18msf of operational
office assets and 13msf under construction
Blackstone DLF 0.2 2011 DLF sells 67% stake in Pune’s 25-acre SEZ
¹ Value is equity infused or as reported. Source: CLSA, Companies
Figure 6
Source: CLSA
Rera makes it more difficult Rera is customer driven, provides a major boost to transparency, increases
for smaller developers to working capital requirements, and significantly raises the property sector’s overall
operate, scale up entry barriers. Its aim - to increase customer confidence in purchasing under-
construction real estate projects - comes at a cost to developers: higher working
capital and the risk of significant liabilities. As a result, marginal players are
looking to completely exit the residential market, while mid-sized developers are
reducing their operational scale to core markets, where risks are more
manageable.
Figure 7
Rera impact: With cashflow tightened, unscrupulous developers’ unbridled expansion plans have come to an end
Banks verify
Post Rera cashflow:
construction progress
Developers working capital rise
Money released to
extent of progress
Customers Bank-monitored
Developer Project A
of account
project A
Customer pays
Raises demand Construction
to extent of Bank may not release for work done bills paid
demand raised money if demand raised
is higher than justified
by work done
Source: CLSA
Diverging customer However, with the release of 70% of customer inflow now tied to a project’s
inflow to expand is no progress, developers’ net inflow will become back-loaded. The practice of a
longer possible ‘prelaunch’ and sales without any significant construction used to generate equity
for a developer that was deployed into capex, like new land or lease-asset
projects. Post Rera’s implementation, this is no longer possible - developers have
had to prioritise their projects at hand and look to exit those where quick
monetisation is no longer possible.
IRR will decline and A look at how project cashflow will change for a standard real estate project
breakeven pushed back (1msf area, Rs6,000/sf selling price) can be seen in Figure 7. We estimate that
project IRR will decline by a third, and cashflow breakeven - in a good scenario
where land costs are paid and all properties are sold at launch - could be pushed
back by about 15-20%. A detailed calculation is presented in the Appendix.
DLF 133
Developer Area (msf)
Godrej Prop 20
Godrej Prop 23
IBREL c.50
Ganesh Housing 25
NCR
Oberoi c.15
Sunteck 9
Ahmedabad
IBREL 20 Kolkata
Godrej Prop 23 Developer Area (msf)
Godrej Prop 7
Mumbai
Developer Area (msf)
DLF 15
Bangalore
Developer Area (msf) Developer Area (msf)
India property
Puravankara 50
Godrej Prop 2
Brigade 38
Prestige 2
DLF 13
¹ Based on disclosure of forthcoming projects/land bank (in acres) as of Sep 17 or latest available. Source: CLSA, Companies
13
Figure 9
14
M3M
Ireo
Tata Housing
Amrapali
Supertech
NCR
Hiranandani
K Raheja Mumbai
Pune Developer
Tata Housing
Embassy
Wadhwa
RMZ
Omkar
Hyderabad Mantri
Tata Housing
Developer
Salarpuria
Panchshil Bangalore
Paranjpe
Chennai
Magarpatta Developer
Kochi VGN
India property
29 January 2018
BBCL
Vijay Shanthi
Figure 10
1,500
1,000
500
(500)
(1,000)
(1,500)
(2,000)
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Source: CLSA
Figure 11
Rera significantly tightens Rera’s impact on developers for key project aspects
standards across all
developer activities
Starting presales
Compulsory registration
with Rera
Need to seek all approvals
Selling standards Slows project launches Use of cashflows
Raises capital needs
Impact on
Transparency
developers Penalties
Figure 12
Antidiscriminatory clauses
consumer to make plan changes
If a buyer finds any structural or workmanship Buyers have the right to get project details, such as
defect within five years from the date of being cost of land, development agreement, sanctioned
handed the flat, the developer must rectify it plans, open spaces, cost of construction, covered
without further charge. Failure to do so means parking lots, phase-wise plans of development,
the buyer has the right to complain against project completion time, etc. These details will be
to the Rera authority. available on the respective state’s Rera website.
Launches in NCR down to A high proportion of investors as initial buyers - instead of end-users - implied
10% of previous peak that as long as the property cycle was strong, developers incrementally focused
on launches and presales, instead of execution. Consequent to the issues in NCR,
new-property launches are down by as much as 90%, compared to previous
peaks, and sales are down by more than two thirds. A proper rollout of Rera in
NCR remains important for its recovery as India’s largest housing market.
Figure 13
Uttar Madhya
Maharashtra Gujarat Tamil Nadu Karnataka Punjab Haryana
Pradesh Pradesh
Rules
17 Apr 17 27 Oct 16 29 Oct 16 22 Oct 16 22 Jun 17 10 Jul 17 8 Jun 17 28 Jul 17
notified
Website
1 May 17 26 Jul 17 20 Jul 17 1 May 17 27 Jul 17 25 Jul 17 27 Jul 17 No website
launched
Authority
gets 24 May 17 17 Aug 17 7 Jun 17 1 May 17 10 Aug 17 na 13 Jul 17 26 Nov 17
chairman
12 Jul 17 4 Aug 17
First
3 May 17 na (first project (first project 31 Jul 17 10 Jul 17 23 Jul 17 15 Jul 17
project
registered) approved)
Source: CLSA, Rera authorities of respective states
More than 10,100 projects Maharashtra began to adopt Rera on 1 May, launching a functional web-portal. As
are Rera-registered across of mid-December, more than 10,100 residential projects statewide were
Maharashtra registered under the bill. The Mumbai metropolitan region (MMR, capital of
Maharashtra state) had more than 3,600 residential projects registered,
comprising over 400,000 apartments under various stages of development. While
several other states have also started their Rera websites, the disclosures
available under the Maharashtra Rera website are currently the most
comprehensive (see Figure 16).
Figure 14
Mumbai suburban
18%
Others
23%
Aurangabad
3%
Nagpur
Thane (Mumbai
3%
outskirts)
Nashik Pune 13%
6% 29%
Figure 15
25,000
20,000
Activity improved post
Rera implementation
15,000
10,000
5,000
0
4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17
We understand that these are mostly timing issues and - due to consumer
demand for Rera staying high and the central government continuing its push for
full implementation - higher disclosure levels will soon be national. Nonetheless,
almost all states, despite nonfunctional Rera websites, have implemented Rera’s
clauses necessitating registration prior to any marketing, and protecting customer
inflow in ongoing projects.
Benami Act and increased Benami has also helped with the property market clean-up; the name refers to the
UID-based asset/account holding of personal property (whether a physical or financial asset) by someone
mapping should help further who is not the beneficial owner of the asset. The law permits the confiscation and
sale of Benami properties once authorities discover them. The government has
also kept on increasing its data-gathering efforts by the usage of UID (India’s
unique personal identification system) and other big-data measures, implemented
post demonetisation. Overall, a less-cash economy and continued anticorruption
measures are important drivers in the property sector’s clean up.
Figure 16
Project name
Project type
Registration number
Litigations related to project
Date of completion
Est cost of construction
Land area
No website available
No website available
Apartment type
Website in Beta
Contractor details
Real estate agent names
Carpet area
No. of apartments per category
Number of booked apartments
Legal title report
Details of encumbrances
Commencement certificates
Copy of layout approval
Pro forma of the allotment
letter and agreement for sale
Source: CLSA, Respective state’s Rera websites
Figure 17
Multiple changes are driving Key sector clean-up steps and impact on buyers/developers
sector consolidation
Easy to compare
Higher compliance
Transparency Rera projects, avoid
requirements
false promises
Source: CLSA
Demonetisation helped The Indian property sector, particularly the secondary market and land-buying
lower cash’s salience in the stage, had - alongside declared property values - a cash component, which helped
property sector with income-declaration and tax-payment avoidance. All locations in India have
predetermined (as per local governments) base property values. Any deal below
this value is unacceptable from a stamp-duty-payment perspective (usually 5-8%).
However, the market value in specific transactions could be much higher than the
base value, thus creating a tax-avoidance incentive. This acted to deter better
organised and/or clean dealmaking. However, demonetisation has led to a fall in
the level of cash in circulation, making these deals tougher. In addition, local
governments have increased their base values, despite property prices remaining
stagnant, narrowing the gap - and thus the incentive - to under-declare property
transaction values.
Developer
Pre-GST Post-GST
Input services
Input services Input goods
and goods
Post-tax cost of completed property is cheaper under GST than previous regime
Source: CLSA
Aspirations have led to In the last decade, we have witnessed this concept being implemented in large
similar demands at the mid affordable townships, allowing MIG and LIG (middle-income group and lower-income
to lower-mid levels as well group) homebuyers to have access to aspirational homes in peripheral areas of large
cities. Providing additional amenities - sporting facilities, gymnasiums, jogging tracks,
clubhouses, amphitheatres, cafes, etc - inside a residential complex has now percolated
to the lower end of the market. This inspires homebuyers to shift to large townships
that have the critical mass to provide such amenities.
Figure 18 Figure 19
Aspirational developments Affordable housing project complex ~50km Clubhouse at the project
in affordable housing from Mumbai
projects in Mumbai
Demand for larger As aspirations rise further, we are likely to witness large-scale projects being
townships to rise preferred to standalones, especially in locations where land is available in
abundance. We believe that developers would yield better returns by executing
such projects on a larger scale. Developers need multi-acre land parcels to
construct complexes where it is economically feasible to provide additional
amenities and open spaces. This also raises the working capital requirements,
which will already be strained under Rera.
Average cost of debt down Average cost of debt for select listed companies
by 3ppts for listed property 14 (%) Phoenix Sobha Godrej Properties
companies since Mar 15 12
13 13
12 12
12 11 11 11
10 10
10 10
10 9
9
8
8
0
Mar 14 Mar 15 Mar 16 Mar 17 Sep 17
Source: CLSA, Companies
But not for everyone While the average borrowing costs for large listed developers is around 8.5-10%,
unlisted but still larger or mid-sized developers are able to borrow at 13-15%, mostly
from the property-lending-focused NBFCs (nonbanking financial companies) that
usually do structured deals. However, the borrowing costs for the unorganised
building sector are still fairly high, at 18-24%, with most of the funding coming from
the informal markets.
Figure 22
Large players can leverage Range of indicative borrowing costs, based on the type of developer
balance sheet for further 18 (%) 18-24
expansion
16
14 13-15
12
10 8.5-10
0
Large/listed players Medium/unlisted Small/unorganised
Source: CLSA
Additional financing sources Additionally, the listed and larger developers have funding routes open via private
for larger developers equity deals (mostly for commercial assets), or equity markets (valuations at near
include PE, public markets 10-year highs). This suggests these brands have an opportunity to acquire quality
assets and gain scale, a decade on from the closure of residential developers’ last
strong PE funding route. With Rera, developers are limited to adding projects
using cashflow from presales. As such, the availability of cheaper and varied
sources of financing will be critical to keeping profitability levels remunerative
enough to develop and expand.
Prices have seen marginal YoY trend in Grade-A residential prices at prime locations for top-seven cities
declines over the last year 25 (% YoY)
20
15
10
5
0
(5)
(10)
(15)
(20)
Sep 07
Sep 08
Sep 09
Sep 10
Sep 11
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Mar 08
Mar 09
Mar 10
Mar 11
Mar 12
Mar 13
Mar 14
Mar 15
Mar 16
Mar 17
Figure 24
Recent land deals are Last few major land deals in Thane
happening at prices seen Buyer Seller Location Deal Deal value Area Price
several years back time (Rsm) (acres) (Rsm/acre)
Figure 25
Oberoi and Godrej have Land/project acquisitions by leading listed developers since FY15
added ~30% to their land
bank in last six quarters 30 (m sf) Oberoi Godrej Properties Phoenix IBREL
25
20
15
10
0
FY15 FY16 FY17 1HFY18
Figure 26
Trustworthy developers Land acquisition models, based on parameters of ROE (Bubble size), flexibility and control
have higher ROE options
now to add projects Flexibility
Development
management
Profit
share Area
share
Private-
equity
platform
Direct land
acquisition
Control
Source: CLSA
Godrej Properties, Prestige From 2010 onwards, a few developers - primarily Godrej Properties and Prestige
built up scale via new forms Estates - began acquiring land via a joint-development model, which is relatively asset
of project additions light. Additionally, the landowner is often a locally knowledgeable/influential person
that can help seek local-authority approval. Over the last two to three years, the
asset-light model of project acquisition has accelerated, with more methods being
added, including development-management fees, profit-sharing and a PE/platform
approach to add new projects.
Figure 27
FY17 FY24
8-10% Market share gains for organised developers 17-20%
India property
29 January 2018
Source: CLSA
Section 2: Affordability to drive housing uptick India property
Figure 29
80 (%)
Property pricing
Cost in FY18: Rs6.0m 70
FY18: Flat
FY19: +2.5% 60 56
54
49
Household income 50 45 46
46 45
41 41
Income in FY18: Rs1.3m 40 36 38
34 35
34
FY18: +7.5% 31
28
31 29
27
FY19: +7.5% 30
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
Rs235,000 via CLSS
Figure 30
11
10
9
12-year lows
8
7
Jan 04
Jan 05
Jan 06
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Jan 18
We estimate that monthly mortgage payments are down by 10% since FY15 for a
similar property - a 2BHK (two-bedroom flat with hall and kitchen) - currently
costing Rs6.0m and located in a metro city suburb. However, if we adjust the
same on an income basis, then the monthly mortgage payment is actually 33%
lower.
Figure 31
In income-adjusted terms, Mortgage payment in nominal and income-adjusted terms for the same property
the property’s cost is 33% 50,000 (Rs) Monthly mortgage payment actual
lower than in FY15 Monthly mortgage payment - Income adjusted
45,000
40,000
35,000
30,000
25,000
20,000
FY15 FY16 FY17 FY18CL FY19CL
Source: CLSA, HDFC, SBI
Figure 32
Size of house
60 Up to 120 Up to 150
(m²)
Interest subsidy
6.5 4.0 3.0
(%)
Figure 33
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
Source: CLSA, SBI, HDFC
The government launched CLSS along with the main Pmay scheme in 2016.
Developers and lenders became attracted to CLSS from 2017, when Narendra
Modi increased the scheme to cover middle-income housing and expanded
income eligibility limits. As of December 2017, CLSS has seen nearly 80,000
houses financed (70,000 under LIG, 10,000 under MIG). A total of Rs16.2bn in
interest subsidies has been disbursed to date, with the major jump happening in
FY18.
Figure 34
9
8
Budget for FY18 is Rs14bn,
enough to support 70,000 7
home purchases 6
5
4
3
2
1
0
FY16 FY17 YTD FY18
¹ FY18 data is Apr-Dec 2018. Total budget for FY18 is Rs15bn. Source: CLSA, Ministry of Housing
Figure 35
Residential sales run-rate Residential property sales trend (tr-12 months, % YoY, top-seven cities)¹
on a tr-12-month basis 50 (% YoY)
down 50% from 2013 peak
40
30
20
10
0
(10)
(20)
(30)
(40)
(50)
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
¹ Top cities - NCR, MMR, Bangalore, Chennai, Hyderabad, Pune and Kolkata. Source: CLSA, JLL REIS
Figure 36
Residential launches run- Residential property launches trend (tr-12 months, % YoY, top-seven cities)¹
rate on a tr-12-month basis (% YoY)
60
down ~65% from 2013 peak
40
20
(20)
(40)
(60)
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
¹ Top cities - NCR, MMR, Bangalore, Chennai, Hyderabad, Pune and Kolkata. Source: CLSA, JLL REIS 3Q17
Figure 37
30
20
10
(10)
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
¹ Top cities - NCR, MMR, Bangalore, Chennai, Hyderabad, Pune and Kolkata. Source: CLSA, JLL REIS
Property markets’ opportunity pyramid by price range: developers currently only serve the premium segment
Opportunity set to
quadruple with Rs4.6tn
affordable push market
0.4m
Premium
>Rs5m Rs2.1tn
0.3m market
Rs4.6tn
Affordable 1.0m market
Rs2-5m Rs1.6tn
0.5m market
Social
Rs3.3tn
<Rs2m 5.7m market Rs7.6tn
9.5m market
FY17 FY24
houses added houses added
Number of Number of
houses: 6.5m houses: 10.9m
Figure 39
Figure 40
Faster sell-through rates, Mumbai’s market distribution of configurations with sales achieved
higher volumes achieved in
affordable segment Property price 4BHK+
~44.6%
sold
3BHK
~48.9%
sold
2BHK
~49.6%
sold
1BHK
~50.2%
sold
1RK
~63.4%
sold
Apartment size
Note: Size of figure replicates amount of supply of particular configuration, Data updated up to 4 th October 2017.
Source: CLSA, JLL, MAHARERA
Lack of scale Developers like Value Budget and Housing Corp (VBHC), XRBIA and Poddar
Housing have tried to scale up as affordable-focused developers, but most large
Indian cities have very limited competition in the space. However, growing
aspiration and existing developers’ poor track-records imply customers in the
affordable segment could be willing to pay more for a better branded product.
Figure 41
Figure 42
Existing sub-Rs10m product Based on previous sales track-records, we believe that Godrej Properties, Sobha
may be extended to sub and Prestige can take advantage of the affordable segment. While we note that
Rs5m bracket these developers have limited presence in the sub-Rs5m segment, they still have
sub-Rs10m products accounting for more than a third of their FY17 presales,
which could be extended to lower price points - particularly as government
incentives make the segment more attractive.
Figure 43
Our estimates (ex-Sobha) of Sub-Rs10m unit presales as % of estimated FY17 residential sales
contribution of Rs10m units
80 (%)
to FY17 presales
70
60
50
40
30
20
10
0
Godrej Properties Sobha Prestige Oberoi Realty DLF
Source: CLSA, Companies
Figure 44
35 (US$bn) Net inflows in domestic MFs Annual CPI inflation (RHS) (%) 14
30 Property prices 12
stagnate but
25 Both investment domestic equity
property and investment booms 10
20 equity do well
15 8
Property prices rise
but domestic equity
10 6
investment suffers
5
4
0
2
(5)
(10) 0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
¹ CPI - Industrial workers before 2013. Source: CLSA, Amfi, Bloomberg, Mospi
Figure 45
50
8
40
6
30
4
20
10 2
0 0
FY12 FY13 FY14 FY15 FY16 FY17CL
Source: CLSA, MOSPI, RBI
Equities have seen Inflow into domestic mutual funds (DMF) has risen to as high as US$32bn in
significant inflow vs 2017, compared to around zero in 2010-13. The share of financial savings in total
property since 2014 annual savings has risen from 40% in FY12, to 54% in FY17. Essentially, the
property investor has, on the margin, turned to equities and other financial assets.
Nonetheless, with property prices now trailing inflation significantly for the last
three years, affordability has improved. In addition, the recent upturn in inflation
and bond yields could signify that the attractiveness of real assets may increase in
the next few quarters. As such, we would expect investor demand to gradually
improve from FY19.
Figure 46
0
Apr 16
Sep 16
Dec 16
Apr 17
Sep 17
Aug 16
Aug 17
Jul 16
Oct 16
Jul 17
Nov 16
Oct 17
Nov 17
Feb 16
Mar 16
Feb 17
Mar 17
Jan 16
May 16
Jun 16
Jan 17
May 17
Jun 17
Figure 47
Yields average 3% across Rental yields for selected properties by listed developers
top metros, less than ~7%
post-tax property rate
Bangalore 3.4
Mumbai 2.9
Delhi-NCR 2.3
(%)
Smaller ticket sizes Our checks on 40 properties over the metros of Mumbai, NCR and Bangalore
command higher yields reveal that rental yields are in the 2-4% range, with Bangalore the highest and
NCR the lowest. Smaller homes have higher rental yields, which are partly a
reflection of better supply-demand dynamics for the lower-ticket housing space.
New business districts Rising connectivity will lower travel times across Mumbai. The rise of new
should expand premium business districts, along with better infrastructure, is likely to trigger city
residential areas north/east expansion in terms of housing locations as well. We note that this has happened
in the past ~15 years as well. Until the early 2000s, the main business district was
restricted to South and Central Mumbai and hence premium residential areas
were limited to those near the airport. With the opening up of BKC in the 2000s,
premium residential areas have now spread about 15km northwards of the airport
and also much further in the eastern part of the city.
Figure 49 Figure 50
Mumbai’s key office/premium residential areas (2000) Mumbai’s key office/premium residential areas (current)
Premium residential:
expands north/east
Business district:
BKC
Premium residential:
south/west Mumbai
Business district:
Lower Parel
Figure 51
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
2010 2011 2012 2013 2014 2015 2016 9M17
Figure 52
100,000
80,000
60,000
40,000
20,000
0
2010 2011 2012 2013 2014 2015 2016 9M17
Figure 53
We forecast combined 14% Housing market sales by segment (dotted lines represent organised sector’s addressable market)
Cagr in affordable/premium
sales over FY17-24CL
(Rstn)
0 1 2 3 4 5 6 7 8 9 10
Source: CLSA
A 30% Cagr likely if market- As market-share gains unfold for organised property developers, sales could rise
share doubling, overall much faster. Our forecast of organised developers’ market-share doubling in the
market growth combine next five years implies their sales to rise at around 30% Cagr over FY17-24CL.
This suggests the organised sector will reach sales of Rs1.8tn (US$28.3bn) by
FY24CL. Even a smaller increase in market share of 50% implies listed universe
sales would enjoy a Cagr of 23%.
Figure 54
Source: CLSA
City-wise housing market: current conditions and prognosis (size of the circle represents market opportunity)
(85) (70)
NCR
% change % change
in launches in sales
(45) (35)
Kolkata
% change % change
Mumbai in launches in sales
(70) (75)
Pune
% change % change
in launches in sales
Hyderabad % change % change
(20) (5) in launches in sales
Bangalore (30) (50)
India property
(50) (20) (80) (50)
29 January 2018
Figure 56
Lease rentals have only now Grade-A office rentals at major office micromarkets
touched the previous peaks
in preferred locations 140 (Rs/sf/mth) Gurgaon prime (Cybercity) Bangalore (ORR)
120
100
80
60
40
20
0
Dec 06 Oct 08 Jul 10 May 12 Feb 14 Dec 15 Sep 17
Figure 57
Demand levels have been Office supply and absorption trends in top-eight¹ cities
consistent, but incremental
supply has fallen off 45 (msf) Supply Absorption Absorbed (RHS) (%) 100
40 95
90
35
85
30
80
25
75
20
70
15
65
10
60
5 55
0 50
2012 2013 2014 2015 2016 2017
¹ NCR, MMR, Bangalore, Chennai, Pune, Hyderabad, Kolkata, Ahmedabad. Source: CLSA, Cushman & Wakefield
Figure 58
Nationwide vacancy rates Average Grade-A vacancy rates in top-six¹ office markets
are at 12%, lower than 20%
four years ago 25 (%)
20
20 18
18
17
15 14
12
10
0
Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Sep 17
¹ NCR, MMR, Bangalore, Chennai, Pune, Hyderabad. Source: CLSA, Cushman & Wakefield
Select micromarkets have As incremental absorption rates have increased, vacancy rates have declined
3-5% vacancy ranges with across most Indian cities, but are still averaging about 12%. Within these cities,
good rental growth preferred micromarkets have emerged as key office destinations; here, occupancy
rates have shrunk from double digits to mid-to-low single digits. Important
micromarkets - like Cybercity in Gurgaon and Sarjapur-ORR in Bangalore - have
seen vacancy rates in low-single digits, spurring higher rental growth.
99 27 78
13 37 35
Ahmedabad Kolkata
Stock Vacancy Rent/
(msf) (%) psfpm
Stock Vacancy Rent/
79 18 122 (msf) (%) psfpm
Pune 34 38 50
Mumbai
Bangalore
Stock Vacancy Rent/
(msf) (%) psfpm Stock Vacancy Rent/
(msf) (%) psfpm
118 6 67
Chennai
India property
44 8 53
Figure 60
Figure 61
Major influx of PE in office Key private equity deals in the leased asset space
space owns existing assets, Investor Investee Value¹ Year Description
controls new supply via JVs (US$bn)
GIC DCCDL/DLF 1.4 2017 GIC acquires 33% stake in DLF’s main lease
asset holding subsidiary, DCCDL, which has
27msf operational lease assets
Blackstone Carvinal Group 0.3 2017 Mall cum Hotel portfolio, earlier developed
and owned by L&T
CPPIB Phoenix Mills 0.3 2017 Mall platform created via acquiring stake in
Phoenix’s Bangalore mall
QIA - RMZ Adarsh Project 0.2 2017 Acquisition of assets & development rights
backed by QIA
Brookfield Hiranandani Developers 1.0 2016 Acquires entire 4.5msf of office & retail
space in Powai
RMZ Essar Biz Park 0.4 2016 Asset located in Mumbai BKC district
GIC Sheth Developers 0.2 2016 GIC buys 50% stake in Viviana Mall, Thane
Blackstone HCC 0.2 2015 100% control in 1.1msf commercial property
in Mumbai
Brookfield Unitech 0.3 2014 Brookfield acquired Unitech's 40% share
for four assets in NCR & Kolkata
QIA RMZ 0.3 2013 JV to buy development assets across top cities
Blackstone Embassy Group na 2012 JV formed in 2012 has 18msf operational and
13msf under construction office assets
Blackstone DLF 0.2 2011 DLF sells 67% stake in 25-acre SEZ, Pune
¹ Equity value or EV as disclosed. Source: CLSA
Lower liquidity post Rera to One of the most important developments in the lease-asset space is the
make it tougher for lease- emergence of global PE funds as the largest holders or partners to India’s major
asset supply to come up lease-asset developers. This suggests we should expect a disciplined approach to
future supply decisions. Also, tougher liquidity conditions, particularly post Rera,
imply that smaller developers will struggle to come up with adequate surplus to
use building speculative lease assets.
Figure 62
Figure 63
9.5
9.0
8.5
8.0
7.5
7.0
Cap rates of 11-13%
6.5
6.0
Cap rates of 8-10%
5.5
5.0
Apr 09
Sep 09
Dec 10
Apr 14
Sep 14
Dec 15
Aug 12
Aug 17
Jul 10
Jul 15
Nov 08
Oct 11
Nov 13
Oct 16
Feb 10
Mar 12
Feb 15
Mar 17
Jan 08
Jun 08
May 11
Jan 13
Jun 13
May 16
Jan 18
AIT SP is a proxy Indian office space does not yet have any listed REITs, which makes the tracking
in the absence of any of benchmark yields difficult. In Figure 64, we track the yield of Ascendas India
India-listed REITs Trust, a Singapore-listed business trust that has only Indian office space as its
assets. The yield has declined from an average of 7.1% during 2010-13, to 5.4%
during 2016-17, partly reflecting the cap-rate compression associated with Indian
lease assets.
Figure 64
Yield has fallen for Indian Implied gross yield for Ascendas India Trust (AIT SP)
office assets listed in
Singapore 10 (%)
4
Jan 10 May 11 Sep 12 Jan 14 May 15 Sep 16 Jan 18
Figure 65
We assume no further However, we believe that cap-rate compression is now over, and that interest
reduction in RBI’s rates, as well as inflation, have bottomed out. Also, bond yields have already
benchmark lending rates moved up by around 80-90bps from their 6.5% low. As such, cap-rate
compression is unlikely to be a return driver for lease assets going forward.
Figure 66
Capital value appreciation Rental and capital value growth over Sep 14 – Sep 17
for lease assets has been Bangalore - ORR Gurgaon - Cybercity Mumbai - Lower parel
exaggerated over last three Rentals (Rs/sf/mth)
years due to cap rate Sep-14 55 81 160
compression Sep-17 80 117 176
Rental growth (% Cagr) 13.0 13.2 3.2
Benchmark cap rates (%)
Sep-14 11 11 11
Sep-17 8 8 8
Implied capital values (Rs/sf)
Sep-14 6,022 8,813 17,488
Sep-17 11,949 17,570 26,415
Capital value growth (% Cagr) 25.7 25.9 14.7
Source: CLSA, Cushman & Wakefield
Figure 67
2,000
1,500
500
(500)
(1,500)
(2,000)
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Source: CLSA
Post Rera cashflow is Residential real estate is now ready for another round of capital raising, and
delayed by one year on private money can again play an important role. The key factor here is that Rera
average (as highlighted in Section 1) makes it tough for developers to rotate money out of
projects. In Figure 67, we can see cashflow pre-and-post Rera for a 1msf project
with a sale price of Rs6,000/sf, 100% sold at launch (see the Appendix for
details). Assuming land costs to be 25% of project (Rs1,500/sf), cashflow recovery
in the post Rera scenario is now delayed by a year. Because banks are not allowed
to lend for land purchases, developers must use alternative sources of capital,
opening up an opportunity for PE to step in.
Figure 68
We see Rera and affordable Capital may head the residential way
expansions as the main
triggers
FY18-24 organised developer pre-sales: US$100bn
Change Impact
Source: CLSA
Figure 69
Expect ~US$10-15bn equity Estimated funding pattern for organised segment’s US$100bn in sales over FY18-24
requirement from organised
residential developers Equity finance Profit
(public/private) (customer flows)
10-15% 15-20%
- Public markets
- Private equity
- Structured/quasi equity
Bridge finance
(debt/quasi debt) Funding pattern of
10-15% US$100bn cumulative
sales by organised
developers
Construction costs
(customer flows)
55-60%
Source: CLSA
We prefer Godrej, Sobha, We are BUYers of Godrej Properties, Sobha and Oberoi for their housing
Oberoi and Prestige exposure. Due to the ongoing progress of their business restructurings, Prestige
Estates and IBREL are seen as attractive mixes of lease assets and residential. Our
sole negative rating in the sector is on DLF, where fundamentals are significantly
trailing implied recovery, meaning a valuation catch-up is highly likely.
Figure 70
MSCI EM 3
MSCI India 0
MSCI Indonesia 2
MSCI Thailand 3
MSCI China 5
MSCI Singapore 19
MSCI Philippines 24
MSCI HK 26
(%) 0 1 2 3 4 5 6 7 8 9 10
BSE Realty index is still While property stocks have outperformed the market in the last 12 months, total
slightly less than 1% of the market capitalisation of the representative BSE Realty index is still slightly less
total stocks listed on BSE
than 1% of the total stocks listed on BSE. The initial burst of excitement in
property stocks took property stocks’ market cap to more than 5% in late 2007.
In five years, assuming Indian market caps reach US$4tn, from their current
US$2.5tn (a 10% Cagr, the same as nominal GDP), a 2.5% weight for the property
sector should imply US$100bn. This will be driven by a higher market share for
existing listed property stocks, and possible new listings.
Figure 71
80 4
60 3
40 2
20 1
0 0
Sep 07
Sep 08
Sep 09
Sep 10
Sep 11
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Source: CLSA, Bloomberg
Figure 72
Stocks are trading above Property stocks¹: one-year forward PE ratio chart over 10 years
the 1sd levels on a PE basis,
similar to Nifty 50 (x)
45
40
35 +1sd34.42x
30 avg28.95x
25
-1sd23.48x
20
15
10
Jan 08 Sep 09 May 11 Jan 13 Sep 14 May 16 Jan 18
¹ Property stocks covered by CLSA India, added as of listing date; Source: CLSA
The one-year forward price-to-book ratio of 2.3x is lower than 1sd levels, and
about 30% higher than the average 1.8x levels. We note, however, that this is in
the context of 10% lower-than-average ROE of 6.3%.
Figure 73
Stocks are trading below Property stocks¹: one-year forward PB ratio chart over 10 years
1sd levels on a PB basis, 9 (x)
again similar to Nifty
8
7
6
5
4
3 +1sd2.75x
2 avg1.82x
1 -1sd0.88x
0
Jan 08 Sep 09 May 11 Jan 13 Sep 14 May 16 Jan 18
¹ Property stocks covered by CLSA India, added as of listing date; Source: CLSA
Figure 74
Sector profitability would Total net profit of property stocks under our coverage¹
lower with companies like (Rsbn) Net profit of property stocks covered (Rsbn)
Unitech and JP Infra 90 85 35
Net profit ex DLF (RHS)
80
30
70
25
60
51
50 20
37
40 32 15
27 26
30 22 25
20 21 20 21
19 10
20
5
10
0 0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
¹ DLF, Oberoi Realty, Prestige, Godrej Properties, Sobha, Indiabulls Real, Phoenix. Source: CLSA
Presales is the right matrix We also note that since Indian accounting standards’ led revenue recognition for
to track ongoing projects starts only after 25% of construction costs are incurred (around
four to eight quarters after launch), any successful new launches - ie, an upturn in
the cycle - will take some time to reflect. We would, in such a scenario, prefer to
track presales for stock performance and, as such, also benchmark our valuations
to normalised presales levels.
Figure 75
Valuation methodologies
Source: CLSA
Figure 76
Godrej
Properties
Prestige
High Premium
volumes pricing
Sobha
IBREL
Oberoi
DLF
Land banking
Note: Size of the circle replicates the amount of residential sales from FY15-1HFY18. Source: CLSA
Figure 77
Property valuation
Company Price Mkt cap ADTO PE (x) EV/Ebitda (x) PB (x) ROE (%) TP % Rec
(Rs) (US$m) (US$m) FY19 FY20 FY19 FY20 FY19 FY20 FY19 FY20 (Rs) Up/dn
DLF 253 7,103 37.2 71.2 61.4 18.1 17.3 1.8 1.8 2.6 3.0 176 (31) SELL
Godrej Prop 823 2,799 3.2 54.9 42.6 72.0 59.2 7.4 6.5 14.3 16.2 1,078 31 BUY
Indiabulls Real 231 1,716 43.0 24.3 20.3 15.7 13.1 2.3 2.1 10.0 10.6 311 34 BUY
Oberoi 528 2,828 2.5 20.2 19.0 14.7 12.0 2.5 2.2 12.9 12.2 639 21 BUY
Prestige 314 1,844 2.6 30.9 27.5 13.6 12.3 2.3 2.2 7.8 8.2 393 25 BUY
Sobha 552 831 6.9 22.2 18.7 11.5 9.4 1.8 1.6 8.2 9.1 760 38 BUY
Source: CLSA
Expect minor margin We do not bake in significant gains on margins for developers, as most of the
improvement, some growth is linear in nature, to the extent that property prices may not rise
moderation of multiples substantially for existing land parcels. High growth (a topline Cagr of around 20%)
will drive some margin gains on the SG&A (selling, general and administrative
expenses) front. Given the nature of business models, we believe Godrej
Properties and Sobha have the highest potential long-term growth.
Figure 78
Company profiles
DLF ................................................................................................................................. 57
All prices quoted herein are as at close of business 25 January 2018, unless otherwise stated
Notes
Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com
DLF - SELL India property
Financials at a glance
Year to 31 March 2016A 2017A 18CL (% YoY) 19CL 20CL
Profit and loss (Rsm)
Revenue 99,256 82,212 77,624 (5.6) 83,561 87,913
Cogs (ex-D&A) (45,579) (34,658) (28,959) (30,705) (31,834)
Gross Profit (ex-D&A) 53,678 47,555 48,665 2.3 52,856 56,079
SG&A and other expenses (13,706) (13,222) (13,795) (14,428) (15,700)
Op Ebitda 39,972 34,333 34,870 1.6 38,428 40,379
Depreciation/amortisation (7,659) (5,725) (5,809) (5,998) (6,211)
Op Ebit 32,313 28,608 29,061 1.6 32,430 34,167
Net interest inc/(exp) (26,798) (29,798) (31,460) (30,068) (30,478)
Other non-Op items 6,714 7,193 6,579 (8.5) 6,705 6,835
Profit before tax 12,229 6,003 4,180 (30.4) 9,068 10,525
Taxation (5,642) (2,293) (1,254) (2,720) (3,157)
Profit after tax 6,587 3,710 2,926 (21.1) 6,347 7,367
Minority interest 11 68 0 0 0
Net profit 5,029 2,855 2,926 2.5 6,347 7,367
Adjusted profit 5,029 2,855 2,926 2.5 6,347 7,367
Cashflow (Rsm)
Operating profit 32,313 28,608 29,061 1.6 32,430 34,167
Depreciation/amortisation 7,659 5,725 5,809 1.5 5,998 6,211
Working capital changes 128,811 (47,836) 235 6,249 (1,680)
Other items (123,139) (2,786) (25,804) (4,993) (5,475)
Net operating cashflow 45,643 (16,289) 9,301 39,684 33,223
Capital expenditure (3,976) (3,438) (11,169) (11,567) (9,533)
Free cashflow 41,667 (19,726) (1,868) 28,118 23,691
M&A/Others (33,084) (14,891) (24,881) (23,363) (23,642)
Net investing cashflow (37,060) (18,329) (36,050) (34,929) (33,175)
Increase in loans (10,308) 39,389 7,447 (81.1) (5,000) -
Dividends (4,281) (4,282) (4,282) (4,282) (4,817)
Net equity raised/other 13,141 6,464 - - -
Net financing cashflow (1,448) 41,571 3,165 (92.4) (9,282) (4,817)
Incr/(decr) in net cash 7,136 6,954 (23,584) (4,526) (4,769)
Exch rate movements 0 0 0 0 0
Balance sheet (Rsm)
Cash & equivalents 35,642 42,595 19,011 (55.4) 14,485 9,715
Accounts receivable 34,868 37,193 14,232 (61.7) 14,352 15,268
Other current assets 257,766 288,601 326,138 13 328,447 335,093
Fixed assets 240,107 237,820 243,181 2.3 248,749 252,071
Investments 18,204 10,490 10,490 0 10,490 10,490
Intangible assets 10,179 10,110 10,110 0 10,110 10,110
Other noncurrent assets 20,538 16,498 18,148 10 18,602 19,067
Total assets 617,305 643,307 641,310 (0.3) 645,235 651,813
Short-term debt - - - - -
Accounts payable 63,039 59,950 53,955 (10) 56,652 59,485
Other current liabs 59,681 44,368 42,274 (4.7) 46,436 47,631
Long-term debt/CBs 252,633 292,022 299,469 2.6 294,469 294,469
Provisions/other LT liabs 0 0 0 0 0
Shareholder funds 240,691 245,728 244,373 (0.6) 246,438 248,989
Minorities/other equity 1,261 1,239 1,239 0 1,239 1,239
Total liabs & equity 617,305 643,307 641,310 (0.3) 645,235 651,813
Ratio analysis
Revenue growth (% YoY) 29.8 (17.2) (5.6) 7.6 5.2
Ebitda margin (%) 40.3 41.8 44.9 46.0 45.9
Ebit margin (%) 32.6 34.8 37.4 38.8 38.9
Net profit growth (%) (11.2) (43.2) 2.5 116.9 16.1
Op cashflow growth (% YoY) 133.7 (135.7) nm 326.7 (16.3)
Capex/sales (%) 4.0 4.2 14.4 13.8 10.8
Net debt/equity (%) 89.7 101.0 114.2 113.0 113.8
Net debt/Ebitda (x) 5.4 7.3 8.0 7.3 7.1
ROE (%) 2.0 1.2 1.2 2.6 3.0
ROIC (%) 3.7 3.8 4.1 4.4 4.6
Source: CLSA, Company
10 2
0 0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
Source: CLSA, Company
10 20
5 10
0 0
(5) (10)
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
12
10
8
13
6 11
12
10
4
2 3
4
2
0
FY10 FY11 FY12 FY13 FY14 FY15 FY16
Source: CLSA, Company
50
40
30
20
10
0
Mar 14 Mar 15 Mar 16 Mar 17 Sep 17 Mar 18CL
¹ Gross size and income. Source: CLSA, Company
30 30
25 25
20 20
15 15
10 10
5 5
0 0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18CL FY19CL FY20CL
¹ Gross size and income. Source: CLSA, Company
120 70
Profits to rise faster than 60
revenue on rising share of 100
lease income and better 50
80
margin mix for residential 40
developments 60
30
40 20
20 10
0 0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
Valuation charts
PE at top end due to PE: One-year forward PE on then-consensus earnings
expectations that (x) PE: 1Y fwd Average +1sd -1sd
100
deleveraging will drive
EPS upgrade 90
80
70
60
50
40
30
20
10
0
Jan 08 Sep 09 May 11 Jan 13 Sep 14 May 16 Jan 18
Source: CLSA, Bloomberg
30
25
20
15
10
0
Jan 08 Sep 09 May 11 Jan 13 Sep 14 May 16 Jan 18
Source: CLSA
0
Jan 08 Sep 09 May 11 Jan 13 Sep 14 May 16 Jan 18
Source: CLSA
Valuation details
We value DLF using a SOTP methodology, separately valuing its annuity and
development businesses. We view the annuity unit as a sum of rental arm DLF
Cyber City Developers (DCCDL) and non-DCCDL assets. We value its
development division on land and completed inventory, and assess DCCDL based
on the value at which a 33% stake has being sold to private-equity investor. DLF
would need to improve its development company’s business outlook in order to
justify a rerating, in our view.
Investment risks
As DLF derives roughly equal value from its annuity and development-company
businesses, the outlook for the commercial and residential-property sectors pose an
important risk factor. In addition to the macro risks associated with a property
company (eg, interest rates and discretionary demand), DLF's large exposure to the
National Capital Region makes the area’s outlook another important risk variable.
DLF has had variety of issues impact its stock, including court cases on capital-
market access, business conduct as well as other regulatory/land acquisition-
related issues where negative outcomes can impact its share-price movement.
Detailed financials
Profit and loss (Rsm)
Year to 31 March 2014A 2015A 2016A 2017A 18CL 19CL 20CL
Revenue 82,980 76,487 99,256 82,212 77,624 83,561 87,913
Cogs (ex-D&A) (38,803) (32,845) (45,579) (34,658) (28,959) (30,705) (31,834)
Gross Profit (ex-D&A) 44,177 43,642 53,678 47,555 48,665 52,856 56,079
Research & development costs 0 0 0 0 0 0 0
Selling & marketing expenses (13,565) (9,916) (10,553) (9,938) (10,479) (10,863) (11,868)
Other SG&A - - - - - - -
Other Op Expenses ex-D&A (5,759) (3,488) (3,152) (3,283) (3,316) (3,565) (3,832)
Op Ebitda 24,852 30,237 39,972 34,333 34,870 38,428 40,379
Depreciation/amortisation (6,629) (5,448) (7,659) (5,725) (5,809) (5,998) (6,211)
Op Ebit 18,223 24,789 32,313 28,608 29,061 32,430 34,167
Interest income 0 0 0 0 0 0 0
Interest expense (24,633) (23,039) (26,798) (29,798) (31,460) (30,068) (30,478)
Net interest inc/(exp) (24,633) (23,039) (26,798) (29,798) (31,460) (30,068) (30,478)
Associates/investments - - - - - - -
Forex/other income - - - - - - -
Asset sales/other cash items 14,915 5,194 6,714 7,193 6,579 6,705 6,835
Provisions/other non-cash items - - - - - - -
Asset revaluation/Exceptional items - - - - - - -
Profit before tax 8,506 6,945 12,229 6,003 4,180 9,068 10,525
Taxation 836 (1,581) (5,642) (2,293) (1,254) (2,720) (3,157)
Profit after tax 9,342 5,364 6,587 3,710 2,926 6,347 7,367
Preference dividends 71 (34) (1,569) (923) 0 0 0
Profit for period 9,413 5,330 5,018 2,787 2,926 6,347 7,367
Minority interest 565 333 11 68 0 0 0
Net profit 9,979 5,663 5,029 2,855 2,926 6,347 7,367
Extraordinaries/others (3,516) (260) (1,967) 4,293 0 0 0
Profit avail to ordinary shares 6,462 5,402 3,062 7,148 2,926 6,347 7,367
Dividends (4,167) (4,274) (4,281) (4,282) (4,282) (4,282) (4,817)
Retained profit 2,295 1,128 (1,219) 2,866 (1,356) 2,066 2,551
Adjusted profit 9,979 5,663 5,029 2,855 2,926 6,347 7,367
EPS (Rs) 5.7 3.2 2.8 1.6 1.6 3.6 4.1
Adj EPS [pre excep] (Rs) 5.7 3.2 2.8 1.6 1.6 3.6 4.1
Core EPS (Rs) 5.7 3.2 2.8 1.6 1.6 3.6 4.1
DPS (Rs) 2.0 2.0 2.0 2.0 2.0 2.0 2.3
Cashflow (Rsm)
Year to 31 March 2014A 2015A 2016A 2017A 18CL 19CL 20CL
Operating profit 18,223 24,789 32,313 28,608 29,061 32,430 34,167
Operating adjustments - - - - - - -
Depreciation/amortisation 6,629 5,448 7,659 5,725 5,809 5,998 6,211
Working capital changes (13,836) (8,440) 128,811 (47,836) 235 6,249 (1,680)
Interest paid /other financial expenses - - - - - - -
Tax paid 836 (1,581) (5,642) (2,293) (1,254) (2,720) (3,157)
Other non-cash operating items 1,902 (682) (117,497) (493) (24,550) (2,273) (2,318)
Net operating cashflow 13,755 19,534 45,643 (16,289) 9,301 39,684 33,223
Capital expenditure 19,118 (12,068) (3,976) (3,438) (11,169) (11,567) (9,533)
Free cashflow 32,872 7,466 41,667 (19,726) (1,868) 28,118 23,691
Acq/inv/disposals 6,357 (1,451) (13,000) 7,715 - - -
Int, invt & associate div (9,717) (17,844) (20,084) (22,605) (24,881) (23,363) (23,642)
Net investing cashflow 15,757 (31,363) (37,060) (18,329) (36,050) (34,929) (33,175)
Increase in loans (24,672) 21,610 (10,308) 39,389 7,447 (5,000) -
Dividends (4,167) (4,274) (4,281) (4,282) (4,282) (4,282) (4,817)
Net equity raised/(buybacks) 7,238 (6,579) 13,141 6,464 - - -
Net financing cashflow (21,601) 10,757 (1,448) 41,571 3,165 (9,282) (4,817)
Incr/(decr) in net cash 7,911 (1,072) 7,136 6,954 (23,584) (4,526) (4,769)
Exch rate movements 0 0 0 0 0 0 0
Opening cash 21,668 29,579 28,506 35,642 42,595 19,011 14,485
Closing cash 29,579 28,507 35,642 42,596 19,011 14,485 9,716
OCF per share (Rs) 7.9 11.0 25.6 (9.1) 5.2 22.2 18.6
FCF per share (Rs) 18.9 4.2 23.4 (11.1) (1.0) 15.8 13.3
DuPont analysis
Year to 31 March 2014A 2015A 2016A 2017A 18CL 19CL 20CL
Ebit margin (%) 22.0 32.4 32.6 34.8 37.4 38.8 38.9
Asset turnover (x) 0.1 0.1 0.2 0.1 0.1 0.1 0.1
Interest burden (x) 0.5 0.3 0.4 0.2 0.1 0.3 0.3
Tax burden (x) 1.1 0.8 0.5 0.6 0.7 0.7 0.7
Return on assets (%) 3.1 2.9 2.7 2.8 3.2 3.5 3.7
Leverage (x) 2.4 2.4 2.5 2.6 2.6 2.6 2.6
ROE (%) 3.5 1.9 2.5 1.5 1.2 2.6 3.0
EVA® analysis
Year to 31 March 2014A 2015A 2016A 2017A 18CL 19CL 20CL
Ebit adj for tax (Rsm) 20,015 19,146 17,404 17,681 20,343 22,701 23,917
Average invested capital (Rsm) 489,750 494,319 472,703 463,322 500,742 516,376 520,832
ROIC (%) 4.1 3.9 3.7 3.8 4.1 4.4 4.6
Cost of equity (%) 14.5 14.5 14.5 14.5 14.5 14.5 14.5
Cost of debt (adj for tax) (%) 13.2 9.3 6.5 7.4 8.4 8.4 8.4
Weighted average cost of capital (%) 13.9 12.3 11.1 11.5 11.9 11.9 11.9
EVA® /IC (%) (9.8) (8.4) (7.4) (7.6) (7.8) (7.5) (7.3)
EVA® (Rsm) (48,228) (41,446) (34,857) (35,435) (39,174) (38,674) (37,988)
Source: CLSA, Company
Notes
Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com
Godrej Properties - BUY India property
Financials at a glance
Year to 31 March 2016A 2017A 18CL (% YoY) 19CL 20CL
Profit & Loss (Rsm)
Revenue 21,226 15,829 15,331 (3.2) 15,840 14,834
Cogs (ex-D&A) (17,342) (10,809) (10,811) (9,632) (7,731)
Gross Profit (ex-D&A) 3,884 5,020 4,520 (10) 6,209 7,103
SG&A and other expenses (2,518) (2,516) (3,106) (3,404) (3,745)
Op Ebitda 1,366 2,504 1,413 (43.6) 2,804 3,358
Depreciation/amortisation (143) (147) (151) (163) (175)
Op Ebit 1,224 2,357 1,263 (46.4) 2,642 3,183
Net interest inc/(exp) (406) (1,015) (1,526) (1,400) (1,440)
Other non-Op items 1,295 1,254 2,000 59.5 1,350 1,400
Profit before tax 2,112 2,596 1,737 (33.1) 2,592 3,143
Taxation (679) (777) (522) (779) (945)
Profit after tax 1,433 1,819 1,215 (33.2) 1,813 2,199
Minority interest 151 247 678 174.6 1,427 1,977
Net profit 1,585 2,066 1,894 (8.3) 3,240 4,176
Adjusted profit 1,585 2,066 1,894 (8.3) 3,240 4,176
Cashflow (Rsm)
Operating profit 1,224 2,357 1,263 (46.4) 2,642 3,183
Depreciation/amortisation 143 147 151 2.5 163 175
Working capital changes 4,219 (7,527) 1,578 1,361 (269)
Other items (8,152) (2,202) (1,432) (752) (407)
Net operating cashflow (2,567) (7,225) 1,559 3,413 2,682
Capital expenditure 243 (79) (100) (100) (100)
Free cashflow (2,324) (7,304) 1,459 3,313 2,582
M&A/Others 1,295 1,254 2,000 59.5 1,350 1,400
Net investing cashflow 1,538 1,175 1,900 61.7 1,250 1,300
Increase in loans (1,203) 6,103 235 (96.1) - -
Dividends 0 0 (506) (633) (759)
Net equity raised/other 0 0 - 0 0
Net financing cashflow (1,203) 6,103 (271) (633) (759)
Incr/(decr) in net cash (2,232) 53 3,189 5,901.4 4,031 3,223
Exch rate movements - - - - -
Balance sheet (Rsm)
Cash & equivalents 4,722 4,775 7,963 66.8 11,994 15,217
Accounts receivable 1,719 2,218 2,520 13.6 2,604 2,438
Other current assets 55,298 59,848 57,624 (3.7) 58,841 65,399
Fixed assets 1,072 1,021 973 (4.7) 914 845
Investments 2,974 3,938 4,000 1.6 4,000 4,000
Intangible assets 0 0 0 0 0 0
Other noncurrent assets 0 0 - 0 -
Total assets 65,784 71,799 73,081 1.8 78,354 87,899
Short-term debt - - - - -
Accounts payable 14,418 11,928 11,058 (7.3) 13,603 19,615
Other current liabs 56 69 595 764.7 712 823
Long-term debt/CBs 33,662 39,765 40,000 0.6 40,000 40,000
Provisions/other LT liabs 0 0 0 0 0
Shareholder funds 17,648 20,037 21,428 6.9 24,039 27,461
Minorities/other equity 0 0 0 0 0
Total liabs & equity 65,785 71,799 73,081 1.8 78,354 87,899
Ratio analysis
Revenue growth (% YoY) 15.2 (25.4) (3.2) 3.3 (6.4)
Ebitda margin (%) 6.4 15.8 9.2 17.7 22.6
Ebit margin (%) 5.8 14.9 8.2 16.7 21.5
Net profit growth (%) (17.0) 30.4 (8.3) 71.1 28.9
Op cashflow growth (% YoY) nm nm nm 118.9 (21.4)
Capex/sales (%) 1.1 0.5 0.7 0.6 0.7
Net debt/equity (%) 164.0 174.6 149.5 116.5 90.2
Net debt/Ebitda (x) 21.2 14.0 22.7 10.0 7.4
ROE (%) 8.8 11.0 9.1 14.3 16.2
ROIC (%) 1.8 3.5 1.8 3.8 4.6
Source: CLSA, Company
70 10
60
8
50
6
40
30 4
20
2
10
0 0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18CL FY19CL FY20CL
¹ Gross sales. Source: CLSA, Company
40
30
20
10
0
FY12 FY13 FY14 FY15 FY16 FY17 1HFY18
Source: CLSA, Company
40
15
30
10
20
5
10
0 0
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
6
4
2
0
FY12 FY13 FY14 FY15 FY16 FY17 1HFY18
Source: CLSA, Company
5 4.6
4 3.5
2
1.0
1
0
FY14 FY15 FY16 FY17
Source: CLSA, Company
5 1.0
0.5
0 0.0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18CL FY19CL FY20CL
Source: CLSA, Company
Valuation charts
Rising PE due to value PE: One-year forward PE on then-consensus earnings
ascribed to Mumbai land
60 (x) PE: 1Y fwd Average +1sd -1sd
50
40
30
20
10
0
Feb 10 Jun 11 Oct 12 Feb 14 May 15 Sep 16 Jan 18
Source: CLSA, Bloomberg
0
Feb 10 Jun 11 Oct 12 Feb 14 May 15 Sep 16 Jan 18
Source: CLSA
Valuation details
We value Godrej Properties based on an SOTP-based approach wherein we value
its normalised earnings on Dec 19CL presales at 40x PAT (as it is likely to sustain
high multiples, given low-cycle earnings and affordable-housing upside) and add
the value of the development potential for its Vikhroli (Mumbai) land parcel, ie,
Rs231 per share, assuming 1msf steady-state sales per annum, as recently
demonstrated by the success of its Trees project).
Investment risks
Godrej is a nationwide residential-property developer with a relatively heavy
exposure to Mumbai (comprising 50% of presales). Key risks to the company's
business are therefore macro variables (eg, interest rates and discretionary
demand) that impact residential real-estate demand. Its Mumbai exposure also
implies that it needs to carefully assess the city's property demand. Also, given
Mumbai’s volatile regulatory environment, approval delays for projects are an
important risk element.
Detailed financials
Profit and loss (Rsm)
Year to 31 March 2014A 2015A 2016A 2017A 18CL 19CL 20CL
Revenue 12,382 18,431 21,226 15,829 15,331 15,840 14,834
Cogs (ex-D&A) (8,381) (14,864) (17,342) (10,809) (10,811) (9,632) (7,731)
Gross Profit (ex-D&A) 4,001 3,567 3,884 5,020 4,520 6,209 7,103
Research & development costs - - - - - - -
Selling & marketing expenses - - - - - - -
Other SG&A (332) (608) (2,068) (2,041) (2,602) (2,863) (3,149)
Other Op Expenses ex-D&A (253) (386) (450) (475) (504) (542) (596)
Op Ebitda 3,416 2,572 1,366 2,504 1,413 2,804 3,358
Depreciation/amortisation (58) (100) (143) (147) (151) (163) (175)
Op Ebit 3,358 2,472 1,224 2,357 1,263 2,642 3,183
Interest income 0 0 0 0 0 0 0
Interest expense (45) (47) (406) (1,015) (1,526) (1,400) (1,440)
Net interest inc/(exp) (45) (47) (406) (1,015) (1,526) (1,400) (1,440)
Associates/investments 160 835 1,295 1,254 2,000 1,350 1,400
Forex/other income - - - - - - -
Asset sales/other cash items - - - - - - -
Provisions/other non-cash items - - - - - - -
Asset revaluation/Exceptional items - - - - - - -
Profit before tax 3,474 3,260 2,112 2,596 1,737 2,592 3,143
Taxation (1,111) (904) (679) (777) (522) (779) (945)
Profit after tax 2,363 2,356 1,433 1,819 1,215 1,813 2,199
Preference dividends - - - - - - -
Profit for period 2,363 2,356 1,433 1,819 1,215 1,813 2,199
Minority interest (768) (447) 151 247 678 1,427 1,977
Net profit 1,594 1,909 1,585 2,066 1,894 3,240 4,176
Extraordinaries/others 0 0 0 0 0 0 0
Profit avail to ordinary shares 1,594 1,909 1,585 2,066 1,894 3,240 4,176
Dividends (466) (466) 0 0 (506) (633) (759)
Retained profit 1,128 1,443 1,585 2,066 1,388 2,607 3,417
Adjusted profit 1,594 1,909 1,585 2,066 1,894 3,240 4,176
EPS (Rs) 8.6 9.6 7.9 9.6 8.8 15.0 19.3
Adj EPS [pre excep] (Rs) 8.6 9.6 7.9 9.6 8.8 15.0 19.3
Core EPS (Rs) 8.6 9.6 7.9 9.6 8.8 15.0 19.3
DPS (Rs) 2.2 2.0 0.0 0.0 2.0 2.5 3.0
Cashflow (Rsm)
Year to 31 March 2014A 2015A 2016A 2017A 18CL 19CL 20CL
Operating profit 3,358 2,472 1,224 2,357 1,263 2,642 3,183
Operating adjustments - - - - - - -
Depreciation/amortisation 58 100 143 147 151 163 175
Working capital changes (6,149) (11,051) 4,219 (7,527) 1,578 1,361 (269)
Interest paid /other financial expenses (45) (47) (406) (1,015) (1,526) (1,400) (1,440)
Tax paid (1,111) (904) (679) (777) (522) (779) (945)
Other non-cash operating items (4,136) (1,663) (7,067) (410) 616 1,427 1,977
Net operating cashflow (8,025) (11,094) (2,567) (7,225) 1,559 3,413 2,682
Capital expenditure (596) (185) 243 (79) (100) (100) (100)
Free cashflow (8,621) (11,279) (2,324) (7,304) 1,459 3,313 2,582
Acq/inv/disposals - - - - - - -
Int, invt & associate div 160 835 1,295 1,254 2,000 1,350 1,400
Net investing cashflow (436) 650 1,538 1,175 1,900 1,250 1,300
Increase in loans 8,930 9,155 (1,203) 6,103 235 - -
Dividends (466) (466) 0 0 (506) (633) (759)
Net equity raised/(buybacks) 7,000 - 0 0 - 0 0
Net financing cashflow 15,464 8,689 (1,203) 6,103 (271) (633) (759)
Incr/(decr) in net cash 7,003 (1,755) (2,232) 53 3,189 4,031 3,223
Exch rate movements - - - - - - -
Opening cash 1,707 8,710 6,954 4,722 4,775 7,963 11,994
Closing cash 8,710 6,955 4,722 4,775 7,963 11,994 15,217
OCF per share (Rs) (43.4) (55.7) (12.9) (33.4) 7.2 15.8 12.4
FCF per share (Rs) (46.6) (56.6) (11.6) (33.8) 6.7 15.3 11.9
DuPont analysis
Year to 31 March 2014A 2015A 2016A 2017A 18CL 19CL 20CL
Ebit margin (%) 27.1 13.4 5.8 14.9 8.2 16.7 21.5
Asset turnover (x) 0.2 0.3 0.3 0.2 0.2 0.2 0.2
Interest burden (x) 1.0 1.3 1.7 1.1 1.4 1.0 1.0
Tax burden (x) 0.7 0.7 0.7 0.7 0.7 0.7 0.7
Return on assets (%) 4.2 2.6 1.2 2.4 1.2 2.4 2.7
Leverage (x) 3.1 3.3 3.6 3.7 3.5 3.3 3.2
ROE (%) 13.4 11.6 7.5 9.7 5.9 8.0 8.5
EVA® analysis
Year to 31 March 2014A 2015A 2016A 2017A 18CL 19CL 20CL
Ebit adj for tax (Rsm) 2,284 1,787 830 1,652 883 1,848 2,227
Average invested capital (Rsm) 33,693 42,811 46,136 47,352 50,277 48,755 48,145
ROIC (%) 6.8 4.2 1.8 3.5 1.8 3.8 4.6
Cost of equity (%) 14.5 14.5 14.5 14.5 14.5 14.5 14.5
Cost of debt (adj for tax) (%) 7.5 7.9 7.5 7.7 7.7 7.7 7.7
Weighted average cost of capital (%) 14.5 14.5 14.5 14.5 14.5 14.5 14.5
EVA® /IC (%) (7.7) (10.3) (12.7) (11.0) (12.7) (10.7) (9.9)
EVA® (Rsm) (2,601) (4,421) (5,860) (5,214) (6,407) (5,221) (4,754)
Source: CLSA, Company
Notes
200
300 CL/consensus (2) (EPS%) - - 98 88 105
250 EPS growth (% YoY) 20.9 29.0 1.4 3.3 17.9
150
200 PE (x) 32.8 25.4 25.0 24.3 20.6
100 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
150
50 100 PB (x) 2.4 2.5 2.6 2.3 2.1
0 50 ROE (%) 5.3 9.9 10.5 10.0 10.6
Jan 16 Sep 16 May 17 Jan 18 Net debt/equity (%) 154.8 175.1 210.5 171.4 142.0
Source: Bloomberg Source: CLSA
Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com
Indiabulls Real Estate - BUY India property
Financials at a glance
Year to 31 March 2016A 2017A 18CL (% YoY) 19CL 20CL
Profit and loss (Rsm)
Revenue 29,595 23,203 43,026 85.4 37,311 41,062
Cogs (ex-D&A) (16,410) (11,914) (25,491) (19,739) (20,917)
Gross Profit (ex-D&A) 13,185 11,290 17,535 55.3 17,572 20,145
SG&A and other expenses (4,208) (4,836) (5,348) (5,616) (6,318)
Op Ebitda 8,977 6,454 12,186 88.8 11,956 13,827
Depreciation/amortisation (695) (714) (1,020) (1,162) (1,319)
Op Ebit 8,282 5,739 11,166 94.5 10,794 12,508
Net interest inc/(exp) (5,011) (5,608) (7,256) (6,338) (6,825)
Other non-Op items 1,372 5,240 2,200 (58) 2,400 2,400
Profit before tax 4,643 5,371 6,109 13.8 6,856 8,083
Taxation (1,420) (1,826) (2,077) (2,331) (2,748)
Profit after tax 3,223 3,545 4,032 13.8 4,525 5,335
Minority interest (264) 424 350 (17.5) 0 0
Net profit 2,959 3,969 4,382 10.4 4,525 5,335
Adjusted profit 2,959 3,969 4,382 10.4 4,525 5,335
Cashflow (Rsm)
Operating profit 8,282 5,739 11,166 94.5 10,794 12,508
Depreciation/amortisation 695 714 1,020 42.9 1,162 1,319
Working capital changes (29,278) 4,191 2,406 (42.6) 12,967 9,107
Other items 11,193 (4,012) (22,011) (7,757) (16,047)
Net operating cashflow (9,108) 6,633 (7,419) 17,167 6,888
Capital expenditure (22,137) (14,257) (6,478) (9,567) (9,288)
Free cashflow (31,245) (7,623) (13,898) 7,599 (2,400)
M&A/Others 1,108 5,664 (7,450) 2,400 2,400
Net investing cashflow (21,029) (8,593) (13,928) (7,167) (6,888)
Increase in loans 30,136 4,218 13,410 218 (10,000) -
Dividends 0 0 0 0 0
Net equity raised/other 0 (2,258) 7,937 0 -
Net financing cashflow 30,136 1,960 21,347 989.4 (10,000) 0
Incr/(decr) in net cash (1) 0 (1) (1) 0
Exch rate movements - - - - -
Balance sheet (Rsm)
Cash & equivalents 15,152 10,831 16,755 54.7 15,843 22,316
Accounts receivable 33,067 38,242 44,338 15.9 31,943 23,867
Other current assets 103,709 95,302 78,686 (17.4) 81,083 87,921
Fixed assets 24,338 37,880 43,338 14.4 51,743 59,711
Investments 4,957 3,420 3,420 0 3,420 3,420
Intangible assets 0 0 0 0 0
Other noncurrent assets 0 0 - - 0
Total assets 181,222 185,676 186,537 0.5 184,032 197,236
Short-term debt - - - - -
Accounts payable 43,018 43,955 35,760 (18.6) 38,753 46,607
Other current liabs 69 92 172 86.8 149 164
Long-term debt/CBs 89,872 94,090 107,500 14.3 97,500 97,500
Provisions/other LT liabs 3 0 - - -
Shareholder funds 39,933 40,430 42,955 6.2 47,480 52,815
Minorities/other equity 8,328 7,109 150 (97.9) 150 150
Total liabs & equity 181,222 185,676 186,537 0.5 184,032 197,236
Ratio analysis
Revenue growth (% YoY) 13.8 (21.6) 85.4 (13.3) 10.1
Ebitda margin (%) 30.3 27.8 28.3 32.0 33.7
Ebit margin (%) 28.0 24.7 26.0 28.9 30.5
Net profit growth (%) 19.3 34.1 10.4 3.3 17.9
Op cashflow growth (% YoY) nm nm (211.9) nm (59.9)
Capex/sales (%) 74.8 61.4 15.1 25.6 22.6
Net debt/equity (%) 154.8 175.1 210.5 171.4 142.0
Net debt/Ebitda (x) 8.3 12.9 7.4 6.8 5.4
ROE (%) 5.3 9.9 10.5 10.0 10.6
ROIC (%) 6.2 3.1 5.7 5.6 6.6
Source: CLSA, Company
5
40
4
30
3
20
2
10 1
0 0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18CL FY19CL FY20CL
Source: CLSA, Company
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
Source: CLSA, Company
NCR
29%
0 (1)
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
Valuation charts
PE climbed to +1sd as the PE: One- year forward PE on then-consensus earnings
stock rerated on business- (x)
50 PE: 1Y fwd Average +1sd -1sd
restructuring hopes
45
40
35
30
25
20
15
10
5
0
Jan 08 Sep 09 May 11 Jan 13 Sep 14 May 16 Jan 18
Source: CLSA, Bloomberg
50
40
30
20
10
0
Jan 08 Sep 09 May 11 Jan 13 Sep 14 May 16 Jan 18
Source: CLSA
2.0
1.5
1.0
0.5
0.0
Jan 08 Sep 09 May 11 Jan 13 Sep 14 May 16 Jan 18
Source: CLSA
Valuation details
We value IBREL using a SOTP methodology. We use the benchmark valuations of
an 8% cap rate and 12%/14% discount rate of for high visibility (central Mumbai
residential and office)/other properties. We value ongoing projects using a DCF-
NAV approach and its landbank and London project at book.
Investment risks
IBREL's projects have a greater exposure to central Mumbai (40%+ of NAV),
where performance - as a residential and office market - can pose risks to its
stock. For the remainder, the majority valuation comes from Gurgaon, where land
is located along the Dwarka Expressway. Though we do not expect an imminent
improvement in the Gurgaon market, timely resolution (2HFY19) of Dwarka’s
issues and an improvement in housing demand are important risk variables for the
company.
Detailed financials
Profit and loss (Rsm)
Year to 31 March 2015A 2016A 2017A 18CL 19CL 20CL
Revenue 26,012 29,595 23,203 43,026 37,311 41,062
Cogs (ex-D&A) (17,689) (16,410) (11,914) (25,491) (19,739) (20,917)
Gross Profit (ex-D&A) 8,322 13,185 11,290 17,535 17,572 20,145
Research & development costs - - - - - -
Selling & marketing expenses - - - - - -
Other SG&A (2,005) (3,064) (3,675) (4,042) (4,244) (4,775)
Other Op Expenses ex-D&A (604) (1,144) (1,161) (1,306) (1,371) (1,543)
Op Ebitda 5,713 8,977 6,454 12,186 11,956 13,827
Depreciation/amortisation (197) (695) (714) (1,020) (1,162) (1,319)
Op Ebit 5,516 8,282 5,739 11,166 10,794 12,508
Interest income 0 0 0 0 0 0
Interest expense (3,361) (5,011) (5,608) (7,256) (6,338) (6,825)
Net interest inc/(exp) (3,361) (5,011) (5,608) (7,256) (6,338) (6,825)
Associates/investments 1,354 1,372 5,240 2,200 2,400 2,400
Forex/other income - - - - - -
Asset sales/other cash items - - - - - -
Provisions/other non-cash items - - - - - -
Asset revaluation/Exceptional items - - - - - -
Profit before tax 3,510 4,643 5,371 6,109 6,856 8,083
Taxation (795) (1,420) (1,826) (2,077) (2,331) (2,748)
Profit after tax 2,715 3,223 3,545 4,032 4,525 5,335
Preference dividends - - - - - -
Profit for period 2,715 3,223 3,545 4,032 4,525 5,335
Minority interest (234) (264) 424 350 0 0
Net profit 2,481 2,959 3,969 4,382 4,525 5,335
Extraordinaries/others 0 0 0 0 0 0
Profit avail to ordinary shares 2,481 2,959 3,969 4,382 4,525 5,335
Dividends 0 0 0 0 0 0
Retained profit 2,481 2,959 3,969 4,382 4,525 5,335
Adjusted profit 2,481 2,959 3,969 4,382 4,525 5,335
EPS (Rs) 5.8 7.1 9.1 9.2 9.5 11.2
Adj EPS [pre excep] (Rs) 5.8 7.1 9.1 9.2 9.5 11.2
Core EPS (Rs) 5.8 7.1 9.1 9.2 9.5 11.2
DPS (Rs) 0.0 0.0 0.0 0.0 0.0 0.0
Cashflow (Rsm)
Year to 31 March 2015A 2016A 2017A 18CL 19CL 20CL
Operating profit 5,516 8,282 5,739 11,166 10,794 12,508
Operating adjustments - - - - - -
Depreciation/amortisation 197 695 714 1,020 1,162 1,319
Working capital changes (29,346) (29,278) 4,191 2,406 12,967 9,107
Interest paid / other financial expenses (3,361) (5,011) (5,608) (7,256) (6,338) (6,825)
Tax paid (795) (1,420) (1,826) (2,077) (2,331) (2,748)
Other non-cash operating items (6,368) 17,624 3,422 (12,678) 912 (6,474)
Net operating cashflow (34,157) (9,108) 6,633 (7,419) 17,167 6,888
Capital expenditure 2,089 (22,137) (14,257) (6,478) (9,567) (9,288)
Free cashflow (32,067) (31,245) (7,623) (13,898) 7,599 (2,400)
Acq/inv/disposals - - - (10,000) - -
Int, invt & associate div 1,120 1,108 5,664 2,550 2,400 2,400
Net investing cashflow 3,210 (21,029) (8,593) (13,928) (7,167) (6,888)
Increase in loans 30,947 30,136 4,218 13,410 (10,000) -
Dividends 0 0 0 0 0 0
Net equity raised/(buybacks) 0 0 (2,258) 7,937 0 -
Net financing cashflow 30,947 30,136 1,960 21,347 (10,000) 0
Incr/(decr) in net cash 0 (1) 0 (1) (1) 0
Exch rate movements - - - - - -
Opening cash 10,036 15,152 10,831 16,755 15,843 22,316
Closing cash 10,036 15,151 10,831 16,755 15,842 22,316
OCF per share (Rs) (80.4) (21.7) 15.2 (15.6) 36.2 14.5
FCF per share (Rs) (75.5) (74.5) (17.5) (29.3) 16.0 (5.1)
DuPont analysis
Year to 31 March 2015A 2016A 2017A 18CL 19CL 20CL
Ebit margin (%) 21.2 28.0 24.7 26.0 28.9 30.5
Asset turnover (x) 0.2 0.2 0.1 0.2 0.2 0.2
Interest burden (x) 0.6 0.6 0.9 0.5 0.6 0.6
Tax burden (x) 0.8 0.7 0.7 0.7 0.7 0.7
Return on assets (%) 2.5 3.3 2.1 4.0 3.8 4.3
Leverage (x) 2.3 2.9 3.8 4.1 4.1 3.8
ROE (%) 3.8 5.4 7.4 8.9 10.0 10.6
EVA® analysis
Year to 31 March 2015A 2016A 2017A 18CL 19CL 20CL
Ebit adj for tax (Rsm) 4,266 5,749 3,788 7,369 7,124 8,255
Average invested capital (Rsm) 66,800 92,413 122,702 128,903 128,148 125,297
ROIC (%) 8.1 6.2 3.1 5.7 5.6 6.6
Cost of equity (%) 12.5 12.5 12.5 12.5 12.5 12.5
Cost of debt (adj for tax) (%) 7.7 6.9 6.6 6.6 6.6 6.6
Weighted average cost of capital (%) 9.9 9.4 9.2 9.2 9.2 9.2
EVA® /IC (%) (1.8) (3.2) (6.1) (3.5) (3.7) (2.6)
EVA® (Rsm) (945) (2,949) (7,528) (4,518) (4,694) (3,300)
Source: CLSA, Company
Notes
Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com
Mahindra Lifespace - N-R India property
5 0.8
4 0.6
3
0.4
2
1 0.2
0 0.0
FY12 FY13 FY14 FY15 FY16 FY17 1HFY18
Source: Company
0.5 2
0.0 0
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
Source: Company
400 264
200
0
FY13 FY14 FY15 FY16 FY17 1HFY18
Source: Company
Pune
National Capital 17%
Region
29%
Chennai Nagpur
2% 14%
Source: Company
1,500
1,141
1,080
1,000
736
500
0
Mahindra World City Chennai Mahindra World City Jaipur
Source: Company
4
2.7 2.8
2 1.2 1.4
1.0 1.1
0.9
0.3
0
FY12 FY13 FY14 FY15 FY16 FY17 1HFY18
Source: Company
Notes
Major shareholders
NAV premium can sustain
Oberoi family 72.5% We do not expect Oberoi to enter the affordable-housing segment, due to its
FIIs 24.7% premium product offering. It also has a high likelihood of adding new project
additions and could experience an upturn in Mumbai’s pricing environment, which
would lead the stock to trade at a premium to NAV. However, we are below
consensus in FY19-20 due to a slower rise in lease income. Our Rs639 target is a
30% premium to its one-year forward NAV and implies 23.5x Dec 19CL earnings.
Stock performance (%)
1M 3M 12M
Absolute 12.0 15.2 70.4 Financials
Relative 6.1 7.1 32.4 Year to 31 March 16A 17A 18CL 19CL 20CL
Abs (US$) 12.6 17.7 82.4 Revenue (Rsm) 14,161 11,137 23,358 24,917 27,421
600 (Rs) Oberoi Realty (%) 170
Ebitda (Rsm) 6,763 5,701 10,581 11,996 12,973
550 Rel to Nifty (RHS) 160
Net profit (Rsm) 4,356 3,786 8,252 8,866 9,435
500 150
EPS (Rs) 13.1 11.2 24.3 26.1 27.8
450 140 CL/consensus (21) (EPS%) - - 108 72 66
400 130 EPS growth (% YoY) 36.0 (15.1) 117.7 7.4 6.4
350 120 PE (x) 40.2 47.3 21.7 20.2 19.0
300 110 Dividend yield (%) 0.4 0.4 0.4 0.4 0.4
250 100 PB (x) 3.3 3.1 2.8 2.5 2.2
200 90 ROE (%) 8.7 6.8 13.5 12.9 12.2
Jan 16 Sep 16 May 17 Jan 18 Net debt/equity (%) 1.3 4.6 29.5 30.1 10.7
Source: Bloomberg Source: CLSA
Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com
Oberoi Realty - BUY India property
Financials at a glance
Year to 31 March 2016A 2017A 18CL (% YoY) 19CL 20CL
Profit and loss (Rsm)
Revenue 14,161 11,137 23,358 109.7 24,917 27,421
Cogs (ex-D&A) (6,297) (4,372) (11,573) (11,555) (12,945)
Gross Profit (ex-D&A) 7,865 6,765 11,785 74.2 13,361 14,475
SG&A and other expenses (1,102) (1,065) (1,203) (1,365) (1,502)
Op Ebitda 6,763 5,701 10,581 85.6 11,996 12,973
Depreciation/amortisation (490) (495) (519) (528) (538)
Op Ebit 6,273 5,206 10,063 93.3 11,468 12,436
Net interest inc/(exp) (68) (56) (139) (526) (1,082)
Other non-Op items 428 473 275 (41.9) 280 400
Profit before tax 6,632 5,623 10,198 81.4 11,222 11,754
Taxation (2,293) (1,868) (3,389) (3,729) (3,906)
Profit after tax 4,340 3,754 6,810 81.4 7,493 7,848
Minority interest 16 31 1,442 4,493.9 1,373 1,587
Net profit 4,356 3,786 8,252 118 8,866 9,435
Adjusted profit 4,356 3,786 8,252 118 8,866 9,435
Cashflow (Rsm)
Operating profit 6,273 5,206 10,063 93.3 11,468 12,436
Depreciation/amortisation 490 495 519 4.8 528 538
Working capital changes 9,168 (3,251) (22,182) (5,746) 11,359
Other items (15,034) (3,307) (3,528) (4,255) (4,988)
Net operating cashflow 897 (857) (15,128) 1,995 19,345
Capital expenditure 1,608 (772) (2,217) (5,645) (7,304)
Free cashflow 2,505 (1,629) (17,345) (3,650) 12,041
M&A/Others 444 504 1,717 240.5 1,653 1,987
Net investing cashflow 2,051 (268) (499) (3,992) (5,317)
Increase in loans (4,450) 3,819 12,506 227.4 2,500 (3,500)
Dividends (817) (817) (817) (817) (817)
Net equity raised/other 3,245 - - - -
Net financing cashflow (2,022) 3,003 11,689 289.3 1,683 (4,317)
Incr/(decr) in net cash 927 1,878 (3,939) (314) 9,710
Exch rate movements - - - - -
Balance sheet (Rsm)
Cash & equivalents 3,863 5,742 1,803 (68.6) 1,489 11,199
Accounts receivable 1,122 1,058 3,200 202.5 3,413 3,756
Other current assets 45,828 51,179 62,434 22 71,676 77,124
Fixed assets 10,258 10,545 12,242 16.1 17,359 24,126
Investments 13,766 16,018 16,018 0 16,018 16,018
Intangible assets 0 0 0 0 0
Other noncurrent assets 0 0 - - 0
Total assets 74,838 84,541 95,697 13.2 109,955 132,222
Short-term debt - - - - -
Accounts payable 16,818 18,860 10,075 (46.6) 13,780 30,926
Other current liabs 43 37 37 (0.7) 42 46
Long-term debt/CBs 4,565 8,385 20,891 149.2 23,391 19,891
Provisions/other LT liabs 0 0 0 0 -
Shareholder funds 53,411 57,260 64,694 13 72,742 81,360
Minorities/other equity 0 0 0 0 0
Total liabs & equity 74,838 84,541 95,697 13.2 109,955 132,222
Ratio analysis
Revenue growth (% YoY) 53.5 (21.4) 109.7 6.7 10.0
Ebitda margin (%) 47.8 51.2 45.3 48.1 47.3
Ebit margin (%) 44.3 46.7 43.1 46.0 45.4
Net profit growth (%) 37.3 (13.1) 118.0 7.4 6.4
Op cashflow growth (% YoY) nm (195.5) nm nm 869.5
Capex/sales (%) 11.4 6.9 9.5 22.7 26.6
Net debt/equity (%) 1.3 4.6 29.5 30.1 10.7
Net debt/Ebitda (x) 0.1 0.5 1.8 1.8 0.7
ROE (%) 8.7 6.8 13.5 12.9 12.2
ROIC (%) 8.8 8.3 12.0 10.5 10.9
Source: CLSA, Company
35 2.0
30
1.5
25
20
1.0
15
10 0.5
5
0 0.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18CL FY19CL FY20CL
¹ Oberoi’s net share. Source: CLSA, Company
25
20
15
10
5
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
Source: CLSA, Company
6 10
4
5
2
0 0
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
1.2
2.5
1.0
2.0
0.8
1.5
0.6
1.0
0.4
0.5 0.2
0.0 0.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18CL FY19CL FY20CL
Source: CLSA, Company
Dec 14
Sep 15
Dec 15
Sep 16
Dec 16
Sep 17
Mar 15
Mar 16
Mar 17
Jun 14
Jun 15
Jun 16
Jun 17
Valuation charts
PE near peak, but not high PE: One-year forward PE on then-consensus earnings
on absolute basis
18 (x) PE: 1Y fwd Average +1sd -1sd
16
14
12
10
0
Nov 10 Jan 12 Mar 13 Jun 14 Aug 15 Oct 16 Jan 18
Source: CLSA, Bloomberg
12
10
0
Nov 10 Jan 12 Mar 13 Jun 14 Aug 15 Oct 16 Jan 18
Source: CLSA
2.5
2.0
1.5
1.0
0.5
0.0
Nov 10 Jan 12 Mar 13 Jun 14 Aug 15 Oct 16 Jan 18
Source: CLSA
400 75
59
300
102
7 491
200
99
100
105
0
Yielding Goregaon Andheri Worli Mulund Borivali Thane Others Net debt NAV
assets - unsold leftover (Dec 18)
Goregaon
Source: CLSA
Valuation details
We value Oberoi using a DCF-NAV approach. The company has high visibility and
concentrated land parcels in Mumbai which have clear valuation benchmarks. The
stock can trade higher than its NAV, given Oberoi’s robust balance sheet and
potential of entering accelerated development platforms which provide NAV-
accretive acquisition possibilities. Our Rs639 target is a 30% premium to its one-
year forward NAV, given upside opportunities in the residential segment.
Investment risks
As Oberoi is a high-end residential developer, it is vulnerable to macro risks
pertaining to the segment (eg, interest rates and discretionary demand. It has a
large exposure to Mumbai (comprising nearly 99% of its portfolio) which has
complicated development rules that often lead to unforeseen and prolonged
approval delays, which are another source of risk.
Detailed financials
Profit and loss (Rsm)
Year to 31 March 2014A 2015A 2016A 2017A 18CL 19CL 20CL
Revenue 7,985 9,227 14,161 11,137 23,358 24,917 27,421
Cogs (ex-D&A) (2,896) (3,148) (6,297) (4,372) (11,573) (11,555) (12,945)
Gross Profit (ex-D&A) 5,088 6,079 7,865 6,765 11,785 13,361 14,475
Research & development costs - - - - - - -
Selling & marketing expenses - - - - - - -
Other SG&A (298) (414) (531) (423) (466) (535) (589)
Other Op Expenses ex-D&A (442) (526) (571) (642) (738) (830) (913)
Op Ebitda 4,348 5,138 6,763 5,701 10,581 11,996 12,973
Depreciation/amortisation (271) (403) (490) (495) (519) (528) (538)
Op Ebit 4,076 4,735 6,273 5,206 10,063 11,468 12,436
Interest income 0 0 0 0 0 0 0
Interest expense (3) (18) (68) (56) (139) (526) (1,082)
Net interest inc/(exp) (3) (18) (68) (56) (139) (526) (1,082)
Associates/investments 571 175 428 473 275 280 400
Forex/other income - - - - - - -
Asset sales/other cash items - - - - - - -
Provisions/other non-cash items - - - - - - -
Asset revaluation/Exceptional items - - - - - - -
Profit before tax 4,644 4,892 6,632 5,623 10,198 11,222 11,754
Taxation (1,533) (1,721) (2,293) (1,868) (3,389) (3,729) (3,906)
Profit after tax 3,111 3,171 4,340 3,754 6,810 7,493 7,848
Preference dividends - - - - - - -
Profit for period 3,111 3,171 4,340 3,754 6,810 7,493 7,848
Minority interest 0 0 16 31 1,442 1,373 1,587
Net profit 3,111 3,171 4,356 3,786 8,252 8,866 9,435
Extraordinaries/others 0 0 0 0 0 0 0
Profit avail to ordinary shares 3,111 3,171 4,356 3,786 8,252 8,866 9,435
Dividends (768) (790) (817) (817) (817) (817) (817)
Retained profit 2,343 2,381 3,539 2,969 7,434 8,049 8,617
Adjusted profit 3,111 3,171 4,356 3,786 8,252 8,866 9,435
EPS (Rs) 9.5 9.7 13.1 11.2 24.3 26.1 27.8
Adj EPS [pre excep] (Rs) 9.5 9.7 13.1 11.2 24.3 26.1 27.8
Core EPS (Rs) 9.5 9.7 13.1 11.2 24.3 26.1 27.8
DPS (Rs) 2.0 2.0 2.0 2.0 2.0 2.0 2.0
Cashflow (Rsm)
Year to 31 March 2014A 2015A 2016A 2017A 18CL 19CL 20CL
Operating profit 4,076 4,735 6,273 5,206 10,063 11,468 12,436
Operating adjustments - - - - - - -
Depreciation/amortisation 271 403 490 495 519 528 538
Working capital changes (8,172) (13,998) 9,168 (3,251) (22,182) (5,746) 11,359
Interest paid / other financial expenses (3) (18) (68) (56) (139) (526) (1,082)
Tax paid (1,533) (1,721) (2,293) (1,868) (3,389) (3,729) (3,906)
Other non-cash operating items 62 21 (12,673) (1,382) 0 0 0
Net operating cashflow (5,299) (10,578) 897 (857) (15,128) 1,995 19,345
Capital expenditure (496) 381 1,608 (772) (2,217) (5,645) (7,304)
Free cashflow (5,795) (10,197) 2,505 (1,629) (17,345) (3,650) 12,041
Acq/inv/disposals - - - - - - -
Int, invt & associate div 571 175 444 504 1,717 1,653 1,987
Net investing cashflow 74 556 2,051 (268) (499) (3,992) (5,317)
Increase in loans 761 8,255 (4,450) 3,819 12,506 2,500 (3,500)
Dividends (768) (790) (817) (817) (817) (817) (817)
Net equity raised/(buybacks) - - 3,245 - - - -
Net financing cashflow (7) 7,465 (2,022) 3,003 11,689 1,683 (4,317)
Incr/(decr) in net cash (5,232) (2,557) 927 1,878 (3,939) (314) 9,710
Exch rate movements - - - - - - -
Opening cash 10,725 5,494 2,937 3,863 5,742 1,803 1,489
Closing cash 5,493 2,936 3,864 5,741 1,803 1,489 11,199
OCF per share (Rs) (16.1) (32.2) 2.7 (2.5) (44.5) 5.9 57.0
FCF per share (Rs) (17.7) (31.1) 7.6 (4.8) (51.1) (10.7) 35.5
DuPont analysis
Year to 31 March 2014A 2015A 2016A 2017A 18CL 19CL 20CL
Ebit margin (%) 51.1 51.3 44.3 46.7 43.1 46.0 45.4
Asset turnover (x) 0.1 0.1 0.2 0.1 0.3 0.2 0.2
Interest burden (x) 1.1 1.0 1.1 1.1 1.0 1.0 0.9
Tax burden (x) 0.7 0.6 0.7 0.7 0.7 0.7 0.7
Return on assets (%) 5.1 4.9 5.6 4.4 7.5 7.4 6.9
Leverage (x) 1.3 1.4 1.5 1.4 1.5 1.5 1.6
ROE (%) 7.3 7.0 8.7 6.8 11.2 10.9 10.2
EVA® analysis
Year to 31 March 2014A 2015A 2016A 2017A 18CL 19CL 20CL
Ebit adj for tax (Rsm) 2,730 3,069 4,104 3,476 6,719 7,657 8,303
Average invested capital (Rsm) 35,247 46,057 46,505 42,116 55,824 73,195 76,330
ROIC (%) 7.7 6.7 8.8 8.3 12.0 10.5 10.9
Cost of equity (%) 14.5 14.5 14.5 14.5 14.5 14.5 14.5
Cost of debt (adj for tax) 7.7 7.5 7.5 7.7 7.7 7.7 7.7
Weighted average cost of capital (%) 14.5 14.5 14.5 14.5 14.5 14.5 14.5
EVA® /IC (%) (6.8) (7.8) (5.7) (6.2) (2.5) (4.0) (3.6)
EVA® (Rsm) (2,380) (3,609) (2,639) (2,631) (1,376) (2,956) (2,764)
Source: CLSA, Company
Notes
Shares in issue 375.0m New expansion plans with better capital efficiency
Free float (est.) 30.0% With 1.1x gearing and capex plans lined up for its next leg of lease-asset buildout,
Prestige has been working to improve its capital efficiency. It completed its
Market cap US$1,844m
business reorganisation; management has announced plans to raise capital and
3M ADV US$2.6m create co-investment platforms in the office and affordable-housing segments.
Prestige recently increased its stakes in its mall portfolio and a large land parcel in
Foreign s'holding 26.4% Bangalore, signalling that its platforms will be finalised in the coming months.
Major shareholders
Razack family 70.0% Near-term turnaround as new launches gain pace
FIIs 26.4% Prestige’s presales run rate fell to a multiyear low of sub-Rs20bn in 2QFY18.
However, we expect a near-term turnaround as it expands its affordable-housing
offerings amid a pickup in new launches. The company has demonstrated
competence in pursuing a volume-led growth strategy which we expect to
continue. Our SOTP-based Rs393 target - which separately values its annuity and
Stock performance (%) development businesses - suggests 25% upside.
1M 3M 12M
Absolute 4.0 9.3 90.3 Financials
Relative (1.4) 1.6 47.9
Year to 31 March 16A 17A 18CL 19CL 20CL
Abs (US$) 4.6 11.7 103.7
Revenue (Rsm) 55,310 47,745 51,459 53,425 56,199
400 (Rs) (%) 140
Prestige Estates Ebitda (Rsm) 10,662 9,198 11,137 12,345 13,539
130
350 Rel to Nifty (RHS) Net profit (Rsm) 4,204 2,578 3,520 3,814 4,281
120
300
EPS (Rs) 11.2 6.9 9.4 10.2 11.4
110
CL/consensus (15) (EPS%) - - 100 95 101
250 100 EPS growth (% YoY) 26.8 (38.7) 36.5 8.3 12.3
200
90 PE (x) 28.0 45.6 33.4 30.8 27.5
80 Dividend yield (%) 0.4 0.4 0.5 0.6 0.7
150
70 PB (x) 2.8 2.6 2.5 2.3 2.2
100 60 ROE (%) 10.5 6.0 7.6 7.8 8.2
Jan 16 Sep 16 May 17 Jan 18
Net debt/equity (%) 102.9 112.2 126.2 123.1 118.8
Source: Bloomberg Source: CLSA
Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com
Prestige Estates - BUY India property
Financials at a glance
Year to 31 March 2016A 2017A 18CL (% YoY) 19CL 20CL
Profit and loss (Rsm)
Revenue 55,310 47,745 51,459 7.8 53,425 56,199
Cogs (ex-D&A) (40,087) (33,541) (34,441) (34,611) (35,313)
Gross Profit (ex-D&A) 15,223 14,204 17,018 19.8 18,814 20,886
SG&A and other expenses (4,561) (5,006) (5,881) (6,469) (7,347)
Op Ebitda 10,662 9,198 11,137 21.1 12,345 13,539
Depreciation/amortisation (1,274) (1,637) (1,847) (2,157) (2,424)
Op Ebit 9,388 7,561 9,290 22.9 10,187 11,115
Net interest inc/(exp) (3,462) (3,160) (3,589) (4,008) (4,348)
Other non-Op items 1,004 872 850 (2.5) 900 1,000
Profit before tax 6,930 5,273 6,551 24.2 7,079 7,766
Taxation (2,291) (1,600) (2,031) (2,265) (2,485)
Profit after tax 4,639 3,673 4,520 23.1 4,814 5,281
Minority interest (435) (1,095) (1,000) (1,000) (1,000)
Net profit 4,204 2,578 3,520 36.5 3,814 4,281
Adjusted profit 4,204 2,578 3,520 36.5 3,814 4,281
Cashflow (Rsm)
Operating profit 9,388 7,561 9,290 22.9 10,187 11,115
Depreciation/amortisation 1,274 1,637 1,847 12.8 2,157 2,424
Working capital changes (5,932) (1,860) (7,149) 1,928 2,134
Other items (12,247) (5,739) (4,259) (7,273) (7,834)
Net operating cashflow (7,517) 1,599 (271) 6,999 7,839
Capital expenditure (5,356) (8,845) (10,059) (9,020) (9,460)
Free cashflow (12,873) (7,246) (10,330) (2,021) (1,621)
M&A/Others 1,004 872 850 (2.5) 900 1,000
Net investing cashflow (4,352) (7,973) (9,209) (8,120) (8,460)
Increase in loans 11,809 4,046 8,590 112.3 2,500 2,500
Dividends (540) (540) (675) (900) (1,013)
Net equity raised/other 0 0 0 0 0
Net financing cashflow 11,269 3,506 7,915 125.8 1,600 1,488
Incr/(decr) in net cash (600) (2,868) (1,565) 479 867
Exch rate movements - - - - -
Balance sheet (Rsm)
Cash & equivalents 6,835 3,967 2,402 (39.5) 2,881 3,748
Accounts receivable 11,426 10,057 11,279 12.1 11,710 12,318
Other current assets 96,565 98,834 101,669 2.9 99,030 99,819
Fixed assets 43,895 51,106 59,318 16.1 66,180 73,216
Investments 2,898 3,448 1,087 (68.5) 1,087 1,087
Intangible assets 3,069 3,069 3,069 0 3,069 3,069
Other noncurrent assets 0 0 - - -
Total assets 164,688 170,481 178,823 4.9 183,957 193,256
Short-term debt - - - - -
Accounts payable 64,731 63,069 59,841 (5.1) 59,337 62,754
Other current liabs 1,422 2,124 2,259 6.4 2,484 2,597
Long-term debt/CBs 52,364 56,410 65,000 15.2 67,500 70,000
Provisions/other LT liabs 1,906 2,124 2,124 0 2,124 2,124
Shareholder funds 41,999 44,640 47,485 6.4 50,399 53,667
Minorities/other equity 2,266 2,114 2,114 0 2,114 2,114
Total liabs & equity 164,688 170,481 178,823 4.9 183,957 193,256
Ratio analysis
Revenue growth (% YoY) 61.7 (13.7) 7.8 3.8 5.2
Ebitda margin (%) 19.3 19.3 21.6 23.1 24.1
Ebit margin (%) 17.0 15.8 18.1 19.1 19.8
Net profit growth (%) 26.8 (38.7) 36.5 8.3 12.3
Op cashflow growth (% YoY) nm nm (117.0) nm 12.0
Capex/sales (%) 9.7 18.5 19.5 16.9 16.8
Net debt/equity (%) 102.9 112.2 126.2 123.1 118.8
Net debt/Ebitda (x) 4.3 5.7 5.6 5.2 4.9
ROE (%) 10.5 6.0 7.6 7.8 8.2
ROIC (%) 7.7 5.6 6.1 6.0 6.3
Source: CLSA, Company
25 4
20 3
15
2
10
5 1
0 0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18CL FY19CL FY20CL
¹ Prestige’s net share. Source: CLSA, Company
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
Dec 12
Sep 13
Dec 13
Sep 14
Dec 14
Sep 15
Dec 15
Sep 16
Dec 16
Sep 17
Mar 13
Mar 14
Mar 15
Mar 16
Mar 17
Jun 12
Jun 13
Jun 14
Jun 15
Jun 16
Jun 17
Source: CLSA, Company
10
8
8
6
6
4
4
2 2
0 0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18CL FY19CL FY20CL
Source: CLSA, Company
20 1.5
We expect profit to rise
faster than revenue on 1.0
rising share of lease income 10
0.5
0 0.0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18CL FY19CL FY20CL
Source: CLSA, Company
Valuation charts
PE at the top end PE: One-year forward PE on then-consensus earnings
30
25
20
15
10
0
Dec 10 Feb 12 Apr 13 Jun 14 Sep 15 Nov 16 Jan 18
Source: CLSA, Bloomberg
18
16
14
12
10
8
6
4
2
0
Dec 10 Feb 12 Apr 13 Jun 14 Sep 15 Nov 16 Jan 18
Source: CLSA
2.5
2.0
1.5
1.0
0.5
0.0
Dec 10 Feb 12 Apr 13 Jun 14 Sep 15 Nov 16 Jan 18
Source: CLSA
Valuation details
We value Prestige using a sum-of-the parts methodology, separately assessing its
annuity and development businesses. We value the annuity unit by applying an
8% cap rate as the benchmark. We also assign 8x EV/Ebitda to development unit
Ebitda where we assume the division will realise FY15 presales levels. We add the
value of the hotel business at book.
Investment risks
With Prestige deriving roughly 53% of its value from annuity and 42% from its
development unit, the outlook for commercial and residential property is
important. Apart from the macro risk associated with a property company (eg,
interest rates and discretionary demand), Prestige's high exposure to Bangalore
makes the city’s outlook an important variable. As Bangalore is a technology-
industry-driven city, its performance remains an important driver for Prestige's
property demand.
Detailed financials
Profit and loss (Rsm)
Year to 31 March 2014A 2015A 2016A 2017A 18CL 19CL 20CL
Revenue 25,492 34,198 55,310 47,745 51,459 53,425 56,199
Cogs (ex-D&A) (15,215) (20,265) (40,087) (33,541) (34,441) (34,611) (35,313)
Gross Profit (ex-D&A) 10,277 13,933 15,223 14,204 17,018 18,814 20,886
Research & development costs - - - - - - -
Selling & marketing expenses - - - - - - -
Other SG&A (1,464) (1,704) (2,531) (2,073) (2,508) (2,759) (3,173)
Other Op Expenses ex-D&A (1,610) (2,290) (2,030) (2,933) (3,373) (3,710) (4,174)
Op Ebitda 7,203 9,939 10,662 9,198 11,137 12,345 13,539
Depreciation/amortisation (893) (1,397) (1,274) (1,637) (1,847) (2,157) (2,424)
Op Ebit 6,311 8,542 9,388 7,561 9,290 10,187 11,115
Interest income 0 0 0 0 0 0 0
Interest expense (2,290) (3,214) (3,462) (3,160) (3,589) (4,008) (4,348)
Net interest inc/(exp) (2,290) (3,214) (3,462) (3,160) (3,589) (4,008) (4,348)
Associates/investments 975 986 1,004 872 850 900 1,000
Forex/other income - - - - - - -
Asset sales/other cash items - - - - - - -
Provisions/other non-cash items - - - - - - -
Asset revaluation/Exceptional items - - - - - - -
Profit before tax 4,995 6,314 6,930 5,273 6,551 7,079 7,766
Taxation (1,750) (2,647) (2,291) (1,600) (2,031) (2,265) (2,485)
Profit after tax 3,245 3,667 4,639 3,673 4,520 4,814 5,281
Preference dividends - - - - - - -
Profit for period 3,245 3,667 4,639 3,673 4,520 4,814 5,281
Minority interest (72) (351) (435) (1,095) (1,000) (1,000) (1,000)
Net profit 3,173 3,316 4,204 2,578 3,520 3,814 4,281
Extraordinaries/others (30) 7 67 121 0 0 0
Profit avail to ordinary shares 3,143 3,324 4,271 2,699 3,520 3,814 4,281
Dividends (614) (721) (540) (540) (675) (900) (1,013)
Retained profit 2,529 2,603 3,731 2,159 2,845 2,914 3,269
Adjusted profit 3,173 3,316 4,204 2,578 3,520 3,814 4,281
EPS (Rs) 9.1 8.8 11.2 6.9 9.4 10.2 11.4
Adj EPS [pre excep] (Rs) 9.1 8.8 11.2 6.9 9.4 10.2 11.4
Core EPS (Rs) 9.1 8.8 11.2 6.9 9.4 10.2 11.4
DPS (Rs) 1.5 1.5 1.2 1.2 1.5 2.0 2.3
Cashflow (Rsm)
Year to 31 March 2014A 2015A 2016A 2017A 18CL 19CL 20CL
Operating profit 6,311 8,542 9,388 7,561 9,290 10,187 11,115
Operating adjustments - - - - - - -
Depreciation/amortisation 893 1,397 1,274 1,637 1,847 2,157 2,424
Working capital changes (5,098) (12,285) (5,932) (1,860) (7,149) 1,928 2,134
Interest paid / other financial expenses (2,290) (3,214) (3,462) (3,160) (3,589) (4,008) (4,348)
Tax paid (1,750) (2,647) (2,291) (1,600) (2,031) (2,265) (2,485)
Other non-cash operating items (84) (66) (6,494) (979) 1,361 (1,000) (1,000)
Net operating cashflow (2,019) (8,273) (7,517) 1,599 (271) 6,999 7,839
Capital expenditure (5,167) (5,144) (5,356) (8,845) (10,059) (9,020) (9,460)
Free cashflow (7,186) (13,417) (12,873) (7,246) (10,330) (2,021) (1,621)
Acq/inv/disposals - - - - - - -
Int, invt & associate div 975 986 1,004 872 850 900 1,000
Net investing cashflow (4,192) (4,158) (4,352) (7,973) (9,209) (8,120) (8,460)
Increase in loans 6,153 9,014 11,809 4,046 8,590 2,500 2,500
Dividends (614) (721) (540) (540) (675) (900) (1,013)
Net equity raised/(buybacks) 0 6,125 0 0 0 0 0
Net financing cashflow 5,539 14,418 11,269 3,506 7,915 1,600 1,488
Incr/(decr) in net cash (673) 1,987 (600) (2,868) (1,565) 479 867
Exch rate movements - - - - - - -
Opening cash 6,121 5,448 7,436 6,835 3,967 2,402 2,881
Closing cash 5,449 7,436 6,835 3,967 2,402 2,881 3,748
OCF per share (Rs) (5.8) (22.1) (20.0) 4.3 (0.7) 18.7 20.9
FCF per share (Rs) (20.5) (35.8) (34.3) (19.3) (27.5) (5.4) (4.3)
DuPont analysis
Year to 31 March 2014A 2015A 2016A 2017A 18CL 19CL 20CL
Ebit margin (%) 24.8 25.0 17.0 15.8 18.1 19.1 19.8
Asset turnover (x) 0.3 0.3 0.4 0.3 0.3 0.3 0.3
Interest burden (x) 0.8 0.7 0.7 0.7 0.7 0.7 0.7
Tax burden (x) 0.6 0.6 0.7 0.7 0.7 0.7 0.7
Return on assets (%) 4.8 4.6 4.4 3.1 3.7 3.8 4.0
Leverage (x) 2.7 2.9 3.3 3.7 3.6 3.6 3.5
ROE (%) 10.3 9.8 10.7 8.1 9.4 9.4 9.8
EVA® analysis
Year to 31 March 2014A 2015A 2016A 2017A 18CL 19CL 20CL
Ebit adj for tax (Rsm) 4,099 4,961 6,284 5,267 6,410 6,927 7,558
Average invested capital (Rsm) 53,238 66,087 81,518 93,338 105,553 115,701 120,619
ROIC (%) 7.7 7.5 7.7 5.6 6.1 6.0 6.3
Cost of equity (%) 14.5 14.5 14.5 14.5 14.5 14.5 14.5
Cost of debt (adj for tax) (%) 8.4 7.6 8.7 9.1 9.0 8.8 8.8
Weighted average cost of capital (%) 11.9 11.5 12.0 12.2 12.1 12.1 12.1
EVA® /IC (%) (4.2) (4.0) (4.3) (6.5) (6.1) (6.1) (5.8)
EVA® (Rsm) (2,239) (2,653) (3,510) (6,089) (6,394) (7,043) (7,006)
Source: CLSA, Company
Notes
Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com
Sobha - BUY India property
Financials at a glance
Year to 31 March 2016A 2017A 18CL (% YoY) 19CL 20CL
Profit and loss (Rsm)
Revenue 19,566 22,462 26,388 17.5 31,722 36,341
Cogs (ex-D&A) (15,136) (18,264) (21,258) (25,695) (29,436)
Gross Profit (ex-D&A) 4,429 4,198 5,131 22.2 6,027 6,904
SG&A and other expenses 0 - - - -
Op Ebitda 4,429 4,198 5,131 22.2 6,027 6,904
Depreciation/amortisation (597) (638) (634) (694) (753)
Op Ebit 3,832 3,560 4,496 26.3 5,333 6,151
Net interest inc/(exp) (1,637) (1,497) (1,906) (2,078) (2,198)
Other non-Op items 343 386 370 (4.1) 390 400
Profit before tax 2,539 2,449 2,961 20.9 3,645 4,354
Taxation (1,188) (970) (1,036) (1,349) (1,611)
Profit after tax 1,350 1,479 1,924 30.1 2,296 2,743
Minority interest 30 129 50 (61.3) 100 100
Net profit 1,381 1,608 1,974 22.8 2,396 2,843
Adjusted profit 1,381 1,608 1,974 22.8 2,396 2,843
Cashflow (Rsm)
Operating profit 3,832 3,560 4,496 26.3 5,333 6,151
Depreciation/amortisation 597 638 634 (0.6) 694 753
Working capital changes (559) (1,543) (2,417) 2,498 1,497
Other items (662) (831) (986) (1,249) (1,511)
Net operating cashflow 3,209 1,823 1,728 (5.2) 7,276 6,890
Capital expenditure (3,181) (410) (705) (1,064) (3,137)
Free cashflow 27 1,413 1,023 (27.6) 6,212 3,753
M&A/Others (1,508) (817) (1,536) (1,688) (1,798)
Net investing cashflow (4,690) (1,227) (2,240) (2,752) (4,934)
Increase in loans 1,215 417 2,000 380.1 31 -
Dividends (232) (290) (318) (347) (376)
Net equity raised/other 182 (521) - - -
Net financing cashflow 1,165 (395) 1,682 (316) (376)
Incr/(decr) in net cash (316) 202 1,170 479.9 4,207 1,580
Exch rate movements 0 0 0 0 0
Balance sheet (Rsm)
Cash & equivalents 1,457 1,659 2,829 70.5 7,036 8,616
Accounts receivable 6,143 6,749 8,314 23.2 9,995 11,450
Other current assets 42,649 50,960 51,344 0.8 51,649 53,448
Fixed assets 6,181 5,952 6,022 1.2 6,393 8,777
Investments 294 0 0 0 0 0
Intangible assets 0 0 0 0 0
Other noncurrent assets 23,964 23,611 26,016 10.2 26,521 26,807
Total assets 80,687 88,930 94,525 6.3 101,594 109,098
Short-term debt - - - - -
Accounts payable 23,144 28,824 30,113 4.5 33,831 37,294
Other current liabs 7,819 9,158 9,807 7.1 11,078 12,651
Long-term debt/CBs 21,803 22,219 24,219 9 24,250 24,250
Provisions/other LT liabs 2,274 2,283 2,283 0 2,283 2,283
Shareholder funds 25,648 26,445 28,101 6.3 30,151 32,618
Minorities/other equity 0 0 0 0 0
Total liabs & equity 80,687 88,930 94,525 6.3 101,594 109,098
Ratio analysis
Revenue growth (% YoY) (19.8) 14.8 17.5 20.2 14.6
Ebitda margin (%) 22.6 18.7 19.4 19.0 19.0
Ebit margin (%) 19.6 15.8 17.0 16.8 16.9
Net profit growth (%) (42.0) 16.5 22.8 21.4 18.6
Op cashflow growth (% YoY) nm (43.2) (5.2) 321.0 (5.3)
Capex/sales (%) 16.3 1.8 2.7 3.4 8.6
Net debt/equity (%) 79.3 77.7 76.1 57.1 47.9
Net debt/Ebitda (x) 4.6 4.9 4.2 2.9 2.3
ROE (%) 5.5 6.2 7.2 8.2 9.1
ROIC (%) 4.4 4.4 5.8 6.6 7.7
Source: CLSA, Company
15 2.0
11
9 1.5
10
6 1.0
5 3
0.5
0 0.0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
¹ Sobha’s net share. Source: CLSA, Company
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
Source: CLSA, Company
1 5
0 0
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
Contracting business
Contracting business Contractual business revenue and contribution
accounts for one-third of 9 (Rsbn) Contracts - business revenue Contracts as % total revenues (RHS) (%) 45
revenue and is a steady
source of cashflow 8 40
generation 7 35
6 30
5 25
4 20
3 15
2 10
1 5
0 0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
Source: CLSA, Company
0
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 1HFY18
Source: CLSA, Company
20 1.5
15
1.0
10
0.5
5
0 0.0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
Valuation charts
PE near all-time peak, but PE: One-year forward PE on then-consensus earnings
reflect low-cycle earnings
30 (x) PE: 1Y fwd Average +1sd -1sd
25
20
15
10
0
Jan 08 Sep 09 May 11 Jan 13 Sep 14 May 16 Jan 18
Source: CLSA, Bloomberg
14
12
10
0
Jan 08 Sep 09 May 11 Jan 13 Sep 14 May 16 Jan 18
Source: CLSA
0
Jan 08 Sep 09 May 11 Jan 13 Sep 14 May 16 Jan 18
Source: CLSA
Valuation details
We value Sobha using a sum-of-the-parts methodology. We value its residential
business using 8.5x EV/Ebitda, given its projected presales. The multiple captures
upside potential, given that presales are recovering from a five-year low. We
value the contracting business at the FY18 execution rate and on an EV/Ebitda
approach.
Investment risks
Sobha is primarily a premium-end residential developer and macro risks pertaining
to the residential-property market (eg, interest rates and discretionary demand)
are the most pertinent to the company. Its high exposure to Bangalore (70-80%
of its portfolio) means that the city’s outlook an important risk variable. Bangalore
is a technology-industry-driven market and its performance remains an important
driver of Sobha's sales.
Detailed financials
Profit and loss (Rsm)
Year to 31 March 2014A 2015A 2016A 2017A 18CL 19CL 20CL
Revenue 21,734 24,406 19,566 22,462 26,388 31,722 36,341
Cogs (ex-D&A) (15,709) (18,233) (15,136) (18,264) (21,258) (25,695) (29,436)
Gross Profit (ex-D&A) 6,025 6,173 4,429 4,198 5,131 6,027 6,904
Research & development costs 0 0 0 0 0 0 0
Selling & marketing expenses 0 0 0 0 0 0 0
Other SG&A - - - - - - -
Other Op Expenses ex-D&A - - - - - - -
Op Ebitda 6,025 6,173 4,429 4,198 5,131 6,027 6,904
Depreciation/amortisation (690) (723) (597) (638) (634) (694) (753)
Op Ebit 5,335 5,450 3,832 3,560 4,496 5,333 6,151
Interest income 0 0 0 0 0 0 0
Interest expense (1,734) (1,883) (1,637) (1,497) (1,906) (2,078) (2,198)
Net interest inc/(exp) (1,734) (1,883) (1,637) (1,497) (1,906) (2,078) (2,198)
Associates/investments - - - - - - -
Forex/other income - - - - - - -
Asset sales/other cash items 103 149 343 386 370 390 400
Provisions/other non-cash items - - - - - - -
Asset revaluation/Exceptional items - - - - - - -
Profit before tax 3,704 3,716 2,539 2,449 2,961 3,645 4,354
Taxation (1,368) (1,277) (1,188) (970) (1,036) (1,349) (1,611)
Profit after tax 2,336 2,439 1,350 1,479 1,924 2,296 2,743
Preference dividends 0 0 0 0 0 0 0
Profit for period 2,336 2,439 1,350 1,479 1,924 2,296 2,743
Minority interest 14 (59) 30 129 50 100 100
Net profit 2,350 2,380 1,381 1,608 1,974 2,396 2,843
Extraordinaries/others 0 0 0 0 0 0 0
Profit avail to ordinary shares 2,350 2,380 1,381 1,608 1,974 2,396 2,843
Dividends (803) (827) (232) (290) (318) (347) (376)
Retained profit 1,547 1,553 1,149 1,318 1,657 2,050 2,467
Adjusted profit 2,350 2,380 1,381 1,608 1,974 2,396 2,843
EPS (Rs) 24.0 24.3 14.1 16.5 20.5 24.9 29.5
Adj EPS [pre excep] (Rs) 24.0 24.3 14.1 16.5 20.5 24.9 29.5
Core EPS (Rs) 24.0 24.3 14.1 16.5 20.5 24.9 29.5
DPS (Rs) 7.0 7.0 2.0 2.5 2.8 3.0 3.3
Cashflow (Rsm)
Year to 31 March 2014A 2015A 2016A 2017A 18CL 19CL 20CL
Operating profit 5,335 5,450 3,832 3,560 4,496 5,333 6,151
Operating adjustments - - - - - - -
Depreciation/amortisation 690 723 597 638 634 694 753
Working capital changes (1,365) (8,093) (559) (1,543) (2,417) 2,498 1,497
Interest paid / other financial expenses - - - - - - -
Tax paid (996) (656) (545) (960) (1,036) (1,349) (1,611)
Other non-cash operating items - 0 (117) 129 50 100 100
Net operating cashflow 3,664 (2,576) 3,209 1,823 1,728 7,276 6,890
Capital expenditure (1,182) (658) (3,181) (410) (705) (1,064) (3,137)
Free cashflow 2,482 (3,234) 27 1,413 1,023 6,212 3,753
Acq/inv/disposals 2 - (294) 294 - - -
Int, invt & associate div (1,597) (1,716) (1,215) (1,111) (1,536) (1,688) (1,798)
Net investing cashflow (2,777) (2,374) (4,690) (1,227) (2,240) (2,752) (4,934)
Increase in loans 257 6,544 1,215 417 2,000 31 -
Dividends (803) (827) (232) (290) (318) (347) (376)
Net equity raised/(buybacks) 0 (149) 182 (521) - - -
Net financing cashflow (546) 5,568 1,165 (395) 1,682 (316) (376)
Incr/(decr) in net cash 341 618 (316) 202 1,170 4,207 1,580
Exch rate movements 0 0 0 0 0 0 0
Opening cash 815 1,156 1,774 1,457 1,659 2,829 7,036
Closing cash 1,155 1,774 1,457 1,659 2,829 7,036 8,616
OCF per share (Rs) 37.4 (26.3) 32.7 18.8 17.9 75.6 71.5
FCF per share (Rs) 25.3 (33.0) 0.3 14.5 10.6 64.5 39.0
DuPont analysis
Year to 31 March 2014A 2015A 2016A 2017A 18CL 19CL 20CL
Ebit margin (%) 24.5 22.3 19.6 15.8 17.0 16.8 16.9
Asset turnover (x) 0.4 0.4 0.3 0.3 0.3 0.3 0.3
Interest burden (x) 0.7 0.7 0.7 0.7 0.7 0.7 0.7
Tax burden (x) 0.6 0.7 0.5 0.6 0.7 0.6 0.6
Return on assets (%) 6.5 6.1 2.9 2.5 3.2 3.4 3.7
Leverage (x) 2.3 2.5 2.9 3.3 3.4 3.4 3.4
ROE (%) 10.5 10.3 5.4 5.7 7.1 7.9 8.7
EVA® analysis
Year to 31 March 2014A 2015A 2016A 2017A 18CL 19CL 20CL
Ebit adj for tax (Rsm) 3,365 3,578 2,039 2,149 2,923 3,360 3,875
Average invested capital (Rsm) 35,988 40,905 46,442 48,631 50,532 50,712 50,092
ROIC (%) 9.4 8.7 4.4 4.4 5.8 6.6 7.7
Cost of equity (%) 14.5 14.5 14.5 14.5 14.5 14.5 14.5
Cost of debt (adj for tax) 7.6 7.9 6.4 7.2 7.8 7.6 7.6
Weighted average cost of capital (%) 12.2 12.3 11.8 12.1 12.3 12.2 12.2
EVA® /IC (%) (2.8) (3.5) (7.4) (7.7) (6.5) (5.6) (4.5)
EVA® (Rsm) (1,022) (1,450) (3,439) (3,726) (3,276) (2,820) (2,229)
Source: CLSA, Company
Notes
US$3.1m
. . . and more in the pipeline
3M ADV
Of Sunteck’s 6.7msf of ongoing and upcoming projects (including 0.2msf) -
Foreign s'holding 17.3% outside of Mumbai) it is developing 5.7msf at another upcoming business hub
called Oshiwara Development Centre (ODC). About 2.6msf at ODC will be lease
Major shareholders
Khetan Family 66.8%
assets, providing a future rental-income stream. ODC is close to existing office
spaces in Western Mumbai suburbs and as such it is a well-established location.
Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com
Sunteck Realty - N-R India property
0
FY14 FY15 FY16 FY17 1HFY18
Source: Company
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
Source: Company
36% 2 1.5
1.0
0.7
1 0.2
0
Total Mumbai residential area to be sold : 3.4m ft² FY14 FY15 FY16 FY17 1HFY18
Key assumptions: Project cashflow and returns for a standard mid-income project
(Rsm) Comment
1m sf project in city- Total selling price 6,000 Assume 1msf project @Rs6,000/sf
suburb with a standard Land cost 1,500 Land in city suburb
land-construction cost Construction 2,500 Cost for a mid-end apartment project
mix of 35:65
Margin 2,000 This is the developer’s gross margin
Notes
Companies mentioned
Abbott India (N-R) L&T Realty (N-R)
AIT (N-R) M3M India Ltd. (N-R)
Ajmera Realty (N-R) Magarpatta Township Development & Construction
Amrapali Group (N-R) Company Limited (N-R)
APG (N-R) Mahindra Lifespace (N-R)
Arihant Superstructures Ltd (N-R) Mantri Developers Ltd (N-R)
Ashiana Housing Ltd (N-R) NESCO Ltd (N-R)
Axis Bank (AXSB IB - RS590.2 - BUY) Oberoi Realty (OBER IN - RS507.0 - BUY)
Bayer CropScience (N-R) Omkar Realtors and Developers Pvt Ltd (N-R)
BBCL Ltd (N-R) Panchsil Realty Ltd (N-R)
Blackstone Group (N-R) Paranjpe Schemes Ltd (N-R)
Bombay Dyeing (N-R) Peepul Tree Properties (N-R)
Brigade Corporation India (N-R) Phoenix Mills (PHNX IN - RS606.8 - BUY)
Brigade Enterprises (N-R) Poddar Housing and Development Ltd (N-R)
Brookfield (N-R) Prestige Estates (PEPL IN - RS310.8 - BUY)
Canada Pension Plan Investment Board (N-R) Puravankara (N-R)
DLF (DLFU IB - RS249.3 - SELL) Qatar Investment Authority (N-R)
Embassy Group (N-R) RMZ Corp (N-R)
Faery Estates (N-R) Sattva Group Ltd (N-R)
Ganesh Housing Corporation (N-R) Shapoorji Pallonji and Company (N-R)
GIC Private Limited (N-R) Sobha (SOBHA IS - RS535.9 - BUY)
Godrej Prop (GPL IB - RS822.2 - BUY) Sunteck (N-R)
GSK India (N-R) Supertech Ltd. (N-R)
HDFC (HDFC IB - RS1,900.5 - BUY) TATA Housing Development Co. Ltd. (N-R)
Hiranandani Developers Ltd. (N-R) TCG Urban (N-R)
Indiabulls Real Est (IBREL IS - RS241.4 - BUY) The Wadhwa Group (N-R)
IndiGo (N-R) Unitech (N-R)
IREO Projects Ltd (N-R) Value Budget and Housing Corp Ltd (N-R)
JP Infratech (N-R) VGN Property Developers Ltd (N-R)
K Raheja Corp (N-R) Vijay Shanthi Developers Ltd (N-R)
KEC Intl (N-R) Voltas (VOLT IS - RS618.2 - SELL)
Kolte-Patil Developers (N-R) Xander Advisors India (N-R)
Kolte-Patil Developers Ltd (N-R) XRBIA Developers Ltd (N-R)
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Key to CLSA/CLST investment rankings: BUY: Total stock return (including dividends) expected to exceed 20%; O-PF: Total expected return below 20% but
exceeding market return; U-PF: Total expected return positive but below market return; SELL: Total expected return to be negative. For relative performance, we
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are introduced to our “Double Bagger” list. "High Conviction" Ideas are not necessarily stocks with the most upside/downside but those where the Research
Head/Strategist believes there is the highest likelihood of positive/negative returns. The list for each market is monitored weekly. 01/01/2018