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A Qualitative Equity Research Company
Analyst: Lovelesh Manocha lovelesh.manocha@ideasfirst.in
Vishal Chopda vishal.chopda@ideasfirst.in
Indiabulls Real Estate Ltd (IBREL) is a real estate company engaged
in development of commercial properties, residential properties and
SEZs having a pan-India presence.
The company also has presence in power
subsidiary Indiabulls Power Ltd (IPL) in which it holds 58.6% of equity.
Further, the company has a 52.3% effective stake (45.3% equity + 7%
through fees) in Indiabulls Properties Investment Trust (IPIT) which is
listed in Singapore. IPIT develops commercial and residential
properties mainly in south central Mumbai.
The company recently bought around 11 acres of mill land in Worli for
a total consideration of Rs.19,790 mn.
September 22
Investment Rationale
Like manufacturing companies, for a real estate company
successful there are must have set of traits, viz.
raw material (land and capital), (2) liaisoning abilities with
government agencies, (3) strong & growing end user demand in
the region and (4) strong execution capabilities.
IBREL has assets in prime areas like Central Mumbai, upcoming Navi
Mumbai Airport & Gurgaon, strong project pipeline in both residential
commercial space and huge land bank which is in possession
paid for. Further, the company has successfully bid for land auctions in
the past and has received higher FSI under various schemes.
IBREL scores highly on parameters 1, 2 and
capabilities of the company are yet to be ascertained due to the young
age of the company. However, given the past track record of
promoters and group companies we feel the company has the
capability to execute the projects on time.
Further, the company has a stake in the power business
currently quoting at inexpensive valuations with the stock trading below
book value.
Valuation
With inexpensive valuations, huge land bank and a stake in the power
business, IBREL is an attractive opportunity with a potential to give
triple digit percentage return over medium-long term horizon.
Based on a SOTP valuation for its various assets, we estimate a NAV
of ` ` ` ` 287 per share for IBREL. At CMP of ` ` ` ` 179.20
at a discount of 38% to its NAV. We feel as the view of the market on
the real estate sector improves the stock will start trading near to its
NAV implying a good upside for the stock from its current levels.
The company scores a 4 (out of 5) on our star matrix and has been
assigned the low risk-medium return rating.
We recommend a Strong Buy on the stock
implying an upside of 60% from current levels.
lovelesh.manocha@ideasfirst.in
al Chopda vishal.chopda@ideasfirst.in
Risk Return Matrix
Real Estate Ltd (IBREL) is a real estate company engaged
in development of commercial properties, residential properties and
generation through its
IPL) in which it holds 58.6% of equity.
Further, the company has a 52.3% effective stake (45.3% equity + 7%
through fees) in Indiabulls Properties Investment Trust (IPIT) which is
listed in Singapore. IPIT develops commercial and residential
The company recently bought around 11 acres of mill land in Worli for
CMP (`̀̀̀)
179.20
-
20
40
60
80
100
120
140
Indiabulls Real Estate
Shareholding Pattern (%)
DII
3.4
Others
15.4
Relative Performance
Indiabulls Real Estate Ltd.September 22, 2010
Like manufacturing companies, for a real estate company to be
there are must have set of traits, viz. (1) easy access to
capital), (2) liaisoning abilities with
government agencies, (3) strong & growing end user demand in
the region and (4) strong execution capabilities.
assets in prime areas like Central Mumbai, upcoming Navi
ct pipeline in both residential &
commercial space and huge land bank which is in possession & fully
Further, the company has successfully bid for land auctions in
the past and has received higher FSI under various schemes.
and 3 while the execution
capabilities of the company are yet to be ascertained due to the young
age of the company. However, given the past track record of
promoters and group companies we feel the company has the
in the power business and is
nexpensive valuations with the stock trading below
With inexpensive valuations, huge land bank and a stake in the power
IBREL is an attractive opportunity with a potential to give
long term horizon.
Based on a SOTP valuation for its various assets, we estimate a NAV
179.20, the stock is trading
% to its NAV. We feel as the view of the market on
roves the stock will start trading near to its
NAV implying a good upside for the stock from its current levels.
The company scores a 4 (out of 5) on our star matrix and has been
stock with a target of ` ` ` ` 287
% from current levels.
BSE NSE
532832 IBREALEST
Face Value (`̀̀̀)
Book Value (`̀̀̀)
52 -week range (`̀̀̀)
M cap (`̀̀̀ Mn)
12-mnth Avg. Daily Vol.
Shares Outstanding Equity (Mn)
Free Float (%)
Market Data
1
Return Matrix
Target (`̀̀̀) Rating
287.00
Indiabulls Real Estate BSE Sensex
Shareholding Pattern (%)
Promoter
22.1
FII
59.2
Relative Performance
Indiabulls Real Estate Ltd.
Initiating Coverage
BLOOMBERG REUTERS
IBREALEST IBREL@IN INRL.BO
: 2
: 235
: 298/142
: 71,977
mnth Avg. Daily Vol. : 5,411,484
Shares Outstanding Equity (Mn) : 401.7
: 78.0
September 22, 2010
IBREL
Particulars
Non-IPIT
IPIT Real Estate Assets
GAV
Less: Tax (25%)
Add: India
discount)
Add: Cash (excluding
Add: Investment in MF (excluding
Less: Debt
NAV
Break-
Power portfolio contributes
more than 25% of the NAV
IBREL – NAV Calculation
Particulars
IPIT Real Estate Assets
Real Estate Assets
Less: Tax (25%)
ndiabulls Power Stake (10% holding company
discount)
Add: Cash (excluding Indiabulls Power)
Add: Investment in MF (excluding Indiabulls Power)
Less: Debt
-up of NAV
Non-IPIT Real
Estate Assets*
36%
IPIT Real Estate
Assets*
30%
Indiabulls Real Estate Ltd.
Initiating Coverage
2
`̀̀̀ Mn Per Share (`̀̀̀)
55,586 138
46,217 115
1,01,803 253
25,451 63
29,855 74
2,833 7
21,016 52
14,765 37
1,15,291 287
Indiabulls
Power Stake
26%
Net Cash &
Investments
8%
*Post tax
Indiabulls Real Estate Ltd.
Initiating Coverage
3 September 22, 2010
Table of Contents
Investment Rationale ............................................................................................................. 4
Overview ................................................................................................................................ 6
Real Estate Assets................................................................................................................... 7
Non – IPIT Real Estate Assets ........................................................................................... 7
IPIT Real Estate Assets ...................................................................................................... 9
Summary of Real Estate Assets ...................................................................................... 10
Indiabulls Power Ltd. ............................................................................................................ 11
Valuation .............................................................................................................................. 12
Methodology .................................................................................................................. 12
Assumptions for NAV Calculation ................................................................................... 12
Detailed NAV Calculation ................................................................................................ 14
Sensitivity Analysis .......................................................................................................... 16
Key Risks ............................................................................................................................... 17
Annexure I - Real Estate Project Status ................................................................................ 18
Annexure II - Power Project Status ...................................................................................... 21
Annexure III – Past Financials ............................................................................................... 22
Annexure IV – Industry View ................................................................................................ 23
Annexure V – About Indiabulls Group .................................................................................. 28
Indiabulls Real Estate Ltd.
Initiating Coverage
4 September 22, 2010
Investment Rationale
Assets in prime areas
IPIT has 3.3 msf of leasable commercial area, 3.3 msf of saleable residential area and 0.5 msf
of additional area in the prime locations (around Lower Parel) of Mumbai. Even though IPIT
forms a small proportion of the total area to be developed by IBREL, it constitutes a substantial
part of NAV due to the high sale & lease rates in those areas and as the projects are near
completion stage. The Lower Parel land (Jupiter & Elphistone mills) was acquired from NTC in
2005 through an auction process at a consideration of ` 7,200 mn. Land prices in this area
have appreciated substantially (more than 3x) since then. With the property prices near all times
highs, the company is set to make huge gains from these projects.
IBREL also has a project in Panvel which is quite close to the proposed Navi Mumbai airport.
Given the vantage location, the prices have already appreciated and the company stands to
gain even more if the airport comes up at the proposed site.
Continued stream of cash flows
Apart from the 7.1 msf of IPIT projects in Lower Parel which will start generating revenues from
FY12, IBREL has non-IPIT projects of 49.0 msf to be delivered over next 4-5 years. These
projects are located all across India with majority being in Panvel (20 msf). Currently, the
company has 14.46 msf of area under construction
At current market prices, the company expects to generate revenues of ` 217,720 mn from
these projects over the next 5 years and ` 10,250 mn during FY11 (excluding IPIT projects).
The Panvel project will be a major contributor to revenue in the coming years.
Huge land bank
Apart from IPIT projects and non-IPIT projects given above where work has started, IBREL has
residential land of 434 acres, commercial land of 56 acres and SEZ of 2500 acres. All of the
above land are fully paid for and is in the possession of the company.
The 434 acres of residential land includes 35 acres of prime land in South Delhi (Tehkand)
purchased in a DDA auction in 2006. The company recently received a favorable judgment from
the high court on this project. The project will aggregate to 1.2 msf of saleable residential area
and the company expects to receive necessary approvals soon. The remaining land area
includes 250 acres of the Savroli project (on Mumbai Pune highway) and 149 acres of the
Sonepat residential project.
The 2500 acres of SEZ land is located at Nashik, Maharashtra where the company plans to set-
up a multi-product SEZ. The proposed SEZ has good connectivity and is on the Shirdi-Nashik
highway while the nearest airport and railway station are 40-50 kms away.
Recently (July 2010-Aug 2010), the company bought Bharat mill land (8.37 acre) and Poddar
mill land (2.30 acre) for a consideration of Rs.15,040 mn and Rs.4,740 mn respectively.
7.1msf of area under development in Lower Parel, Mumbai (52.7% IBREL interest) IBREL’s share of revenue from the entire area under development at current market prices is ` ` ` ` 217,720 mn Land bank of 2,990 acres which is fully paid for and in possession of the company
Indiabulls Real Estate Ltd.
Initiating Coverage
5 September 22, 2010
Share in the power business
IBREL holds a 58.6% stake in Indiabulls Power Ltd (IPL) which was publicly listed in Oct 2009.
At IPL’s current market cap, IBREL’s stake in IPL is worth ` 34,416 mn.
Post the IPO, IPL has strong balance sheet which will help it to execute the projects it intends to
undertake. Work on the Nasik Phase I and Amravati Phase I have already started. Coal
linkages for both the projects were granted in November 2008.
Totally, IPL plans to have a capacity of 6615 MW (coal-fired) and 167 MW (hydro) in next 3-4
years. Coal linkages for Phase II of Nasik and Amravati project has also been granted in April
2010. Further, 1200MW has been tied up in long term Power Purchase Agreement with
Maharashtra State Electricity Distribution Company Limited at a tariff of ` 3.26/unit from the
Amravati Phase I project.
The share price of IPL has already seen a fall of 35% from its issue price and is currently
quoting at attractive valuations compared to its peers.
Inexpensive valuations
At CMP, IBREL is trading at P/BV of 0.76x based on June 2010 book value. The company has
already paid for the entire land it owns and its Mumbai land has been brought during 2005
where prices has increased considerably compared to the acquisition cost. Further, with many
of the projects in the execution phase the return on equity for the company is also bound to
improve.
58.6% stake in IPL which is
executing 5 coal-fired plants
aggregating 6615 MW and 4
hydro projects aggregating
167 MW
IBREL share price is
currently quoting at P/BV of
0.76x
Indiabulls Real Estate Ltd.
Initiating Coverage
6 September 22, 2010
Indiabulls Real Estate Ltd. (IBREL)
Non – IPIT Real Estate (100% ownership)
IPIT – Singapore Listed (45.3%
ownership + 7% fees)
Indiabulls Power (58.6% ownership)
Non-IPIT Real Estate (100% ownership)
Area Under Development
• 40.70 msf of residential area
• 8.30 msf of commercial area
Area owned by IBREL where work has not started
• Residential – 434 acres
• Commercial – 56 acres
• SEZ – 2500 acres
IPIT – Singapore Listed (45.3% ownership + 7% fees)
• 3.30 msf of commercial development
• 3.30 msf of residential development
• 0.50 msf of further development to be finalized
Indiabulls Power (58.6% ownership)
• Coal based power plants under development
• Phase I execution already in progress at Nashik and Amravati
• Phase II coal linkages received in April 2010
• Power Purchase Agreement (PPA) for 1200 MW from the Amravati
Phase I project tied up at a tariff of ` 3.26/unit for a term of 25 years
Overview
Market focusing only on IPIT and Power assets
Indiabulls Real Estate Ltd.
Initiating Coverage
7 September 22, 2010
Real Estate Assets
Non – IPIT Real Estate Assets
Projects Under Development (excluding IPIT)
Residential
Project
Area
(msf)
IBREL
Ownership
Project
Completion
Under Const in
Ph 1 (msf)
Exp. completion
of Ph1 in FY11
Ahmedabad 1.80 100% FY14 0.80 100%
Chennai 4.75 75% FY14 0.75 70%
Gurgaon 6.84 51% FY14 1.25 70%
Hyderabad 0.26 100% FY13 0.26 50%
Madurai 0.22 100% FY14 0.20 45%
Indore 1.46 100% FY15 0.16 10%
Panvel 19.96 100% FY15 4.90 50%
Commercial
Project
Area
(msf)
IBREL
Ownership
Project
Completion
Under Const in
Ph 1 (msf)
Exp. completion
of Ph1 in FY11
Ahmedabad 0.30 100% FY14 - 0%
Baroda 0.70 100% FY14 0.12 30%
Gurgaon 3.70 51% FY15 0.30 30%
Indore 0.40 100% FY14 - 0%
Thane 0.10 100% FY13 0.10 75%
Panvel 2.20 100% FY15 - 0%
At current market prices, the total value of all projects under development (excluding IPIT) is around ` ` ` ` 143,240 mn
Source: Company, Ideas1st Research
Indiabulls Real Estate Ltd.
Initiating Coverage
8 September 22, 2010
Description of Key Projects (excluding IPIT)
Project Description
Central Park,
Ahmedabad
The project is located in the Saraspur Area and is 1 km from the railway
station. 1 BHK and 2 BHK apartments will be designed.
High Street,
Baroda
The project is located on Jaitalpur Road near railway station. High end
integrated development is planned.
Greens, Chennai
The project is located on OMR Road close to software companies like TCS,
Wipro, Infosys etc. Premium residential township of 900 units of 2 BHK and 3
BHK will be designed.
Central Park,
Gurgaon
The project is located on the new Gurgaon-Dwarka Expressway. The project
will entail both commercial and residential development.
Central Park,
Hyderabad
The project is located near Indra Park and Husain Sagar Lake in Central
Hyderbad. 2 BHK, 21/2 BHK, 3 BHK and 4 BHK apartments in harmony with
Vastu and modern architecture will be designed.
Central Park,
Madurai
The project is located off South Veli Street in close proximity to the Meenakshi
temple and 11 km from Madurai Airport. 2 BHK and 3 BHK apartments will be
designed.
Greens, Panvel
The project is located adjacent to NH4, 5 min drive from Panvel Station and
will also benefit from the upcoming Navi Mumbai Airport. Spread across 80
acres, 2 BHK, 3 BHK and 4 BHK will be designed along with commercial
development of 2.20 msf.
Source: Company, Ideas1st Research
Indiabulls Real Estate Ltd.
Initiating Coverage
9 September 22, 2010
IPIT Real Estate Assets
IPIT is developing 6.60 msf space in Lower Parel, Mumbai
About Indiabulls Property Investment Trust (IPIT)
• IPIT is a Singapore listed subsidiary with IBREL having a 45.3%
equity stake
• IPIT is developing 6.60 msf of residential and commercial space in
the Lower Parel area of Mumbai
• Development on 19 acres of mill land (Jupiter & Elphistone)
purchased from NTC in 2005 at a cost of ` 7,170 mn.
• IBREL has a 52.3% economic interest (45.3% equity stake + 7%
through fees) in IPIT.
IPIT Projects Under Development
Project Area
(msf)
IBREL
Ownership
Project
Completion
Residential - Indiabulls Sky, Sky Suites and Sky
Forest 3.30 45% FY15
Commercial – One Indiabulls and Indiabulls
Finance Centre 3.30 45% FY12
Additional Development (To be finalized) 0.50 45% NA
Source: Company, Ideas1st Research
Description of IPIT Projects
Project Description
Residential High-end residential development located in Lower Parel (one of the premium
areas of Mumbai). 3 towers with total developable area of 3.30 msf.
Commercial
High-end commercial development located in Lower Parel (one of the
premium areas of Mumbai). 5 office towers with total office space of 3.30 msf
to be developed.
Source: Company, Ideas1st Research
Indiabulls Real Estate Ltd.
Initiating Coverage
10 September 22, 2010
Summary of Real Estate Assets
Total sales revenue from the entire area under development at current market prices is ` ` ` ` 310,860 mn
IBREL’s share of revenue from the entire area under development at current market prices is ` ` ` ` 217,720 mn
More than 90% of projects (by value) are in super metro cities –Mumbai Metro Region, NCR and Chennai.
Area Under Development (including IPIT and Non-IPIT)
Area (msf)* Residential Commercial Total
Gross Developable Area 44.50 11.60 56.10
Less – Project Handover - 1.90 1.90
Net Developable Area 44.50 9.70 54.20
Area Under Construction 12.14 2.32 14.46
Source: Company, Ideas1st Research
*Does not include recent Mumbai Mill Land acquisition
Area Under Construction (including IPIT and Non-IPIT)
Area (msf) Residential Commercial Total
Super Metro* 10.70 2.20 12.90
Rest of India 1.44 0.12 1.56
Total 12.14 2.32 14.46
Source: Company, Ideas1st Research
*Super Metro includes Mumbai Region, NCR and Chennai
Land Bank Summary
Residential Commercial SEZ Total
Area (acres) 434 56 2,500 2,990
Source: Company, Ideas1st Research
The 434 acres of residential land includes 35 acres of prime land in South Delhi (Tehkand)
purchased in a DDA auction in 2006. The company recently received a favorable judgment from
the high court on this project. The project will aggregate to 1.2 msf of saleable residential area
and the company expects to receive necessary approvals soon. The remaining land area
includes 250 acres of the Savroli project (on Mumbai Pune highway) and 149 acres of the
Sonepat residential project.
The 2500 acres of SEZ land is located at Nashik, Maharashtra where the company plans to set-
up a multi-product SEZ. The proposed SEZ has good connectivity and is on the Shirdi-Nashik
highway while the nearest airport and railway station are 40-50 kms away.
Indiabulls Real Estate Ltd.
Initiating Coverage
11 September 22, 2010
Indiabulls Power Ltd.
At CMP, IPL has a market cap of ` 58,731 mn. The stock has already seen a fall of more than 35% since its listing in October 2009
IPL Thermal Projects Overview
Project Amravati
Phase I
Nashik
Phase I
Amravati
Phase II
Nashik Phase
II
Bhaiyathan,
Chattishgarh
Proposed
Capacity 1320 MW 1335 MW 1320 MW 1320 MW 1320 MW
Land Available Yes Yes No Yes No
Coal Linkage Yes Yes Yes Yes Yes
Off-take
Agreement
PPA for
1200 MW
signed
No No No PPA for 65% of
generated power
Expected
Commissioning June 2012
September
2011 March 2013 March 2013 December 2012
Expected Cost (`
mn) 68,880 60,480 55,866 57,338 67,960
Source: Company, Ideas1st Research
About Indiabulls Power Ltd. (IPL)
• IBREL has a 58.6% stake in IPL
• IPL was listed on NSE and BSE in October 2009
• IPL is developing 5 coal-fired plants aggregating 6615 MW and 4
hydro projects aggregating 167 MW.
Indiabulls Real Estate Ltd.
Initiating Coverage
12 September 22, 2010
Valuation
Methodology
Assumptions for NAV Calculation
Non-IPIT Residential Projects
Project
Selling
price
(`̀̀̀/sq ft)
Const.
cost (`̀̀̀/sq
ft)
Cash flow break-up
FY11 FY12 FY13 FY14 FY15
Central Park,
Ahmedabad 1,980 1,200 20% 30% 30% 20% -
Greens, Chennai 3,015 1,700 20% 30% 30% 20% -
Central Park, Gurgaon 2,655 1,700 20% 30% 30% 20% -
Central Park, Hyderabad 3,240 1,700 25% 45% 30% - -
Central Park, Madurai 2,250 1,600 20% 30% 30% 20% -
Central Park, Indore 1,980 1,500 - 20% 30% 30% 20%
Greens, Panvel 3,060 1,700 - 20% 30% 30% 20%
Non-IPIT Commercial Projects
Project
Selling
price
(`̀̀̀/sq ft)
Const.
cost (`̀̀̀/sq
ft)
Cash flow break-up
FY11 FY12 FY13 FY14 FY15
Central Park,
Ahmedabad 2,700 1,700 20% 30% 30% 20% -
High Street, Baroda 3,150 1,700 20% 30% 30% 20% -
Central Park, Gurgaon 4,500 1,700 20% 30% 30% 20% -
Central Park, Indore 1,980 1,700 20% 30% 30% 20% -
Mint, Thane 4,950 1,700 25% 45% 30% - -
Greens, Panvel 3,150 1,700 - 20% 30% 30% 20%
We have used Sum-of-the-Parts (SOTP) based valuation methodology to value IBREL. We
have calculated Gross Asset Value (GAV) by using DCF method to value the Non-IPIT & IPIT
properties under development and have assigned value to the land bank by assuming selling
price for the land bank. Finally, we have calculated Net Asset Value (NAV) by deducting taxes,
adding power business stake and net cash & investments (excluding power).
Indiabulls Real Estate Ltd.
Initiating Coverage
13 September 22, 2010
IPIT Residential Projects
Project
Selling
price
(`̀̀̀/sq ft)
Const.
cost (`̀̀̀/sq
ft)
Cash flow break-up
FY11 FY12 FY13 FY14 FY15
Indiabulls Sky, Sky
Suites and Sky Forest -
Mumbai
18,900 5,000 - 20% 30% 30% 20%
IPIT Commercial Projects
Project
Selling
price
(`̀̀̀/sq ft)
Const.
cost (`̀̀̀/sq
ft)
Cash flow break-up
FY11 FY12 FY13 FY14 FY15
One Indiabulls and
Indiabulls Finance Centre
- Mumbai
175 3,500 30% 70% - - -
WACC Calculation
Risk Free Rate 8%
Beta 1.54
Equity Risk Premium 8%
Cost of Equity 20%
Cost of Debt (pre tax) 13%
Tax rate 25%
Total Long Term Debt / Equity Ratio 1
WACC 15%
Other Assumptions
• Capitalization rate of 10%
• Residential project to be developed at 0.50 msf of IPIT land and cash flow
from the same to occur over FY15 - FY18
• 2,990 acres of land (including the Nashik SEZ land) has been valued at ` ` ` ` 150
/sq ft with a FSI of 1.0. This also includes the 35 acres of land in South Delhi.
• Recent land acquisitions in Mumbai and few other projects where details
not available are not considered for NAV calculation
• Tax rate of 25% since the GAV also includes land cost
Indiabulls Real Estate Ltd.
Initiating Coverage
14 September 22, 2010
Detailed NAV Calculation
Non-IPIT Residential Projects
Project `̀̀̀ Mn Per Share (`̀̀̀)
Central Park, Ahmedabad 1,150 3
Greens, Chennai 3,836 10
Central Park, Gurgaon 2,728 7
Central Park, Hyderabad 348 1
Central Park, Madurai 117 0.29
Central Park, Indore 499 1
Greens, Panvel 19,324 48
Total 28,001 70
Non-IPIT Commercial Projects
Project `̀̀̀ Mn Per Share (`̀̀̀)
Central Park, Ahmedabad 246 1
High Street, Baroda 831 2
Central Park, Gurgaon 4,327 11
Central Park, Indore 92 0.23
Mint, Thane 282 1
Greens, Panvel 2,271 6
Total 8,048 20
IPIT Projects
Project `̀̀̀ Mn Per Share (`̀̀̀)
Indiabulls Sky, Sky Suites and Sky
Forest - Mumbai 17,077 43
One Indiabulls and Indiabulls Finance
Centre - Mumbai 27,440 68
To be finalized (0.50 msf) – Mumbai 1,700 4
Total 46,217 115
September 22, 2010
Land
Area = 2,990 acres
Indiabulls Power Stake
IPL Market Cap (
IBREL stake
Power stake/share
Holding Company
Discounted Power stake/share
NAV Calculation
Particulars
Non-IPIT
IPIT Real Estate Assets
GAV
Less: Tax (25%)
Add: India
discount)
Add: Cash (excluding
Add: Investment in MF (excluding
Less: Debt
NAV
Break-
Non-
Estate
Assets*
IPIT Real
2,990 acres `̀̀̀ 19,537
Indiabulls Power Stake
IPL Market Cap (` Mn)*
IBREL stake (`̀̀̀ Mn) 33,172
Power stake/share
Holding Company Discount
Discounted Power stake/share
NAV Calculation
Particulars
IPIT Real Estate Assets
Real Estate Assets
Less: Tax (25%)
ndiabulls Power Stake (10% holding company
discount)
Add: Cash (excluding Indiabulls Power)
Add: Investment in MF (excluding Indiabulls Power)
Less: Debt
-up of NAV
-IPIT Real
Estate
Assets*
36%
IPIT Real
Estate
Assets*
30%
Indiabulls
Power Stake
26%
Net Cash &
Investments
Indiabulls Real Estate Ltd.
Initiating Coverage
15
19,537 mn `̀̀̀ 49/share
56,608
3,172 (58.6% holding)
83
10%
74
*As on September 22, 2010
`̀̀̀ Mn Per Share (`̀̀̀)
55,586 138
46,217 115
1,01,803 253
25,451 63
29,855 74
2,833 7
21,016 52
14,765 37
1,15,291 287
Indiabulls
Power Stake
26%
Net Cash &
Investments
8%*Post tax
Indiabulls Real Estate Ltd.
Initiating Coverage
16 September 22, 2010
Sensitivity Analysis
Sensitivity of Gross value of IPIT & Non-IPIT real estate assets (excluding land
bank) to WACC and Cap rate
Per Share (`̀̀̀)
WACC/Cap rate 9% 10% 11%
13% 220 211 204
14% 217 208 200
15% 214 205 197
16% 211 202 195
17% 208 199 192
At a WACC of 17% and Cap rate of 11%, the Gross value of IPIT & Non-IPIT real estate
assets (excluding land bank) decline by ` ` ` ` 13 per share implying a decline in IBREL NAV
by ` ` ` ` 10 per share (25% tax) to ` ` ` ` 277 per share.
Sensitivity of Gross value of IPIT & Non-IPIT real estate assets (excluding land
bank) to delay in cash flows
Per Share (`̀̀̀)
Base Case 205
Delayed by one year 178
Delayed by two years 155
If the cash flows get delayed by two years, the Gross value of IPIT & Non-IPIT real estate
assets (excluding land bank) decline by ` ` ` ` 50 per share implying a decline in IBREL NAV
by ` ` ` ` 38 per share (25% tax) to ` ` ` ` 249 per share.
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17 September 22, 2010
Key Risks
Oversupply in South Central Mumbai
With most of the real estate players, developing premium properties on the mill lands in South
Central Mumbai region there is a fear of oversupply in the area. This can slow down the
absorption of properties affecting the NAV of the company.
However, most of the players have a very healthy balance sheet and thus, have the capability to
hold on to inventory without reducing the prices.
Low promoter holding
Promoters of IBREL have only 22.1% stake (as on June 2010) in the company while most other
real estate companies have a promoter holding > 50%. The low promoter holding raises a risk
since IBREL has a lot of cash which is under the control of promoters & management. Further,
ROE delivered by the company has been historically very low. Hence, deployment of cash in
productive assets leading to improvement in ROE is required. However, over the past two
quarters the promoter stake has increased gradually from 16.7% to 22.1% indicating the
commitment and confidence of the promoters in the company.
Project execution risks
IBREL currently has 56.1 msf of area under development and 14.46 msf under construction.
Being a young company they have lesser experience and other bottlenecks like govt clearance,
availability of manpower and working capital requirement could hamper the execution of these
projects.
Further, the company is undertaking large scale power projects under its subsidiary IPL which is
also a new to the company.
Any delay in execution of these projects will significantly impact the valuation of the company.
Power business valuation
Since IBREL has a 58.6% stake in IPL, any deterioration in power business valuation will impact
IBREL valuation.
Economic slowdown
A slowdown in the economy due to any internal or external reasons could impact the demand
and pricing of real estate.
Delay in absorption will
reduce the NAV
Low promoter holding with
huge cash under control
Inexperience in executing
large real estate and power
projects could lead to delays
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Annexure I - Real Estate Project Status
Nashik SEZ
Gurgaon Centrum
Panvel - Greens
Chennai - Greens
Source: Company, Ideas1st Research
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19 September 22, 2010
Real Estate Project Status
Ahmedabad – Central Park
Hyderabad – Central Park
Baroda – High Street
Madurai – Central Park
Source: Company, Ideas1st Research
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20 September 22, 2010
Real Estate Project Status
Indiabulls Finance Centre – Tower 1
Indiabulls Finance Centre – Tower 2
Indiabulls Finance Centre – Tower 3
Source: Company, Ideas1
st Research
Indiabulls Real Estate Ltd.
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21 September 22, 2010
Annexure II - Power Project Status
Amravati Phase I
PCC & Reinforcement Work
Contractor’s Office
Site Office
Nashik Phase I
Boiler Unit Excavation
Contractor’s Offices
Batching Plant being erected
Source: Company, Ideas1st Research
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22 September 22, 2010
Annexure III – Past Financials
Profit & Loss Statement
`̀̀̀ Mn
Year FY09 FY08 FY07
Net Sales 2,086 1,407 139
Total Income 10,646 16,942 2,447
Operating Profit 1,743 6,220 311
Interest 244 522 53
Depreciation 108 33 8
Net Profit 692 4,067 131
Minority Interest (after tax) 398 65 -9
Net Profit after Minority Interest & P/L of Assoc. Co. 295 4,002 140
Extraordinary Items 50 2,684 -
Adjusted Net Profit 245 1,319 140
EPS before Minority Interest 2.06 13.77 -
EPS after Minority Interest 0.52 13.50 0.03
Balance Sheet
`̀̀̀ Mn
Year FY09 FY08 FY07
Share Capital 1,890 1,857 3,322
Total Shareholders’ Funds 55,283 42,359 14,502
Minority Interest 14,457 14,248 3,418
Total Debt 11,956 3,783 1,420
Total Liabilities 81,696 60,390 19,339
Net Block 1,540 1,493 246
Capital Work in Progress 2,644 753 2
Investments 12,347 675 5,944
Inventories 17,566 11,441 1,993
Sundry Debtors 878 1,165 59
Cash and Bank 15,897 16,218 12,129
Loans and Advances 32,535 49,651 3,758
Total Current Assets 66,876 78,475 17,939
Total Current Liabilities 1,702 20,998 4,785
Net Current Assets 65,174 57,477 13,153
Total Assets 81,696 60,390 19,339
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Annexure IV – Industry View
1. Current scenario
The real estate sector has witnessed a strong bull run over the last few years starting 2004, before plunging in second half of 2008. With
the rapid economic growth in the country, the income and surpluses in the hands of the people suddenly increased. Real estate being one
of the only two perennial & traditionally preferred asset class and with the inborn desire of Indians to own a house, the sector became a
natural choice for these excesses to be invested. This sudden spurt in demand caught the fancy of investors globally.
Real estate sector was one of the key beneficiaries of the foreign fund inflows or hot money. However with the global crisis in 2008, this
very fact went against the sector. Also, the crisis had its genesis in real estate sector and as a result the real estate stocks took a steep
plunge across all the countries, including India, even though India’s real estate market was safe and didn’t face proportional impact. The
sudden disappearance of the liquidity and the fear in investor’s minds resulted in steep fall in demand. Real estate companies in India
which had taken huge leveraged positions for expansion in anticipation of booming demand saw their market cap erode quickly and had to
hold projects due to negative cash flows. The share prices of these companies have fallen to unjustified levels even though the long term
fundamentals of the Indian real estate sector haven’t changed.
While economic growth returned and the markets improved beginning the first quarter of 2009, rationality has not come back to the real
estate stocks. Though other sector indices have appreciated many folds over the past one year, the BSE realty index continues to
underperform the broader market by a wide margin. This despite the fact that property prices are almost nearing and in fact even crossed
their 2008 peaks in most places. Further demand has returned to the sector now and projects are being sold out within days of their
launch. It is encouraging to know that even the demand for premium housing is growing fast. Most importantly the debt position and
balance sheet of real estate companies have improved significantly over the past two years. This disconnect in high property prices and
low realty stock prices can be attributed to the unwarranted fear of fall in housing demand due to the anticipated interest rates hike and the
fragile economic milieu in the western countries and their weak real estate stocks. As we discuss later, based on India’s and the sectors
long term fundamentals we believe the Indian real estate sector is in a secular bull run and currently smartly recovering out of the cyclical
bear run.
2. Demand
Even though post crisis the real estate sector has taken a major hit, fundamentally things have only improved. Based on our top down
approach and our strong macro view of the Indian economy we believe the Indian real estate sector is in a multiyear, stable growth
phase. Following are a few of the key points that make us confident on the sector.
a) Domestic consumption story
We believe that the growth matrix in India has never been better. With a focused, pro reform and a stable government at the
center, there is no stopping for India. Even though the global economy is going through an unusually uncertain phase, we believe
that over medium to long term the fundamentals would prevail and see a limited impact of the global developments on the real
sector in case of a negative fallout. . Unlike most other sectors, real estate is a pure domestic theme which is produced,
consumed & sold domestically; global developments in US, Europe, China; et al have only an indirect impact on demand through
confidence and capital channel. It’s surprising to see that while all experts & financial gurus are stressing to invest in Indian
domestic demand driven sectors, real estate has been given a total miss.
We expect the real estate sector to grow step-in-step with the fast growing GDP. A large part of the savings is expected to flow
into real-estate for the twin purpose of having own abode and making a stable investment.
b) Demographics
i. Working age population
In contrast to the aging population and rising dependency ratios in many countries, India is blessed with a young and
growing population. India has amongst the best demographic ratio globally and this would continue to improve over next
three to four decades. This comes at a time when western economies have deteriorating demographic ratio. Even China
is at fag end of its favorable demographic ratio which is expected to peak between 2012 & 2015 and decline sharply
thereafter for next few decades. While demographic dividend is a double edge sword, if handled in a right way it can be
hugely positive for a country. The rising proportion of persons of working age will stimulate savings as pressure on
household and public budgets for the needs of dependent children & elderly comes down. Young workers are
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comparatively more mobile who are willing to take chances and ready to migrate where opportunity is available. The
rapidly growing work force implies growing savings leading to higher demand for housing.
ii. Exploding Middle Class
McKinsey Global Institute (MGI) predicts that the India’s middle class will reach 583 million from the current 50 million by
2025. Further it states that the average household income in India will triple over the next two decades and it will become
the world’s 5th-largest consumer economy by 2025, up from 12th now. Another study shows that according to Indian
standards, the middle class population in India is already more than the total population of the United States. With this
exploding middle class the demand for real estate is bound to go up unidirectionally.
iii. Changing trend towards nuclear families
The traditional ‘joint-family’ system in India is rapidly breaking up. With increasing expenses and with more people
migrating to cities for work, people are increasingly opting for nuclear and small families. This undoubtedly means more
demand for residential segments.
c) Huge Surpluses
i. High savings
India is among the very few economies globally that has a high savings rate. A savings rate of approximately 34% of
GDP implies savings of USD 400 million annually. Historically Indian’s have preferred two asset classes over others –
gold and real estate and an increase in savings would directly lead to an increase in demand for these asset classes.
People in urban areas are increasingly investing in second homes too.
ii. Parallel economy
The parallel economy or the ‘black money’ as more commonly known in India is estimated to be anywhere between 40 to
100 percent of the stated GDP. Property is the easiest and most attractive place to park this huge amount of
unaccounted funds. ‘Cash’ component in real estate deals has been a very common practice in India. Other than acting
as an invisible hand supporting the real estate market, the black or unaccounted component also provides a cushion to
banks financing the sector.
d) Growing Income
i. Increasing Employment
Barring the span of 12 to 18 months of the economic slowdown, the employment the employment for both blue and
white collared workers has been increasing in India. With the strong economic recovery in India, companies have
started hiring again. This entails increase in demand for commercial space. Further this increase in work force migration
also means more housing requirement by these corporate.
ii. Inclusive growth
There has been a notable shift in the ‘growth’ in India towards a more ‘inclusive growth’. As a result of the broader based
growth and the redistributive measures by the government, the surplus in the hands of the common man is fast
increasing. The National Rural Employment Guarantee Act (NREGA), the Sixth Pay Commission and the government’s
increased focus on infrastructure would further boost the growth at the ground level. Moreover with manufacturing and
service sector gaining traction in the rural economy, the reliance on farm-based income has decreased substantially over
the years reducing the income volatility.
e) Urbanisation
Approximately only 30% of the total population or 340 million people reside in cities. McKinsey Global Institute (MGI) predicts this
number will go up to 590 million, in next 20 years. This addition of 250 million to urban areas will be at a very rapid pace requiring
only half the time compared to the 40 years (1971-2008) needed to add the last 230 million to the urban population. Such rapid
urbanization would need to be supported by rapid development in real estate may it be residential, commercial or hospitality.
Historically all developed countries have seen a boom in real estate specifically during their fastest growing years characterized
by rapid urbanization. A more recent parallel would be China, one of the few countries to experience such high rates of
urbanization. The real estate growth there over the last decade gives a fair idea about the growth potential of the real estate
sector in India.
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f) Perennial investment destination
People in India have a natural tendency to save and are relatively more conservative when it comes to investments. Even today
majority of financially literate people park their surpluses in the traditionally safe haven, real estate. Further the desire to own a
home is relatively very high amongst Indians, house being the first major asset purchased by a majority of them.
g) Low Mortgage to GDP ratio
The real estate industry in India is not driven by bank / non bank finance with bulk of the purchases financed entirely from
savings. The mortgage to GDP ratio in India continues to remain one of the lowest globally with a very low penetration of housing
loans. It is surprising to know that only about 30% of the total realty deals in the country are financed by financial institutions. This
phenomenon can partially be attributable to high savings, huge parallel economy, lack of financial knowledge amongst the public
and limited availability of credit facilities.
Interestingly high value properties are rarely financed by financial institutions, with the portion being financed usually limited to
1/3rd
of the total value. Rather it is the low cost housing sector that forms bulk of the demand for finance.
However this situation is fast changing and the leverage ratio is improving more favorably. The opportunity lies in the problem
itself, offering a great upside to the real estate demand and prices as the mortgage’s market grows.
3. Why the real estate stocks have been beaten down by the investors?
While multiple reasons have been attributed to justify the disconnect between the high real estate prices and low realty stock prices, we
believe that it’s fear, fear and fear that is keeping investors away from the sector. Listed below are the most common fears that we believe
investors have in their minds. Needless to say, that these fears are unwarranted and do not hold in the Indian scenario.
a) Increase in Interest rates
The anticipated interest rate hike by RBI is one of the basic reasons driving the investors out of the real estate sector. With the
increase in cost of financing, investors believe that the demand for real estate would dry up. However we believe that unlike in
other countries, the rise in interest rate will not have a significant impact on the demand of real estate.
The real estate industry in India is not driven by bank / non bank finance with bulk of the purchases being financed entirely from
the savings. This can be easily deduced from its relatively low mortgage to GDP ratio and the fact that only about 30% of the total
realty deals in the country are financed by financial institutions. Additionally, bulk of the demand is coming from the end user and
not just investors, which further mitigates the impact on demand.
b) Global crisis fears
The fragile recovery in the United States, the instability in the Euro zone and the fears of a property bubble in China are
depressing the realty market. However based on India’s strong macroeconomic fundamentals and its limited exposure to the
international market we expect only a mild, if any, impact on India’s growth.
c) Many IPO’s scheduled for launch
The IPO’s scheduled by realty companies over the next few months are believed to be depressing the current investment in the
sector. We believe that given the low market value of the free float stocks in the sector the scheduled IPOs will have minimal, if
any impact on the demand over medium to long term or once sentiments turn around.
4. The transient irrationality
Many property stocks in India are currently trading at over 50% discount to their NAV and approximately 33% of their pre crisis peak price.
However we feel this is mainly because of the global meltdown in property prices and slowdown in China. Given the sector’s domestic
nature it won’t be long before the investors realize its true potential. Following are a few more points that highlight the disconnect between
the fundamentals and the stock prices
a) Real Estate prices nearing 2008 peak prices:
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The real estate prices have moved up sharply after plummeting during the recent global economic meltdown. Property prices are
already nearing their 2008 peak prices and have even breached the peak in some regions. However the stock prices of these real
estate developers are yet to be adjusted upwards.
b) Stronger balance sheets:
Pre crisis, most developers had taken huge leveraged positions in anticipation of the growing demand over the coming years.
However with the melt down in second half of 2008, their cash flows deteriorated and balance sheets started bleeding. Debt
levels had grown to unsustainable levels. However these companies have put their house back in order by slowing down their
aggressive expansion plans, adopting a cautious and conservative strategy, and even selling their land. Their debt position and
cash flows are much more comfortable now. Consolidated debt position of the sector as a whole is much lower now. Despite
stronger financials their stock prices continue to get the beating.
c) Business reviving smartly:
The sector has seen smart recovery in the business. Projects are being sold within days of their launch and signs of demand
revival are clearly visible. Despite this optimism fear persists in the stock markets and investors continue to discount the stock
prices for these companies.
With an eye on the above three factors we see every reason for the realty sector to provide exceptional returns from their current
levels and believe the downside to be limited.
Proof
The signs of the revival of the sector are eminent. Projects are getting booked within days of their launch. Further the aggression and
optimism in the sector is clearly visible in the media. Whether it is land purchase at multiple times of reserve price or the size and volume
of their advertisement in most renowned publications, you yourself can judge. These are indirect yet significant indications of the boom
ahead.
5. Why is the Indian real estate sector different from the rest of the world?
The real estate sector in India is very peculiar owed majorly to its economic structure. These structural differences make it vacuous to
compare it with the real estate markets in other countries.
a) Perennial investment destination
People in India have an inborn tendency to save and are relatively more conservative when it comes to investments. Even today
majority of the people park their surpluses in gold and real estate, which are traditionally considered as safe havens for
investment. Further as compared to people across the globe, the desire to own a home is relatively very high amongst Indians,
house being the first major asset purchased by a majority of them. This habit of Indians provides strong support to the demand.
b) Parallel economy
The parallel economy or the ‘black money’ as more commonly known in India is estimated to be anywhere between 40 to 100
percent of the stated GDP. This huge surplus has limited avenues other than property markets to be invested in and ‘cash’
component in real estate deals is a very common practice in India. It also reduces the financing requirement. Other than acting as
an invisible hand supporting the real estate market, the black or unaccounted component also provides a cushion to banks
financing the sector.
This invisible force which gets even more active during slow periods is very peculiar to the Indian economy and a major factor
why the country’s real estate sector cannot be paralleled against any other country.
c) Low Mortgage to GDP ratio
The real estate industry in India is not driven by bank / non bank finance with bulk of the purchases being entirely financed from
savings. The mortgage to GDP ratio in India continues to remain one of the lowest globally with a very low penetration. It is
surprising to know that only about 30% of the total realty deals in the country are financed by financial institutions. This
phenomenon can partially be attributable to higher savings, huge parallel economy, limited availability of credit facilities and to
some extent lack of knowledge.
Interestingly high value properties are rarely financed by financial institutions, with the portion being financed limited to 1/3rd
of the
total value. Rather it is the low cost housing sector that forms bulk of the demand for finance.
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The low dependence on the financial sector again differentiates the Indian realty sector form the sector across the world.
d) Difficulty in getting clear title land
This is probably the most important differentiator for the sector. It is very difficult to get a clear title land in India. Further legal
complications involving real estate deals take years to be resolved. Therefore clean properties typically demand a premium up to
50-100% of the property value. This again differentiates the sector from the realty markets world over.
e) High utilization of land in India
Owing to high population density, availability of natural water resources and presence of habitable & fertile land almost
everywhere in country, there is negligible percentage of the total land which has not been put to some use or for revenue
generation. This is in stark contrast to the western countries with low population density. Companies find it difficult to acquire large
track of land to set up their factories along with vendor’s production facilities and residential complexes.
6. The emerging trend
a) Growing interests amongst NRIs
There is a renewed interest amongst Non-Resident Indians specially amongst the older generation who are purchasing properties
and houses in Indian Tier I & Tier II cities for investment, as second homes and also increasingly with a view to spend their
retirement years in India. Encouraged by this trend a number of developers are tapping their pockets and have conducted road-
shows for the premium projects specifically targeted towards this affluent group.
b) Demand for premium housing
Over the last few months, especially in the Tier I & Tier II cities, demand for premium housing and larger properties have been
growing. There have been a slew of launches of premium and luxury residential projects. Further demand for larger residential
properties is also increasing.
c) Macroeconomic policies
The macroeconomic policies will play a very important role in shaping the future of the industry. With 100% FDI being allowed in
single brand retail stores and under ‘cash-n-carry’ formats, a lot of demand for retail space in the Tier I & Tier II cities has been
generated. As and when the FDI norms are relaxed the sector is expected to benefit from a demand spike.
d) Improving connectivity & mass transport
The improving connectivity and public transport is helping the cities to spread and also rationalizing the realty prices by reducing
concentration. It would an increasingly important role in the growth of the sector.
e) Strong emergence of new categories for demand of land
Shopping malls, warehouses, airports, resorts, multiplex theatres, entertainment centres like fun parks, sports facilities,
educational institutes, parking facilities & venues for public gathering for purpose of conferences, workshops, celebrations et al
are all contributing to a positive upswing to this new phase of land sale in India.
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Annexure V – About Indiabulls Group
Indiabulls Group has business interest in real estate, infrastructure, financial services, retail, multiplex and power sectors. Currently the
Group operates its real estate business through Indiabulls Real Estate Limited (IBREL), financial services business through Indiabulls
Financial Services Limited (IBFSL) and capital market business through Indiabulls Securities Limited (IBSL).
Indiabulls Group of Companies
• Indiabulls Financial Services Limited (IBFSL)
IBFSL is one of the market leaders in the Indian non banking financial services sector. The company offers a wide range of services
such as consumer finance, housing finance, commercial loans, life insurance, asset management and advisory services. IBFSL along
with MMTC Limited, the largest commodity trading company in India, has set up India’s 4th
Multi- Commodity Exchange.
• Indiabulls Real Estate Limited (IBREL)
IBREL was originally a wholly owned subsidiary of IBFSL. However, effective from 1 May 2006, the company demerged from IBFSL
through a scheme of arrangement under Companies Act. The company focuses on construction and development of properties,
project management, investment advisory and construction services. Also its operations cover all aspects of real estate development
from identification of land, to the planning, execution, construction, marketing of its projects and so on. IBREL partnered with Farallon
Capital Management LLC of USA was the first to bring in Foreign Direct Investment (FDI) into real estate sector.
• Indiabulls Securities Limited (IBSL)
Pan India presence and an extensive client base has made IBSL country’s leading capital market company. The main business of the
company is providing securities and commodities broking and advisory services and related activities like buying, selling, dealing,
transferring and hypothecating shares and debentures. The company acts as a financial consultant or portfolio manager and also
managing the funds of investors.
• Indiabulls Power Limited (IPL)
Indiabulls group made its foray in the power sector through Indiabulls Power Limited. IBREL has a 58.6% stake in IPL and the
company got listed on BSE & NSE during October 2009. IPL is developing 5 coal-fired plants aggregating 6615 MW and 4 hydro
projects aggregating 167 MW.
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