Recommend: NEUTRAL Issue Snapshot Issue Period: Feb 01 - Feb 06, 2008 Price Band Issue Size Market Cap Issue Size Employees: QIB: Non-Institutional: Retail: Rs.540 - Rs.630 Rs.55.39 - Rs.64.62 bn Rs.532.40 - Rs.621.14 bn 102,570,623 shares Nil 61,542,374 shares 10,257,062 shares 30,771,187 shares Face Value: Rs.10 Book Value: Rs.49.08 as on Sept 30,2007 Capital Structure: Pre Issue Equity Post Issue Equity Rs.8,834 mn Rs.9,859 mn Shareholding Pattern Preissue (%) Post issue (%) Promoter 80.22 71.87 Promoter Group 15.01 13.44 Others 4.61 4.14 Pre - IPO Placement 0.16 0.15 Public 0.00 10.40 Total 100.00 100.00 Total no. of shares 883,359,403 985,930,026 Website: www.emaarmgf.com Abhishek Kothari abhishek.kothari@spasecurities.com Mobile: +91 9321481484 Phone: +91 22 40439000 Company Highlights: EMGF is a joint venture between Emaar Properties PJSC of Dubai and MGF Development Limited of India. The primary business of EMGF is the development of properties in the residential, commercial, retail and hospitality sectors. In addition, EMGF has also recently identified healthcare, education and infrastructure as business lines for their future growth. Investment Rationale: Strong parentage providing access to international and local capabilities; Land reserves of 13,024 acres; High proportionate of fully paid land reserves; Diversified business model ensuring less risk due to dependency on a single segment; Easy access to capital and land reserves; Experienced management; Entered into JVs with some of the leading players in the hospitality segment; New business line identified for growth; Niche projects. Concerns are: Limited operational history; Land reserves are heavily concentrated in the north; Project execution capability; Approximately 80% of the land reserves comprises of agricultural land; Stiff competition. CARE has assigned an IPO Grade 4/5 to this issue. The trend towards greater organization and transparency has contributed to the development of reliable indicators of value and organized investment in the real estate sector by domestic and international financial institutions. Regulatory changes permitting foreign investment are expected to further increase investment in the Indian real estate sector. The nature of demand is also changing, with heightened consumer expectations that are influenced by higher disposable incomes, increased globalization and the introduction of new real estate products and services. Valuation: The strong parentage and land reserve coupled with niche projects of international standards makes EMGF an attractive story. The company is well diversified within the real estate industry and has plans of diversifying into healthcare, education and infrastructure segment. The cost of land per sq. ft based on our estimates works out to be at Rs.1100 for EMGH. This is on the higher side while comparing to the peer group and since the company has not completed a single project till date, it makes it look expensive on this front. The revenues from the completion of projects will start from FY 2010 since majority of the projects are stated to be completed by 2010. Hence, we recommend Neutral to the issue. Page 1 of 11
Company Background The company was incorporated on February 18, 2005. EMGF is a joint venture between Emaar Properties PJSC of Dubai and MGF Development Limited of India. Emaar is one of the world s leading real estate companies, having developed approximately 50 mn square feet of real estate across residential, commercial and other business segments, with operations in 16 countries as of December 31, 2007. MGF is one of the players in retail real estate development in Northern India. The primary business of EMGF is the development of properties in the residential, commercial, retail and hospitality sectors. In addition, EMGF has also recently identified healthcare, education and infrastructure as business lines for their future growth. Their operations span across various aspects of real estate development, such as land identification & acquisition, project planning, designing, marketing and execution. In the residential business line, EMGF is focused on developing integrated master planned communities in the mid to luxury segment, wherein EMGF designs, builds and sells a wide range of properties including villas, townhouses and apartments of varying sizes. In the commercial business line, EMGF is focused on developing, selling and leasing offices and SEZ properties targeted towards a wide range of customers from individual users and small companies to large corporates in various sectors including IT and ITES. The commercial properties include both stand-alone commercial sites and properties forming part of the integrated master planned communities. In the retail business line, EMGF is into the development for sale or lease, shopping centres within their integrated master planned communities & on a stand-alone basis, large regional destination malls and luxury retail space at the luxury hotel developments. In the hospitality business line, EMGF is into the development of hotels at various price points in the luxury, up market, mid-market and budget segments across India. EMGF intends to enter into management agreements with well-recognized, experienced and successful international hospitality companies for the operation and management of their hotels. Company Snapshot Investment Rationale: 1. The parentage of Emaar and MGF provides EMGF with the organizational skills, experience and the resources required for delivering projects. Emaar s brand name, development expertise and international experience combined with MGF s local knowledge and capabilities gives EMGF the ability to identify suitable locations, acquire and aggregate large parcels of land and design and develop properties. EMGF will benefit from the use Emaar s experience to bring an innovative marketing approach to the Indian residential real estate sector. 2. As on December 31, 2007, EMGF had land reserve of approximately 13,024 acres of which the company has development plans for approximately 12,028 acres which is expected to provide them with a proposed developable area of approximately 588 mn sq. ft and a proposed saleable area of approximately 566 mn sq. ft. The details regarding the break up and geographical spread of land reserves are as follows: Break up of Land Reserve 16% 3% 1% 80% Residential Commercial Retail Others Page 2 of 11
Geographical Spread of Land Reserves 14% 1% 9% 76% North South East West 3. One of the main concerns for any real estate developer is the escalating cost of land (for acquisition). EMGF has paid for 89% of the land bank which saves it from the concern of future rise in prices of the land for acquisition. For the remaining 11%, the company has entered into sole development rights for which consideration will be typically paid out in the form of revenues and profit sharing out of the property development. 4. EMGF has operations in different segments within the retail industry i.e. they are into the development of residential properties, commercial properties, retail properties and hotels. This enables them to reduce dependency on a single segment. Furthermore, the company has identified new business line for growth i.e. healthcare, education and infrastructure. This will enhance the company s scope of operation which presents the opportunity to an increase in the market share of the company. 5. Due to the strong parentage, the company has easy accessibility to mobilize funds required for their operations with less stipulated time taken. 6. EMGF has entered into joint ventures with Accor for the development and operation of budget hotels and with Premier Inn for the development and operation of mid-market category hotels in India. They have also entered into relationships with various entities in the Intercontinental Hotels group, Four Seasons Hotels Limited, various entities in the Hyatt International Corporation group and Marriott Hotels India Private Limited for the operation and management of some of the company s other hotel properties. 7. Emaar is one of the leading global real estate developers. Emaar is also an FT Global 500 company. Both the companies, Emaar and MGF have good experience in the real estate business. 8. The company has many upcoming projects (majority of them are stated to be completed in 2009-2010): Mohali Hills (plots), part of a 3,000 acre project of integrated master planned communities - expected to be completed in the fiscal year 2009-10. The Views at Mohali Hills, part of a 3,000 acre project of integrated master planned communitiesexpected to be completed in the fiscal year 2009-10. The Villas at Mohali Hills, part of a 3,000 acre project of integrated master planned communities - estimated to be completed in the fiscal year 2009-10. Boulder Hills (group housing Phase I), a 14 acre residential project (part of a 510 acre integrated master planned community) in Hyderabad - expected to be completed in the fiscal year 2009-10. Palm Springs, a 16.5 acre high-end residential project in Gurgaon - expected to be completed in the fiscal year 2009-10. The Commonwealth Games Village 2010 residential complex in Delhi - expected to be completed in the fiscal year 2009-10. Chennai Esplanade (Phase I), a 7 acre residential project (part of a 14 acre project) in North Chennai - expected to be completed in the fiscal year 2009-10. Palm Drive, a 35.1 acre development in Gurgaon - expected to be completed in the fiscal year 2010-11. Page 3 of 11
The Central Plaza at Mohali Hills, part of a 3,000 acre development of integrated master planned communities - expected to be completed in the fiscal year 2009-10. Courtyard by Marriott in Amritsar, a hotel project of approximately 135 keys - expected to be completed in the fiscal year 2009-10. J.W. Marriott in Kolkata, a hotel project of approximately 300 keys - expected to be completed in the fiscal year 2009-10. Holiday Inn in Kolkata, a hotel project of approximately 250 keys - expected to be completed in the fiscal year 2010-11. Holiday Inn in Dehradun, a hotel and convention centre project of approximately 200 keys - expected to be completed in the fiscal year 2009-10. A luxury hotel New Delhi of approximately 250 keys - expected to be completed in the fiscal year 2010-11. Concerns: 1. EMGF has been in existence only for the last three years (approx.). The company seems to be mobilizing land reserves currently and didn t record any topline figures for the first two fiscals. During H1FY08, it has recorded a topline of Rs.4727.2 mn and a bottomline of Rs.1,298.4 mn. This leaves the NPM at around 27%. 2. More than 75% of the land reserves are in north India. The land reserves of the company are mainly concentrated in the NCR region which has the attention of almost every other organized player of the sector in the country due to the commonwealth games (which is going to happen in 2010). We expect over supply in that region post the 2010 games, which may lead to decrease in the land prices. Since the company is mainly concentrated there, this may impact its revenues. 3. As on date, the company has not completed any project which is a concern on the project execution and completion capability of EMGF, since there are many projects with the company to be completed by 2010. 4. Land reserves of approximately 80% comprises of agricultural land (sole/joint development partners) for which the company has not yet obtained a certificate of change of land use. The procedure for obtaining a certificate for change of land use takes a lot of time. The applicant is also required to pay fees for a certificate of change of land use, which may vary from state to state. These fees could escalate, particularly in areas such as Gurgaon that are attractive for real estate development and where EMGF has huge amount of its land reserves. 5. This sector is highly competitive with other players like DLF, Omaxe, Parsvnath, etc. who have been in the industry for a longer period than EMGF. The ability to sustain competition will be a great concern going forward since the company has no track record of its competitive ability. CARE has assigned an IPO Grade 4/5 to this issue. This indicates above average fundamentals of the company. Industry Scenario The trend towards greater organization and transparency has contributed to the development of reliable indicators of value and organized investment in the real estate sector by domestic and international financial institutions. Regulatory changes permitting foreign investment are expected to further increase investment in the Indian real estate sector. The nature of demand is also changing, with heightened consumer expectations that are influenced by higher disposable incomes, increased globalization and the introduction of new real estate products and services. Page 4 of 11
Drivers of demand in residential real estate market: According to NCAER s 2005 report, the number of households with annual incomes of between Rs.0.2 mn and Rs.0.5 mn per year, Rs.0.5 mn and Rs.1 mn per year and in excess of Rs.1 mn per year is expected to increase in size by 23%, 26% and 28%, respectively, between fiscal 2002 and fiscal 2010. These higher income households will be target customers for mid to luxury residential developments offered by premium residential property developers. In addition to rising income levels and increasing affordability, changing demographics, lower interest rates, rising disposable incomes and fiscal incentives have spurred demand for real estate in India. By 2013, India is expected to add 91 mn people to the working population (aged 25-44 yrs). Over the next 20 years, the working age population is projected to grow at 1.9% per annum. Going forward, revenue from ITES is expected to grow at a CAGR of 30% to reach USD 19.7 bn in fiscal 2010 while IT services revenue is expected to grow at a CAGR of 26% to reach USD 28.5 bn by fiscal 2010. Within the IT and ITES sectors, the Indian off shoring operations of multinational companies are expected to increase demand for commercial space. The trend for these companies has been to set up world class business centers to house their growing work forces. According to Cushman & Wakefield, despite capital flows into commercial property and record high levels of new office development, higher demand has helped to stabilize vacancy rates. Capital flows into commercial real estate over the next three years are estimated at more than US$5 bn. The last two or three years have witnessed a proliferation of shopping malls, enclosures having different format of retailers and usually including anchor tenants who cover large areas and are important for attracting footfalls. India has four metros: Mumbai, Delhi, Kolkata and Chennai and an equal number of mini metros: Bangalore, Hyderabad, Ahmedabad and Pune. Initially, most retail players launched their ventures in the metros and mini metros. However, of late, the retail phenomenon is spreading to regional centres across the country. Players are entering these cities early to gain a first-mover advantage and enjoy benefits of a larger customer base and a higher share of loyal customers. Over the past few years, the share of these cities in the percentage of organized retail has been growing steadily. CRIS INFAC estimates construction investments of Rs.112 bn over the next five years leading to around 105 mn sq. ft of mall space by 2010. Of the total malls space to be available by 2010, Mumbai, Pune, Delhi and NCR (including Gurgaon, Noida, Greater Noida, Faridabad and Ghaziabad), Bangalore and Hyderabad will have a share of 74%. The balance 26% will be made up by cities such as Kolkata, Chennai, Ahmedabad, Jaipur, Nagpur, Lucknow, Indore, Ludhiana and Chandigarh. India is also emerging as a major destination for global tourism which in turn pushing up the demand for hotels and resorts across India. This increasing demand for hotels and resorts across India offers yet another opportunity for real estate development. According to HVS International, the majority of segments in the Indian hotel industry have shown robust recent growth in room rates as well as occupancy rates. With increased demand and limited availability of quality accommodation, the average room rates in metropolitan markets have shown significant growth of 36.7% for Hyderabad, 32.5% for Delhi, 30.5% for Jaipur, 24.7% for Mumbai and 24.0% for Bangalore. Agra, Kolkata, Chennai and Goa experienced a growth range of between 17.0% and 21.0%. The general increase in both room rates and occupancy rates is expected to contribute significantly to the demand for new hotel developments. Page 5 of 11
Peer group comparison: Company* EV/EBITDA (x) P/E (x) MCAP/SALES (x) P/BV (x) EPS (Rs.) Share Price (Rs.) Cost of Land / Per sq. ft. (Rs.) EMGF at Lower Band 150.4 205.0 56.3 15.1 2.6 540.0 940.6 EMGF at Upper Band 174.3 239.2 65.7 17.7 2.6 630.0 1,097.4 DLF Limited 47.8 53.2 26.5 39.0 15.3 812.6 1,727.3 Parsvnath Developers Limited 11.1 12.6 3.1 3.4 21.6 272.4 228.6 Unitech Limited 39.1 52.8 21.4 30.2 7.0 370.7 731.2 Omaxe Limited 11.2 12.6 2.9 11.1 22.6 283.9 328.4 *Source: SPA Research. Key Financials Financial Snapshot (Rs. In Million) H1 FY 08 FY 2007 FY 2006 Sales 4,727.20 0.00 0.00 Total Income 5,017.40 168.70 86.60 Operating Profit 1,854.00-758.80-117.50 Net Profit 1,298.40-482.30-58.80 EPS* (Rs./share) 1.32-0.49-0.06 Share capital 17,945.70 12,563.90 24,527.00 Reserves & Surplus 30,442.60 34,126.30-25.60 Net worth 48,388.30 46,690.20 24,501.40 Total Debt 41,577.20 25,166.70 5,838.10 Book Value* (Rs./share) 49.08 47.36 24.85 *The no. of shares is of the post issue equity i.e. 985.93 mn shares. Page 6 of 11
Financial Performance 6,000.00 5,000.00 Amt (INR,mn) 4,000.00 3,000.00 2,000.00 1,000.00 - (1,000.00) (2,000.00) FY 2006 FY 2007 H1 FY 08 Net Sales EBITDA PAT Income Statement Rs, mn Net Sales Cost of Sales Personnel Expenses Operating and Other Expenses Selling Expenses Operating Expenditure Operating Income Other Income Gross Profits Finance & Interest charges Depreciation Profit Before Tax Tax Profit After Tax Extraordinary Items Net Profit H1 FY 08 FY 2007 FY 2006 4,727.20 - - 1,835.80-24.90 249.90 190.10 92.60 644.70 568.70-142.80 - - 2,873.20 758.80 117.50 1,854.00 (758.80) (117.50) 290.20 168.70 86.60 2,144.20 (590.10) (30.90) 94.00 46.70 52.30 36.20 41.00 4.60 2,014.00 (677.80) (87.80) 715.60 (195.50) (29.00) 1,298.40 (482.30) (58.80) - - - 1,298.40 (482.30) (58.80) Page 7 of 11
Cash Flow Statement Rs, mn H1 FY 08 FY 2007 FY 2006 Cash flow from operations Cash for working capital Net Operating Cash Flow - A (Purchase) / Sale of fixed assets (Purchase) / Sale of investments Payment of Share Application Money Increase in Fixed Deposits Cash Inflow / (Outflow) on acquiring subsidiaries Interest & Dividend Received Net Cash Flow From Investing - B Proceeds from Equity Proceeds from Share Application Money Receipts Against Partly Paid Up Shares Proceeds from Issuance of Preference Share Proceeds / (Repayment) from borrowings Equity Share Issue Expenses Interest paid Net Cash Flow From Financing - C Net Cash Flow (A+B+C) Cash Acquired on Acquisition of Subsidiaries Opening Cash Closing Cash 2,095.60 (626.70) (64.20) (16,667.30) (35,394.90) (26,861.60) (14,571.70) (36,021.60) (26,925.80) (2,122.30) (5,866.70) (1,054.40) (312.10) (249.60) 66.40 (5.00) - - (89.60) - (100.00) (0.20) (545.20) - 21.10 35.60 15.70 (2,508.10) (6,625.90) (1,072.30) 481.20 10,891.50 24,527.00 35.00 2,278.80 - - 266.40 - - 9,225.30-16,452.10 19,337.50 5,838.10 (116.40) - - (436.90) (776.30) (78.30) 16,415.00 41,223.20 30,286.80 (664.80) (1,424.30) 2,288.70 2.50 278.60-1,161.10 2,306.80-498.80 1,161.10 2,288.70 Page 8 of 11
Balance Sheet Rs, mn Sources of Funds Equity Share Capital Preference Shares Share Application Money Pending Allotment Reserves & Surplus Miscellaneous expenditure (written off) Networth Secured Loan Unsecured Loan Loan Funds Deferred Payment Liability Minority Interest Total Liability Application of Funds Gross Block Less: Depreciation Net Block Expensiture During Construction Period Capital work in progress Net Fixed Assets Investments Deferred Tax Asset H1 FY 08 FY 2007 FY 2006 8,685.40 1,059.80 29.80 9,225.30 9,225.30-35.00 2,278.80 24,497.20 30,559.00 34,126.30 (25.60) (116.40) - - 48,388.30 46,690.20 24,501.40 10,450.50 2,695.50 18.10 31,126.70 22,471.20 5,820.00 41,577.20 25,166.70 5,838.10 201.30 81.00 - - 1.20-90,166.80 71,939.10 30,339.50 8,664.40 7,398.30 74.60 83.50 45.90 4.50 8,580.90 7,352.40 70.10 890.00 299.20 3.30 1,105.60 437.00 977.90 10,576.50 8,088.60 1,051.30 556.40 260.00-29.40 250.20 12.70 Current Assets Inventories 69,925.10 57,706.10 76.90 Sundry Debtors 17.70 - - Cash & Bank 688.40 1,261.00 2,388.70 Other Current Assets 2,723.20 7.10 1.10 Loans & Advances 15,099.30 12,048.30 26,888.10 Less: Current Liabilities & Porvisions Net Current Assets 9,449.20 7,682.20 79.30 79,033.90 63,590.50 29,288.20 Total Assets 90,166.80 71,939.10 30,339.50 * The figures for FY 2006 are on a standalone basis and the figures for FY 2007 & H1 FY 08 are on a consolidated basis. Page 9 of 11
Objects of the issue: 1. Part payment towards the acquisition of land and land development rights and related approvals for the ongoing and planned projects. 2. Development and construction costs for the project Palm Drive. 3. Repayment of loans. 4. General corporate purposes. The detailed cost of the above objects of the issue is given below: (Amount, INR, mn) SNo. 1. Particulars Part payment towards the acquisition of land and land development rights and related approvals for the ongoing and planned projects. Total Estimated Cost Amount Paid as on December 31, 2007 Estimated Schedule of Deployment of Net Proceeds for Fiscal Amount to be Financed from Net Proceeds of the Issue 2008 2009 2010 31,165 8,728 25,605 10,000 15,605 --- 2. 3. 4. 5. Development and construction cost for project Palm Drive. 7,755 5 7,755 2,500 2,500 2,755 Repayment of loans. 14,496 --- 14,496 9,826 4,420 250 General corporate purpose. Issue expenses. Total The objects of the issue have not been appraised by any bank or any financial institution or an independent organization. Page 10 of 11
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Nagar, Chennai - 600014 Tel: (044) 52071380-82 Fax: 52071379 AHMEDABAD 407, Anand Mangal Complex - I, Behind Omkar House, C.G.Road, Navrangpura, Ahmedabad Tel: (079) 32998056 D i s c l a i m e r: The information contained in this report is obtained from reliable sources and is directed at institutional investors. In no circumstances should it be considered as an offer to sell/buy or, a solicitation of any offer to, buy or sell the securities or commodities mentioned in this report. No representation is made that the transactions undertaken based on the information contained in this report will be profitable, or that they will not result in losses. SPA and/or its representatives will not be liable for the recipients investment decision based on this report. Page 11 of 11