Yet, the decline in realty stock prices offers an opportunity to invest in select stocks. Indiabulls Real Estate (IBREL) is one such company.
With projects that are likely to yield revenues in the near future, a bank of prime mill land in Mumbai, a cash-rich balance-sheet and diversification measures that have resulted in the company bagging power projects, IBREL's per share earnings could well double over the next two years.
At the current price of Rs. 288 the stock trades at ten times its estimated consolidated per share earnings for FY-10. The stock has fallen 60 per cent from the time of our 'Book Profit' call in October 2007.
The stock is, however, suitable only for investors with an above-average risk appetite. A complicated holding structure for projects and subsidiaries and aggressive growth plans add to the company's risk profile.
Rapid growth
IBREL concluded its first full financial year (after the demerger from Indiabulls Financial Services) in 2007-08 and quickly ramped up its sales to Rs 141 crore. Huge cash raised from warrant issues to promoters was parked in interest-earning instruments, taking the 'other income' component to a whopping Rs 624 crore, bolstering total income.
While this cannot be viewed as a sustainable income, the deployment of this cash can be expected to ramp up revenues through additional business. One near-term revenue trigger for Indiabulls is likely to arise from lease rentals from the mill projects — Jupiter and Elphinstone — likely to be completed before FY-09.
These projects, listed as real-estate investment trusts in Singapore, would ensure a steady stream of revenues (in the form of dividends) from the rentals.
Equipped with about 3.5 million sq ft of office space at a prime location, a substantial part of the Jupiter Mill complexes have already been leased out. Interestingly, the lease rentals recently signed at the Jupiter Mills complex (at Rs 325 per sq ft) is also substantially higher than the Rs 275 per sq ft given to anchor tenants in the previous year.
The rising rentals suggest that the projects, primarily offering commercial space, could well be an exception to the weakening rates seen in some regions.
Powered assets
The other high potential business for IBREL over the medium term may be its foray into power generation.
Of the Rs 2,190 crore of equity capital of this fully-owned subsidiary, over 70 per cent has come through private funding channels such as Farallon Capital and the LN Mittal group.
That this company has managed to bag power generation projects from State electricity boards through competitive bidding, lends confidence. While 5,447 MW of coal-based projects are under development as per schedule, it has recently bagged a 1,320 MW thermal project. The company's execution track record in other nascent businesses is a point in its favour.
Another promising revenue stream could arise from its 3,000-acre SEZ at Nashik, an industrial belt between Delhi-Mumbai.
More cautious moves
In the residential segment, the company appears to favour cautious moves on launches; it resorted to just a single pre-sale of premium apartments in New Delhi in recent times.
The premium market, with less sensitivity to interest rates, appears a better target customer at this point in time.
Most of the malls planned by IBREL in major cities are expected to be leased out by late 2009.
While the company is in talks with international single-product retailers for the same, Indiabulls hypermarket and department stores are expected to be the anchor tenants in these malls.
We view this as a backward integration measure that may not, however, help profitability in the short term. We also do not view the retail segment to be a key earnings driver at this point. Increasing supply of mall space may well lead to weakening lease rates over the next couple of years.
IBREL's main advantage could be its possession of mall space in key space-constrained areas in Mumbai, apart from less penetrated markets.
Cash and investments, amounting to over Rs 5,700 crore on IBREL's books, are a source of comfort at a time when most realty developers are witnessing a funds crunch and are able to raise funding only at prohibitive rates. That most of the land that is being developed is fully paid for, is a comfort factor. However, the latest annual accounts suggest that a good part of the surplus was parked in inter-corporate deposits with promoter-group companies.
While this amount appears to earn reasonable interest and can be called back at a week's notice, such a move cannot be viewed as a good practice, from a governance perspective. While low land costs have ensured that the company enjoys strong operating profit margins, rising commodity costs may yet pose a threat.
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