May 22, 2014 Kolte Patil Developersbsmedia.business-standard.com/_media/bs/data/... · Sensex (LHS)...

Real Estate May 22, 2014

Kolte Patil Developers

Bloomberg: KPDL IN Reuters: KOLT.BO

BUY

Institutional Equities

India Research

RESULT REVIEW

Recommendation

CMP: Rs123

Target Price: Rs186

Previous Target Price Rs160

Upside (%) 51%

Stock Information Market Cap. (Rs bn / US$ mn) 09/158

52-week High/Low (Rs) 134/48

3m ADV (Rs mn /US$ mn) 50/0.8

Beta 1.3

Sensex/ Nifty 24,298/7,253

Share outstanding (mn) 76

Stock Performance (%) 1M 3M 12M CYTD

Absolute 24.7 59.9 23.6 33.8

Rel. to Sensex 16.9 36.3 2.3 16.6

Performance

Source: Bloomberg

Estimates Revision

(%) FY15E FY16E

Sales 6.8 3.9

EBITDA 5.1 3.9

PAT 0.9 0.4

Source: Bloomberg, Karvy Institutional Research

Analysts Contact Parikshit Kandpal

022 6184 4311

[email protected]

Varun Chakri

022-6184 4326

[email protected]

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Sensex (LHS) Kolte Patil Developers

The right ingredients?

KPDL reported subpar headline financial performance with Revenue,

EBIDTA and PAT below our estimates by (9.7%), (28.3%) & (39.2%). Delay

in construction (pending approvals) and higher S&M cost impacted

profitability. Building on strong 4QFY14 pre-sales of 0.79mn sqft and new

approvals of ~12.8mn sqft, KPDL has guided for FY15-17E cumulative pre-

sales of 12mn sqft at an average realization of Rs6,000/sqft and Rs72bn in

value. Further approvals of ~ 15mn sqft are expected during FY15E. We

maintain our BUY stance with increased NAV target price of Rs186/share.

4QFY14 headline numbers a miss, profitability lags

KPDL 4QFY14 Consolidated Net revenue, EBIDTA & PAT de-grew (18.5%),

(40.7%) & (71.1%) YoY respectively, below our estimates by (9.7%), (28.3%) &

(39.2%). KPDL recorded 0.79mn sqft of new sales at Rs5,374/sqft realization

and Rs4,245mn sale value. Average realization decreased 4.0% YoY whilst

declining 6.2% QoQ, owing to higher share from affordable projects.

Gross/Net debt increased by Rs160/89mn to Rs2,210/1,360mn QoQ. 4QFY14

Net D/E stood at 0.17x (vs 0.16x 3QFY14), adjusted for CCD.

Expected approvals of 28.3mn sqft – lends visibility to FY15-17E pre sales

guidance of ~12mn sqft

KPDL expects to receive 28.3 mn sqft of new approvals over FY15E. Strong

approvals pipeline lends visibility to KPDL FY15-17E pre-sales guidance of

12mn sqft at an average realization of Rs6,000/sqft. The icing on the cake is

that the launches are from existing paid land inventory and KPDL doesn’t

look to acquire any new land parcels during FY15E.

New Townships, Mumbai foray - may add upto Rs79/share optional value

We expect new Township & Mumbai foray to add about Rs79/share optional

upside to our NAV estimate. The Sanjivani Township project with ~15mn

sqft saleable area has been certified as ‘Green building’ and is currently being

evaluated for EC (can add about Rs21/share to SOTP). Increase in township

FSI may add Rs44/share and Mumbai foray may add Rs15/share to SOTP.

Maintain BUY: NAV increased to Rs186/share

We maintain our BUY stance on KPDL with increased SOTP-based target

price of Rs186/share. We have recalibrated our base price estimates 3-5% and

reduced WACC from 20% to 18% post the CRISIL A+ rating. Our valuation is

based on 0.9x our end-FY15E NAV forecast. At CMP the KPDL trades at

5.7xFY16E EPS and offers ~3.5% dividend yield.

Key Financials (Consolidated)

Y/E Mar (Rs mn) FY12 FY13 FY14 FY15E FY16E

Operating income 2,492 7,275 7,642 8,548 10,219

EBITDA 677 1,921 2,208 2,811 3,642

Net profit (post minority) 341 1,074 920 1,307 1,635

EPS (Rs) 4.5 14.2 12.1 17.2 21.6

RoE (%) 4.8 14.9 12.2 15.4 16.9

P/E (x) 16.7 5.3 10.1 7.1 5.7

Source: Company, Karvy Institutional Research

2

May 22, 2014


Quarterly results KPDL 4QFY14 Consolidated Net revenue, EBIDTA & PAT grew (18.5%),

(40.7%) & (71.1%) YoY respectively, below our estimates by (9.7%), (28.3%) &

(39.2%). Net revenue de-grew 18.5% YoY and 9% QoQ. Decline in revenue was

on account of delayed construction in the Downtown project which recorded

Rs170mn in sales, a Rs240mn shortfall vs 3QFY14 (and this accounted for the

variation from our numbers). The main reason attributable was delayed

approvals for the tree cutting at the site.

EBIDTA de-grew 40.7% YoY higher than revenue de-growth. This was on

account of 129.9% YoY growth in the selling expenses. KPDL carried out 3-4

page advertisement in the Times of India and other leading news paper on

delivering 10mn sqft area, besides putting up hoarding in Mumbai, other cities

in Maharastra and Bangalore for Projects.

PBT de-grew 58.7% YoY, higher than EBIDTA de-growth as Interest expense

grew 56.5% YoY. KPDL expects to bring down interest costs as the Company

has been assigned CRISIL A+/Stable rating’. The interest cost may reduce from

15% to 12%.

KPDL reported net profit of Rs130mn vs our expectation of Rs214mn a de-

growth of 71% and higher de-growth vs PBT. Tax rate for the quarter was 51%

owing to losses in a subsidiary.

Exhibit 1: Consolidated - 4QFY14 quarterly performance

Rs mn 4QFY13 3QFY14 4QFY14 Growth %

YoY

Growth %

QoQ FY13 FY14 YoY %

Net Sales 2,099 1,881 1,711 (18.5) (9.0) 7,275 7,642 5.0

Expenditure 1,431 1,309 1,315 (8.1) 0.4 5,354 5,434 1.5

Cost of material consumed 1,179 1,104 1,050 (11.0) (4.9) 4,600 4,617 0.4

Administration & general expenses 90 79 61 (32.2) (22.7) 242 264 9.2

Employee cost 109 85 83 (24.0) (2.5) 279 292 4.8

Selling expenses 53 41 121 129.9 195.0 202 260 28.7

Public issue & Miscellaneous exp. - - -

31 -

Operating Profit 668 573 397 (40.7) (30.7) 1,921 2,208 15.0

(% of operating profit) 31.8 30.4 23.2 (865.8) (725.8) 26.4 28.9 249.5bps

Depreciation 26 13 20

59 71 20.7

Other Income 176.0 19.2 48.9

365 152 (58.5)

EBIT 819 579 425 (48.1) (26.6) 2,227 2,289 2.8

Interest 76 120 119 56.5 (1.2) 363 457 25.7

Profit before Tax 743 459 306 (58.7) (33.2) 1,864 1,832 (1.7)

Tax 238 158 155 (34.6) (1.7) 625 663 6.2

Profit after Tax 505 301 151 (70.1) (49.8) 1,239 1,169 (5.6)

Net Profit 505.4 300.8 151.1 (70.1) (49.8) 1,239 1,169 (5.6)

Minority Interest 54.8 96.8 21.0 (61.7) (78.3) 165 249 51.0

Net Profit after minority 450.6 204.0 130.2 (71.1) (36.2) 1,074 920 (14.3)

EPS (Rs/share) 5.9 2.7 1.7 (71.1) (36.2) 14.2 12.1 (14.3)


3

May 22, 2014


Sales volume steady – in absence of major approvals

For the 4QFY14 KPDL recorded new sales of 0.79mn sqft and Rs4,245mn in value.

The average realization decreased by 4.0% YoY to Rs5,374/sqft. The decrease in

realization is largely on account of 0.1mn sqft sales in Kondhwa project at

Rs4,800/sqft and Bangalore project sales of 0.08mn sqft at Rs4,700/sqft. Both these

projects are in the affordable segment. During FY14, KPDL achieved 2.13mnsqft in

new sales and Rs11,501mn in new sales value. Average FY14 realization stood at

Rs5,400/sqft which is a growth of 14.7% YoY. KPDL has given robust 12mn sqft

cumulative pre-sales guidance for FY15-17E with an average realization of

Rs6,000/sqft, translating into a sales value of Rs72bn.

Exhibit 2: Sales volume and realization trend

Y/E Mar 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 FY13 FY14 % change

Sales booked (mn sqft) 0.8 0.8 0.50 0.5 0.45 0.45 0.44 0.79 2.7 2.1 (19.6)

Value of pre-sales (Rsmn) 3,800 3,380 2,500 2,800 2,152 2,582 2,521 4,245 12,480 11,501 (7.8)

Average Realization/sqft 4,634 4,072 5,000 5,600 4,783 5,737 5,730 5,374 4,709 5,399 14.7


Marginal debt uptick – net D/E at 0.2x During 4QFY14, KPDL Gross debt increased by Rs981mn to Rs3,370mn (vs

Rs2,390mn during 2QFY14). Adjusting for the ASK PE investment in the Kondhwa

project as NCD (equity structure) amounting to Rs820mn & Tuscan CCD’s of

Rs340mn the Net debt stands at Rs1,360mn. Net D/E stacks up at 0.2x.

Exhibit 3: Net D/E – lowest amongst peer

Rs mn 3QFY14 4QFY14 Chg QoQ Comments

Gross Debt 2,390 3370 981 Debt increase largely on account of Rs820mn NCD for Kondhwa Project

Structure NCD's (340) (1,160) (820) Deducting NCD & CCD as they are Equity structured as debt by KPDL and JVs

Cash 415 700 285

Current investments 364 150 (214)

Net debt 1,271 1,360 89 Marginal increase in consolidated debt

Net Worth 7,872 8,060 188

Net Debt/equity (x) 0.16 0.17

Net D/E marginal increase


Revenue largely driven by JV projects The key contributor to the revenue underperformance is Downtown as KPDL got

delayed approval for tree cutting and hence construction delays.

Exhibit 4: Project wise revenue contribution (Rs mn)

Project 1QFY14 2QFY14 3QFY14 4QFY14

Life Republic - Phase I 490 630 470 460

Corolla - Phase I 220 190 100 110

Tuscan - Phase I & II 150 110 190 160

Margosa Heights I & II 270 230 180 130

Downtown - Phase I 380 100 410 170

Glitterati 24K 130 110 160 120

City Bay 30 70 20 70

Green Olive Venture 20 20 20 60

Others 480 430 330 440

Total 2,170 1,890 1,880 1,710


4

May 22, 2014


Change in estimates

We have recalibrated our FY15E and FY16E estimates largely to reflect upon (i)

marginal recalibration of the project pricing upwards - 3-5% (ii) higher Sales

&Marketing cost as KPDL plans new launches for FY15E & (iii) lower other

income as current investment has been monetized towards land acquisitions. We

have marginally changed our FY15E and FY16E EPS by 0.9% and 0.4%

respectively.

Exhibit 5: Change in Estimates

Y/E March (Rs mn) FY15E FY16E

Old New Change % Old New Change % Comments

Operating income 8,003 8,548 7 9,835 10,219 3.9 Increase in base price assumption leads to

marginal revenue estimates upgrade

% growth - 12

23 20

Operating expenditure 4,458 4,648 4 5,297 5,179 -2.2

We have increase our S&M costs by

Rs180mn owing to new launches though

the impact is muted by high realization

EBITDA 2,676 2,811 5 3,504 3,642 3.9

EBIDTA change lower than revenue

change on account of disproportionate

revenue & cost recalibration

EBIDTA Margin (%) 33.4 32.9 -54.4bps 35.6 35.6 0.9bps

We build EBIDTA margins contraction

during FY15E, marginal expansion in

FY15E

Depreciation 75 75 - 82 82 -

EBIT 2,601 2,736 5 3,422 3,560 4.0

Interest expenditure 439 439 - 431 431 -

Other income 170.3 91.0 -47 187.3 100.1 -46.6

Lowering our estimate for other income

as KPDL has been utilizing surplus for

Land acquisition, also current investment

has come down during

PBT 2,332 2,389 2.4 3,178 3,229 1.6

Tax 765 788 3.0 1,043 1,065 2.2

Adjusted PAT before minority 1,567 1,601 2.1 2,135 2,163 1.3

PAT Margin before minority (%) 19.6 18.7 -85.9bps 21.7 21.2 -54.3bps

Minority interest 271.7 293.8 8 506.4 527.9 4

Adjusted PAT 1,295 1,307 0.9 1,628.9 1,635.3 0.4

Lower other income and higher taxes

mutes the EBIDTA improvement at Net

profit level

PAT Margin (%) 16.2 15.3 -90.1 16.6 16.0 -56.0


5

May 22, 2014


Investment Rationale

Approvals no more a limiting factor – about ~28.3mn new

projects expected by FY15E

Projects in advance stages of Environment clearances

In our earlier visit note dated 10th Jan 2014, ‘Right time, ride Time?’ we had

highlighted our concerns on slow progress on Environmental approvals for

Maharashtra real estate projects. The two state committees State Expert Appraisal

Committee (SEAC) & State Environment Impact Assessment Authority (SEIAA,

that gives final Environmental Clearance to projects recommended by SEAC) were

dissolved in July-13 as some of the members had resigned. The new committees

have started appraising the projects end Nov-13. This has resulted in significant

movement on approvals with KPDL receiving new projects approvals worth

~2.6mn sqft (during 4QFY14) and another ~25.7mn sqft (expected by FY15E of

which ~11.2mn sqft expected by 1HFY15E) worth projects are in final stages of

approval.

Exhibit 6: Final SEIAA approvals received

Project Location Area mn sqft Stake % Launches

Jazz Aundh Annexe 0.7 100 1HFY15E

Giga Viman Nagar 0.4 100 1HFY15E

Bavdhan Bavdhan 0.5 62 1HFY15E

Kondhwa Kondhwa 0.7 30% cashflow share 1QFY15E

Hills & Dales – Phase III Kondhwa 0.3 75 1HFY15E

Total 2.6


Kondhwa deal may add about – Rs7.5/share to the NAV/share

KPDL has announced ~2mn sqft of Kondhwa project financial closure with private

equity fund Ask Investment encompassing an area of ~35acres for a total

consideration of Rs2.2bn. The deal is part cash (Rs1,600mn) and part area share

(worth Rs600mn) to the owner. KPDL shall be investing Rs480mn whilst ASK will

invest Rs1,120mn and Rs600mn (~0.58mn sqft) will be given go to the land owner

as area share. The project will have a total saleabe area of ~2mn sqft of which land

owner share will be ~0.58mn sqft whilst KPDL share will be ~1.42mn sqft. Land

owner has option to give his share to KPDL for construction and marketing, at 5%

PMC charge. Capital structure is through NCD and ASK will receive proceeds as

interest, based on 70% profit share till hurdle rate of 19% (post tax). KPDL shall

receive 30% profits (post tax) as interest. Incremental IRR beyond ~19% will have a

30:70 sharing. The project is located in close proximity to key business, education

and religious centres with excellent connectivity through (Mumbai- Bangalore

Highway) NH4 and (Pune-Solapur Highway) NH9. In the Phase I, KPDL has

received Environmental Clearance for ~0.7mn sqft and balance 0.7mn sqft is

expected by 2QFY15E. The project has been soft launched in Mar-14 and KPDL has

already sold ~0.1mn sqft area, launch price was Rs4,300/sqft which is now

Rs4,800/sqft. The prevailing prices in the location range from Rs4,500-5,500/sqft.

The deal is plain vanilla with capital structure as NCD to avail tax benefit. There is

no guaranteed IRRs or exit to be provided by KPDL to ASK private equity fund.

6

May 22, 2014


SEAC/SEIAA – approvals worth ~25.7mn sqft pending with

1HFY15E visibility of which ~11.2mn sqft may come by 1HFY15E

In Exhibit 6 we highlight projects currently under the SEAC/SEIAA appraisal.

Sanjivani Integrated Township: The significant achievement during Mar-14 was

SEAC recommending the project to SEIAA for final EC approval. This shall make

available for development about ~14.5mn sqft of saleable area. The project is

pending locational clearance from Maharastra Urban Development Ministry and

hence this will be a major impediment for final EC approval. We expect the

‘locational clearance’ to come by 1HFY15E lending visibility to a 4QFY15E end

launch. Sanjivani township can add Rs21/share to our NAV estimate with a

further option upside of Rs15/share in case township FSI increase from 0.5x to 1x

(currently in final stages of approval). We have not yet included project in NAV.

Wakad Project update: The project approval is still pending with SEAC. The

committee has sought site inspection as one old structure is present on the land.

Management highlighted that the site inspection is already over now and final EC

may be expected by 1QFY15E. Wakad project contributes about Rs13.3/share to

our NAV estimate and is completely owned by KPDL.

Corolla Project update: Is in the final stages of EC approval (~2.7mn sqft), SEAC

meeting on 27th March 2014 has listed the project for discussion and final approval

is expected by 1QFY15E. KPDL holds about 37% stake in the project. Corolla

project contributes about Rs10.5/share to our NAV estimate.

Life Republic Township update: The phase two of the township with a saleable

area of ~5.8mn sqft has been referred for EC revalidation. The process is routine as

EC approval is usually valid for 5yrs. A similar revalidation was done for the

Kondhwa project. The Life Republic project received locational clearance in Mar-14

and expected Phase-II launch is schedule in 2HFY15E. Life Republic project

contributes about Rs37.2/share to our NAV estimate.

We expect about ~25.7mn sqft of approvals to come in 9MFY15E. KPDL has been

awaiting new approval since past 6-9M and these projects are in the final appraisal

leg as KPDL has already made representation to SEAC/SEIAA on these projects in

earlier meetings. The significant milestone shall be achieving new approvals of

~11.2mnsqft by 1HFY15E.

Exhibit 7: Projects appraisal being done by SEAC

Project Location Approval status Comment Kolte Share % Expected EC

Sanjivani Integrated Township Urse

SEAC approved and

reffered to SEIAA in

Mar-14

14.5 50% profit share 3QFY15E

Wakad Wakad

Still with SEAC, final

approval by

1QFY15E

2.0 100 1QFY15E

Kondhwa Kondhwa Change of use 0.7 30% cash flow share 2QFY15E

Corolla Wagholi Final EC expected by

1QFY15E 2.7 37% Associate 1QFY15E

Life Republic – Phase 2 Hinjewadi EC revalidation

pending with SEAC 5.8 45 2QFY15E

Total 25.7


7

May 22, 2014


New Townships, Mumbai foray - may add upto

Rs79/share optional value

Townships locational clearance – key to long term growth

KPDL has about ~14.5 mn sqft of gross saleable area currently under locational

clearance and final approval is expected by 3QFY15E. Besides Maharastra

Government has in principal approved the increase in FSI for ‘Special Townships’

and final ‘Government Gazette’ is awaited. In case of increase in the FSI from 0.5x

to 1x the likely saleable area will double from ~14.5mn sqft to ~29mn sqft.

Exhibit 8: Location clearance timelines

Location clearance Saleable Area (mn sqft) Kolte Share % EC status Expected Clearance

Sanjivani Integrated Township 14.5 50% profit share Initiated 3QFY15E

Total 14.5


Optional upside from Townships can add – Rs64/share to KPDL

We have not considered the FSI increase in Life Republic in our valuation

estimates as we await final ‘Government Note’ on the same. With regards to

Sanjivani Integrated township we await Environment clearance before

incorporating the same into our model. The FSI increase in Life Republic can add

upto Rs29/share to our valuation estimate whilst Sanjivani Township can add

about Rs21/share with 0.5x FSI and Rs36/share at 1x FSI.

Exhibit 9: Optional upside can add a further Rs64/share to our SOTP Value (Rs160/share)

Name Location Sale area

(sq ft)

Total GNAV

(Rs mn)

KPDL

shares (%)

KDPL GNAV

(Rs mn)

KDPL Saleable

area (sqft)

GNAV/

Share (Rs)

Life Republic - Increase FSI Hinjewadi 8.9 4,924 45 2,216 4 29

Sanjivani Township Urse 13 3,107 50 1,553 6.5 21

Sanjivani Township -

Increase FSI Urse 10.4 2,237 50 1,118 5.2 15

Total

32.3 10,267

4,887 16 64


Mumbai yet to play out – may add about Rs15/share

KPDL forayed into Mumbai real estate market with its first redevelopment project

win at Khar (West), Linking Road (Aug-13). The project has a total developable

area of 0.1mn sqft and KPDL has guided for ~Rs300-350mn profits from the

project. Besides this project KPDL has won two more redevelopment projects in

Mumbai with saleable area of ~0.35mn sqft. Considering average pricing of

~Rs13,500/sqft, on quick maths the Mumbai can contribute about ~Rs15/share to

NAV estimates. We await more clarity before ascribing any value. We expect ~20%

profit contribution from Mumbai from FY16E.

8

May 22, 2014


Strengthening management bandwidth, improving

transparency

High growth to be accessed with – management bandwidth,

transparency & brand building

KPDL has embarked upon a journey of being a ~10% market share in Pune market

with incremental growth coming in from Bangalore & Pune. Whilst the growth has

to be measured up with the increase in management bandwidth, KPDL first time

in its history has recruited experienced & fresh talents from Grade A, Management

schools. Besides KPDL is building up a Strategy team – (i) which will look into

global brands tie up for luxury projects (ii) identifying new upcoming strategic

locations to invest in & (iii) brand building. Operations teams has been

strengthened to focus on (i) cost saving – KPDL has partnered with IBM to

improve EBIDTA margins from FY16E onwards through automated processes,

compensation to IBM will be directly linked to savings from these initiatives (ii)

building technology – extensive use of MIVAN Aluform which helps in (a) lesser

reliability on labour (b) more seismic resistance (c) higher carpet area & (d) faster

completion. With a focus on consistence transparency KPDL during 1HFY14 has

changed its Auditor to Deloitte Haskins & Sells, whilst initiatives on rewarding

shareholders, has resulted in a 15-25% profit being paid out as dividend.

Strong execution and contractual compliance – has been a key brand pull

In our channel checks with leading real estate funds, we found that KPDL enjoys

high comfort with the leading Principals at these funds. Some of the key attributes

being highlighted include (i) high contractual compliance (ii) strong business

engagement values (iii) commitment to execution & (iv) presence in highly end

user driven and affordable Pune markets. With most of the key projects being

positioned in key IT corridors of Kharadi (East Pune) and Hinjewadi (West Pune),

KPDL seems to be in a sweet spot. Both these locations have become a Rs5,000-

6,000/sqft capital value markets with stable demand which is largely IT driven.

Low debt + high dividend payout

KPDL has a very conservative approach on availing debt for funding growth. Our

interaction with the Promoters suggests a clear strategy of dissociating growth and

means of financing, with loan funds for expansion being the last option. Whilst

real estate investors are wary of increasing debt levels in the portfolio companies,

KPDL is one amongst few which has judiciously stayed away from the ‘greed

mirage’ of acquiring land parcels and utilizing projects cashflows to keep

servicing banks/financial institution. To show solidarity with its own philosophy,

KPDL has stated policy of distributing 15-25% of annual profits as dividend and

utilize balance cash for land acquisition purpose. The preferred mode for land

acquisition would be JDA, JVs, Private Equity and lastly loan funds. Current Net

Debt/Equity stands at 0.17x) and KPDL Board has sanctioned 0.2-0.5x – though

the approach remains conservative owing to strong cash-flow visibility.

Exhibit 10: Low net D/E + high dividend payout

FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Net D/E (%) 21.4 8.9 19.1 19.2 25.2 8.7 24.6 14.8 (0.0)

Dividend Rs/share 1.7 1 1 1.6 1.6 3.5 3.5 3.5 4.3

Source: Karvy Institutional Research

9

May 22, 2014


Key assumptions and estimates

Exhibit 11: Summary of key assumptions and estimates

Estimates Growth (%) Comments

FY14 FY15E FY16E FY14 FY15E FY16E

Volume assumptions

Residential (mn sqft) 2.1 2.5 3.5 (19.6) 18.3 39.8

Sales de-growth in FY14 due to slower pace of

approvals and limited in hand inventory. Pick up

during FY15-16E as we expect final approvals worth

~28.7mn sqft to come in during FY15-16E. KPDL has

guided for 2.5-3mn sqft of pre-sales for FY15E and

cumulative 12mn sqft of pre-sales for FY15-17E.

FY16E – 4-4.5mns sqft & FY17E – 4.5-5mn sqft

Residential (Rs/sqft) 5,399 5,500 5,620 14.7 1.9 2.2

Marginal increase in Realization in line with WPI

inflation or lower. KPDL expect average realization of

Rs6,000/sqft during FY15-17E

Total Pre - Sales 11,501 13,859 19,800 (7.8) 20.5 42.9

Sharp uptick in new sales during FY15-16E, owing to

stronger pre-sales. KPDL has guided for Rs72bn pre-

sales over FY15-17E.

Earnings forecast

Sales (Rs mn) 7,642 8,548 10,219 5.0 11.9 19.6 Growth uptick on strong pre-sales

EBIDTA (Rs mn) 2,208 2,811 3,642 15.0 27.3 29.6

EBIDTA Margin (%) 28.9 32.9 35.6 250bps 399bps 275bps Margin increase on account of better realization &

higher share from commercial property sales

PAT (Rs mn) 920 1,307 1,635 (14.3) 42.0 25.1

PAT Margin (%) 12.0 15.3 16.0 (272bps) 324bps 72bps Increase in PAT margins in line with overall estimates

EPS (Rs) 12.1 17.2 21.6 (14.3) 42.0 25.1

Cash flows forecast

CFO - a (875) 1,343 2,344

Strong operating cash flows during FY15-16E

CFI - b 114 (11) (12)

FCF - a+b (761) 1,332 2,332

Free cash-flow positive

CFF-c 722 (700) (2,058)

Reduction in debt in FY16E on account of strong

FCF

Total change in cash -

a+b+c (39) 632 274


10

May 22, 2014


Valuation – increase NAV based target of Rs186/share

Target Price of Rs186 implies 51% upside

We have valued KPDL using DCF and arrive at a target price of

Rs186/share (previous target price of Rs160/share). We have reduced our

WACC from 20% to 18% on account of CRISIL A+ rating and also increased

base sale price assumption by 3-5% across project. Our valuation is based

on 0.9x our end-FY15E NAV forecast.

Exhibit 12: NAV Calculation – Increase to Rs186/share

Rs mn Old New comments

Gross NAV 14,662 16,556

We have taken 3-5% Price hike across projects in Pune in

line with KPDL current rate. Value KPDL at 18% WACC

(previous 20%).

Less Net debt 1,571 1,330 Net Debt as on end FY15E

Current Investments 394 394 end FY15E - liquid funds

NAV 13,485 15,619

Shares outstanding (mn) 76 76 As of Mar-14

NAV/share 178 206

Discount to NAV 10% 10%

Target Price 160 186


Future development Land bank – not considered in valuation

Besides the 26.7mn sqft of land under execution and approval stage, KPDL

has potential future land bank with a saleable area of 30.7mn sqft. In our

valuation estimates we have not considered the future land parcels as there

is limited visibility on the launch front and there is no major upfront

investment, with most of these engagements through a JV or JDA.

Exhibit 13: Future development potential not considered in valuation

Particulars and

Location of

Land

Total Project

Area (In

Acres)

Saleable

Area (sq.ft)

Title/MOU/DAPA

/Saledeed/JV

Share of

KPDL

KPDL's

Share of Area

(in Acres)*

Status

Urse Township 475.00 15,000,000 DAPA 50% 237.5

Near to Lodha Township Contour 9, Urse

Township is in the BS. It’s a 50:50 Profit

sharing (launch target by mid-FY16E end)

with Sanjivani Remidies a Pune Pharma firm

Ghotawade 70.17 3,228,529 JV 50% 35.1

This is a JV with Petroleum Company -

Vibhu. Earlier the KPDL had plans to make a

SEZ now they would be looking to want to

do residential project (will target by end

FY15E)

Jambhe

Township 383.00 8,341,740 JV 50% 118.5

JV with ICICI, 45% equity stake, we expect

the FSI increase from 0.5x to 1x may result in

the incremental addition of 10.3mn sqft

Sadapur

(Lonavala) 101.00 4,000,000 MOU 33.33% 33.6

Rs160mn is the total deposit to be paid of

which paid Rs50mn. KPDL will have 34%

profit share in the township. This project is

with Kothari Products Limited

Lohgad

(Lonavala) 90.00 200,000 MOU 33.33% 30.0

Total 1,119.3 30,770,269 528


11

May 22, 2014


Key valuation assumptions

In exhibit 14 we highlight our sales and cost inflation forecasts. We expect

property price appreciation in line with WPI inflation i.e. 6% and cost inflation of

slightly higher at 6%. We forecast other costs including marketing, SGA and

employees’ costs at 14% of sales. We have discounted the cash flows using 18% as

hurdle rate.

Exhibit 14: Base case assumptions

Assumptions %

Discount rate 18

Annual rate of inflation - sales price 5

Annual rate of inflation - cost of construction 7

Other costs - marketing, SGA, employee cost (as % sales) 12

Tax rate 33


In the exhibit 14 we highlight our sale price and construction cost forecasts. Our

pricing assumptions are moderate and at a 10-20% discount to the current

prevailing prices. We have marginally increased our base price by 3-5%.

Exhibit 15: Base property price and construction cost assumptions

Location City Saleable area

mn sqft

Prices

Rs/sqft

Cost

Rs/sqft

Wagholi Pune 4.4 3,750 2,000

Hinjewadi Pune 10.0 4,700 2,200

Kharadi Pune 2.9 5,350 2,400

Undri-NIBM Pune 0.5 5,050 2,400

Mohamad Wadi Pune 1.0 4,150 2,100

Aundh Annexe Pune 1.3 5,600 2,600

Boat Club Road Pune 0.1 9,000 3,200

Viman Nagar Pune 0.6 8,500 3,500

Aundh Pune 1.0 6,500 2,600

Kalyani Nagar Pune 0.6 7,500 2,600

Bavdhan Pune 1.1 4,600 2,100

Atria Pune 0.2 7,500 3,200

Wakad Pune 2.0 5,400 2,400

Koramangla Block III Bangalore 0.2 7,000 2,100

Hosur Road Bangalore 0.6 6,100 2,300

Kannur Road Bangalore 0.2 3,500 1,800

Total

26.7


12

May 22, 2014


Key Catalysts

Success of new launches

KPDL has planned ~7-8mn sq ft of new launches over FY15E with 80% of the

launches in Pune. Bulk of these project will be in final stage of Environment

clearance. With in hand inventory of ~3.5mn sqft (recent approvals) we forecast the

FY15E new sales to come largely from the new launches at higher realization. With

revenue mix changing to newer projects, EBIDTA margins expansion may result in

operating leverage playing out. We built up gradual pre-sales recovery for FY15E

& FY16E with pre-sales number ~2.5mn sq ft & ~3.5mn sqft respectively.

Locational clearance of Life Republic – Phase II received, Sanjivani

township location clearance awaited – may happen by 3QFY15E

KPDL has received ‘locational clearance’ for the Phase II of the ‘Life Republic’

township encompassing an area of 200acres in Mar-14. Assuming an FSI of 0.5x

and 25% loading this shall result in a total saleable area of ~5.8mn sqft. Currently

the Phase 1 – comprising 147acres has been launched, with residual inventory of

0.2mn sqft. Besides Life Republic, KPDL has Sanjivani Township at Urse which is a

50:50 profit share JDA with Sanjivani Pharma. The locational clearance is expected

by 3QFY15E and SEAC has recommended the project to SEIAA for final

Environment Clearance. KPDL has received ‘Green Project’ certification for

Sanjivani Township and this shall act as a catalyst for speedier Environment

Clearance. Sanjivani Township can add about Rs21/share to our SOTP valuation

on 0.5x FSI. With a Maharashtra Government proposal of increasing special townships

FSI to 1x, Sanjivani Township & Life Republic incremental FSI can add about Rs43/share.

Foray in the Mumbai market through less capital intensive

redevelopment Model – may add Rs15/share to our NAV estimate

KPDL has forayed into the Mumbai market with the first redevelopment project

on KHAR linking road which has a development potential of 0.1mn sqft. KPDL

will place the existing occupants in lieu of that the Company will get to sell the

free commercial/residential area. KPDL expects to realize about ~Rs300mn net

profits from the development proceeds. Besides this KPDL has announced two

more redevelopment projects in Mumbai with a total saleable area of ~0.35mn .

Management indicated that Mumbai foray is an extension of presence in Pune

markets & strong brand equity besides in Pune they already have a ~10% market

share which they look to maintain. We believe that this is more of growth chasing

move as there is a 3x difference in average realization and KPDL wants to

cautiously establish its footprints here. We expect Mumbai to add further upside of

about Rs15/share to our NAV estimate of Rs160/share with existing pipeline.

13

May 22, 2014


Key Risks to our BUY stance

Exit by PE partner could result in increase in debt levels

KDPL has maintained that it is not liable to provide exit to its PE partners in the

JVs but it did buy Arora Int. UK's (its JV partner in 2 projects, one each in Pune

and Bangalore) stake. While the deal was done at valuations attractive for KDPL,

any future stake purchase would result in an increase in debt, something that

markets may not look upon favourably.

Oversupply situation in the Pune market may lead to a price correction

Pune is a crowded Township market with multiple developers vying for market

share. Whilst the end user prices still remain affordable at Rs3,500-5,500/sqft any

volume oversupply situation may result in 10-15% price correction. For every 1%

correction in base residential prices our NAV estimate for KPDL will be negatively

impacted by 3%.

Delays in new project approvals

Whilst we have sufficient visibility on the FY14E financial estimates, we are

cautious on the launch approvals for FY15E as any delays may results in

decelerating revenue estimates/profitability for FY15-16E. There has been a 6-

9Months approvals delays in some of the projects owing to (i) Maharastra State

Environment Committee was dissolved in July-13 and took 5months to get

reconstituted. This led to a 6 months delay in ~4mn sqft of new approvals for

KPDL.

High mortgage rates/slowdown in IT/ITES sector

Pune is typically an end user market with investors comprising about 25-30% of

overall sales volumes. An end user market which is 60-65% driven by IT/ITES

sector is highly sensitive to direction of IT/ITES job scenario & mortgage rates. A

negative direction could adversely impact the real estate sales.

14

May 22, 2014


Consolidated Financials

Exhibit 16: Profit & Loss Statement

Y/E Mar (Rs mn) FY12 FY13 FY14 FY15E FY16E

Operating income 2,492 7,275 7,642 8,548 10,219

% growth 23% 192% 5% 12% 20%

Operating expenditure 1,815 5,354 5,434 5,737 6,577

EBITDA 677 1,921 2,208 2,811 3,642

% growth -20% 184% 15% 27% 30%

Depreciation 21 59 71 75 82

EBIT 656 1,862 2,137 2,736 3,560

Interest expenditure 263 363 457 439 431

Non-operational income / Exceptional 105 365 152 91 100

PBT 498 1,864 1,832 2,389 3,229

Tax 140 625 663 788 1,065

PAT / Net profit - reported 358 1,239 1,169 1,601 2,163

Minority 17 165 249 294 528

Adjusted PAT / Net profit 341 1,074 920 1,307 1,635

% growth -29% 215% -14% 42% 25%


Exhibit 17: Balance Sheet

Y/E Mar (Rs mn) FY12 FY13 FY14E FY15E FY16E

Cash & equivalents 464 1,122 1,083 1,715 1,989

Debtors 443 762 1,253 1,795 2,759

Inventory 9,892 9,826 10,241 10,617 12,196

Loans & advances 2,429 2,553 3,772 4,526 5,567

Miscellaneous 357 375 499 512 512

Total Current Assets 13,585 14,637 16,848 19,165 23,023

Current liabilities & provisions 3,934 5,502 5,332 6,336 9,688

Net current Assets 9,651 9,136 11,517 12,829 13,335

Investments 725 394 394 394 394

Gross Block 625 927 1,019 1,121 1,233

CWIP - 12 55 - -

Net Block 559 851 818 845 875

Miscellaneous 41 27 27 27 27

Total assets 10,977 10,408 12,756 14,095 14,631

Debt 2,282 1,745 3,045 3,045 1,745

Minority Interest 1,484 1,490 1,738 2,032 2,560

Total liabilities 3,766 3,235 4,784 5,078 4,306

Shareholders' equity 758 758 758 758 758

Reserves & surpluses 6,453 6,415 7,214 8,259 9,568

Total networth 7,211 7,172 7,972 9,017 10,325

Total liabilities & equity 10,977 10,408 12,756 14,095 14,631

Net debt (cash) 1,818 624 1,963 1,330 (243)


15

May 22, 2014


Exhibit 18: Cash Flow Statement

Y/E Mar (Rs mn) FY12 FY13 FY14E FY15E FY16E

PBT 341 1,864 1,832 2,389 3,229

Depreciation 21 59 71 75 82

Interest 263 363 457 439 431

Tax (285) (235) (663) (788) (1,065)

(Incr) / decr in net working capital (140) 260 (2,420) (680) (233)

Others (46) (229) (152) (91) (100)

Cash flow from operating activities 154 2,082 (875) 1,343 2,344

(Incr) / decr in capital expenditure (125) (345) (38) (102) (112)

(Incr) / decr in investments 59 (378) - - -

Others 93 265 152 91 100

Cash flow from investing activities 27 (458) 114 (11) (12)

Incr / (decr) in borrowings 263 (350) 1,300 - (1,300)

Issuance of equity - - - - -

Dividend paid (130) (253) (121) (261) (327)

Others (263) (363) (457) (439) (431)

Cash flow from financing activities (130) (967) 722 (700) (2,058)

Net change in cash 52 657 (39) 632 274

Closing cash balance 464 1,121 1,083 1,715 1,989


Exhibit 19: Key Ratios

Y/E March FY12 FY13 FY14E FY15E FY16E

EBITDA margin % 27.2 26.4 28.9 32.9 35.6

EBIT margin % 26.3 25.6 28.0 32.0 34.8

Net profit margin % 13.7 14.8 12.0 15.3 16.0

Dividend payout ratio (x) 0.4 0.1 0.1 0.2 0.2

Net debt: equity (x) 0.3 0.1 0.246 0.148 (0.024)

Working capital turnover (x) 0.2 0.7 0.6 0.6 0.7

Gross block turnover (x) 4.0 7.9 7.5 7.6 8.3

RoCE % 5.2 13.8 12.6 14.1 17.1

RoE % 4.8 14.9 12.2 15.4 16.9


Exhibit 20: Valuation Parameters

FY12 FY13 FY14E FY15E FY16E

EPS (Rs) 4.5 14.2 12.1 17.2 21.6

Diluted EPS (Rs) 4.5 14.2 12.1 17.2 21.6

Book value per share (Rs) 95.2 94.7 105.2 119.0 136.3

P/E (x) 27.3 8.7 10.1 7.1 5.7

P/BV (x) 1.3 1.3 1.2 1.0 0.9

EV/EBITDA (x) 16.4 5.2 5.1 3.8 2.5

EV/Sales (x) 4.5 1.4 1.5 1.2 0.9


Institutional Equities Team Rahul Sharma

Head – Institutional Equities /

Research / Pharma +91-22 61844310 [email protected]

Gurdarshan Singh Kharbanda Head - Sales-Trading +91-22 61844368/69 [email protected]

INSTITUTIONAL RESEARCH

Analysts Industry / Sector Desk Phone Email ID

Hatim Broachwala, CFA Banking +91-22 61844329 [email protected]

Maruti Kadam Research Associate +91-22 61844322 [email protected]

Mitul Shah Automobiles/Auto Ancillary +91-22 61844312 [email protected]

Parikshit Kandpal Infra / Real Estate / Strategy/Consumer +91-22 61844311 [email protected]

Rahul Singh Textile/MidCap +91-40-44857911 [email protected]

Rajesh Kumar Ravi Cement/ Logistics/ Paints +91-22 61844313 [email protected]

Rupesh Sankhe Power/Capital Goods +91-22 61844315 [email protected]

Varun Chakri Textile +91 22 61844326 [email protected]

Vinesh Vala Research Associate +91 22 61844325 [email protected]

INSTITUTIONAL SALES

Celine Dsouza Sales +91 22 61844341 [email protected]

Edelbert Dcosta Sales +91 22 61844344 [email protected]

INSTITUTIONAL SALES TRADING & DEALING

Bhavesh Gandhi Institutional Sales/Trading/ Dealing +91-22 61844361 [email protected]

Prashant Oza Institutional Sales/Trading/ Dealing +91-22 61844370 /71 [email protected]

Pratik Sanghvi Institutional Dealing +91-22 61844366 /67 [email protected]

For further enquiries please contact:

[email protected]

Tel: +91-22-6184 4300

Disclosures Appendix

Analyst certification

The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed

herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of

his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views

contained in this research report.

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