Investors who received the stock after the company was demerged from Indiabulls Financial Services and listed would have been rewarded well as the stock has now doubled from its Day 1 close of Rs 325 in March 2007.
While the ambitious plans of Indiabulls Real Estate may hold the potential to turn in returns over the long term, we see little scope for any fundamentally-backed upside at this juncture, given that the company is yet to complete execution of any of its projects.
Also, the company has been massively expanding its equity; commensurate earnings growth is unlikely in the near term.
Further, as the listed space now has a good number of real-estate players trading at relatively reasonable valuations, backed by strong execution skills, investments can be considered in superior plays with better earnings visibility.
Background: Indiabulls Real Estate is the demerged real-estate arm of Indiabulls Financial Services. The promoter stake, as of June 2007, stood at 31 per cent.
The company has presence in projects in the residential and commercial segments and has plans to develop special economic zones.
The company has 4,031 acres of fully-owned land and 8,000 acres of land for which agreements have been signed, in Mumbai, Chennai and the National Capital Region.
Of the above, projects are planned/ongoing in about 1,400 acres.
These projects would be executed through the company's real-estate subsidiaries and associates. The company is yet to book any revenue from its planned projects.
Plans in lucrative marketsThe location of Indiabulls Real Estate's planned commercial projects are in Tier-I cities that face a strong demand for office space, notably Mumbai.
The company won the lucrative mill lands of Jupiter and Elphinstone through a special purpose vehicle with a 40-percent stake in each project.
These lands, which are to be developed into office spaces (of 3.5 million square feet of lease area), are expected to be ready for tenancy by 2008; revenue from these projects might start flowing in from FY-2009.
As Indiabulls Real Estate's present strategy is to 'develop and sell', it is likely that the company would sell its complete stake once there is full occupancy. This would mean that these projects may not serve as regular income streams.
The lease model in this case would have been lucrative as it could have enjoyed peak rentals, given the shortage in office space in the region.
However, the sale of stake may be warranted as the company needs to infuse cash for its other projects.
The other planned projects include integrated housing in the Northern Capital Region, Chennai and the Mumbai Metropolitan Region. These projects that have not yet reached the launch stage may well take five-six years to execute and sell.
Further, with well-entrenched players such as Unitech and Hiranandani, the company may require strong marketing as its brand recognition is limited compared to its peers.
The three special economic zones to be developed by the company should be viewed with caution.
For one, with little execution skills in the real-estate development business, the company plans to develop the SEZs on its own, even as established players prefer co-developers.
Two, some of the planned SEZs such as the Raigarh one may not find it easy to get the right tenants.
Although this SEZ plans to capitalise on the upcoming Rewa Port and Mumbai trans-harbour link, it may face competition from Reliance's Navi Mumbai SEZ planned in the locality.
Given the long gestation period for completion of SEZs and further time needed to get tenants and break-even, we are not factoring in any earnings contribution from the SEZs in the medium-term.
Hence, of the total projects, Jupiter mill and Elphinstone may be the only ones that could significantly add to the earnings stream in the near future.
Too much expansionThe company has been on an equity expansion mode since its listing. It recently announced plans to issue 4.3-crore preferential warrants to its promoters to raise about Rs 2,322 crore.
This, together with earlier issues, would result in an equity expansion of 30 per cent on conversion of warrants.
Given the limited earnings visibility over the next couple of years, the massive equity expansion bears the risk of earnings dilution.
The issue of warrants to promoters at a sizeable discount to the market price does not lend confidence on the governance aspect.
On the business expansion front, the company plans to seek members' approval to invest or lend Rs 1,000 crore to Indiabulls Wholesale Services.
This suggests that the company may be looking at utilising the funds towards its proposed retail foray. This apart, it has also joined the bandwagon of real-estate companies applying for telecom licence.
With sizeable projects in hand, huge funding requirement and limited track record, the company's foray into new businesses diffuses focus from its primary business, which is itself in a nascent stage.
This also poses the risk of diversion of resources from its existing business.
BL
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