takeaways from site visits visited mahindra world city,...
TRANSCRIPT
8 February 2011
Visited Mahindra World City, JaipurSteady progress in SEZ; NPA still in concept stage
We visited Mahindra World City (MWC), Jaipur. We were given a tour of the site,and we interacted with the senior management and Head of Operations of a keytenant. We also met local brokers. The 3,000 acres of integrated developmenthas received notifications for three SEZs: (1) IT/ITES, (2) Light Engineering -including Automobiles and Automobile Components, and (3) Handicrafts. Thecompany plans to expand coverage to include segments such as Gems andJewelry, Apparel, and Logistics. When fully operational, this business city will
employ ~100,000 people and will have an annual export potential of Rs50b.
Steady progress in early stage of monetization: The Jaipur SEZ is inthe early monetization phase, with sale of the processing area underway.While ~280 acres of the IT SEZ area have been leased out to key tenants,another 90 acres have been leased out in the Handicraft and Light Engineeringspace. The current customer base at the Jaipur SEZ is 37, of which three(Infosys, Deutsche Bank KPO and EXL) have started operations and 11 havecommenced construction. The current employment base of the SEZ is 2,200v/s projected employment of 100,000.
Monetization of non-processing area yet to cross conceptualizationstage: MWC has ~1,000 acres of non-processing area (NPA), where it plansto develop residences, hospitals, schools, etc. The total estimated saleablearea for the planned residential projects is ~30msf, implying a supply potentialof ~20,000 apartments. However, the company does not have any immediatemonetization plan for the NPA. Even the product-mix and mode of monetizationare not finalized. While joint development with co-developers such as theparent, Mahindra Lifespaces (MLL) is one option, bulk deals on plotted land isanother. The management has indicated that it would be a couple of yearsbefore it starts developing the NPA.
Valuing MWC, Jaipur at Rs181/share of MLL - 30% of FY13E NAV ofRs604/share: We have valued MWC on an NPV basis at Rs7.3b or Rs181/share (30% of MLL's FY13E NAV of Rs604). We estimate the processing areato contribute ~31% of gross value, and the residential and institutional areato contribute ~69%. MLL has (1) a sound business model, (2) strong brandequity, (3) established client relationships, and (4) a strong balance sheet.Our FY13E SOTP value for MLL is Rs604/share: (1) Chennai SEZ at Rs167/share, (2) Jaipur SEZ at Rs181/share, (3) residential vertical at Rs185/share,and (4) other rental assets at Rs60/share. We expect earnings to grow at aCAGR of 34% over FY11-13, due to strong contribution from the Chennai SEZ,sale of the processing area in the Jaipur SEZ, and increased contribution fromresidential projects. The stock trades at 7.6x FY12E EPS of Rs43.5 and 5.7xFY13E EPS of Rs57.6, at ~45.5% discount to our FY13E SOTP value. MaintainBuy with a target price of Rs453 (25% discount to FY13E NAV).
Siddharth Bothra ([email protected]); Tel:+912239825407/Sandipan Pal ([email protected]); Tel:+912239825436
Takeaways from site visitsThe InSites
Mahindra Lifespaces
MWC, Jaipur: Master Plan
MWC, Jaipur: IT SEZ
Financial snapshotY/E March FY10 FY11 FY12 FY13
Net Sales (Rs b) 4.2 6.3 8.0 10.4
EBITDA (Rs b) 1.2 2.1 2.8 3.5
NP (Rs b) 0.8 1.3 1.8 2.4
EPS (Rs) 19.0 32.2 43.5 57.6
EPS Growth (%) 23.0 69.3 35.2 32.4
BV/Share (Rs) 240 268 308 362
P/E (x) 17.1 10.1 7.5 5.7
P/BV (x) 1.4 1.2 1.1 0.9
EV/EBITDA (x) 13.9 8.0 5.6 3.6
EV/Sales (x) 3.9 2.7 1.9 1.2
RoE (%) 7.9 12.0 14.1 15.9
RoCE (%) 8.9 13.7 16.5 19.4
The InSites
8 February 2011 2
We visited Mahindra World City (MWC), Jaipur. We were given a tour of the site, and weinteracted with the senior management and Head of Operations of a key tenant. We alsomet local brokers. We present our key takeaways.
Mahindra World City (MWC), Jaipur - an overview
Mahindra World City (MWC), Jaipur is a joint venture between the Mahindra Group (74%)and the Government of Rajasthan through RIICO (26%). Constituted in July 2005, thisproposed Integrated Business City will be developed as a multi-product SEZ and DTAover 3,000 acres. The company has acquired ~2,650acres as on date and is acquiring theremaining land in primarily non-processing zone.Notifications have been received for threeSEZs: (1) IT/ITES, (2) Light Engineering - including Automobiles and AutomobileComponents, and (3) Handicrafts. The company plans to expand coverage to includesegments such as Gems and Jewelry, Apparel, and Logistics. When fully operational, thisbusiness city will employ ~100,000 people and will have an annual export potential ofRs50b. Given (a) the strong infrastructure development in/around Jaipur, (b) increasingwater problem in Gurgaon SEZ, (c) lower land cost, and (d) strong resource base withincity, the SEZs in Jaipur would have tremendous growth opportunity.
Overview of MWC, JaipurMoU Signed in Year 2005
Began Operations in Year 2008
Growth Partners
JV Partner RIICO (Government of Rajasthan)
Master Planner Jurong, Singapore
Landscaping Consultant Site Concept Internation, Singapore
Knowledge Partner Hewitt
Sustainability Partner Clinton Foundation (Clinton Climate Initiative)
Focus Sectors
Developed/ Under Development IT/ITES
Light Engineering including Automotive
Handicrafts
Proposed Domestic Tariff Area (DTA)
Apparel
Gems & Jewelry
Logistics and Warehousing
Social Infrastructure –Institutional, Recreational,
Commercial, Health, Residential etc
Source: Company/MOSL
Early phase of monetization gathering pace
The Jaipur SEZ is in the early monetization phase, with sale of the processing area underway.According to the management, ~380 acres have been leased out, with realizations betweenRs6m-Rs10m/acre. The total customer base at Jaipur SEZ is 28 with 3 operational (Infosys,Deutsche Bank KPO and EXL) and 11 under construction (includes Ratan Textiles inHandicrafts SEZ, Knit Pro in Light Engineering SEZ, and ICICI Bank and SBI in DTAzone). MLL has entered into MoUs with 10 more customers, taking the total potentialcustomer base to 38. The current employment base of the SEZ is 2,200 v/s projectedemployment of 100,000. Till 2QFY11, the company has invested ~Rs11b against theprojected investment of Rs100b.
WMC, Jaipur: JV Partners
MLL 74%
RIICO 26%
MWC has received
notifications for three SEZs
(1) IT/ITES, (2) Light
Engineering and
(3) Handicrafts
Sale of the processing area
is underway; ~380 acres
leased out with realizations
of Rs6m-10m/acre
MWC, Jaipur: IT SEZ
The InSites
8 February 2011 3
MWC, Jaipur: Master Layout Plan
Mfg Area (Light Engineering)
200ft wide road connecting NH-8 is 70% complete
Mfg Area (Handicraft)
Proposed Ring road connecting city
NPA (Residential, school)
Proposed 250ft road connecting Airport
IT SEZ DTA
(SBI area)
DTA
Ongoing and upcoming residential projects by Emar Group, Omaxe, Ansal, local developers such as MahimaGroup, Mangalam Group and Government low-cost housing projects
Source: Company/MOSL
MWC, Jaipur: Entrance MWC, Jaipur: IT SEZ
Source: Company/MOSL
The InSites
8 February 2011 4
MWC: Land Usage Plan and Current StatusLand Usage Plan Land Leasable Lease Remarks Status
area Area Commited
(acres) (acres) (acres)
IT SEZ -Phase I 383 268 ~240 Infosys (190 acres), Notified
Nucleus Software
(18 acres),
Deutsche Bank
KPO and EXL
IT SEZ -Phase II 80 56 ~40 Wipro (23 acres), Applied for
Tech Mahindra (15 acres) Notification
IT SEZ -Phase III 287 201 Not notified
Total IT Zone 750 525
Handicraft 250 180 40 Ratan Textile, Stone Notified,
Age, Amani Overseas, 75 acres
Samurai Export, developed
Artasia etc
Light Engineering 250 175 50-60 Knit Pro, Marsons, Notified,
Polymed, Talbros, 100 acres
Dynamic Cable etc developed
Gems and Jewelry 25 18 Not notified
Total Manufacturing Zone* 750 530
DTA 500 350
NPA- Residential** 750 525
NPA- School and Hospital** 250 175
Total 3,000 2,105
* Area could be changed post approval of multi-product SEZ;
** Product mix is tentative Source: Company/MOSL
Key Client ProfilesIT SEZ Handicrafts SEZ Light Engineering SEZ DTA
Nagarro Software (Jaipur) Ratan Textiles Marsons Industries ICICI Bank
Truworth KPO Services Rajdhani Craft Veto Polymers & Metals SBI
Connexxions IT Services Rediprint International Veto Electricals
Nucleus Software Samurai Designs & Interiors QH Talbros Limited
Infosys BPO Limited Kirat Crafts Dynamic Powertech
Infosys Technologies Limited Seesham Handicraft House Tijaria International Limited
Girnar Software GAD Industries Knitpro Designs
Tech Mahindra Limited Jaipur Crafts India Agrovision
Wipro Rustic Furniture Veto Power Products
IsysSoftech Art Age Furnishings Poly Medicure Limited
Deutsche Bank Heritage Prime Furniture Genus Power Infrastructure
EXL Service Rama Handicrafts
Source: Company/MOSL
IT zone: Phase I and II witnessing steady leasing momentum
The fully developed IT zone will be spread over 750 acres, making it the largest planned ITSEZ in India. The company has divided its IT SEZ into three phases.
Phase I of the IT zone, which is spread over 383 acres, has been notified as an IT SEZ.Infrastructure development for the first phase is complete and two anchor customers,Infosys BPO and DBOI Global Services along with EXL are operational, generating directemployment for ~2,200 people (~1,100 in DBOI and ~800 in Infosys) and posting annualexports of ~Rs1b.
MWC has ~1,400 acres of
leasable area in SEZs/DTA
and ~700 acres in non-
processing zone
The current customer base
at the Jaipur SEZ is 38,
of which three have
started operations
IT Park at IT/ITES SEZ
The InSites
8 February 2011 5
The management has indicated that total leasable area for phase-I would be ~268acres, ofwhich it has committed lease agreement for ~90% area. It has concluded lease transactionswith blue chip companies such as Infosys Technologies, Nucleus Software, Connexions,Truworth, Nagarro and Tech Mahindra.
Besides the leasing of land for development, the IT SEZ includes Evolve, a 1.4msf multi-tenanted IT park, spread over 25 acres. Out of the completed construction of 0.23msf inthe project, 0.11msf has been leased to DBOI Global Services and 0.04msf to EXL ServiceBPO. Another 0.06msf has been committed to Deutsche Bank. Given the demand forspace in the segment, MLL is constructing another 0.08msf (not visible in the below picture).This is expected to be completed in 3-6 months.
Infosys has already started operation at Phase I of IT SEZ Evolve- the IT Park (Office of DBOI and EXL)
Source: Company/MOSL
Phase II of the IT zone is spread over ~80 acres. Wipro and Tech Mahindra are the keytenants who have entered into lease agreements in this area. While the company has only383 acres of notified area in the IT SEZ, the management has mentioned ~200 acres ofadditional area under formal approval, which includes the entire phase-II. Construction hascommenced by several tenants, Nucleus Software being one.
Phase III of the IT zone is spread over ~287 acres and is not yet notified.
Key takeaways from our interaction with Mr Anurag Shukla, Director andSite Head, DBOI Global Services, Jaipur
On growth plan: DBOI, Jaipur currently employs ~1,100 people, expected to growto 1,700 over the next one year.
On attractiveness of MWC, Jaipur: Cost inflation and higher land prices haveled most companies to opt for a tier-III location as a new business destination.Jaipur's attractiveness is high on account of (a) good infrastructure, (b) large talentpool due to presence of several reputed educational institutions, (c) good socio-economic environment, and (d) favorable government.
Approval for notification has
been applied for ~200 acres
of additional area at IT SEZ
IT SEZ includes Evolve, a
1.4msf multi-tenanted IT
park, spread over 25 acres
DBOI office at Evolve
The InSites
8 February 2011 6
On residential demand: The long-term outlook for residential demand within MWCis robust. However, for the next 3-4 years, buyer response could be limited, as (a)only 30% of its total employees are from outside Jaipur, and (b) connectively withinthe city is robust, which gives people the flexibility of living in the city and commutingto MWC, rather than staying there.
Infrastructure development in full swing
MWC is witnessing strong traction in infrastructure development, with a state supportagreement already in place for supply of power and water to the project. The stategovernment is likely to establish substations as per demand. The management has indicatedthat while ~66% of water demand will be met with re-cycled water, the remaining demandwill be taken care of by fresh supply from the municipality. The management has estimatedthe maximum demand for power to be 400MW and for water to be 62MLD at its fullcapacity.
Internal Road at IT SEZ Amphitheater at Evolve
Other Amenities (Water Works, Police Station, etc.)
Source: Company/MOSL
MWC has established state
support agreement for power
and water supply
The InSites
8 February 2011 7
Handicrafts and Light Engineering zones: Construction has commenced
The company has also made progress in its Light Engineering and Handicrafts SEZs of250 acres each. Infrastructure development at the SEZ is witnessing steady progress, withwater re-cycling process, water body, etc visible on the site. MWC has signed severalMoUs with renowned companies in both the SEZs. In the Handicrafts SEZ, it has signedan MoU with Rama Handicrafts and lease-related agreements with Rajdhani Crafts, RatanTextiles, Kirat Crafts, Rediprint, GAD Industries and Samurai. In the Light EngineeringSEZ, MLL has signed an MoU with India Agrovision and lease agreements with TijariaInternational, Knit Pro, QH Talbros, Dynamic Powertech and Arjay Creations LLP. Amongthe key tenants that have already start construction are Ratan Textiles in the HandicraftsSEZ (single floor construction already done) and Knit Pro in the Light Engineering SEZ.The management mentioned that MWC has robust growth potential in the Light Engineeringzone due to (1) proximity to major auto production hubs of like Noida, Gurgoan and Daruhera,(2) ~26% of India's total wire & cable production takes place in Rajasthan, and (3) proximityto proposed rail freight and industrial corridor/ICD/dry port.
Entry to Handicraft and Light Engineering SEZ
Source: Company/MOSL
Internal Road in Handicraft SEZ Construction in Progress at Light Engineering SEZ
Source: Company/MOSL
Handicraft
SEZ
Light
Engineering
SEZ
MWC has entered into lease
agreement for ~90 acres of
Handicrafts and Light
Engineering SEZs
Robust growth potential in
the Light Engineering zone
due to proximity to major
auto production hubs
Strong progress in
construction activities
visible in Handicrafts and
Light Engineering zones
The InSites
8 February 2011 8
Gems & Jewelry and Apparel zones: Awaiting approvalMWC plans to expand coverage to include segments such as Gems & Jewelry (25 acres)and Apparel (225 acres). While these portions of the SEZ are not notified, the companyhas applied for multi-product SEZ status for the whole 750 acres of manufacturing area,which provides it with flexibility to change the product mix within the SEZ depending ondemand potential.
Meaningful progress in DTA plotsMWC also has entered into lease agreements with ICICI Bank and SBI in the DTA.While it has concluded the agreement with SBI for ~30 acres of land for the bank to set upits North India hub, construction on the ICICI building (data processing centre) is alreadyover plinth area.
Location of SBI and ICICI Bank plots in DTA
Source: Company/MOSL
Monetization of non-processing area yet to cross conceptualization stageMWC has ~1,000 acres of non-processing area (NPA), where it plans to develop residences,hospitals, schools, etc. The total estimated saleable area for the planned residential projectsis ~30msf, implying a supply potential of ~20,000 apartments. However, the company doesnot have any immediate monetization plan for the NPA. Even the product-mix and mode ofmonetization are not finalized. While joint development with co-developers such as theparent, Mahindra Lifespaces (MLL) is one option, bulk deals on plotted land are another.The management has indicated that it would be a couple of years before it starts developingthe NPA.
Strong residential supply in surrounding areasWhile the development of the residential portion within MWC is unlikely to commence inthe near-term, we saw a robust supply pipe-line in nearby areas (MWC and across AjmerRoad) by various local and outside developers. Among the key projects are: (1) Emar
ICICI Data Processing centre
SBI area (30acres)
MWC has applied for multi-product SEZ for remaining
750 acres
MWC has entered into leaseagreements with ICICI Bank
and SBI in the DTA
Monetization of NPA iscouple of years away
Road to DTA
The InSites
8 February 2011 9
Group's 155-acre Jaipur Green, (2) Managalam Group's villa and plotted developmentprojects over 150 acres, (3) Mahima Group's Project Nirwana, (4) Project SK-125 bysome local developers near Jaisingpura, (5) Omaxe Group's upcoming projects over ~450acres. Our interactions with local brokers and sales persons of a few projects suggest thatmost of these projects are banking on the strong RE demand the area is likely to witness inthe medium term due to increasing employment in MWC, especially the IT SEZ. Theongoing rates in these projects are (a) Rs1,800-2,300/sf for apartments, (b) ~Rs4,500/sffor villas, and (c) Rs5,000-Rs6,000/square yard for plotted development. With better outlookfor infrastructure such as water and electricity, these projects are attracting considerableresponse from prospective buyers.
Supply Pipeline in Neighboring Areas
Source: Company/MOSL
Jaipur Greens by Emaar Group Projects by Mangalam Developers
Source: Company/MOSL
Omaxe Projects
Mangalam Projects
Jaipur Green, Emaar Group
Most of the upcoming
residential projects are
banking on the strong RE
demand from IT SEZ
Jaipur Greens project by
Emaar Group has witnessed
strong response with plot
rate increasing from
Rs5,400/sf (2009) to
Rs6,500/sf (currently)
The InSites
8 February 2011 10
Strong supply, good connectively within city bodes negatively for MWC
Jaipur City enjoys strong connectivity among different locations including MWC. Transportinfrastructure is reasonably good. Besides, projects located in the center of the city do notcommand a huge pricing premium (average realization of Rs2,500-4,000/sf) to the growthcorridor of MWC. This provides home buyers flexibility to stay in the main city and commuteto the SEZ area. This coupled with increasing supply pressure near the SEZ area couldexert strong pressure on the monetization potential of MWC's residential area.
MWC, Jaipur valued at Rs181/share of MLL
We have valued MWC on NPV basis at Rs7.3b or Rs181/share (30% of MLL's FY13ENAV of Rs604). We expect the processing area to contribute ~31% of gross value, while~69% of the value would be contributed by residential and institutional area.
NPV-based valuation of MWC, JaipurSaleable Area Value(Rs m) NAV/share (Rs)
Residential 23 msf 5,380 132
Insitutional Area 7.6 msf 3,409 84
Processing area (PA) 1,500acres of SEZ PA +500acres of DTA 3,926 96
Net Debt -2,756 -68
Equity Value 9,958 244
MLL's Share (%) 74 74
MLL NPV 7,369 181
Source:MOSL
Valuation and viewMLL has (1) a sound business model, (2) strong brand equity, (3) established clientrelationships, and (4) a strong balance sheet. Our FY13E SOTP value for MLL is Rs604/share: (1) Chennai SEZ at Rs167/share, (2) Jaipur SEZ at Rs181/share, (3) residentialvertical at Rs185/share, and (4) other rental assets at Rs62/share.
MLL has two ongoing SEZs in Chennai and Jaipur. It is acquiring two more SEZs in NorthChennai (~1,000 acres) and Mumbai-Pune Expressway (~3,000 acres). The company haspaid an advance of Rs1.3b. We expect clarity on these acquisitions to emerge in 6 months.During 3QFY11, MLL entered into two more MoUs with the government of Gujarat at theVibrant Gujarat Summit: (1) an Integrated Business City of ~3,000 acres in Dholera SpecialInvestment Region (DSIR) along the upcoming Delhi Mumbai Industrial Corridor (DMIC),and (2) a high quality and professionally managed industrial park of ~500 acres nearAhmedabad. With the potential acquisition of two more integrated development projects inGujarat, we believe MLL is strongly positioned to augment the scalability of its businesssignificantly. While it has ongoing SEZ projects at Chennai and Jaipur with ~4,550 acresarea, its project pipeline comprises four attractive integrated development projects of ~6,500acres.
However, our valuations do not include its pipeline SEZs (a) in North Chennai, (b) near theMumbai- Pune Expressway, and (c) new MoUs at Dholera Special Investment Region.
MLL's IntegratedDevelopment ProjectsProject Location Acres
Ongoing Projects 4,550
Chennai 1,550
Jaipur 3,000
Pipeline Projects 6,500
North Chennai 1,000
Mumbai-Pune EY 2,000
Delhi-Mumbai Corridor 3,000
Ahmedabad 500
Source: Company/MOSL
MWC residential properties
likely to witness significant
competition
Poised for significant scale-
up with pipeline SEZs of
~6,500 acres
The InSites
8 February 2011 11
We expect earnings to grow at a CAGR of 34% over FY11-13, due to strong contributionfrom the Chennai SEZ, sale of the processing area in the Jaipur SEZ and increasedcontribution from residential projects. The key near term catalyst for the company wouldbe (1) progress on new SEZ acquisition, and (2) addition of value accretive projects throughthe joint-development route or outright purchase.
The stock trades at 7.6x FY12E EPS of Rs43.5 and 5.7x FY13E EPS of Rs57.6, at~45.5% discount to our FY13E SOTP value. Maintain Buy with a target price of Rs453(25% discount to FY13E NAV).
SOTP value of Rs604/shareAcres Method Value Rs/sh % of total
Jaipur SEZ 3,000 DCF 7,369 181 30
Chennai SEZ 250 DCF 6,824 167 28
Residential Development 6 NAV 7,551 185 31
Land Bank - Land Value 1,237 30 5
Rental Properties - Actuals 1,303 32 5
Add: Adjustments 364 9 1
Total - - 24,647 604 100
The InSites
8 February 2011 12
Mahindra Lifespaces: Financials and Valuation
The InSites
8 February 2011 13
N O T E S
The InSites
8 February 2011 14
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