Orbit Corporation
Buy
In A Different Orbit
Rs595 Urmik Chhaya 91-22-6639 9176
[email protected]
Nirav Parikh ,CFA 91-22-6639 9147
[email protected]
Reuters code
ORCP.BO
Bloomberg code
ORB IN
Shares o/s
Investment Positives h Niche focus with huge market opportunity
36.27mn
Mkt Cap
Rs22bn / US$0.5bn
52 week high/low
Rs629/90
Avg daily trading volume
3.83mn shares
BSE Sensex
17777
Nifty
5209
Shareholding pattern (%) Promoters
60.5
Flls
4.2
Banks/FIs/MFs
4.5
Public/Others
30.8
Performance (%) Absolute Relative to Sensex
1m
3m
12m
MTD
24.3
109.8
NA
14.6
8.2
75.6
NA
11.4
Share Price Movement
Orbit Corporation Ltd (OCL) primarily focuses on redevelopment of existing properties in the island city of Mumbai (Mahim-Colaba). The redevelopment undertaken by it primarily involves construction of new buildings, wherein a set percentage of houses are given back to existing tenants and the balance are for free sale. The re-developed property is targeted towards high end customers.
h Huge market opportunity Currently, there are 19,642 buildings which are old and dilapidated (50-200 years old) in Mumbai. Currently, the market potential stands at 6,386 units which fall under different categories/wards that are available for redevelopment. (Refer Table 2)
h Ability to monetize projects The ability to monetize projects is the key differentiator for a real estate company, since the industry is highly capital intensive. With the recent monetization of its Kalina project, the company has once again displayed its ability to monetize projects, early.
(Rs) 700 600 500 400 300 200 100 Sep-07
Aug-07
Why we did this report
Jul-07
Jun-07
May-07
Apr-07
0
¾ Niche player in real estate. ¾ Is not a land bank story.
How are we different? ¾ The company has been valued on a P/E basis rather
than NAV due to its specific characteristics.
Key triggers ¾ Larger number of projects getting bunched in FY08 &
Financial Highlights FY09.
Concerns h Long gestation period The redevelopment projects normally have a longer gestation period due to the nature of projects and the process involved. Negotiations with tenants may take a longer time, thus resulting in fluctuations in earnings
Valuations At Rs594.9, Orbit Corporation trades at P/E of 9.9x and 6.1x on FY08E and FY09E basis. Initiate coverage with a BUY and a target price Rs775/share at which the stock will trade at 8x PER on FY09E.
(Rs mn)
Financial Highlights Y/E March Net Sales (Rs Mn) EBIDTA (Rs Mn)
FY06
FY07
FY08E
FY09E
7.2
1915.0
9002.0
14150.7
35.9
740.0
4293.7
6931.8
38.6
47.7
49.0
EBIDTA (%) Net Profit (Rs Mn)
1.1
572.2
2739.1
4395.8
EPS (Rs) (Fully Diluted)
0.1
21.1
60.4
96.9
41568.8
286.7
160.5
EPS Growth (%)
Bloomberg code ASSB
Alchemy
Contents Investment positives ...................................................................................................................... 3 Niche focus with huge market opportunity ..................................................................................... 3 Huge market opportunity ............................................................................................................... 3 Ability to execute and monetize projects (Kalina project)............................................................... 4 Ability to monetize projects ............................................................................................................ 4 Market re-rating of the stock after the transaction.......................................................................... 5 Less vulnerable to interest rates cycle........................................................................................... 5 Concerns ....................................................................................................................................... 5 Long gestation period .................................................................................................................... 5 Valuation methodology .................................................................................................................. 6 Strategy and outlook...................................................................................................................... 6 Annexure I ..................................................................................................................................... 7
2
Orbit Corporation
Investment positives NICHE FOCUS WITH HUGE MARKET OPPORTUNITY h Orbit Corporation Ltd (OCL) is primarily focused on redevelopment of existing properties in the island city of Mumbai (Mahim-Colaba). The redevelopment undertaken by it primarily involves construction of new buildings, wherein a set percentage of houses are given back to existing tenants and the balance is for free sale. The re-developed property is targeted towards high end customers.
HUGE MARKET OPPORTUNITY h The company primarily operates under three regulations of DCR (Development Control Regulations) namely regulations 33(6), 33(7) and 33 (10). Table 1: DCR Regulations Key Elements
33(6)
33(7)
Features of Scheme
Existing Built Up Area available for development irrespective of applicable FSI for the plot size
Higher of 2.5 times of plot area available for development or 50% of the rehabilitation area as incentive
33(10)
Identification of Property
Preferably in the CRZ zone
All other parts of the Island City
Slums situated over large areas
Ownership Strategy
Direct Ownership
Development Agreement
Redevelopment Area/Tenement
Existing Built Up Area
Direct Ownership/Joint Development Minimum 225SFT upto a Maximum of 750 sq.ft per tenement
Tenant Rehabilation Strategy
Complete buyout of tenancy rights
No buyout
No buyout
80I (b) Tax Benefits Discounted BMC Development Charges
Available
Available
Available
Available
Available
Available
Maximum of 2.5 times of Plot area available for redevelopment or 3 times Plot area incase of dense projects
Only 225 SFT self contained Apts
Relative Acquisition Cost
High
Low
Low
Value Realization
Very High
High
Low
Source: Company
h Understanding 33 (7) – This section is dynamic in terms of Floor Space Index FSI). Under this scheme, the area to be developed can be 2.5x the size of the plot or 50% of rehabilitation as incentives. However, this option is dependent on the number of tenants. The numbers of tenants determine incentives for developers. (Refer Table 1).
3
Alchemy Table 2: Section 33(7)
Particulars Area (Sq ft) (A) FSI (B) Tenants (C ) Min SFT/Tenant (D) Area to be provided to existing tenant (C x D) Area that can be developed (2.5 FSI) (A x B) Incentive @ 2.5 times Plot Incentive @ 50% of rehab area (SFT) Effective FSI @ 2.5x plot (SFT) Effective FSI @ 50% of rehab area
Particulars Area (Sq ft) (A) FSI (B) Tenants (C ) (% of tenants selling out) (D) Min SFT/Tenant (E) Area available for tenants (E x C) Area of tenants selling out (SFT) (C x D x E) Area to be provided to existing tenant Area that can be developed (2.5 FSI) (A x B) Incentive @ 2.5 FSI Incentive @ 50% of rehab area (SFT) Incentive @ 50% of rehab area in Case A (SFT) Source: Alchemy Table 3: Market potential and addressable market Ward Total Redeveloped Dilapidated Bldgs A 936 9 D 2747 71 F&G North 2056 212 F&G South 1336 35 Open Plots Total 7075 327 Source: Company
Case A Tenants not selling out Case I Case II 10000 10000 2.5 2.5 100 20 225 225 22500 4500 25000 25000 2500 20500 11250 2250 2.50 2.50 3.38 0.68 Case B Tenants selling out Case I Case II 10000 10000 2.5 2.5 100 20 40% 40% 225 225 22500 4500 9000 1800 13500 2700 25000 25000 2500 20500 20250 4050 11250 2250
Under Process Under Construction NOC Obtained 5 8 53 53 93 93 31 31 182
ABILITY TO EXECUTE AND MONETIZE PROJECTS (KALINA PROJECT) OCL, till date, has executed one project (Shivam – Babulnath, South Mumbai) and has 16 more projects under execution. The project was completed in March 2005 and average realization per unit was Rs17.4mn (Average size of unit 1860 sq.ft.) Two other projects, namely Orbit WTC (Bandra Kurla Complex, Suburbs) and Orbit Plaza (BKC, Suburbs) have already been pre-sold to the extent of 100% and 86.7%, respectively (For further details, refer to project details -- Annexure I).
ABILITY TO MONETIZE PROJECTS The ability to monetize projects is the key differentiator for a real estate company, since the industry is highly capital intensive. Also, for a niche player like OCL, whose segment area has high gestation period with gradual lock up of capital, monetizing capital at the early stage of a project is highly beneficial.
4
185
Potential 914 2570 1658 1239 6381
Orbit Corporation
Kalina project (Orbit WTC) OCL through its SPV – Orbit Shelters Pvt Ltd, acquired a property located at Kalina, Santacruz, Mumbai, from Ambuja Cements Ltd for Rs3.33bn. A bridge loan of Rs2bn was raised for funding this acquisition. This property has been sold for Rs8.07bn and is expected to be delivered in March 2009.With the property already pre-sold, the company intends to pay off the debt raised. Thus, the company has already monetized the project. Table 4: Kalina deal structure Particulars Debt Equity Land Cost Stamp Duty Development Cost TDR Total Cost Sale Price Profit Source: Company
(Rs mn) 2000 1500 3330 170 1500 250 5250 8070 2820
Market re-rating of the stock after the transaction Chart 1: Re-rating after the Kalina deal 700 600 Acquisition of Kalina Property
(Rs)
500 400 300
Pre-selling of Kalina Property to JSW group
200
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
100
Source: Alchemy
LESS VULNERABLE TO INTEREST RATES CYCLE OCL primarily operates in a segment which is less vulnerable to the interest rate cycle. This is due to the fact that both regulations under DCR i.e. 33(6) and 33(7) are primarily meant for high end users. This is evident from average realizations for properties already sold by OCL.
Concerns LONG GESTATION PERIOD The redevelopment projects normally have a longer gestation period due to the nature of projects and the process involved. Negotiations with tenants may take a longer time, thus resulting in fluctuations in earnings.
5
Alchemy
Valuation methodology Real estate companies are primarily valued using present value approach where in free cash flows are discounted using an appropriate discount rate. However, this approach will not be appropriate for company like OCL. The NAV approach is more appropriate for companies having large land banks and this approach is expected to be utilized over a period of time. However, OCL, which operates in a niche segment and relies on redevelopment – valuations are highly project sensitive. The price/earnings multiple would be appropriate for a company like OCL. For continued momentum in earnings, the call would be on macro opportunity and ability of the management to capitalize on it. In OCL, the macro opportunity is significant and its management has certainly shown its ability to capitalize on it.
Valuation At Rs594.9, Orbit Corporation trades at P/E of 9.9x and 6.1x based on FY08E and FY09E. Initiate coverage with a BUY and target price Rs775/share at which the stock will trade at 8x PER on FY09E.
Strategy and outlook OCL will continue to focus on redevelopment of properties. The company expects 70% of its projects to be of redevelopment and 30% through open plots. The company intends to go for block development which will expedite the process of tenant rehabilitation and enable the company to go in for larger projects. The company plans to develop the concept of studio apartments, thus targeting working couples. Under the concept of studio apartments (these will developed in areas which were previously industrial area in South Mumbai – primarily Lower Parel), all household services are provided by developers to customers (since target customers are working couples). Average size of these apartments will be 700-1,000 sq ft.
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Orbit Enclave
Worli Sea Face Bandra Kurla Complex
Orbit View
Lower Parel Napeansea Road Bandra Kurla Complex
Iqbal Manzil & Daruwala Chawl
Source: Company, Alchemy Note: 1) Parking is not part of FSI calculations
Orbit WTC
Munkund Mansion
Jensen Veneers
Tardeo New Breach Candy Rd
Gokuldas Devji Wadi
Orbit Plaza
Altamount Road
Orbit Ambrosia
Villa Orb
Orbit Haven
Lower Parel Napeansea Road
Prathna Samaj
Orbit Eternia
Orbit Grand
Lower Parel
Orbit Heights
Lower Parel Napeansea Road
Tardeo Road
Orbit Arya
Hafeez Contractor House
Napeansea Road
Projects
Location
PROJECT DETAILS
March 2009
March 2010
December 2009
March 2010
September 2009
December 2007
March 2010
December 2009
March 2008
June 2009
March 2010
December 2009
March 2010
December 2008
June 2008
December 2008
Expected Completion
333000
52500
25000
10500
14375
75000
35000
34000
52500
48000
35000
226200
23000
25000
82500
65000
(sq ft)
Est Saleble Area
493000
81300
68400
17500
39575
110000
63800
62800
91300
137500
71800
493111
67000
84000
190500
108500
(sq ft)
Est Builtup Area
5250.0
1140.0
254.5
96.2
111.8
419.5
701.5
516.6
1127.6
295.9
457.3
1674.6
171.2
185.6
696.7
1341.2
(Rs mn)
Total Est Cost (A+B)
3500
900
75
36.8
50.3
170
450
270
765
63.4
213.5
570
12
23.9
52.9
696.1
(Rs mn)
Land Acquisition Cost (A)
1750
240
179.5
59.4
61.5
249.5
251.5
246.6
362.6
232.5
243.8
1104.6
159.2
161.7
643.8
645.1
(Rs mn)
Construction Cost (B)
Total Area of Construction
25000
50000
20000
18000
20000
22000
18000
40000
50000
50000
18000
45000
27000
18000
24000
45000
(Rs)
Est.Avg Realisation/ sq ft
800000
1500000
800000
800000
800000
800000
1000000
1500000
1500000
700000
1500000
700000
700000
800000
900000
1500000
(Rs.)
Parking Rates (Per Parking)
400
72
60
20
20
100
72
72
72
150
72
150
60
100
180
120
No of Parkings
Commercial
Residential
Residential
Residential
Residential
Commercial
Residential
Residential
Residential
Residential
Residential
Commercial
Residential
Residential
Residential
Residential
Res/Commercial
Project Type
Orbit Corporation
ANNEXURE I Income Statement (Rs mn) Net Sales Operating Expenses EBIDTA
FY06
FY07
Rs.mn FY09E
7.2
1915.0
9002.0
14150.7
1170.6
4702.3
7212.9
Less : Tax
35.9
740.0
4293.7
6931.8
38.6
47.7
49.0
Net Operating Profit after Tax
1.8
8.2
30.9
51.0
EBIT
36.1
749.6
4280.5
6898.6
Interest
33.8
100.7
155.3
278.4
Profit Before Tax
2.3
648.9
4125.2
6620.2
Provision for Tax
1.2
76.7
1386.1
2224.4
Profit After Tax
1.1
572.2
2739.1
4395.8
Balance Sheet Y/E March (Rs mn.)
FY06
FY07
FY08E
Rs.mn FY09E
Sources of Funds 216.0
271.7
362.7
453.7
Reserves & Surplus Less: Misc Exp not written off Shareholders Funds
770.5
1760.6
5306.4
14180.8
Minority Interest Loan Funds
2.5
14.4
9.4
4.4
983.9
2018.0
5659.8
14630.1
23.0
1001.0
0
1.5
1.5
1.5
595.6
917.9
1417.9
2767.9
439.7
763.1
1263.1
2613.1
Unsecured Loans
155.9
154.8
154.8
154.8
1602.5
3938.4
7079.2
17399.6
Fixed Assets
23.3
42.5
111.5
172.3
Gross Block
27.2
54.2
154.2
254.2
4.0
11.8
42.8
81.9
23.2
42.4
111.5
172.3
Application of Funds
Less: Depreciation Net Block Capital WIP
0.1
0.1
0.6
0.6
0.6
0.6
Current Assets
2008.4
5680.4
13461.3
25743.8
Inventories
1205.4
1672.7
4076.3
6276.8
55.1
1085.3
3000.7
4716.9
154.7
1831.8
5119.47
13177.20
Cash & Bank Balances Loans and Advances
593.3
1090.5
1264.9
1572.8
Current Liabilities
430.0
1785.0
6494.1
8517.1
Current Liabilities
424.7
1702.3
5095.33
6276.83 2240.27
Provisions Net Current Assets Total Capital Employed
Operating Cash Flow Capex Free Cash Flow
FY08E
Rs.mn FY09E
36.1
749.6
4280.5
6898.6
1.2
76.7
1386.1
2224.4
34.9
672.9
2894.5
4674.2
-2078.2
-460.3
4551.6
2485.4
1.8
8.2
30.9
51.0
-2041.5
220.7
7477.0
7210.6
-20.8
-29.3
-100.0
-100.0
-2062.3
191.4
7377.0
7110.6
Ratios FY07
FY08E
FY09E 49.0
EBIDTA margin (%)
38.6
47.7
Net Margin (%)
29.9
30.4
31.1
ROE (%)
38.1
71.4
43.3
ROCE (%)
27.1
77.7
56.4
0.5
0.3
0.2
Debt/Equity Ratio (x)
Valuation Ratios PER (x)
8.7
5.4
EV/EBIDTA (x)
4.8
3.8
60.4
96.9
Per Share Data (Rs)
Investments
Sundry Debtors
Change in Working Capital Add: Depreciation
FY07
Leverage
Secured Loans
Total Capital Employed
EBIT
FY06
Profitability
Equity Share Capital
Application Money Pending Allotment
Cash Flow (Rs Mn)
-29.8
EBIDTA (%) Depreciation
FY08E
5.3
82.7
1398.76
1578.43
3895.3
6967.2
17226.7
1602.5
3938.4
7079.2
17399.6
EPS
21.1
Source: Company, Alchemy
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Alchemy
Sales Arun Singh
[email protected]
91-22-6639 9125
Chetan Chitroda
[email protected]
Dealing 91-22-6639 9134
Disclosure of interest statement Analyst holding of the stock Firm holding of the stock Owners holding of the stock
NO NO YES
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