>Affordable Housing – A key growth driver in the real estate sector?

“Affordability” as a concept is very generic and could have different meanings for different people based on differences in income levels.

Affordable housing refers to any housing that meets some form of affordability 1 criterion .
Different countries have defined affordable housing to present the economic potential of an individual buying a house. In the United States and Canada, a commonly accepted guideline for affordable housing is that the cost of housing should not be more than 30 percent of a household's gross vary with regions and income levels.

Another point to note is that the definition of affordable housing is not just restricted to the three categories mentioned above, but applies to people across the country. Affordable housing can be defined using three key parameters viz. income level, size of dwelling unit and affordability. While the first two parameters are independent of each other, the third parameter is correlated
income. Housing costs here include taxes and insurance for owners, and utility costs. If the monthly carrying costs of a home exceed 30–35 percent of household income, the housing is considered 2 unaffordable for that household .

Defining affordable housing in India is a difficult task given that at every square kilometer of the country, the dynamics of the market are different. At KPMG and CREDAI, we have therefore broadly defined affordable housing in India for Tier I, II and III cities based on three key parameter

To read the full report: HOUSING SECTOR

>IRB INFRASTRUCTURE LIMITED: Strong Macro + Pure Play = Perfectly Priced

■ Target price Rs278 — We use a sum-of-the-parts methodology to value IRB: 1) BOT assets are valued at Rs164 on a discounted FCFE basis; 2) The EPC business is valued at Rs84 (11x Dec 2011E P/E), a 25-30% discount to its E&C peers given the captive nature of its order book; 3) Other investments and cash on books are valued at Rs13 (book value); 4) Probability adjusted value of future projects is at Rs17, based on our market-share estimates in the projects awarded.

■ Pure play on roads, making it expensive — IRB is one of very few listed pure plays on roads in India and the scarcity premium it has already attracted would likely limit its upside potential. IRB is trading at an average P/E of ~19x FY11E, in line with mid-cap E&C peers but at a 31% premium to its global peers. We might get constructive on the stock at lower levels or better than expected order wins.

■ Leading player, looks well positioned to benefit from strong macro tailwinds… — NHAI intends to award 12,000km of road contracts in FY11 (~4x the FY10 level). IRB has a portfolio of 16 road assets covering ~1,250km. It has a market share of 7% in GQ projects and ~12% in NHAI FY10 project awards. While we do not expect IRB to maintain its current market share in future projects given larger rollouts, it looks well positioned to win a reasonable share of projects based on its technical qualification and net worth. IRB recently tied up with Reliance Infra to bid for the US$1bn Kishangarh-Udaipur-Ahmedabad highway.

■ PAT CAGR estimated at 15% over the next 2 years — 1) A revenue CAGR of 46% over the next 2 years due to project ramp-ups; 2) An EBITDA margin decline of 745bp due to a higher percentage of lower-margin EPC revenues. In its FY10 investor meeting, management indicated that another Rs60-80bn-worth of projects can be funded without resorting to dilution. Our sense is that if the order flow is strong and faster than expected, there could be dilution.

To read the full report: IRB INFRASTRUCTURE

>IDBI BANK (SKP SECURITIES)

Capital infusion, fuel for growth:
■ As on 31st March 2010. Tier 1 capital of IDBI Bank was 6.2%, which is lower than the RBIs suggested level of 8%.

■ To increase the Tier 1 capital to 8% GOI is expected to infuse capital of Rs.31000 Mn. by way of preferential placement of equity.

■ This will provide headroom to IDBI bank to raise funds to support its business growth.

Healthy business growth:
■ With the capital infusion, IDBI Bank would be in position to grow its business above the industry average, though achieving the previous high growth rate will not be possible. We believe that Total business for IDBI Bank will grow at the CAGR of 24% from FY09 to FY12E.

■ This growth would be supported by:
1. Branch expansion.
2. Capital infusion.
3. Targeting infrastructure lending.

Increased emphasis on CASA deposits:
■ IDBI Bank has been depending on borrowings to support its lending business. Now bank is emphasizing on deposits to support its lending, leading to decreased cost.

■ The bank has been growing its concentration on mobilizing the CASA deposits as witnessed by the CASA ratio trend which we estimate to increase from 14.78% in 2009 to 17% by 2012E.

Robust profitability:
■ Reshuffling of deposits and skew ness towards low cost deposits will improve margins and on this basis we expect to see growth in NII by 56% and 36% for FY2011E and 2012E respectively.

■ Fee based income is also expected to grow in line with growth in credit, helping to sustain high growth in PAT.

Valuation
At present IDBI Bank is trading at 1.2x Adj. BV of FY10. Our target price of Rs.154 is 1.2x and 1.1x to Adj. BV per share of FY11& FY12 respectively.

We hereby initiate coverage on IDBI Bank and recommend buy rating with a target price of Rs.154/- (24% upside) in 12 months.

To read the full report: IDBI BANK

>OMAXE LIMITED

■ Low inventory for the company: Most of the projects for Omaxe in Noida, Greater Noida, Faridabad and Lucknow have all been sold out the extent of 70-75%. Major portion of the projects are at the completion stage or ready to move in stage which provides them with an edge over their competitors whose projects are still under construction.

■ Timely execution of the projects: The company has good execution capabilities, as most of its projects were executed in a period of 3 – 3.5 years. Timely execution leads to a higher demand as compared to peers since it provides with ready possession and there is hardly any waiting period for the customers, which aids in increasing the market visibility of the company.

■ Demand scenario in Delhi and Lucknow: The markets at New Delhi and Lucknow are diverse in terms of the product demand by the customers. There is great demand for luxury and super luxury apartments in Delhi, which have an average realization in the range of Rs. 5,500 – Rs. 6,000 per sq ft. and with the construction cost being Rs. 2,000 per sq ft., the EBITDA margins, are higher as compared to that in Lucknow which has an average realization of Rs. 1,800 per sq ft. and construction cost of Rs. 1,100 per sq ft. where the margins are relatively lower.

■ Upcoming projects in the pipeline: The company has a large project line up for launch in the coming quarters. For instance the Hi Tech City at Lucknow which is 2,700 acres will be executed in phases, it’s Phase – I of 500 acres is to be launched in November 2010. It has a visibility of 10 - 12 years for the entire development.

To read the full report: OMAXE

>KPIT CUMMINS (TATA SECURITIES)

Revenues increase 4.6% sequentially: KPIT’s consolidated revenues grew by 4.6% in 1QFY11 to Rs2,061mn. In US$ terms, the growth was 5 .6%. The growth in 1QFY11 was driven by a 3% volume growth and around 2.5% increase in realisations. The increase in realisation was on account of higher share of revenues from SAP and auto businesses, which have a higher average
realisation. In 1QFY11, the SAP business grew by 9.6% sequentially, with auto and engineering business growing by 4.8%. The company also commented there were some early starts to the projects resulting in higher-than-expected revenue growth in 1QFY11.

EBITDA margins decline by 310bps: In line with expectations, KPIT’s EBITDA margins declined by 310bps in 1QFY11 on account of a) Salary increases of 12% offshore and 2% onsite and b) Addition of more than 400 employees in 1QFY11. Going forward, we expect margins could improve on account of a) Economies of scale and b) Improving utilisation as the freshers
hired in 1QFY11 start getting billed in the quarters ahead.

Net profit declines by 6.8%: Though the company’s EBIT declined by 15.6% sequentially, the net profit declined only by 6.8% to Rs194mn. This was mainly on account of a) Lower forex losses as the INR appreciated by 1% in 1QFY11 and b) Lower taxes.

To read the full report: KPIT CUMMINS