A Tamed Bull, At Least For Now

Indiabulls Real Estate is one of the largest real estate companies in India with asset base of Rs.22,055 crore and net worth of Rs.7,899 crore, having a well-diversified presence in both commercial and residential real estate development. It has projects across the price spectrum, from mid-income, premium to the super luxury space. Geographically, the company’s strategic focus is in key markets of Mumbai Metropolitan Region (MMR), National Capital Region (NCR) in India and a high end mix-use residential cum commercial development in Central London. LAND BANK: THE KEY TO FUTURE PROFITABILITY The company has fully paid land bank of 1,017 acres in key cities across India, of which more than 95% of the land bank is in high value super-metro cities – Mumbai (MMR), National Capital Region (NCR) and Chennai. This land bank is sufficient for proposed development over the next 7 years. In addition to the said land bank of 1,017 acres, the company also possesses 2,588 acres of SEZ land in Nashik, Maharashtra. The size and location of the company’s land reserves allows it to respond more effectively to changes in market conditions and demand. We believe that sizeable land reserves are the most important resources for any property developer.

Key Strengths :-

1.       Sound financials

2.       High demand locations of the projects

3.       Execution capabilities

4.       Track record of deliveries

5.       Quality construction

6.       Strong brand recognition

Government Initiatives affecting the RE sector

• The Cabinet Committee on Economic Affairs (CCEA) has approved various measures to revive the construction sector, putting in place a mechanism to release funds stuck in arbitration awards to revive stalled projects.

• The Make in India initiative has helped accelerate leasing of commercial property to the manufacturing sector, which has outpaced the Information Technology (IT) sector by registering two-fold increase in office transacted space in the first six months of 2016.

• Brihanmumbai Municipal Corporation (BMC) has introduced a single-window clearance for construction which will cut the time taken for getting approvals for a building project and lead to correction in prices of residential property, thereby giving a fillip to Mumbai realty.

• The Securities and Exchange Board of India (SEBI) has proposed easier regulations for real estate investment trusts (REITs), such as raising the cap of investment of REITs’ assets in under-construction projects from 10 per cent to 20 per cent, in order to attract the interest of developers, and also plans to relax the rules for foreign fund managers to relocate to India

Financials  -

The revenue per share for IBREAL has been growing on an average at a rate of 27.21 per cent over the last three years and at a rate of 13.24 per cent over five years. The net profit has grown by almost 29.56 per cent over past three years, whereas over the last five years, the net profits have grown 13.25 per cent.

The operating margins have been steady for the company at 32.04 per cent. The net profit margins have improved to 12.17 per cent, if we take the average for the year, from 11.12 per cent for a three-year average period. Return on net worth improved to 4.61 per cent from the three-year average of 3.81 per cent. 

Demonetisation impact on the sector: -

There are mixed views coming from the market experts on impact of demonetisation on the real estate sector, with few views suggesting that that the cities and micro markets such as the National Capital Region (NCR) with high investor demand to be severely impacted.  The impact could be much higher on the unorganised developers.

The impact would be even more negative on the repurchase market. Real estate transactions across the board will represent possible losses to the players in the sector.

On the positive side, the impact is expected to be minimum for large institutionalised players with a solid brand and governance framework. Also, the impact on the residential real estate market could be minimal as most of the transactions are influenced by the home finance players and these deals are mostly facilitated in a transparent manner.

On the commercial real estate front where IBREL has presence, it is expected that the impact will be minimal as in the office/industrial leasing and transaction business, the cash component does not play a major role. 

Conclusion :-

Indiabulls Real Estate being a recognised brand in the market may actually benefit from the current demonetisation initiative by the Modi government. The companies diversified portfolio spread across segments viz., super premium category, premium category and mid-income category aided with the diversified geographic spread with presence in key locations such as Mumbai (MMR), Delhi (NCR) and Chennai augurs well for the stock.

The company’s strategy of generating value through new launches and consolidation of land bank can be expected to build a momentum to the growth. The unsold inventory of existing projects renders visibility on future cash-flows and revenue. The company’s focus on execution and timely delivery is one of its key strengths.

Investors can look at buying opportunity in the stock for the long term, expecting the stock to grow at a decent pace, albeit knowing that there is stiff competition for the company and the key risk still remain the policies of the government. 

"IB Real estate Ltd. is targeting a cash flow of Rs.20000 crores over the next four years, including its upcoming new projects & from IPIT consolidation. Over next 6-12 months, the company will launch its Imperial and Mint projects, a 7-acre project in Thane and another one in London. The two projects Sky Suites and Sky Forest will come up to revenue recognition during FY17. Moreover, it is developing 11 projects with a total saleable area of 30.51 million sq ft. It has presence in key metros of Mumbai, NCR and Chennai. Therefore, during FY17 company will be launching four projects that would be cash accretive. Eyeing on the financials, IBRE reported 2-fold increase in its consolidated net profit at Rs.141.60 Crores for Q2 FY17, as compared to Rs.70.64 Crores in the year ago period. Though the income from operations fell to Rs.710.60 crore in the second quarter of the current financial year from Rs.722.48 crore in the year-ago period. EPS for Q2 FY17 shoot up to Rs.3.06 as against Rs.1.72 last year. Company’s Net debt have reduced by about Rs.863 crores after consolidation which was about Rs.4,600 crores last fiscal. Altogether, company’s existing and new projects with a target of Rs.20000 crores of cash flow in the next four years attracts the company’s share price. Also, Revenue recognition by the company would start giving the positive momentum this fiscal. However, considering demonetisation in this economy, we recommend to stay away from this stock for a short term perspective, however, one could stay for long term with a target of Rs.82."