Embassy Office Parks REIT BUY · Embassy REIT is sponsored by Embassy Group (Embassy Property...

Please refer to important disclosures at the end of this report

Market Cap Rs278bn/US$3.7bn Year to Mar FY20 FY21E FY22E FY23E Reuters/Bloomberg EMBASSY IN Revenue (Rs bn) 21.4 21.8 24.5 28.9 Shares Outstanding (mn) 771.7 Adjusted PAT (Rs bn) 9.4 8.5 8.5 9.8 52-week Range (Rs) 480/321 EPU (Rs) 9.9 11.0 11.0 12.7 Free Float (%) NA % Chg YoY 109.5 10.6 0.2 15.6 FII (%) NA P/E (x) 36.3 32.8 32.7 28.3 Daily Volume (US$'000) 5,645 P/B (x) 1.2 1.3 1.4 1.5 Absolute Return 3m (%) 10.3 Net D/E (x) 0.2 0.3 0.4 0.5 Absolute Return 12m (%) 0.9 Distribution yield (%) 6.8 6.8 7.1 7.8 Sensex Return 3m (%) 27.5 RoCE (%) 3.7 4.1 4.9 5.8 Sensex Return 12m (%) 7.0 RoE (%) 3.4 3.9 4.1 5.0

Equity Research August 25, 2020 BSE Sensex: 38844 ICICI Securities Limited is the author and distributor of this report

Annual report analysis and reco change

Real Estate Target price Rs430 Target price revision Rs430 from Rs403

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Embassy Office Parks REIT BUY Upgrade from ADD Standing tall in tough times Rs360

Research Analyst:

Adhidev Chattopadhyay [email protected]

+91 22 6637 7451

The Embassy Office Parks REIT (Embassy REIT) delivered a robust performance in FY20 in its maiden year of listing with a Net Operating Income (NOI) growth of 15% and NDCF distribution of Rs18.8bn or Rs24.4/unit. Inspite of COVID-19 headwinds, Q1FY21 performance was also resilient with 99% collection efficiency in office rentals resulting in NDCF distribution of Rs4.5bn which was up 8% YoY. We believe that the REIT’s low leverage (net D/E of 0.2x), marquee tenant profile and de-densification of offices making up for increased Work from Home will enable the REIT to deliver 11% NOI CAGR over FY20-23E. We roll forward our DCF based target price to March 2021 with a revised NAV of Rs430/unit (earlier Rs403) and upgrade our rating to BUY from ADD. At CMP of Rs360, the Embassy REIT offers a distribution yield of 6.8% in FY21E, 7.1% in FY22E and 7.8% in FY23E. FY20 NDCF distribution of Rs18.8bn: The Embassy REIT distributed Rs18.8bn of

Net Distributable Cash Flow (NDCF) in FY20 or Rs24.4/unit. Of the total FY20 distribution/unit, Rs10.0 was in the form of interest, Rs14.0/unit in capital repayment and Rs0.4/unit in the form of dividend. At a portfolio level, Net Operating Income (NOI) grew 15% YoY driven by incremental leasing, re-leasing at decent mark-to-market spreads and early completion of 1.4msf of development.

Embassy REIT portfolio cushions the COVID-19 blow: The REIT’s current tenant portfolio has around 50% of tenants in the technology domain with even smaller verticals such as financial services and research/consulting consisting of Global in-house captives. Currently, the REIT’s top ten occupiers contribute ~42% of the gross overall rental income as of June 2020. We expect the REIT to deliver 11% NOI CAGR over FY20-23E driven by incremental leasing, new assets and recovery in hotels.

Mark-to-market opportunity is back-ended: While the mark-to-market opportunity for higher rentals in the REIT portfolio are now at risk, with just 7% of overall portfolio expiring in FY21E and 5% in FY22E, we do not see any risk to our assumptions of a 5% CAGR growth in rentals across the portfolio with FY23E having ~9% of portfolio expiry when the demand situation may normalise.

Limited completions and debt maturity in FY21-22E: With the next set of completions of 0.9msf being in Techzone, Pune, 0.7msf in Embassy Oxygen and 1.0msf in Manyata (M3) only in FY23E with the rest of the completions of 4.5msf scheduled post FY23E, the REIT has enough leeway to control supply depending on the market dynamics over the medium-term. As of June 2020, the REIT has gross debt of Rs59bn (including amortised cost of zero-coupon bonds of Rs36.5bn), of which Rs2.7bn is scheduled for repayment in FY21E and Rs4.3bn in FY22E. The REIT also has cash and investments of Rs9.0bn to cushion against COVID-19 impact.

INDIA

Embassy Office Parks REIT, August 25, 2020 ICICI Securities

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Company Profile Embassy Office Parks is India’s first listed REIT that owns seven high quality office parks and four prime city centre office buildings with 26.2msf of completed leasable area and under construction and development pipeline of 7.1msf. In addition to the offices, the REIT also owns two operational hotels across 477 keys, an under-construction hotel of 619 keys and a solar park with 100MW of output. It was listed on April 1, 2019.

Embassy REIT is sponsored by Embassy Group (Embassy Property Developments Private Limited) and Blackstone Group. Blackstone Group is based out of US and has been actively investing in the Indian Real estate market since 2010. Blackstone holds 46.5% of Embassy Office Parks.

Chart 1: Embassy Office Parks REIT Company Structure

64%

Embassy Office Parks Private Limited(Embassy Techzone)

100%

50%(1)

Manager(EOPMSPL)

Trustee(Axis Trustee) Acts on Behalf of

Unitholder

Management Services

BlackstoneSponsor Groups

100% 100% 100% 100% 100% 100% 100%

36% 80%

20%

EmbassyREIT

Embassy Sponsor Entity

Public Unitholders

Indian Express

Newspapers (Mumbai) Private Limited

Quadron Business

Park Private Limited

Qubix Business


EarnestTowersPrivateLimited

Vikhroli Corporate


GalaxySquarePrivateLimited

Oxygen Business


Manyata Promoters

Private Limited

Embassy Energy Private Limited

Golflinks Software


Umbel Properties

Private Limited

Express Towers

Embassy Quadron, Embassy

One & Four Seasons

Embassy Qubix FIFC Embassy

247Embassy

GalaxyEmbassy Oxygen

Embassy Manyata

Embassy Energy

Embassy Golflinks

Hilton atEmbassyGolflinks

100%

Source: Company, I-sec research


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Overview of Assets Table 1: Embassy Office Parks REIT Asset Portfolio (as of June 2020)

Property Leasable Area (msf)/Keys/MW WALE*

(yrs) Occupancy

(%) Rent (₹ psf / mth)

Completed Development Total In-place Market MTM (%) Embassy Manyata 11.8 3.1 14.8 7.4 97.4% 60 90 50% Embassy Golflinks 2.7 - 2.7 8.6 98.6% 115 148 28% Embassy One 0.3 - 0.3 8.7 5.5% 156 147 -6% Bengaluru Sub-total 14.7 3.1 17.8 7.8 96.0% 71 101 43% Express Towers 0.5 - 0.5 3.7 93.5% 262 270 3% Embassy 247 1.2 1.2 3.6 91.6% 100 110 10% FIFC 0.4 - 0.4 3.8 77.8% 297 285 -4% Mumbai Sub-total 2.0 - 2.0 3.7 89.6% 170 176 4% Embassy Techzone 2.2 3.3 5.5 5.6 90.6% 49 48 -3% Embassy Quadron 1.9 1.9 3.0 77.0% 44 48 8% Embassy Qubix 1.5 - 1.5 5.1 97.6% 39 48 23% Pune Sub-total 5.5 3.3 8.8 4.7 87.8% 45 48 7% Embassy Oxygen 2.5 0.7 3.2 11.0 77.7% 48 54 13% Embassy Galaxy 1.4 1.4 2.9 98.9% 35 45 28% Noida Sub-total 3.9 0.7 4.6 8.2 85.2% 43 50 18% Subtotal (Office) 26.2 7.1 33.3 6.7 92.2% 69 89 29% Four Seasons at Embassy One(2) 230 Keys - 230

Keys - NM - - -

Hilton at Embassy Golflinks 247 Keys - 247

Keys - NM - -

Manyata (5 & 3 star) - 619 Keys 619 Keys - - - -

Embassy Energy 100MW - 100MW - - - - Subtotal (Infrastructure Assets)

477 Keys / 100MW 619 Keys 1,096 Keys /

100MW

Total 26.2 msf / 477 Keys / 100MW

7.1 msf / 619 Keys

33.3 msf / 1,096 Keys

/ 100MW Source: Company, I-sec research, WALE = Weighted Average Lease Expiry


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Strong performance across operational parameters in FY20

The Embassy REIT delivered a strong performance in its maiden year of listing in FY20 which was driven by incremental leasing, re-leasing at decent mark-to-market spreads and early completion of 1.4msf of development. The Embassy REIT delivered a total Net Distributable Cash Flow (NDCF) distribution of Rs18.8bn in FY20 or a Distribution per Unit (DPU) of Rs24.4/unit.

Table 2: FY20 Walkdown of Financial Metrics (Rs mn, year ending Mar 31)

Consolidated FY20 FY19 YoY (%) Revenue from Operations 21,449 18,771 14.3 Property Taxes and Insurance (771) (970) Direct Operating Expenses (2,509) (2,059) Net Operating Income 18,169 15,742 15.4 Other Income 1,293 1,539 Property Management Fees (486) (303) Indirect Operating Expenses (660) (1,747) EBITDA (excluding other income) 17,023 13,692 24.3 EBITDA (including other income) 18,316 15,231 20.3 Working Capital Adjustments 1,969 30 Cash Taxes (1,381) (1,863) Other Adjustments (1,500) (1,034) Cash Flow from Operating Activities 17,404 12,364 40.8 External Debt (Interest & Principal) (1,515) NM NM Other Income from Investments 1,054 NM NM NDCF at SPV Level 16,943 NM NM Distribution from SPVs to REIT 17,206 NM NM Distribution from Embassy Golflinks 1,920 NM NM REIT Management Fees (215) NM NM Other Inflows at REIT level (Net of Expenses) (45) NM NM NDCF at REIT level 18,866 NM NM Distribution

Source: Company, I-Sec research

Chart 2: Embassy REIT FY20 Business highlights



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Chart 3: Embassy FY20 Net Operating Income up 15% YoY


Key Excerpts from FY20 Annual Report

Excerpts from the comments by Mr. Mike Holland, the Embassy REIT’s Chief Executive Officer (CEO) from the FY20 annual report:

“While FY2020 was a successful first year for Embassy REIT across various business performance metrics, the narrative in recent months across business and society in general has clearly shifted to the impact of the COVID-19 pandemic. Embassy REIT will not be immune to the significant impact on global and domestic economies, but we are well positioned with our strong balance sheet, long tenured leases with our high quality, technology-focused, and international occupier base.”

“Over the last year, the markets understood and appreciated the simple model on which Embassy REIT is established. Predictable and sustainable cash flows generated under long-term contracts from international corporations located in high quality office assets in India’s leading commercial centres provide a clear line of sight to the embedded rental growth within the Embassy REIT portfolio. Additional avenues for growth include expansion in leasable area due to lower risk on-campus development and, given the strength of our balance sheet, the potential to add properties through third party acquisitions.”

“Notwithstanding this strong set of results for FY2020, our full focus now is on our business today and the year ahead given the challenging external environment which has enveloped global and Indian markets since the COVID-19 outbreak. In India, COVID-19 started to emerge as a potentially significant business disruptor in late February 2020. We entered this crisis in a position of great strength, the result of years of prudent and proactive management of the business. At our portfolio level, our strong balance sheet, ample liquidity, the long-term lease contracts with our 160+


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corporate office occupiers, the strong relationships and trust we have built with them over the years and our first class on-ground operations teams across the country all contribute to the resilience of our platform, and surely that resilience will be required over the coming year.”

Outlook going ahead – “While our rental collections since the outbreak of the pandemic are encouraging and remain healthy at over 90% demonstrating the resilience of our office business, we recognise that we are still in early stages of this global business disruption. There is uncertainty, many views, and speculative comments about the potential impact of issues such as social distancing, work from home, workplace de-densification, business travel reductions, liquidity squeeze, and so on. In addition, we are still operating in a restricted environment today, and it is difficult to estimate with a reasonable level of certainty as to how long the current challenges will persist. However, amid this uncertainty, we have a clear and positive view on several areas.”

“Firstly, the office market will witness a significant reduction in the densities of the workplace, given the increased priority to employee wellness. Some of this de-densification, but certainly not all, will be offset by more flexible work styles including work from home. The work from home experiment in India has delivered in this crisis but our recent interactions with many corporate occupiers lead us to a preliminary assessment that while the industry may see more flexibility in employee work styles, the total business environment which Embassy REIT provides to its occupiers and their employees cannot, in India, be replaced by solitary work from home measures.”

“Our conclusion is that workspaces will, more than ever, be the venue for building company culture, collaboration, training, and teamwork. The workplace for the young Indian workforce provides a social, professional and community space as well as the necessary physical and digital infrastructure and productive environment which is so often lacking at home. We are not alone in our view that we will see demand shifting to higher quality, lower density workspaces in the coming years. This aligns well with our overall product offering and strategy: the total business ecosystem.”

“A third point of certainty is that our business is focused on delivering best-in-class office premises and amenities to the best corporations globally and in India, that we entered this phase with record office demand and low vacancies, and we foresee a dramatic tightening of new supply. Our core customer base operates here in India because this remains the global hub for technology talent. This, and the fact that India continues to have a significant employee cost advantage and affordable rentals, has not changed. In fact, again, technology has become even more important to the functioning of the global economy and consequently, many technology companies are prospering in this environment. Over the coming months, as we start to emerge from this pandemic, we believe that this phase will result in continued consolidation in the Indian office market, considerable reduction in annual supply and a higher market share for high-quality institutional landlords in India such as Embassy REIT.”


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Embassy REIT portfolio cushions the blow

While we acknowledge the risk to medium-term demand for office spaces in India, we believe that the office portfolio of the Embassy REIT is relatively resilient in these tough times for the following reasons:

Tenant mix of global IT MNCs and Global In-House Captives: Embassy REIT’s current tenant portfolio has around 50% of tenants in the technology domain with even smaller verticals such as financial services and research/consulting consisting of Global in-house captives. Currently, the REIT’s top ten occupiers contribute ~42% of the gross overall rental income as of June 2020.

Only 6% of overall portfolio has exposure to stressed sectors: Among the directly impacted sectors by COVID-19, the Embassy REIT has 6% of its overall portfolio consist of occupiers who are directly impacted by COVID-19 including co-working spaces, hospitality, aviation and retail which could see some stress in collections/occupancy.

Rental collections of 99% in Q1FY21: The Embassy REIT management has mentioned in its Q1FY21 earnings update that ~99% of rental collections (including facility management and common area maintenance) have been paid by its tenants till date for April-June 2020.

Chart 4: Embassy REIT Sectoral and Tenant Wise Breakup

Source: Company, I-Sec research Sticky nature of global MNC companies: Globally MNC occupiers typically enter

into long-term tenancy contracts with office developers for 8-10-year periods with a contracted rental escalation of 15% every 36 months. They also invest at least Rs3,000-4,000/psf for fit-outs for their offices in addition to the contracted rentals keeping in mind the longer tenure of their leases.

High quality talent pool in India: India leads in STEM (Science, Technology, Engineering, Mathematics) talent for technology assignments with over 2 million students graduating each year. Over the last decade, the emergence of GICs


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(Global In-House Captives) has led to more high-end development work being done in India. Further, employees’ costs in India would not be more than 20-25% of comparable cost for employees in the occupier’s country of origin.

Affordable rentals: India remains one of the more affordable office markets in the world, with average rentals for Grade A office markets in peripheral/suburban micro-markets hovering around 1 USD/psf/month or Rs70-75/psf/month. Further, with rental costs for MNC occupiers being just 2-3% of their revenues, we do not anticipate any major payment issues for the Embassy REIT.

Mark-to-market opportunity is back-ended: While the mark-to-market opportunity for higher rentals in the REIT portfolio are now at risk, with just 7% of overall portfolio expiring in FY21E and 5% in FY22E, we do not see any risk to our assumptions of a 5% CAGR growth in rentals across the portfolio with FY23E having ~9% of portfolio expiry when the demand situation may normalise.

Chart 5: Mark-to-Market opportunity for REIT portfolio is back-ended

Source: Company, I-Sec research Limited completions in FY21-22E: As of March 2020, the Embassy REIT had

delivered 2 offices space of 1.4msf (0.8msf in Manyata, Bengaluru and 0.6msf in Oxygen, Noida) around 2-3 quarters ahead of schedule of which ~57% area was pre-committed with rentals expected to kick in from Q2FY21.With the next set of completions of 0.9msf being in Techzone, Pune, 0.7msf in Embassy Oxygen and 1.0msf in Manyata (M3) only in FY23E with the rest of the completions of 4.5msf


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scheduled post FY23E, the REIT has enough leeway to control supply depending on the market dynamics over the medium-term.

Chart 6: Near-term risk to incremental leasing is limited for the REIT portfolio



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Leverage Profile of Embassy REIT

The Embassy REIT enjoys a low leverage ratio of 0.2x net debt/equity which puts in a prime position to expand its asset portfolio through further asset injections via acquisitions. The Embassy REIT has two tranches of zero-coupon bonds of Rs36.5bn with a maturity date of June 2022 at a coupon of 9.05-9.40% coupon and out of the total gross debt of Rs59bn as of June 2020 (including amortised cost of zero-coupon bonds), only Rs2.7bn is scheduled for repayment in FY21E and Rs4.3bn in FY22E. Our estimates currently assume a refinancing of the zero-coupon bonds maturing in June 2022. The Embassy REIT also has cash and investments of Rs9.0bn as of June 2020 which cushions it against any COVID-19 related cash flow impact going forward.

Table 7: Debt profile of Embassy REIT as of June 2020


Table 3: Net Debt of Embassy REIT as of June 2020 (in Rs mn)

Gross Debt (includes amortised cost of zero-coupon bond) 58,759 Less: Cash and cash equivalents 8,994 Net Debt 49,765



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Valuation

REITs derive cash flows in the form of interest, debt repayment and dividend payments from owned assets which have differing cash flow profiles. Unlike assets in Infrastructure Trusts like toll/annuity roads or power transmission assets which have a fixed tenure of operations, the underlying assets in REITs which consist of offices, malls and hotels are perpetual in mature and carry an element of capital appreciation as well through escalation in rentals, addition of new assets and ramp up in occupancies. Hence, the total return offered by a REIT should be measured as a mix of annual distributions and capital appreciation of the units of the REIT. Hence, we prefer a DCF based approach which captures the upside from uptick in rental income along with the annual distribution of at least 90% of the Net Distributable Cash Flow (NDCF) to REIT unitholders.

Our key assumptions include:

5% annual increase in rentals from FY22E onwards

4% terminal growth rate from FY30E

Cap rate of 8% on Net Operation Income (NOI) of each asset

WACC of 11% assuming 0.2x debt/equity with cost of equity of 12% and cost of debt of 9.0%.

3.2msf of under construction assets to become operational in FY23-24E

We have assumed that the zero-coupon bond maturing in June 2022 will be

refinanced again on similar terms

We have not assumed any injection of ROFO assets into the Embassy REIT

We have assumed a collapse in the holding structure of Manyata Tech Park to a two-tier structure from the current three-tier structure from FY22E onwards.

We expect the REIT to deliver 11% NOI CAGR over FY20-23E driven by incremental leasing, new assets and recovery in hotels. We roll forward our valuation of Embassy REIT to March 2021 and arrive at a revised DCF based target price of Rs430/unit (earlier Rs403/unit). This factors in lower occupancies across office assets and weakness in hotel operations in key assets. Accordingly, we upgrade our rating on Embassy REIT to BUY from ADD. At CMP of Rs360, the Embassy REIT offers a distribution yield of 6.8% in FY21E, 7.1% in FY22E and 7.8% in FY23E.

Table 4: Return profile of Embassy REIT Embassy REIT Cash Flows FY20 FY21E FY22E FY23E Revenue from Operations* 21,449 21,813 24,499 28,913 Net Operating Income (NOI)* 18,170 19,316 22,064 25,000 EBITDA* 17,023 17,795 20,235 23,425 NDCF at SPV level^ 16,943 18,870 20,015 22,217 NDCF at REIT level^ 18,866 18,808 19,724 21,669 NDCF Distribution Payout (%) 100% 100% 100% 100% NDCF Distribution by REIT^ 18,821 18,808 19,724 21,669 Distribution per Unit 24.4 24.4 25.6 28.1 Distribution Yield (%) 6.8 6.8 7.1 7.8 Source: I-Sec research estimates, *excludes Golflinks, ^ includes Golflinks


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Table 5: Valuation of Embassy REIT Enterprise Value 395,720 Less: REIT level debt 54,140 Less: Security deposits 9,985 Equity Value 331,595 Equity Value per Unit 430

Source: I-Sec research estimates

Table 6: Sensitivity of Target Price to Cap Rate and Cost of Equity Cost of Equity (%) Target Price 10% 11% 12% 13% 14% 15%

Cap Rate (%)

6% 535 502 474 450 430 412 7% 502 471 445 423 404 388 8% 472 442 430 397 380 364 9% 443 416 393 374 357 343

10% 416 391 369 351 336 322 11% 391 367 347 330 316 303

Source: I-Sec research estimates


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Appendix: Indian office market scenario

Net absorption/demand to contract 40-50% in CY20-21E

Until the global COVID-19 concerns reduce, corporates will relook at their space requirements in CY20E, expansion or consolidation plans will be put on the backburner. Given the fact that 30-40% of Indian office space demand originates from the USA, a prolonged economic slowdown in the USA will likely lead to reduced demand for offices in CY20-21E. While CY19 was a record year with 42msf of net absorption and another 40msf of net absorption expected in CY20E and CY21E prior to COVID, we now build in net absorption of 25msf in CY20E and 29msf in CY21E which is a 40-50% reduction in demand.

Chart 8: India annual absorption-supply of offices and forecast

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Supply Absorption Vacancy (RHS)

Source: Cushman & Wakefield, JLL India, I-Sec Research

Q2CY20 showing a few green shoots

All office asset developers in our coverage universe have surprised positively with office rental collections of over 90% post the lockdown in mid-March 2020. While there has been news flow of few corporates deferring/renegotiating rentals, this has been limited to standalone buildings and sectors which have been adversely impacted by COVID-19. However, large institutional landlords with a significant percentage of technology focused Global In-House Captives (GICs) continue to hold fort on rentals with rental escalation clauses also being honoured by tenants and pre-COVID leasing commitments coming through. Table 7: India office absorption over CY14-CY21E

City CY14 CY15 CY16 CY17 CY18 CY19 CY20E CY21E MMR 3.9 2.9 3.0 2.4 2.9 5.2 3.0 3.5 NCR 6.2 3.8 4.3 3.7 4.8 10.0 4.2 4.5 Bengaluru 8.9 10.3 12.3 8.0 7.9 9.3 7.0 8.0 Chennai 2.6 2.8 2.9 2.2 1.7 1.8 1.5 1.8 Hyderabad 4.4 5.5 6.3 4.9 6.0 9.3 5.0 6.5 Pune 3.6 6.2 3.3 2.0 3.4 5.1 3.5 3.6 Kolkata 0.8 1.1 0.8 0.8 0.4 1.4 0.9 0.8 Overall 30.3 32.6 32.9 24.1 27.1 42.0 25.1 28.7

Source: Cushman & Wakefield, I-Sec Research


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India’s long-term advantages remain as a high-quality office hub

While near-term news flow may be negative, our view is that the Indian office market retains many positives such as: 1) Limited number of 8-10 pan-India developers capable of building quality rental assets; 2) India remains one of the more affordable office markets in the world, with average rentals for Grade A office markets in peripheral/suburban micro-markets hovering around 1 USD/psf/month or Rs70-75/psf/month; 3) India leads in STEM (Science, Technology, Engineering, Mathematics) talent for technology assignments with over 2 million students graduating each year; 4) numerous representations by industry stakeholders has prompted the GoI to rollback the proposed Dividend Distribution Tax (DDT) on REITs in March 2020 on the condition that REIT SPVs will not move to the new tax regime (of lower tax rate).

Bengaluru and Hyderabad remain the key markets

Pre-COVID, Bengaluru continues to see low Grade A vacancy at 5% and accounted for ~22% of net absorption of office space in CY19. We expect Bengaluru market to retain more than 25% of net absorption over CY20-21E.

Pre-COVID, the Hyderabad market clocked record annual absorption of 4.9msf in CY17 and 6.0msf in CY18. Vacancy levels for Hyderabad also fell to 7% in CY18 from 18% in CY14. In CY19, Hyderabad has seen record net absorption of 9.3msf and is now on par with leasing levels seen in Bengaluru. With the city continuing to offer affordable rentals, occupiers continue to flock to Hyderabad for expansion purposes. We expect net absorption to revert back to 5-6msf annually over CY20-21E.

Kolkata and non-CBD regions of Gurugram continue to suffer from supply glut where current vacant office space is expected to take at least 24-36 months to be absorbed.

Table 8: India Grade A office stock vs. vacancy City (Jun-20) Stock (msf) % share of

stock Vacancy (%) Occupied

space (msf) % share of

occupied stock MMR 97.2 18% 19% 78.9 17% NCR 116.1 21% 24% 88.2 19% Bengaluru 148.0 27% 7% 138.3 29% Chennai 51.0 9% 9% 46.3 10% Hyderabad 60.3 11% 7% 56.2 12% Pune 53.4 10% 6% 50.5 11% Kolkata 26.4 5% 34% 17.5 4% Overall 552.3 100% 14% 476.0 100%

Source: Cushman & Wakefield, I-Sec Research


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Two-third of India office demand driven by MNCs

IT-ITES sector has remained top-most in terms of share of office occupancy across major Indian cities. The sector maintains its lead with 35-40% share in office occupancy. While there has been a noticeable slowdown in absorption by E-Commerce companies, they only accounted for 3% of demand in CY17.

Chart 9: India office absorption by sector

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CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19

IT & ITES Manufacturing / IndustrialBFSI Telecom, Pharma & RealtyConsultancy Business EcommerceProfessional Services/Coworking

Source: JLL India, I-Sec Research In CY16, share of leasing by US-based firms jumped up to 42% from 32% in CY15 led by expansion of companies such as Amazon, Microsoft, Google. Domestic firms continue to account for a third of demand. Incrementally, we expect this trend to continue as majority of office expansion, especially in the IT/ITeS segment, is being driven by Global In-House Captives (GICs). Further, large domestic IT/ITeS companies such as Infosys and Tata Consultancy Services (TCS) now prefer to lease office space as per their requirement vs. the previous model of building large captive campuses.

Chart 10: India office absorption by country of origin of the occupier

0%10%20%30%40%50%60%70%80%90%

100%

CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19

USA India EU APAC Others

Source: JLL India, I-Sec Research


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Financial summary (Consolidated) Table 9: Profit and Loss statement (Rs mn, year ending Mar 31)

FY20 FY21E FY22E FY23E Revenue from operations 21,449 21,813 24,499 28,913 Operating Expenses 4,793 4,017 4,264 5,488 EBITDA 16,656 17,795 20,235 23,425 % margins 77.7% 81.6% 82.6% 81.0% Depreciation & Amortisation 5,281 5,290 5,475 5,718 Interest expenses 3,804 4,398 6,706 8,234 Other Income 990 685 719 755 Exceptional items - - - - PBT 8,562 8,793 8,773 10,229 Less: Taxes 300 1,319 1,316 1,534 PAT before Minority/Associate 8,262 7,474 7,457 8,695 Associates 1,169 995 1,032 1,119 Net Income (Adjusted) 9,431 8,469 8,489 9,814

Source: Company data, I-Sec research

Table 10: Balance sheet (Rs mn, year ending Mar 31)

As at March FY20 FY21E FY22E FY23E Assets

Total Current Assets 24,364 21,876 22,653 21,726 of which cash & cash eqv. 3,419 1,048 2,259 1,355 Total Current Liabilities & Provisions 13,856 15,438 16,110 17,213 Net Current Assets 10,508 6,438 6,543 4,513 Goodwill 50,289 50,289 50,289 50,289 Investments 36,365 31,365 31,365 31,365 Net Fixed Assets 2,19,777 2,15,467 2,24,839 2,24,966 Capital WIP 4,107 12,086 3,083 7,583 Total Assets 3,21,046 3,15,645 3,16,119 3,18,716 Liabilities

Borrowings 57,461 62,461 74,461 89,461 Net Worth 2,23,178 2,12,776 2,01,251 1,88,848 Minority Interest - - - - Deferred Taxes 40,407 40,407 40,407 40,407 Total Liabilities 3,21,046 3,15,645 3,16,119 3,18,716


Table 11: Cashflow statement (Rs mn, year ending Mar 31)

Year ending March FY20 FY21E FY22E FY23E PBT 8,562 8,793 8,773 10,229 Interest income and fair value change in financial assets (444) (685) (719) (755) Finance costs 3,804 4,398 6,706 8,234 Depreciation and amortisation expense 5,281 5,290 5,475 5,718 Others 1,373 308 (2,059) (3,206) Operating cash flows before working capital changes 18,575 18,103 18,176 20,219 Changes in Working Capital 1,545 1,698 1,107 1,126 Cash generated from operations 20,120 19,801 19,283 21,345 Income taxes paid, net (1,429) (1,319) (1,316) (1,534) Operating Cashflow 18,691 18,482 17,967 19,810 Capital Commitments (11,798) (8,958) (5,845) (10,345) Free Cashflow 6,893 9,524 12,122 9,465 Investments (7,215) 5,995 1,032 1,119 Others (2,429) 685 719 755 Cashflow from Investing Activities (21,442) (2,278) (4,093) (8,471) Issue of Share Capital/(Distribution) (2,369) (18,870) (20,015) (22,217) Inc (Dec) in Borrowings (24,515) 5,000 12,000 15,000 Finance costs (1,562) (4,398) (4,647) (5,028) Others (13,517) - - - Cashflow from Financing activities (41,964) (18,268) (12,662) (12,244) Chg. in Cash & Bank balances (44,716) (2,064) 1,212 (905)



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Table 12: Key ratios (Year ending Mar 31)

FY20 FY21E FY22E FY23E Per Share Data (Rs)

Earnings per Unit 9.9 11.0 11.0 12.7 Distribution per unit (DPU) 24.4 24.4 25.6 28.1 Book Value per Unit (BV) 289.2 275.7 260.8 244.7

Growth (%) Net Sales 14.3 1.7 12.3 18.0

EBITDA 22.5 6.8 13.7 15.8 PAT 158.2 (10.2) 0.2 15.6

Valuation Ratios (x) P/E 36.3 32.8 32.7 28.3

P/BV 1.2 1.3 1.4 1.5 Distribution Yield 6.8 6.8 7.1 7.8 Operating Ratios

Debt/EBITDA (x) 3.4 3.5 3.7 3.8 Net D/E 0.2 0.3 0.4 0.5 Profitability/Return Ratios (%)

RoE 3.4 3.9 4.1 5.0 RoCE 3.7 4.1 4.9 5.8 EBITDA Margins 77.7 81.6 82.6 81.0 Net Income Margins 44.0 38.8 34.7 33.9



18

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