Wednesday, December 2, 2009


Upgrade to OW(V): Valuation now attractive

�� Channel checks suggest IBREL is benefitting from
improving luxury residential demand in Mumbai

�� Stock has substantially underperformed the broad market
and sector and now offers a better risk reward trade-off

�� Upgrade to OW(V) from UW(V) with TP of INR252 (INR235
before). Slower-than-expected execution is a key risk

Improving demand in Mumbai’s luxury residential market is positive for IBREL. We
have seen a steady pickup in demand for luxury residential in the Mumbai market over the past
5-6 months. We believe this segment will benefit from an economic recovery, which is now
steadily becoming evident as well. Our channel checks suggest that IBREL has received a
good response to its luxury residential product in South Mumbai, which we believe is
sustainable. Improved business environment increases our visibility on volumes and execution.
Offset impact of weak office space demand. IBREL’s strategy of increasing the residential
component in its IPIT assets is positive as it offsets current weak demand for its commercial
product (c1m sq ft of near-term delivery). The residential projects should allow IBREL to
capitalise on a higher Floor Space Index (FSI) of 4.0x (against 2.66x earlier). We expect
accelerated cash flows from these residential projects to allow Indiabulls Properties Investment
Trust (IPIT) to tap re-investment opportunities.
Upgrade to OW(V) on improved visibility and attractive valuation. IBREL stock has
underperformed the Sensex by 38% y-t-d and 29% over the past three months. It has also
underperformed the sector by 19% y-t-d and 7% over the past three months. Accordingly, we
upgrade our contrarian UW(V) call to OW(V). We believe the current share price factors in
most of the negatives and provides opportunity to gain exposure to a good mix of Grade A
office space and luxury housing projects in South Mumbai, along with other mid-income
projects across Tier II cities.
Revise TP to INR252. We value IBREL’s real estate business at INR174 (10% discount to
its DCF-based NAV). Further, we value the power business at INR78 (market price less
20% holding company discount) versus INR64 before (1.5x PB before its listing). Our
revised TP also factors in a cut in earnings (9% in FY10 and 3% in FY11), mainly owing to
lower interest income on cash balances. Key share price catalysts: Announcements on
improved business volumes and new project additions by deploying cINR90/share of net
cash (real estate: September 2009e). Key risk: Slower-than-expected execution.

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