Anant Raj Industries. Shift in focus: Newly acquired projects to mitigate concern over monetization delay

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1 BSE SENSEX S&P CNX 19,091 5,729 Rs92 18 April 2011 Update Sector: Real Estate Anant Raj Industries Buy Shift in focus: Newly acquired projects to mitigate concern over monetization delay Golf Course Road project to be a key growth driver Bloomberg ARCP IN Equity Shares (m) Week Range (Rs) 160/66 1,6,12 Rel. Perf. (%) 12/-31/-41 M.Cap. (Rs b) 27.1 M.Cap. (US$ b) 0.6 Y/E March 2011E 2012E 2013E Net Sales (Rs b) EBITDA (Rs b) NP (Rs b) EPS (Rs) EPS Gr. (%) BV/Share (Rs) P/E (x) P/BV (x) EV/EBITDA (x) EV/ Sales (x) RoE (%) RoCE (%) Shareholding pattern % (Mar-11) Foreign, 24.4 Domestic Inst, 2.9 Others, 11.0 Promoter 61.7 Stock performance (1 year) Anant Raj Inds Sensex - Rebased 50 Apr-10 Aug-10 Dec-10 Apr-11 With a sharpened focus on launches of recently acquired projects, Anant Raj Industries (ARIL) is well placed to offset its recent under-performance. Concerns over delays in monetization of its super-luxury projects are likely to be mitigated by ARIL's strong cash flow visibility from recently acquired projects. The Golf Course Road project, acquired in FY11 is expected to contribute 30-50% of sales over FY12-14, and will be the key medium term value driver. While ARIL's net debt jumped sharply in FY11 to Rs8.8b, visibility of robust operating cash flow and steady growth in annuity income provides necessary comfort to address the liquidity risk. We expect ARIL's RoE to improve from 4.9% in FY11 to 6.2% in FY12 and 10.7% in FY13. The stock trades at 0.7x FY12E BV of Rs134. We believe ARIL's ongoing projects and land bank (at cost) offer a healthy cushion to its current valuations and incremental cash flow visibility from new projects could be a strong trigger. We reiterate Buy. Value accretive land acquisition offers strong growth potential: Over the past months ARIL deployed ~Rs8.5b to acquire ~200 acres of land (saleable area ~10msf) in the NCR and we expect the monetization to start over the next 3-6 months. We believe these land parcels render strong value accretive potential due to their (a) attractive acquisition cost, (b) superior locations and (c) suitability for large format development in the mid/high-end segment. Its recently acquired Golf Course Road project is likely to be a key growth driver and will account for ~24% of its GAV and about half its sales value over FY Lack of clarity persists on luxury projects, new projects overshadow concerns: ARIL's super luxury projects in Hauz Khas and Bhagwandas continue to face headwinds. However, we expect monetization of recently acquired projects to mitigate concerns over delays in old projects. With the focus shifting from luxury-end old projects to mid to high-end new projects and an improving market outlook in NCR, we believe on-time incubation of projects at Golf Course Road, Gurgaon Sector 91, Neemrana and Rai will offset recent underperformance. Leverage comfortable despite surge in net debt: During its land acquisition phase, ARIL's net debt increased to Rs8.8b (v/s net cash of ~Rs3.5b in FY10), implying net DER(x) of 0.24x. Still, we believe ARIL is unlikely to face liquidity pressure due to (a) an easy repayment period, (b) strong cash flow visibility from recently acquired readily saleable projects and (c) steady support from annuity income, which we expect to grow to Rs1.6b by FY12 (v/s ~Rs800m in FY11). Valuation offers an attractive entry point: We estimate ARIL's one-year forward NAV at Rs167. The stock trades at 11.4x FY12E EPS of Rs8.1, 6.1x FY13E EPS of Rs15 and ~45% discount to its NAV. Its ongoing operation and fully paid land bank render strong support to current valuations. At 0.7x FY12E BV of Rs134, ARIL offers an attractive entry point, as we expect its RoE to improve meaningfully from 4.9% in FY11 to 6.2% in FY12 and 10.7% in FY13 going forward, through faster monetization. We reiterate Buy with a target price of Rs140. Sandipan Pal (Sandipan.Pal@MotilalOswal.com); Tel:

2 Value accretive land acquisition offers strong growth potential Over the past months ARIL acquired land worth ~Rs8.5b in the NCR and has projects at attractive locations in Gurgaon such as Golf Course Extension Road (Sector 63A) and New Gurgaon (Sector 91). ARIL acquired the land at rates ranging from ~Rs100/ sf (for EWS housing in Rajasthan) to ~Rs1,000/sf (Golf Course Road), suitable for its focus on mid to high-end products. Recent acquisitions have been at attractive rates and render a strong launch pipeline in mid and high-end segments ARIL has most of the requisite approvals and is well placed to monetize over the next 3-6 months. It soft launched its mid-income project in Gurgaon, Sector 91 (1.5msf), with a base price of Rs3,800/sf and sold 80 units in 4QFY11. It plans to launch its affordable housing project Neemrana (Rajasthan) in 1QFY12 and its key township project in Golf Course Road awaits master-plan approval and is due to be launched in 1HFY12. Key recent land acquisitions Project Area Purchase Effective Expected price (Rs b) cost (Rs/sf) launch date Gurgaon Sector acres/1.5msf Soft launch Golf Course Road 167 acres/6.6msf ,024 1HFY12 (Sector 63A) Neemrana, Rajasthan 18 acres/ 2msf QFY12 Total 9.8 msf An encouraging response to ARIL's Gugraon residential projects bodes well for its new launches Strong sales pick up in Gurgaon augurs well for new projects Over the past six months sales momentum has picked up well in Gurgaon with key real estate players like Unitech and DLF drawing a huge response to their residential and plotted development projects in all segments. ARIL also has witnessed an encouraging response to its Manesar project (1.2msf), which was completely sold out during 9MFY11. Industry sources suggest that in February 2011 Gurgaon recorded a ~45% MoM jump in sales volume (~7msf v/s ~5msf in January 2011 and ~3msf in July 2010). This was backed by an increase in the number of launches and absorption of mid-income (Rs3,000-5,000/ sf) and high-end (Rs5,000-7,000/sf) projects in peripheral zones. We believe ARIL's newly acquired projects will come on the market at an appropriate time to benefit from strong market momentum. Its township project in the attractive Golf Course Road is likely to draw strong response from the high-end customer segment and its projects in Sector 91, Manesar and Rajasthan (Neemrana) are strategically placed to tap the mid-income and affordable segments. NCR absorption rate highest among key RE markets Bangalore price appreciation Mumbai price appreciation NCR price appreciation Bangalore absorption rate (%) Mumbai absorption rate (%) NCR absorption rate (%) 1Q2009 2Q2009 3Q2009 4Q2009 1Q2010 2Q2010 3Q2010 4Q % 30% 20% 10% 0% Source: REIS-JLLM/MOSL 18 April

3 Capital values in most locations in the NCR have appreciated by over 20% a year, with Gurgaon (a high-end segment) registering 36% increase in values. This can be attributed to rising interest from end-users and economic revival at large. Though any sharp pricing upswing could dampen the sales velocity, we believe a moderate price increase is anticipated due to strong end-user demand over next 6-12 months. We expect the incubation of Golf Course Road in 1HFY12 and the monetization of plotted developments Golf Course Road project can be a major revenue driver We expect ARIL's township project in Golf Course Road (Sector 63A) to be a key growth driver over FY ARIL acquired 163 acres of land (development potential of 6.6msf) for ~Rs6.8b and it plans to develop the project as a township with plotted development in the initial phase, followed by residential and commercial segments. The project has obtained zoning approval for the township and the master layout plan approval is expected over the next three months. We expect the early phase (plotted development) of monetization of the Golf Course Road project to start in 1HFY12. The management is looking to acquire more land in the area, taking its total area to ~200 acres. Details of the Golf Course Road project acres FSI (x) Saleable area (msf) Township plotted Independent floor/row houses Residential group housing Commercial Commercial for T/S Total land area Golf Course Road project to account for 24% of ARIL's GAV Area FY12 FY12 Cost Launch Completion GAV (Rs b) GAV (Rs/sh) GAV (%) (msf) Realization (Rs/sf) date (Rs/sf) Township, plotted (m sq yard) 2.3 6, FY12 FY Independent floor/row houses 1.2 5,500 1,800 FY13 FY Residential group housing 2.0 5,000 2,000 FY13 FY Commercial 0.6 6,000 2,500 FY13 FY Commercial for T/S 0.5 6,000 2,500 FY13 FY The Golf Course Road project could contribute 24% of ARIL's GAV We believe the Golf Course Road project could spell the success of ARIL's land acquisition strategy. At its existing acquisition cost and our assumed monetization timeline, the project is likely to enjoy a pre-tax IRR of ~51%. Our estimate suggests the Golf Course Road township project is likely account for 30-50% of ARIL's sales volume in FY12 and FY13, aggregating about half of its sales accruals. We estimate the project will account for Rs20.9b, implying ~24% of its GAV at Rs71/share (v/s GAV of Rs294/share). 18 April

4 Golf Course Road project to account for a significant portion of ARIL's sales volume and value over FY12-14 Total sales volume (msf) Golf course sale volume (msf) Golf course contribution (%) Total accruals (Rs b) Golf Course accruals (Rs b) Golf course contribution (%) FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14 We expect robust cash flow and revenue contribution from the Golf Course Road project Cashflow and revenue contribution of the Golf Course Road project (Rs b) Cash Inflow FY12E FY13E FY14E FY15E Plotted develoment Independent floor/row houses Residential group housing Commercial Commercial for T/S Total Cash Inflow Cash outflow Plotted develoment Independent floor/row houses Residential group housing Commercial Commercial for T/S Total Cash Outflow Net Cashflow Revenue Cost Gross Profit Litigation/approvals overhang persist on the Hauz Khas and Bhagwandas projects, and the development of ARIL's other Delhi land awaits implementation of the Delhi Master Plan Lack of clarity persists on super-luxury projects ARIL has two city-centric luxury projects in Hauz Khas (0.26msf) and Bhagwandas (0.25msf) in the heart of South-central Delhi. The projects have been delayed due to litigation and approval-related issues. Our estimates indicate the projects could contribute ~Rs11.2b (~13%) to ARIL's GAV. We believe lack of clarity on the status of the projects has been a key headwind. We model the launch of the projects in FY13. ARIL owns about 500 acres of fully paid land in Delhi. However, most of its Delhi projects such as Tilak Marg, Nazafgarh and Nagli Poona are unlikely to be launched before FY13, since such lands fall beyond Delhi's existing development plan and cannot be monetized through residential development. In this regard, we believe ARIL will be a key beneficiary of the implementation of Delhi Master Plan 2021, which includes such land. The management said ongoing infrastructure development in these locations was likely to boost demand for residential projects from FY April

5 Focus on mid-income housing to augment sales velocity Expect strong sales volume (msf) 1.5 9MFY QFY11E 1.3 FY12E 2.5 FY13E Increase in net debt causes no concern, cashflow visibility offsets liquidity risk new projects, affordable housing strategy offset concerns While delay in monetizing old assets remains an overhang, we expect monetizing the Golf Course Road project to significantly mitigate ARIL's cash flow concerns. Its low cost land bank renders ARIL a huge opportunity to tap affordable and mid-income demand through projects in New Gurgaon, Rajasthan and Rai. ARIL's recent launch plans include an affordable housing project Neemrana (Rajasthan), where the company is likely to launch ~2,800 units, with expected sales realization of Rs1,400/sf (ticket sizes of Rs0.7m onwards) for the EWS/MIG segment. We expect that the focus on the affordable housing segment is likely to bolster its sales volume. Key launch pipeline in mid-income segments Projects Area (msf) Expected realization Target Expected (Rs/sf) segment launch date Gurgaon Sector ~3800 Mid-income 1HFY12 Neemrana, Rajasthan 2.0 ~1400 Affordable/EWS 1HFY12 Housing project, Rai, Sonepat 1.0 ~2400 Affordable 2HFY12 Leverage comfortable despite surge in net debt In FY11, ARIL's debt increased sharply to Rs8.8b (v/s net cash of ~Rs3.5b in FY10), implying net DER(x) of 0.24x, mainly to fund construction of its residential projects (Kapasera and Manesar) and ongoing commercial projects (Manesar IT Park, Kirti Nagar Mall, IT SEZ at Rai and IT Park at Panchkula). ARIL is looking to acquire more land in Golf Course Road in 1QFY12, which is likely to be the last leg of its land acquisition plan. We believe it could be an indication of further increase in debt in 1QFY12. However, we believe ARIL is unlikely to face liquidity pressure due to (a) easy repayment period (average maturity of its debt is 6-7 years, with no repayment in FY12 and only ~Rs500m in FY13), (b) strong cash flow visibility from recently acquired projects, and (c) support from annuity income, which we expect to grow to Rs1.6b by FY12 (v/s ~Rs800m in FY11). ARIL is expected to return to net cash by FY14 ARIL has one of the soundest balance sheets in the RE domain Net debt (Rs b) Net DER (x) FY08 FY09 FY10 FY11 FY12E FY13E DLF Net DER (x) Unitech HDIL Net debt (Rs b) Indiabulls Prestige GPL Anant Raj Phoenix Mills 0.4 Mahindra Life 18 April

6 We expect ARIL's leverage to fall steadily due to monetization from the early phase of plotted development in the Golf Course Road project, which provides it with a huge cushion against liquidity risk. ARIL is looking forward to repaying a significant portion of its debt in FY12 and FY13, and to returning to a net cash position by FY14. ARIL is well placed to leverage on the recovery of the commercial vertical, with projects to be delivered over FY12 and FY13 Growing annuity income a strong cushion ARIL will be a key beneficiary from the ongoing revival of the commercial vertical. While the lease momentum in its IT Park project at Manesar has been slower than expected, we believe commencement of (a) Kirti Nagar Mall, (b) IT SEZ, Rai, (c) a few hotel projects and (d) increase in operational clients in Manesar IT Park will boost ARIL's annuity income. We model ARIL's annuity income increase to Rs1.6b in FY12 and to Rs2.3b in FY13 from Rs814m at present. ARIL's growing annuity income will provide it with strong resilience to its cash flow during a down cycle. Key annuity projects under development Projects Area (msf) Expected completion Remarks Manesar IT Park 1.1 Completed ~50% yielding rent, average rental Rs35/sf Kirti Nagar Mall 0.8 1HFY % of area tied-up, average rental value Rs110/sf IT SEZ, Rai- Phase I 2.1 4QFY12 ~0.6msf tied up, average rental Rs30/sf Hotel Tri Color 0.6 1HFY12 Expected to contribute Rs7.5m/mth Hotel at Manesar IT Park 0.1 1HFY12 IT Park Panchkula Phase I 0.5 FY13-14 Kirti Nagar Mall, IT Parks at Manesar and Rai are the key growth drivers of ARIL's annuity income Annuity income expected to increase to Rs1.6b by FY12 (Rs m) Area (msf) Rental FY11 FY12 FY13 (Rs/sf/month) IT - Parks Manesar Haryana Rai Haryana Sub - Total (A) Percentage of total rental income Commercial/ Retail Koral Bagh, Delhi Kirti Nagar, Delhi Jhandewalan, Delhi Faiz Road, Delhi Rani Jhansi Road, Delhi Sub - Total (B) Percentage of total rental income Hotels Manesar IT Park Shahoorpur, Delhi, Kalinga Grand Meadows Near Airport, Delhi Papillion Estates, Near Airport, Delhi Bhasin Resorts, Shahoorpur, Delhi Tri Color NH8 Delhi, Reliance JV Sub - Total (C) Percentage of total rental income TOTAL (A+B+C) ,630 2, April

7 We expect a steady improvement in ARIL's RoE on account of faster monetizations Valuation discount offers attractive entry point ARIL has a robust business model with multiple revenue streams, relatively healthy liquidity and high visibility of monetization. While successful utilization of surplus cash in value accretive land acquisition will mitigate the risk of delay in luxury projects, a strong focus on mid-income housing and the arrival of readily saleable projects (like the Golf Course Road project) in its portfolio, is likely to provide it with robust cashflow momentum. ARIL is likely to be a key beneficiary from the ongoing recovery in the commercial vertical with ~4msf of completed commercial/retail projects and ~3msf of projects under construction. We estimate its FY11 rental income will be Rs814m, which is expected to increase to Rs1.6b in FY12 and to Rs2.3b in FY13. However, to incorporate the delay in monetization of its old projects, we are revising our NAV estimate downward by ~10% to Rs167 (v/s Rs185 earlier). The stock trades at 11.4x FY12E EPS of Rs8.1, 6.1x FY13E EPS of Rs15 and ~45% discount to its NAV. Its ongoing operation and fully paid land bank render strong support to current valuations. At 0.7x FY12E BV of Rs134, ARIL offers an attractive entry point, as we expect its RoE to improve meaningfully from 4.9% in FY11 to 6.2% in FY12 and 10.7% in FY13 going forward, through faster monetization. We reiterate Buy with a target price of Rs140. We estimate ARIL's one-year forward NAV at Rs167 Particulars Rs m NAV/share % NAV % GAV Residential 50, Commercial and Retail 16, Hotels 1, IT Parks 17, SEZ 1, Gross Asset Value 86, Less: Net debt 8, Less: Other op exp 6, Tax 21, Land costs Net Asset Value 49, Strong near term triggers offer a meaningful upside Near term triggers The near term triggers for ARIL are: (a) Successful monetization of plotted development project in Golf Course Road, (b) Timely delivery of annuity projects coupled with the revival of the commercial vertical and stronger rentals, and (c) Monetization visibility of luxury projects at Hauz Khas and Bhagwandas and older projects after the implementation of the Delhi Master Plan. 18 April

8 Existing projects offer a strong cushion to valuations As illustrated below, ARIL has a strong cushion of Rs80/share from value emerging from its existing projects such as (a) operational annuity assets, (b) pre-sold residential projects and (c) remaining land parcel, valued at acquisition costs. Hence, we expect near to medium term triggers to provide a strong upside. Key land bank Particulars Area Cost (acres) (Rs b) Residential Delhi Others Commercial Delhi Others IT Park/SEZ Hotel Total 1, ARIL's ongoing portfolio offers support at ~Rs80/share Rsb Rs/sh Capitalized value of annuity assets (11% cap rate) Pre-sold projects (Kapasera/Manesar) Projects under soft launch (Gurgaon) Other land valued at cost Less: Net debt (Rs b) Value From Current Projects Key triggers: Value accretion from furture devlopments Golf Course Road Project Hauz Khas + Bhagwandas Development of future projects Total Key near term triggers offer value unlocking potential (Rs/share) Value from existing portfolio Key triggers Operational annuity assets Presold/ongoing projects Acquisition cost of remaining land Less:Net debt Golf Course Road project Hauz Khas + Bhagwandas Upcoming projects 18 April

9 Financials and Valuation Income Statement (Rs Million) Y/E March E 2012E 2013E Net Sales 2,508 3,111 4,492 6,916 11,135 Change (%) Construction expenses ,730 2,992 4,035 Staff Cost Selling & Adminstrative exp EBITDA 2,197 2,586 2,475 3,522 6,505 % of Net Sales Depreciation Interest Other Income PBT 2,806 2,965 2,431 3,225 5,990 Tax ,557 Rate (%) Reported PAT 2,071 2,384 1,799 2,387 4,433 Extra-ordinary Income (net) Adjusted PAT 2,073 2,383 1,798 2,386 4,432 Change (%) Balance Sheet (Rs Million) Y/E March E 2012E 2013E Share Capital Reserves 32,431 35,360 36,900 38,899 43,125 Net Worth 33,198 35,951 37,490 39,489 43,715 Loans 2,102 1,390 10,318 11,318 11,318 Deffered Tax Liability Capital Employed 36,013 38,206 48,522 51,521 55,746 Gross Fixed Assets 14,131 20,147 27,355 31,243 32,028 Less: Depreciation ,189 1,395 1,711 Net Fixed Assets 13,613 19,513 26,165 29,849 30,317 Capital WIP 7,211 7,457 7,591 7,042 5,295 Investments 3,089 2,949 2,949 2,949 2,949 Curr. Assets 13,305 10,150 18,864 21,299 29,993 Inventory ,034 8,998 11,301 Debtors 2,405 2,399 3,182 3,879 4,647 Cash & Bank Balance 6,257 4,891 4,357 4,639 9,505 Loans & Advances 4,517 2,742 3,290 3,783 4,540 Current Liab. & Prov. 1,260 1,890 7,048 9,619 12,806 Creditors 99 1,134 1,707 1,792 1,882 Advance received ,377 6,490 8,269 Other Liabilities Provisions ,337 2,656 Net Current Assets 12,046 8,260 11,816 11,680 17,187 Misc. Expenses Application of Funds 36,013 38,206 48,522 51,521 55,748 Ratios Y/E March E 2012E 2013E Basic (Rs) Adjusted EPS Growth (%) Cash EPS Book Value DPS Payout (incl. Div. Tax.) Valuation (x) P/E Cash P/E EV/EBITDA EV/Sales Price/Book Value Profitability Ratios (%) RoE RoCE Leverage Ratio Debt/Equity (x) Cash Flow Statement (Rs Million) Y/E March E 2012E 2013E PBT before EO Items 2,804 2,964 2,431 3,225 5,990 Add : Depreciation Interest Less : Direct Taxes Paid ,557 (Inc)/Dec in WC -73-2,420 4, CF from Operations 2,246 5,128-2,106 3,550 5,013 (Inc)/Dec in FA -4,703-6,253-6,936-3, (Pur)/Sale of Investments-1, CF from Investments -6,306-6,113-6,936-3, (Inc)/Dec in Networth 2, (Inc)/Dec in Debt 1, ,929 1,000 0 Less : Interest Paid Dividend Paid CF from Fin. Activity 4, , ,112 Inc/Dec of Cash 210-1, ,866 Add: Beginning Balance 6,048 6,257 4,891 4,357 4,639 Closing Balance 6,257 4,891 4,358 4,640 9,505 E: MOSL Estimates 18 April

10 For more copies or other information, contact Institutional: Navin Agarwal. Retail: Manish Shah Phone: (91-22) Fax: (91-22) Motilal Oswal Securities Ltd, 3rd Floor, Hoechst House, Nariman Point, Mumbai This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. MOSt and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement Anant Raj Industries 1. Analyst ownership of the stock No 2. Group/Directors ownership of the stock No 3. Broking relationship with company covered No 4. Investment Banking relationship with company covered No This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be required from time to time. Nevertheless, MOSt is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries. 18 April