>HCC: Gearing up for a full fledged ‘Dasve’ launch by Dec’10; Lavasa visit

We recently visited Lavasa and returned impressed by the preparation for the full scale commercial launch of ‘Dasve’ by Dec’10. Lavasa Corporation Ltd (LCL) has already sold 1,850 apartments and villas till date spanning over 3.5mn sq ft and is confident of handing over keys to buyers by Mar’11 at the latest. The first set of 200 keys was handed over to the customers during Q4FY10. Phase I would have an additional 600 residential units, out of which the soft launch of 250- 300 units is expected to be announced over the next couple of months.

Among other significant developments since our last visit in Dec’09 have been formal launches of ‘Dasvino Town & Country Club’, 50 bed Apollo Hospital, 130 keys Mercure Hotel and an International Convention Centre (1,500 capacity). The Dasvino Town and Country Club has been established via a management agreement with International Leisure Consultants (ILC), Hong Kong and includes a Spa, Gymnasium, floodlit courts for tennis and squash, children’s playroom, specialty restaurants, a business lounge and a pub.

Lavasa listing on cards by Q1FY12
HCC had plans for a potential listing of LCL by Oct-Nov’10. However, given the volatile market conditions that are not conducive for realty IPOs, the same has been postponed to early 2011. The company presently holds a 65% stake in the entity via its wholly owned subsidiary, HCC Real Estate Ltd (HREL). Avantha Group, Venkateshwara Hatcheries and some large private investors together hold the remaining equity. Additionally, eight banks and financial institutions hold ~11% (at an EV of Rs100bn) in the company via DDCDs. We believe the eventful listing of Lavasa shall play a major role in determining HCC’s stock price performance over the next 12months. We retain our BUY recommendation on the stock with a SOTP based price target of INR170.

Lavasa valuation
As per our DCF calculation, LCL has a potential value of Rs57.7bn (~Rs123/share for HCC). While the company expects to execute the project over next 12-15 years, we have taken a longer execution period of ~20 years. We have also assigned a holding company discount of 20% to the final NAV of LCL. Key assumptions for Lavasa valuation are:

• We have assumed a sale model for the entire area available (~163 mn sqft) given the lack of clarity on the future revenue stream of SPVs; LCL though shall hold a strategic 26% stake in all commercial, hospitality, leisure and social SPVs thereby becoming a perpetual partner in their growth.
• We have taken a capital value at an average of Rs3,500/sqft for sale of residential development. For land/plot sales, we have assumed a rate of Rs100/sqft. From FY11 we have escalated capital values at ~10% CAGR.
• Construction cost at Rs1,800/sq ft, escalated at 5% CAGR fromFY12 onwards.

To read the full report: HCC