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1
National Building Construction Corporation (NBCC)
Analyst: Rohit Natarajan +91-22-4322 1209 [email protected]
07 April, 2016
A screaming multi-bagger waiting in the wings!
2
IndexNo.
Investment Rationale 3
How did NBCC evolve? 6
What is the Business Model? 7
What is unique about NBCC? 17
Is the sovereign advantage intact? 19
Are there problems with urban planning? 20
Are there urban planning issues? 23
Is Metro Rail Phase-III Project on time? 33
Can JJ/Slum clusters be an issue? 34
What if Delhi Real Estate Price Crash? 35
Does Real Estate regulation pose any risk? 37
How will Smart City benefit NBCC? 39
What is NBCC’s scope in housing for all? 44
Can NBCC count on Railways? 50
Are there other avenues? 55
Is the latest acquisition a worrying point? 56
Are there substitutes for NBCC? 58
Is market microstructure an issue? 59
Why do we think valuation is cheap? 60
Financial Summary 62
3
Investment Rationale:
Is NBCC still a BUY? National BuildingConstruction Corporation (NBCC) — is, still, amulti-bagger. Sadly, investors continue tooverlook radical changes. Further,conventional sell-side report often notdelves deep into the critical factors. The bigpicture: based on our research, we see at-least 100% upside for this stock. And throughthis eye-opening note, we will explain youwhy.
Are there structural problems with DDAorders? No, things are changing on ground.First, Delhi Chief Minister has cleared thesticking points through Delhi Slum and JJRehabilitation and Relocation Policy, 2015 inDecember 2015. Second, addressing theDelhi High court judgment and NationalGreen Tribunal comments, NBCC is re-designing the pipeline projects.
Third, redesigning of existing projects is notas quixotic as shelved BMC Mumbairedevelopment plans that mooted higherFSI. Our point: there is a delay; not acancellation. Fourth, DDA for FY17 hasproposed 33 new land developmentschemes and 18 new housing-relateddevelopment works for FY17. Thus, the DDA,can award Netaji Nagar, Thyagaraja Nagar,Kasturba Nagar, Vasant Kunj and theremaining 24 projects. Though the timelinefor non-disclosed projects is uncertain, thepotential order inflows are in excess ofRs.750bn. Thus, even excluding Railways,housing for all, smart cities, NBCC canachieve order book target of Rs.1tn before2020. This is 25% CAGR in order inflows—something even L&T can’t dream of.
4
Investment Rationale:
What about railways? Housing for all?Smart cities? – Are they all talk and notrousers? And why should they benefitNBCC? No. There are few sticking points. Andthey are on its way to be addressed.Contention #1: Railway transit orientdevelopment is not fructifying. Answer tocontention #1: Projects in Mumbai requiresFSI — and higher powers for administrativeauthorities. Policy makers don’t have anoption to delay it. Contention #2: To availHousing for All Plan of Action subsidy,beneficiaries must first be part of themunicipal plans. Is the title of the slumdweller, anywhere in the country, clear?Answer to contention #2: Govt. is mootingGujarat/Charkop model. We haveincorporated other models mooted by NBCCand Govt.
Contention #3: We have been hearing smartcities for some time now. Where is thedevelopment? Answer to contention #3:Government incorporates the Land Valuebased taxation and higher FSI in “FinancialArchitecture for Smart Cities”. Further smartcities are happening at mission mode. Thereis an administrative difference for the workdone in central sponsored scheme andmission mode. So, two critical aspects aresolved. And NBCC is all set to reap thebenefits.
Orders are one thing; profitability is quiteanother. Is that the case?
No. And here is the reason why: First, AskShobbit Uppal, the Deputy managingdirector of Ahluwalia Contracts or MKrishnamurthi, the Chief Corporate affairs ofVascon and they will acknowledge thehardships of working with NBCC.
5
Investment Rationale:
Second, management themselves claims thatthey are working on superior business modelunmatched. And with sovereign backing, thecompetitive advantage is forever. Third,through high court judgments in litigation,we are convinced NBCC is the killer in thevalue chain.
What will, if any, be the impact ofadditional inventory offloaded by Govt.?
No, there is no impact. First, withGovernment owning 90% of the stake, andunmatched theme present before investors,market microstructure supersedesfundamentals. Now, as per Security Contract(Regulations) Rules, 1957, minimumthreshold of public holding is 25%. To complywith this rule, we speculate NBCC, withGovernment approval, will dilute its stakegoing forward.
However, using our models, the additionalquantity of inventory, market fears of fall inprices is overblown. Second, NBCC canpropose an FPO to raise seed money toinvest in redevelopment projects. But then,this money will make at least 25% projectIRR.
But everything is factored in price. Is it so?No, not at all. First, scalability of businessmodel is intact. Second, there is a visibility tothat. Third, the Return on equity is far aheadof cost of equity. Fourth, from impliedgrowth expectations, we see the potential ofNBCC to double over the next four years.Fifth, add focus on uncertain orders, the fairvalue may even triple. Sixth, across theindustrial value chain, there is hardly a stockthat can match this theme. Thus, over thenext four years, we will not be surprised ifthe stock runs ahead of Rs.2,000 a piece.
6
How did NBCC evolve?
Year Event1960 Incorporation of NBCC1970 Entered into power sector1977 Entered into overseas market
2001When company was in bad shape, Dr. Arup Roy Choudhary, after a long stint at DLF, took
over at the age of 44 as the CMD.2004 Won excellent rating from GOI.2005 Company was turned into profit making.2007 Paid maiden dividend, and started work on New Moti Bagh redevelopment2008 Schedule A PSU Status2012 Listed in BSE, NSE with issue price of Rs.106 apiece; issue size--10% stake for Rs.1.27bn2013 Dr. Mittal took over as CMD.2014 Accorded with Navaratna status.
Source: Company, IDBI Capital Research
Dr. Arup Roy Choudhary turned around NBCC; PSEB made him the
CMD of NTPC.
7
What is the Business Model?
What is Project Management Consultancy?
First, NBCC sources projects throughnomination.
Second, NBCC prepares conceptual plans ordetailed project report. NBCC engages in-house technical experts to work on preliminaryestimates. Sometimes, they do seek advicefrom third-party consultants.
Third, NBCC executes a letter of intent /agreement / MoU with client. This emphasizesthe principal terms of engagement and fees.
Fourth, with final approval from client on “Billof quantities”, NBCC divides the work inseveral packages. Then, NBCC finalizestechnical and financial criteria. And eventually,the way for L1 bidding.
Fifth, NBCC seeks clearances, Govt. licensesand approvals. Sometimes, this is doneconcurrently or before the appointment ofcontractors.
Sixth, in this phase, NBCC monitors theproject– both for technical and financialaudit. Once done, the project is awardedcompletion certificate.
Seventh, even the defect liability period of12 months is passed on to the contractors.
Source: Company, IDBI Capital Research
Unmatched business model!
8
What is the Business Model?
Work done in Project Management Consultancy:
Project DeveloperProject Amount
(Rs.bn)
Re-Development of Kidwai Nagar (East) MoUD 42.7
Development of "Lake View complex" based on T.O.D DDA 12
PMGSY Works, Odisha Orissa State Rural Road Agency 12
Construction of Medical College at Mandi (Himachal Pradesh) Employee State Inusrance Corporation 7.6
PMGSY Works, Tripura Govt. of Tripura 7.2
Implementation of JNNURM-UIG Scheme in FaridabadHaryana Urban Infrastructure Development
Board 6.9
Construction of Medical College and hospital at Patna Employee State Inusrance Corporation 6.5
Construction of Mahanadi Institute of Medical Sciences, Talcher Mahanadi Coalfields 4.9
Construction works at IIT Kanpur campus IIT Kanpur 3.5
National Institute of Food Technology Entrepreneurship & Management, Ministry of Food processing & Industries 3
Source: Company, IDBI Capital Research
9
What is the Business Model?
What is EPC work?
First, unlike PMC, NBCC sources projectsthrough competitive bidding. Interestingly,management emphasizes that they wouldlike to work in “specialized” EPC works–where scope of nomination exists.
Second, client evaluates the tenders andissues a letter of intent to NBCC, ifsuccessful.
Third, NBCC splits the work and re-tenders itto sub-contractor.
Fourth, NBCC monitors on-work jobs andfinally, with client approval, the project iscompleted. Interestingly, the managementclaims to have defect liability period of 12months in the agreement with sub-contractors.
What is Real Estate segment?
First, PMC and EPC work is asset-light. Withsurplus profit from core PMC business, NBCCdiverted the profit in acquisition of landparcels across the country.
Second, sometimes, Govt. nominates NBCCto develop a certain plot. But the format, byand large, involves the property is registeredwith NBCC.
Third, company evaluates the need ofmanpower and material. Also, gets theclearances and licenses from Govt.
Fourth, NBCC appoints contractors throughopen tenders. With drawings andspecifications, contractors commences thework—actively monitored by NBCC.
Fifth, post completion, NBCC engages inmarketing and post-maintenance work.
Source: Company, IDBI Capital Research
We are not cheering the Real Estate model!
10
What is the Business Model?
Work done in EPC:
Work plans in Real Estate:
Project DeveloperProject Amount
(Rs.bn)
BoP Bongaigaon Thermal Power Project NTPC 3,207
Township main package For Lara Super Thermal Power Project NTPC 2,393
Construction of main and station draft cooling towers Mcnally Bharat Engg. Company 1,807
Construction of twin flue RCC Chimney BHEL 349
2X250 MW Parichha Extn Unit 5 &6 Uttar Pradesh Rajya Vidyut Utpadan Nigam 332
Real Estate Projects by NBCC Project Amount (Rs.mn)
NBCC Green View, Sector 37D, Gurgaon 3,241
Group housing complex, Gandhi Path, Jaipur 2,115
Group housing project, Sector 89, Gurgaon 2,002
State of the art building complex at New town, Rajarhat, Kolkata 1,796
Group housing complex, Gandhi Path, Jaipur 1,618
Group housing complex, Ghaziabad 1,582
Group housing complex, Naya Raipur 1,500
Group housing complex, Faridabad 1,040
Commercial cum residential complex, Ghaziabad 900
Commercial complex at Lucknow (U.P.) 650
Source: Company, IDBI Capital Research
11
What is NBCC today?
NBCC
PMC
Institutional, Housing and Industrial
Water, effluent treatment, plant & solid waste management
Redevelopment work
Post completion maintenance work
Real Estate
Township and Residential apartments
Commercial
and Corporate building
E&C
Chimney & Cooling towers
Civil & Structural work for power
project
Source: Company, IDBI Capital Research
12
What is the Business Model?
Why does NBCC earn higher ROE?
First, NBCC works on miniscule working capitalcycle.
Second, incremental capital expenditure isminimal. NBCC clocks a revenue (PMC+EPC) inexcess of Rs.40bn over a gross block ofRs.415mn. Add, 5.5% EBITDA margins, an RoE inexcess of 20% is a cakewalk.
Is the higher RoE deployed back in highRoE business?
No.
We are not happy with the Real Estatemodel.
First, most of the real estate parcels areacquired in tier-II or non-metro areas.
Second, from cost of the land acquired topricing power of the end flats sold is a bigquestion mark.
Third, if this approach continues inperpetuity, this becomes a Real Estatecompany.
And for real estate themes, an investor cantake exposure to high-RoE housing financecompanies and high-RoE building materials.
(In Days) 2009 2010 2011 2012 2013 2014 2015
Sundry Debtors 139 108 66 99 94 118 133
Inventories 35 33 48 48 71 91 92
Loans and Advances 106 81 56 47 32 43 46
Creditors 335 277 267 264 274 262 256
Working Capital Cycle -55 -55 -98 -71 -76 -10 14
(%) 2009 2010 2011 2012 2013 2014 2015
Return on Equity 86.2 42.6 23.4 27.1 23.4 24.6 22.5
Source: Company, IDBI Capital Research
Higher exposure to Real Estate land led to higher inventory days. This will
not be the case anymore.
13
What is the Business Model? Why are we worried?
All figures in mn, stated otherwise FY15 FY14 FY13 FY12
Land 6,838 5,349 2,082 684
Inventory 11,733 10,196 6,324 4,501
Land as % Inventory 58% 52% 33% 15%
Total Assets 47,639 42,072 37,290 36,372
Land as % Total Assets 14% 13% 6% 2%
Land Bank (Acres) 178 125
Incremental Land acquisition cost over four years 6,155
Incremental physical land acquired (Acres) 53
Cost of acquisition per acre 116
Input All figures in mn, stated otherwise
Land Bank (acres) 178
Permissible FSI with 25% plot factor 2
Built-up area to be sold (mn. Sq.ft) 15.5
Weighted average land cost per acre (Rs.mn) 38.4
Realization per sq.ft 3000
Construction Cost per sq.ft 1600
Output
Years 0 1 2 3 4 5 6
Land Cost -6838
Revenue 0 0 11631 11631 11631 11631
Construction cost 0 4962 4962 4962 4962 4962
Gross Profit 0 -4962 6668 6668 6668 6668
Fixed expenses 465 465 465 465 465 465
Profit before taxes -465 -5428 6203 6203 6203 6203
Taxes -154 -1791 2047 2047 2047 2047
Profit after taxes -312 -3636 4156 4156 4156 4156
Cash flows -6838.21 -311.70 -3636.48 4155.97 4155.97 4155.97 4155.97
Project IRR 12%
Source: Company, IDBI Capital Research
Land Bank model, in our calculation is not attractive at all!
14
What is the Business Model?What if the real estate price crashes?
Realization per sq.ft (Rs.)
Constr
uction c
ost per
sq.f
t(R
s.)
Project
IRR 2600 2800 3000 3200
1600 4% 8% 12% 15%
1800 0% 4% 8% 12%
2000 -6% -1% 4% 8%
2200 -11% -6% -1% 3%
City Type Flat cost (Rs.) Area (sq.ft)
Avg.
Realization
(sq.ft)
Cochin,
Kerala Residential 4559400 1788 2550
Saharanpur,
Uttar Pradesh Residential 2520000 1100 2291
Patna, Bihar Mix 5269800 1219 4323
Where is the land bank distributed?
Is the Real Estate pricing attractive enough?
Source: Company, IDBI Capital Research
In a worse-case scenario, things does not bode well!
15
What is the Business Model?
With redevelopment projects on cards, company will not be foraying aggressively in Real Estate segment.
So, is redevelopment the next big thing?
And what if NBCC continues to invest in Land Bank?
Source: Company, IDBI Capital Research
If higher exposure to land bank model continues, stock might de-rate. But
then, management changes its stance!
16
What is the Business Model? What if the high-RoE is ploughed back as seed money for redevelopment
projects where company can, arguably, make RoE in excess of cost of equity?
Total Project size (Rs.mn) 50000
PMC Gross margins 10.00%
Marketing fees 1%
Preferential dividend on seed money 15%
Execution Speed 0% 10% 20% 20% 20% 30%
0 1 2 3 4 5
Seed money -5000
Execution 0 5000 10000 10000 10000 15000
PMC Margins 0 500 1000 1000 1000 1500
Marketing fees (net of expenses) 0 38 75 75 75 113
Tax (@33%) 0 177 355 355 355 532
PMC segment profit 0 360 720 720 720 1080
Seed money and accumulated preferential dividend 0 0 0 0 0 10057
Total cashflows -5000 360 720 720 720 11137
Project IRR 25%
Debt Cost 14%
Debt/Total seed money 50%
Equity IRR 59%
Source: Company, IDBI Capital Research; Notes: We assume 20000 flats to be sold at Rs.2500/sq.ft. Construction cost is Rs.2500/sq.ft. Also, we assume NBCC makes 1% gross marketing margin s. Zero-coupon bonds can be issued for debt. Though Company has not mooted such an idea. Fixed continues as it is difficult to apportionate.
Killer Project IRR! Even with the most conservative assumptions!
17
What is unique about NBCC? And what if the redevelopment project model is going to be the next big thing?
General Pool Residential Accommodation targets Central Government residential accommodations.They are under the administrative control of the Directorate of Estates in Delhi. Further, there areother 31 stations like Kolkata, Mumbai, Chennai, Chandigarh etc. DDA plans to redevelop 30 colonies.The quantum is in excess of Rs.1tn, we foresee.
(Rs.bn) FY17E FY18E FY19E FY20E
Opening Order Book 361.9 507.8 738 987
Order Inflow 222 340 400 400
Execution 77 110 151 188
Closing order Book 508 738 987 1199
FY17E FY18E FY19E FY20E FY21E
Netaji Nagar R.K Puram Lodhi Road Bharti Nagar Laxmibai Nagar
Kasturbha Nagar Sriniwaspuri Hanuman Road Rabindra Nagar Peshwa Road
Thyagaraj Nagar Mohammadpur Kaka Nagar Pandara Road Kalibari Marg
Sarojini Nagar Chanakyapuri Shahjahan Road DIZ Area
Tilak Lane BKS Marg
Vinay Marg Mandir Marg
Subramanya BhartiMarg North West Moti Bagh
Prem Nagar Aram Bagh
Albert Square Minto Road
Source: DDA, IDBI Capital Research
These are merely DDA Govt. colonies orders!
18
What is unique about NBCC?
What are the other PMC opportunities?
Year IIT Location Status2015 Dhanbad Announced
2015 IIT Tirupati Announced
2015 IIT Palakkad Announced
2015 IIT Chattisgarh Announced2015 IIT Goa Announced2015 IIT Jammu Announced
2015 IIT Karnataka Announced
Year IIM Location Status2014 Nagpur Announced2014 Sirmaur Announced2014 Amritsar Announced2014 Gaya Announced2014 Sambalpur Announced
2014 Visakhapatnam Announced2015 J&K Announced
2017 Telengana Yet to be announced
Year AIIMS Location Status2015 J&K Announced2015 Punjab Announced2015 Tamil Nadu Announced2015 Himachal Pradesh Announced2015 Assam Announced
Particulars Lower range Upper rangeIIT 120 150IIM 32 64
AIIMS 40 45Total (Rs.bn) 192 259
Source: DDA, IDBI Capital Research
Its raining opportunities even in PMC segment
19
Is the sovereign advantage intact?
Why should Govt. nominate NBCC? Is therea rule? What if the rule changes? Is there anexample?
The Govt. has notified NBCC as a PublicWorks Organization (PWO) explicitly. Thismeans NBCC is a construction agencycovered under revised Rule 126 (2) of GFRs.
What are the benefits of being this agencyunder this clause?
As per this clause, the GovernmentDepartment(s)/ PSUs and AutonomousBodies can award the works to NBCC onnomination basis.
Does NBCC has any other competitiveadvantage?
Nothing meaningful.
Then why should Govt. projects let NBCCmake 5-7% gross margins for the value of aproject?
First, NBCC calls itself a project managementconsultancy work. Second, thereby, anemployee is engaged in pre-construction,construction and post construction activity.Third, this enhances transparencies to theproject developer, typically Govt. agencieswhen they hire NBCC, by adhering the rulesprescribed by General Financial rules, CentralVigilance Commission Act, Central Bureau ofInvestigation Act and Right to Information Act.
Source: Company, Ministry of Finance, IDBI Capital Research
The Competitive edge for NBCC is written on wall!
20
Are there problems with urban planning?Are there structural problems with DDA orders?
No, things are changing on ground.
First, Delhi Chief Minister has cleared the stickingpoints through Delhi Slum and JJ Rehabilitation andRelocation Policy, 2015 in December 2015.
Second, addressing the Delhi High court judgmentand National Green Tribunal comments, NBCC is re-designing the pipeline projects.
Third, redesigning of existing projects is not asquixotic as shelved BMC Mumbai redevelopmentplans that mooted higher FSI. Our point: there is adelay; not a cancellation.
Fourth, DDA for FY17 has proposed 33 newland development schemes and 18 newhousing-related development works forFY17.
Thus, the DDA, can award Netaji Nagar,Thyagaraja Nagar, Kasturba Nagar, VasantKunj and the remaining 24 projects. Thoughthe timeline for non-disclosed projects isuncertain, the potential order inflows are inexcess of Rs.750bn.
Thus, even excluding Railways, housing forall, smart cities, NBCC can achieve orderbook target of Rs.1tn before 2020.
Source: Company, Media Articles, IDBI Capital Research
Things are changing with DDA; Is everyone turning a blind eye?
21
Are there problems with urban planning?What is a redevelopment project?
Let us take the example of New Moti Bagh .
Once, it was home to some World-war IIstructure. And today, it is one of the Delhi'smost expensive areas. Occupying 143 acresto the south of Delhi, New Moti Bagh hasearned the moniker, "next best thing toliving in a Lutyens bungalow”.
The UPA Govt. sanctioned the project– whichwas conceived by MPD 2021-- in 2007. Onassigning it to NBCC, this project wascompleted in 2012.
There are 492 residential units in thecomplex. They are further split into: 116independent bungalows and 376 large sizedapartments. Even within the 116 bungalows,there are two types of bungalows: 14 Type-VIII (costing ranging from Rs.700mn- Rs.1bn.)and 102 Type VII bungalows with a cost ofRs.400-600mn.
Needless to guess, they are home (or Govt.quarters) for senior Indian bureaucrats.
Little surprise to our eyes, when the IndianUrban Development Minister, in 2014,handed over a cheque of Rs.3.3bn to theFinance Minister as surplus from New MotiBagh Project.
So, how was the New Moti Bagh projectfunding done? It all begin with a three acreparcel of land. The price: Rs.6.5bn. Paid byHotel Leela.
If this price is anything to go by, the totalland value of the 143 acres is ~Rs.310bn or~$4.6bn.
So, where did this idea emerge from?
Source: (1) Media articles, Company and IDBI Capital Research (2)http://pib.nic.in/newsite/PrintRelease.aspx?relid=105445
DDA and NBCC made money out of thing air!
22
Are there problems with urban planning?What is a redevelopment project?
This is one type of redevelopment projectwhere land based instruments are used infinancing. Similar land based instruments ismooted in smart cities.
Total Area (acres) 143
Project Awarded (Year) 2007
Residential Units (Nos) 492
Project Completed (Year) 2012
Type-VIII Bungalows (nos.) 14
Type-VII Bungalows (nos.) 102
Residential apartments (nos.) 376
Type-VIII Bungalows (sq.ft) 121307
Type-VII Bungalows (sq.ft) 495976
Residential apartments (sq.ft) 1284125
Total buildable area sq.ft (mn) 1.90
Land sale to Hotel Leela (3 acres out of 143) (Rs.mn) 6500
Primary Construction cost (Rs.mn) 3613
Sub-contractor's margin (Rs.mn) 361
Construction cost including sub-contractor’s margin (Rs.mn) 3975
Construction cost including NBCC margin (Rs.mn) 4372
Surplus to Govt. (Rs.mn) 2128
Actual Surplus DDA handed over to Finance minister (Rs.mn) 3300
Deviation in surplus (Rs.mn) 1172
Source: IDBI Capital Research
DDA makes money with no investments! Totally self-financed
projects!
23
Are there urban planning issues?What is a redevelopment project?
A model similar to Kidwai Nagar
Residential (mn.sq.ft) 4.5
Commercial (mn.sq.ft) 0.2
Total Area to be developed (mn.sq.ft) 4.7
Seed money from NBCC (Rs.mn) 2818
Total construction cost of Commercial (Rs.mn) 494
Per month Rentals/(Rs./sqft) 120
Yearly Lease from total commercial space (Rs./sq.ft) 356
Yearly Escalation in Lease 1.075
Present value of total lease for 30 years (Rs.mn) 4424
Residual seed money (Seed money from NBCC- Commercial construction cost) (Rs.mn) 2324
Residual Seed money plus present value of lease for residential construction (a) (Rs.mn) 6748
10% of Residential to be sold to Govt. (b) (Rs.mn) 4502
Total capital for residential construction (a+b) (Rs.mn) 11250
Viable for residential construction of mn sq.ft 4.5
Planned residential 4.50
Shortfall of construction for remaining units -
Target residential unit realization per sq.ft 10,004
Potential revenue for project 40,516
NBCC preferential capital (including dividend) 5,668
Contractors and NBCC gross margins profit 2349
Net proceeds before investments in social and other infrastructure to DDA 32,499
Project IRR for NBCC 21%
Source: Company, IDBI Capital Research
Even after the most conservative assumptions, East Kidwai style model
can make at least 21% IRR
24
Are there urban planning issues?
So, where did this idea emerge?
The redevelopment project is a part ofMaster Plan of Delhi (MPD 2021. )
The process of planned development of theNational Capital began with enactment ofthe Delhi Development Act 1957, followedby the promulgation of the Master Plan ofDelhi in 1962 (MPD-62).
Source: Delhi Development Authority, IDBI Capital Research
Exhibit: Emphasis on Redevelopment in MPD 2021
Types of Project Units Phase upto 2011 Phase upto 2016Phase
upto 2021 Target upto 2021
Housing for Urban poor through Slum & JJ approaches '000 70-100 70-160 60-140 200-400
Houses as Independent Plots & Redevelopment '000 20-35 30-35 30-30 80-100
Group housing '000 84-190 84-300 72-270 240-760
Employer Housing '000 14-15 14-25 12-20 40-60
Unauthorized Regularised Colonies '000 15-150 25-105 20-90 60-300
Other Housing areas (Villages) '000 10-42 16-42 14-36 40-120
Exhibit: Master Plan for Delhi -2021
This model is merely a drop in the ocean!
25
Are there urban planning issues?What is the strategic plan for pricing?
We observe pricing plans are aggressive by DDA.
This will lead to downward trend in prices.
Source: Company, Industry sources, IDBI Capital Research
East KidwaiNagar Vasant Kunj Netaji Nagar
ThyagrajNagar Kasturba Nagar
State New Delhi New Delhi New Delhi New Delhi New Delhi
Order Size (Rs bn) 50 100 77.5 4.4 34.2
Area (acres) 86 240 111 14 53
ModelResidential + Commercial
Residential + Commercial
Residential + Commercial
Residential + Commercial
Residential + Commercial
Project Duration 5 Years 5 Years 5 Years 5 Years 5 Years
Expected Commencement 2015 2017 2017 2017 2017
Porject Completion 2019 2022 2022 2022 2022
NBCC revenue10% PMC
Charge
10% PMC Charge + 1%
marketing fees
10% PMC Charge + 1% marketing
fees
10% PMC Charge + 1% marketing
fees
10% PMC Charge + 1%
marketing fees
Current Status FillExpecting Govt.
approvals
Expecting Govt.
approvals
Expecting Govt.
approvalsExpecting Govt.
approvals
Current residential units 2,444 2,772 131 2,521
Proposed residential units 4,608 7,295 282 4,321
Rs.mn/ residential unit 10.85 #DIV/0! 10.62 15.60 7.91
Zones Area Price RangeImpact
Sou
th D
elh
i
Anand Lok 45,000 - 55,000
East
Kid
wai
Nag
ar a
t R
s.1
0,0
04
per
sq
.ft
Vasant Vihar 28,500 - 37,000
Greater Kailash - I, II 27,500 - 36,000
Saket 23,500 - 28,000
Wes
t D
elh
i
Janakpuri 12,500 - 15,000
Will
DD
A k
eep
up
th
e an
te?
Paschim Vihar 12,000 - 14,500
Vikaspuri 10,000 - 13,000
Dwarka 8,000 - 12,000
East
Del
hi
Preet Vihar 16,000 - 20,000
Vivek Vihar 12,000 - 15,000
Mayur Vihar 11,000 - 12,500
Patparganj 10,000 - 12,500
Laxmi Nagar 8,500 - 10,500
Prices mooted by NBCC is remarkably attractive!
26
Are there urban planning issues?
Are there problems with East Kidwai project?
Yes.
In 2014, with the case of Aman Lekhi & ORS vs.Union of India ORS., concerns have emerged up.
The petitioner argued, “if commercialisation andredevelopment of East Kidwai Nagar, asenvisaged, is allowed, it would amount tocreating an urban slum in the heart of the city.”
The Honourable High Court in it’s judgementmade it clear,
“…This Court takes judicial notice that theexisting infrastructure of road, water andelectricity in Delhi and, in particular, in SouthDelhi is already “severely overburdened…(contd)”
“…(contd)No material has been placed on recordto indicate that any proposal for additional road,flyover, underpass or augmentation of electricityor water supply has been approved by anystatutory authority in anticipation of theimpugned redevelopment plan.”
Dismissing the speculation of corporate rivalry,we believe, this is a classical urban planningdebate.
Also, then why did NBCC complete Moti Baghproject on time?
Further, is DDA immature enough to overlookclassical urban planning problems? And moreimportantly, are these problems restricted onlyto East Kidwai?
This is a critical trigger for NBCC and our targetprice.
Source: Company, IDBI Capital Research
This issue is past! NBCC fixed it with change in design!
27
Are there urban planning issues?
Did DDA moot higher FSI?
Yes, they did.
As per Master Plan for Delhi 2021, “Vision-2021 is to make Delhi a global metropolis and aworld-class city, where all the people would beengaged in productive work with a betterquality of life, living in a sustainableenvironment.”
Delhi Development Authority planned 66% ofthe total geographical area. Arguably, themajor thrust vied for higher FAR/FSI.
Even Srivastava committee report addressedthe need for higher FSI,
“With increase in population and limited space,one has to shed the reluctance in goingvertical. If other world-class cities have sky-scrapers, why must we limit our constructionsto 4 or 8 storeys?”
Sr.no Land UseArea (Ha.)
Percentage to Total Area (Ha.)
1Total Geographical Area - NCT Delhi 148300 100
2 Built-up Area 70162 47
3 Natural Features 19509 13
4 Sub-Total (2+3) 89671 60
5Balanced land available in NCT - Delhi (1-4) 58629 40
6 Land to be kept reserved for:
Disposal of Solid Waste generated 10000 7
Metro Services / Utilities 10000 7
Agriculture zone in NCT Delhi 11000 7
7 Sub-Total 31000 21
8Proposed / Actual Land available for urbanization (5-7) 27629 19
9Total Urbanisable area 2021 (2+8) 97791 66
Source: DDA, IDBI Capital Research
DDA is not run by Summer-trainees! They saw this coming!
28
Are there urban planning issues?
What are the benefits of higher FSI?
Efficient use of buildable area.
Restricted FSI aggravates Welfare loss.How?
Definition: Assume mono-centric city. Aperson earns “y” as income working incentral business district. The distancebetween his house to office is “x.” A roundtrip cost to travel is “t.”
Total savings of individual: “y-tx.”
Further, he stays in a flat paying rent of “p”per square feet “q.”
Source: Alain Bertaud Consultancy, World Bank, Industry, IDBI Capital Research
But will higher FSI be a burden?
So, his net savings is: y-tx-pq.
Alain Bertaud of the World Bank opineshigher FSI leads to lower tx and pq. Thereby,maximum welfare.
Unrestricted FSI eases Realty prices. How?
Our reader may counter-argue: With higherstoreys, construction cost has to go up.Thereby, affordable real estate prices withhigher FSI is a myth.
Floor Space Index (FSI)
Sq.ft 1 2 4 8
Bu
ildab
le p
lot
are
a
1 1 2 4 8
2 2 4 8 16
3 3 6 12 24
4 4 8 16 32
5 5 10 20 40
FSI 1 2 4 8
Land Cost 7500 3750 1875 938
Construction Cost 2500 2750 3025 3328
Total Cost 10,000 6,500 4,900 4,265
Affordable pricing for real estate is on its way!
29
Are there urban planning issues?With higher FSI, can Indian real-estate prices crash?
Possible.
Variations in construction cost can be multifold.
But will higher FSI be a burden?
Elementary economics tells us price– inefficient market-- should be equal tomarginal cost.
So, what should be the ideal FSI?
Construction Cost $/sq.ftBelow 30
floorsAbove 30
floors
London 344 451
Melbourne 163 242
New York 200 251
UAE 125 256
Shanghai 116 149
Cost per square feetBelow 30
floorsAbove 30
floors
Substructure 10% 8%
Superstructure 20% 21%
Facades 17% 18%
Internal walls and finishes 10% 9%
MEP services 19% 17%
Lifts and Escalators 4% 7%
Prelims, OH&P 19% 20%
62122
3640
6286
107286
365389
0 50 100 150 200 250 300 350 400 450
Atlanta
Los Angeles
New York
Paris
Shanghai
Mumbai/Delhi
Source: Company, IDBI Capital Research
Marginal costing says real estate prices may fall
30
Are there urban planning issues?But then, did DDA overlook this aspect?
In the section, “SYNERGY BETWEEN
TRANSPORT AND LAND USE,”
The concept of the Master Plan for Delhi1962 was based on a poly-nodal, polycentric,distribution of work centres, largely based onroad transport nodes. A major fall-out of thishas been distortion between infrastructure,transport and land use. To achieve spatialbalance, development should take placeaccording to new corridors of massmovement.
What is the counter argument for Higher FSI?
The basic urban planning tries to minimize streetcrowding. Through a simple abstract illustration,we will explain you street crowding.
Imagine a locality. We define:
SC = street crowding = occupants/ street area.
IC = indoor crowding = occupants/ built-up area.
FSI = built-up area/buildable plot area.
PF = plot factor = buildable plot area/street area.
We say: SC = IC × FSI × PF
Keeping other things constant, higher FSI leads tohigher SC. The petitioner in Kidwai Nagar projecthas a point.
DDA has plans for higher FSI in remainingredevelopment projects. Will this be a cause ofconcern?
Source: Industry, IDBI Capital Research
Street Crowding is one point! But DDA has planned Transit oriented
development.
31
Are there urban planning issues?
Source: Industry, IDBI Capital Research
32
Are there urban planning issues?
So, is there some work on “Mass Movement”?
On May 4th, 2014, Indian Express article statedthat East Kidwai Nagar project will be connectedto the South Extension and INA Metro stationsthrough an underground tunnel, besides beinglinked to the Barapullah elevated road.
“We are looking at connecting the housingcomplex with the South Extension and INA Metrostations through an underground tunnel. It willalso be linked with the Barapullah elevated road,”NBCC Chairman and Managing Director Dr AnoopMittal said.
Exhibit: Most of the projects will be beneficiary of DMRC-Phase-III
Source: Company, IDBI Capital Research
The progress of DMRC-Phase III helps NBCC– directly!
33
Is Metro Rail Phase-III Project on time?Project Details
Cost Escalation Rs. 377,360 million
Status Under Implementation
Ownership State Govt. - Commercial Enterprises
Industry Railway transport infrastructure services
Completion by Dec-16
Raw Materials
Type Substantial Expansion
Contract Basis
Forex component
Export commitment
Employment
Cost Escalation Rs. 232,360 million
Time Overrun 46 month(s)
Last Updated On 29-Mar-16
Project locationsBadli, North West Delhi, NCT of Delhi
Bahadurgarh, Jhajjar, HaryanaCentral secrtariat, New Delhi, NCT of Delhi
Dwarka, South West Delhi, NCT of DelhiGokulpuri, New Delhi, NCT of Delhi
Jahangirpuri, North West Delhi, NCT of DelhiJanakpuri (west), West Delhi, NCT of Delhi
Kalindi kunj, New Delhi, NCT of DelhiKashmiri gate, New Delhi, NCT of DelhiMandi house, New Delhi, NCT of DelhiMukundpur, North Delhi, NCT of Delhi
Mundka, West Delhi, NCT of DelhiNajafgarh, South West Delhi, NCT of Delhi
Shiv vihar, New Delhi, NCT of Delhi
Civil Contractor Era Infra Engg
Hindustan Construction Co
Italian-thai Deveplopment Public
JKIL
LT
Pratibha
Sadbhav
Shanghai Urban Construction
Supreme Infrastructure
Equipment Siemens
B M E L Infra India Ltd.
Corsan Corviam Constructions Sa
What is the status now? DMRC’s Delhi Metro RailPhase-III Project to complete by December 2016.With DMRC phase-IV, DDA has wider plans to coverDwaraka and outer part of Delhi.
Source: CMIE, IDBI Capital Research
Phase-III delay was past! Its on its way for completion!
34
Can JJ/Slum clusters be an issue?
Is working with DDA risky?
If majority of JJ/slum clusters are with DDA,will it not risk execution of projects?
Delhi Chief Minister has cleared the stickingpoints through Delhi Slum and JJRehabilitation and Relocation Policy, 2015 inDecember 2015.
The nodal agency for this policy is DUSIB(Delhi Urban Shelter improvement Board).
Rehabilitation of JJ clusters will be similarmodel to Kathputli Colony.
Rehabilitation should be completed withinfive years.
Relocation will be in rare cases. (Example ofrare cases: Court order, encroached a streetor road, encroached a specific publicproject.)
To our understanding, NBCC is not dealingwith work in JJ clusters.
Land Owning Agency No. Of JJ Clusters %
Cantt. Board 12 1.8%
CPWD/L&DO 42 6.1%
DDA 352 51.4%
Delhi Govt. 56 8.2%
DUSIB 98 14.3%
MCD 58 8.5%
NDMC 5 0.7%
Others 10 1.5%
Railway 52 7.6%
Source: Govt. Agencies, IDBI Capital Research
To our understanding, NBCC is not
dealing with work in JJ clusters.
35
What if Delhi Real Estate Price Crash?Will DDA go bankrupt – say if there is a downtrend in Delhi Real estate prices? And does this impact NBCC?
First, DDA has a pedigree for developingproperties that is 5-6x the land bank of DLF, thelargest in NCR.
Second, DDA is a Govt. entity.
Third, NCR has 180k homes oversupply. Withcurrent pace, it would take 5 years to sell theunsold inventory. There are chances of pricecorrection.
Fifth, even if the price crashes, the equilibriumprice has to be equal to marginal cost of high riseflats.
The beauty is DDA has the legroom to pricingaccordingly. And thereby, DDA can absorb thisfall.
Unsold inventory is strong in non-New Delhi region in 2013…
…2014 and 2015 as well.
Source: Industry, JLL, IDBI Capital Research
Micro market reveals unsold
inventory is in Non-New Delhi
region
36
What if Delhi Real Estate Price Crash?Will DDA go bankrupt – say if there is a downtrend in Delhi Real estate prices? And does this impact NBCC?
Third, NCR has 180k homes oversupply. Withcurrent pace, it would take 5 years to sell theunsold inventory. There are chances of pricecorrection.
Fifth, even if the price crashes, theequilibrium price has to be equal to marginalcost of high rise flats.
Vacancy rate(%) Q4CY12 Q1CY13 Q2CY13 Q3CY13 Q4CY13 Q1CY14 Q2CY14 Q3CY14 Q4CY14 Q1CY15 Q2CY15 Q3CY15 Q4CY15
CBD 5 8 8 10 9 9 9 9 7 6 7 5 4
CBD - Others 5 8 8 10 9 9 9 9 7 6 7 5 4
SBD 21 21 23 24 28 28 28 27 24 22 24 24 24
South 9 9 9 9 9 10 10 10 10 10 10 10 10
Gurgaon - CBD 9 12 10 14 13 10 10 6 3 2 3 4 4
Gurgaon - Others 33 40 38 37 40 32 33 34 35 36 35 40 40
Noida 18 31 36 31 30 32 34 33 32 30 33 30 31
Overall 21 28 28 27 29 25 27 27 27 26 27 29 29
Source: Industry, IDBI Capital Research
We have factored in this
oversupply!
37
Does Real Estate regulation pose any risk?Will NBCC be covered under new Real Estate (Regulation and Development) bill?
Though we have not come across documents thatspecifies the bill’s power over developmentmanagers, we still give the skeptics the benefit ofdoubt.
What if a development manager like NBCC is partof new Real Estate (Regulation and Development)bill?
To our knowledge, the treatment of force majeureis still unclear.
Usually, in development agreement, there is aforce majeure clause built in.
In Puri Construction vs Larsen and Toubro, theclause read like,
“The Developer shall not be deemed to be indefault if the performance of its obligationshereunder is delayed or prevented by conditionsconstituting force-majeure which shall include …”
“…but not be limited to any laws, order bye-laws, rule or direction of any Government orMunicipal or statutory agency or otherauthority, restrains, injunctions from any courtof law, withdrawal of permissions, non-availability of construction materials strikes,fire or any act of God, as also the prevailingreal estate market conditions or any otherreason or cause whatsoever beyond and thereasonable control of the Developer Allperiods, hereunder fixed shall be deemed tohave been extended by the periods equal tothe periods of delay on account of theconditions constituting force majeure."
Source: High Court documents, IDBI Capital Research
Real Estate Regulations does not
redefine “Force majeure”
38
Will NBCC be covered under new Real Estate (Regulation and Development) bill?
No, we are not drawing conclusions out ofdistant ratio-decidendi. Even NBCC uses forcemajeure in its agreement.
Consider this: In a State Consumer Disputeredress case: Amitava A Acharjee vs. NBCC, 2011,we learn,
“As regards the grouse seeking compensation,the complainant has referred to Clause 11 of theGeneral Terms and Conditions which reads asunder:-
NBCC shall endeavour to give possession of theApartments to the allottees within 33 monthsfrom the date of allotment of the Apartments.The possession will be given after clearing of alldues in respect of the Apartment including stampduty and registration charges as applicable.
However, if NBCC fails to so deliver (except dueto force majeure), the allottee will be paidcompensation as mentioned here in under.
Force majeure shall, inter alia include non-availability or irregular availability of essentialinputs, delay by the contractors/constructionagencies employed/to be employed, litigation,acts of God, delay in getting service connection,statutory approval, completion/occupancycertificate or such other reasons beyond thecontrol of NBCC.”
Source: High Court documents, IDBI Capital Research
Does Real Estate regulation pose any risk?
Even NBCC uses it in development
agreement!
39
How will Smart City benefit NBCC?
What is NBCC targeting for Smart Cities?
A replicable model which will act like a lighthouse to other aspiring cities.
The four types of model Govt. identifies are:(1) Retrofitting– more than 500 acres; (2)Redevelopment– less than 50 acres (KidwaiNagar model); (3) Greenfield– more than 250acres (GIFT City model); and (4) Pan City– useof technology, information to improveservices.
A Special Purpose Vehicle will implement theproject at the City level. Here, State and ULBwill have equal share. Further, at no pointthey will have minority.
Majority of Board voting rights, thoughChairperson will be from State, rests withMoUD. More importantly, the CEO will beappointed by MoUD.
Can there be problems with this model?
Lack of executive powers: Land acquisition iswith State authority.
Lack of manpower: With limited manpower,the SPV can end up like MMRDA vs. BMC.
Lack of state representation: With this powerdistribution, State can arm twist Centre.
Source: Govt. of India, IDBI Capital Research
NBCC is pre-qualified for Smart
cities!
40
How will Smart City benefit NBCC?
What is the source of Finance for Smart Cities?
Other than conventional ULB financing meanslike-- Property Tax, Profession tax, entertainmenttax, advertisement tax, Octroi and entry tax,Govt. has mooted ideas– Land basedinstruments, municipal bonds, borrowing frommultilateral, NIIF, convergence with other Govt.schemes.
We believe land based instruments will open thechunky revenues.
How FSI can help?
Messrs Devesh Kapur, T.V.Somanathan andArvind Subramanian once argued for “chooseyour FSI” policy,
In this proposed policy, every builder canchoose his/her FSI. Of course, this comes withan important rider. What it is, you may think.The builder should pay for FSIs beyond thecurrent limits. For what, may you ask? This willoffset the marginal cost of providinginfrastructure. Now, city planners have tocalculate the ‘long-run marginal cost’ ofadditional infrastructure. This calculation isfeasible, albeit not easy. Once done, cityplanners may levy tax on incremental FSI. Then,the authority would mop up funds. Further,those funds will finance the needs. Simple.
Year
End User auctioned by
MMRDA Price per square meter (Rs.)
1993 Unknown 30000
1995 Diamond Bourse 42500
2000 Citibank 86000
2006Convention
Center 153000
2007
Commercial complex and car
park 504000
Source: Media, Govt. of India, IDBI Capital Research
Financing smart cities is strong!
Both MMRDA and DDA has done
it.
41
How will Smart City benefit NBCC?
What is the source of Finance for Smart Cities?Executing authority Project description Sale agreement and proceeds Use of proceeds for infrastructure
Mumbai Metropolitan
Regional Development
Authority (MMRDA) is
responsible for development
planning and
major infrastructure
investments in Greater
Mumbai region.
Bandra-Kurla is a 553-acre
site, originally developed from
marshland to be a secondary
“suburban” commercial and
office node to relieve congestion
in central Mumbai. It has
now become a valuable location
for commercial activity
and new commercial investment,
rivaling the traditional economic
center around the Stock exchange.
Two successful land sale auctions
took place in 2006–07. A total of 13
hectares of land were sold for
~US$1.2bn.
However, in a 2008 auction only
three of five parcels reached the
minimum bid threshold. About20
hectares of developable land remain
available for sale.
Government authorities announced
that sale proceeds would be used
principally to finance MMRDA’s
capital
investment plan, primarily the rail
transit program being developed in
collaboration with the World Bank
under the Mumbai Urban Transit
Project.
However, there has been no
disclosure
or public commitment as to the
exact use of funds.
Exhibit: Government incorporates the above ideas in “Financial Architecture for Smart Cities”
Source: Govt. of India, IDBI Capital Research
The proof of the pudding is in
eating!
42
How will Smart City benefit NBCC?
Is “Mission mode” way more efficient?
Had it been a central-sponsored scheme,without an SPV/mission mode, we wouldhave turned bearish on smart cities.
But then, it is not.
First, each SPV/mission earmarks scarceadministrative resources, power andattention.
If not, would it result in overburdening?
Yes, in fact, one of the problems with theproliferation of Centrally-SponsoredSchemes was that they essentially burdenedthe district magistrates (DMs) with more andmore work.
Is there a way to improve administrativecompetence?
Yes, take Bihar for instance. Here, NitishKumar, the Chief minister, at the beginningof his second term, observed that his DMswere in charge of implementing over 5,000schemes. This entailed an average scrutiny of100 files a day.
Segregation of powers: In 2011, through anexecutive order, he reduced the DM'sauthority. Here, the departmental officialunder a DM - sometimes as many as 50 in adistrict - would be responsible for signing offon files relevant to their departments.
What did it result into? Articles point outmore responsive and accountable localadministration in Bihar.
Source: Media, Govt. of India, IDBI Capital Research
Powers are segregated for smart
cities!
43
How will Smart City benefit NBCC?
The first 20 out of 100 cities identified. NBCC has approached everyone.
Bhubaneswar Devangere NDMC (New Delhi) Udaipur
Pune Indore Ahmedabad Guwahati
Jaipur Coimbatore Jabalpur Chennai
Surat Kakinada Vizag Ludhiana
Kochi Belgaum Solapur Bhopal
Source: Company, IDBI Capital Research
NBCC has already initiated the
talks!
44
What is NBCC’s scope in housing for all?
What is NBCC targeting in Housing for all?
The need for affordable housing is widely known.
Each state is planning on three models: (1)Rajasthan Model; (2) DDA Land pooling model; (3)Gujarat/Charkop model.
First, Rajasthan model: Drafted an extensive; PPPpolicy for different types of development: (1) Landowned by the government; (2) Land owned bydeveloper; (3) Acquisition of land by thegovernment; (4) Slum rehabilitation.
Results of Rajasthan Model: Housing unitswith market price of INR1,500 per sq ft wereoffered at a cost of INR 850 per sq ft forEWS/LIG category and INR1,000 per sq ft forMIG.
Typical flat cost: EWS is Rs.240k; LIG is Rs.375k;MIG is Rs.700k.The policy facilitatedconstruction of about 235k houses in 77 cities.
Second, DDA pooling model:
The current population: 17mn. The existinginfrastructure capacity: 15mn. Expectedcapacity of 2021 population: 23mn. What doesit entail? At least 50,000 acres.
Where are the constraints? Restricted financialcapacity of DDA to acquire huge land parcels;Unwillingness on part of the land owners; Lackof transparency in the acquisition process .
Particulars (Mn units) Urban Rural Total
Current Housing shortage 19 40 59
Required housing units by 2022 29 25 54
Total need 48 65 113
Source: KPMG study on affordable housing, Industry, Company and IDBI Capital Research
NBCC is pre-qualified for Housing
for all– at least for the work done is
anything to go by!
45
What is NBCC’s scope in housing for all?
How will land pooling work?
Two categories of land pooling: 2 to 20hectares; above 20 hectares
We believe land based instruments will openthe chunky revenues.
FAR allowed to DE: Residential 400;Commercial 250.
Additional 15% residential FAR (above 400) isreserved for EWS housing.
DE to develop 500 EWS houses for every 10hectare.
Example:Project: Sardar Patel Ring Road
Ahmedabad Urban Development Authority(AUDA) conceptualized the plan to developSardar Patel Ring Road.
The Sardar Patel Ring Road is a 76 km arterialring road planned in 2002. With pooling method,the project minimized the need for landacquisition. Only a stretch of 13.1km wasacquired for the project, the rest was takenthrough the pooling route.
Land category >20 hectares 2-20 hectares
Land returned to Developer 60% 48%
Residential 53% 43%
Commercial 5% 3%
PSP 2% 2%
Source: Academic papers by Swati Sharma, IDBI Capital Research
Land pooling is the next big thing!
In Gujarat, it did wonders!
46
What is NBCC’s scope in housing for all?
Increase in
Map Landholdings for a designated area
reorganize land parcels or plots,provide access to each land parcel or plot
set aside land for
public uses by taking a
portion from each
landholding
1
2
3
appropriate increments in landvalues for infrastructure development. Detailed infrastructure is designed and cost estimates are prepared.
4
Infra provision without additional cost
5
Source: Academic papers by Swati Sharma, IDBI Capital Research
47
What is NBCC’s scope in housing for all?
Example:Project: Sardar Patel Ring Road
The project was divided into 3 phases:
– Phase 1: Two-laning of the entire stretch ofthe ring road and construction of 4 lanesfor major stretches. (completed in 2006)
– Phase 2: construction of 4 lanes expandingthe earlier 2 lane network
– Phase 3: construction of flyovers andunderpasses at major intersections withnational highway, state highway andimportant roads. The project also includesservice roads, bicycle tracks, and exclusivebus lanes for Bus based Rapid TransitSystem (BRTS) and walkways on both sides
Public Private Partnership for RoadInfrastructure Development, AUDA
How was it financed?
An amount of Rs.2.3bn was required for theconstruction of phase 1 of the project.AUDA: AUDA invested Rs.1.3bn from its ownresources. Further, consortium of six bankslend the balance amount of Rs.1bn.
What is the Project Returns? First, tollcollection: from the ring road amounts toRs.10mn per month. Further, through valueCapture, AUDA reconstituted approximately1 km wide belt adjacent to the ring road.
Out of the total land acquired for the project60% was returned to the land owners, 20-30% was used to develop amenities likeroads, schools and gardens, and the rest wassold as separate plot. Due to development ofinfrastructure the land value of adjacentplots increased and AUDA earned about Rs.6bn through the sale of plots.
Source: Academic papers by Swati Sharma, IDBI Capital Research
With Land pooling, it is minimal
land acquisition!
48
What is NBCC’s scope in housing for all?
What is Gujarat/Charkop Model?
Even within Gujarat Model, there are fourtypes to deal with affordable housing.
The first is under the Regulations forRehabilitation and Redevelopment of theSlums, 2010. It is aimed at rehabilitation ofslums. Similar to the SRA model of Mumbai,the public sector does not build or financeanything, its only involvement is throughregulations and incentives such as additionalFSI.
For the scheme to be approved forconstruction, a society of individual slumdwellers must be formed and 75 per cent ofthese individuals must agree to the scheme.This scheme is only viable where the landvalue is very high.
The second scheme is under the Regulationsfor Residential Townships Act, 2009. Itrelates to private developers who want todevelop residential townships. The targetarea of township should be at least 40 acres.
The third scheme is --within township landshould allotted to Govt. Though Govt. paysthe market rate, they also finance theinfrastructure development.
The fourth scheme is the Urban Land Ceilingand Regulation Act. Gujarat Govt. hasrepealed the Urban Land ceiling andRegulation Act and transferred surplus landto local bodies at nominal rates.
Source: KPMG, Economics and Political weekly, IDBI Capital Research
If not land pooling, there are other
models ready on table!
49
What is NBCC’s scope in housing for all? NBCC has signed an MOU with Rajasthan
Govt. Management is contemplating EastKidwai Nagar model with an initial capitaloutlay of Rs.5bn
15 States have signed Memorandum ofAgreement (MoA) with the Ministry ofHousing & Urban Poverty Alleviationcommitting themselves to implement sixmandatory reforms essential for making asuccess of the housing mission in urbanareas.
State Number of cities/town
Chattisgarh 36
Gujarat 30
Kashmir 19
Jharkhand 15
Kerala 15
Madhya Pradesh 74
Odisha 42
Rajasthan 40
Telengana 34
Total Cities/towns 305
1Doing away with the requirement of separate Non Agricultural Permission (NAP) in case land falls in the residential zone earmarked in the Master Plan of city or town;
2 Preparing or amending Master Plans earmarking land for Affordable Housing;
3 Putting in place a single-window-time bound clearance system for layout approvals and building permissions;
4Doing away with approvals below certain built up area/ plot size in respect of Economically Weaker Sections and Low Income Groups;
5Legislating or amending existing rent laws on the lines of the Model Tenancy Act circulated by the Ministry of HUPA ; and
6To provide additional Floor Area Ratio (FAR)/Floor Space Index/Transferable Development Rights (TDR) and relax density norms , for slum redevelopment and low cost housing.
Source: Govt of India, IDBI Capital ResearchNBCC is all set to reap!
50
Can NBCC count on Railways?
What is the scope of Railway?
On 18th February, 2015, over the conferencecall, we asked Dr. Mittal on Railway landmonetization plans.
To this, he replied, “See, we are in discussionwith railway authority to develop their landparcels, not only in Mumbai in entire country,and particularly in Mumbai we had one landparcel, I mean approximately 10 acres to 11acres in Bandra next to railway station. Sowe are in discussion with them, but I meannothing concrete has emerged till now. So letus speak, but nothing has done.”
Post railway budget FY17, we wrote, “Shouldone look at asset monetization seriously?”
We have been here; seen this; done that. Toshore up the coffers, Indian railways havebeen talking about selling or developingrailway-linked land plots–for some time now.The proof of the pudding is in eating. Rosyprojections from Mumbai and Delhi railwayplots continue to remain on paper. Shouldthe tide change, the sole beneficiary is NBCCIN.
Source: Govt of India, IDBI Capital Research
Dr. Mittal is already in talks with
Railways! But we remain cautious.
51
Can NBCC count on Railways?
Are the regulations in place?
On 18th February, 2011 Govt. passed an Act.
“The Standing Committee has also given itsview that in many places railway property isbeing encroached upon by the people andabout 2,300 hectares of railway land, whichis under encroachment, is mostly in metrocities. Most of the lands have beenencroached in and around metro cities andurban areas. The encroachment upon therailway property in rural areas is less.”
With these words, The Railway Property(Unlawful Possession) Amendment Bill, 2011,was passed in the upper house as an Act.
Even digitization of records is in place.
“Indian Railways have also digitised detailsof vacant plots of land measuring more thanone acre to chalk out the blue print formonetisation of its vacant land,” as perMinister of State for Railways, Manoj Sinha,in a written response to a question in theRajya Sabha in the winter session 2015.
Source: Govt of India, IDBI Capital Research
Despite legislations and digitization
of records….
52
Can NBCC count on Railways?
Case Study: Sarai Rohila Railway Station
Rail Land Development Authority planned forcommercial development of 38 acres ofrailway land around Sarai Rohilla RailwayStation in Delhi. The station is centrallylocated--4 kms away the Connaught Place.The plans included Luxury residentialapartments, commercial/ shopping areas,railway housing, railway service building &common facilities, hospital/school and otheramenities, club with gymnasium and sportsfacilities.
RLDA held open auction for a 90-year landlease in 2010. Parsvnath Developers Limited,the selected developer, bided Rs.16bn forthe project, and paid Rs.3.3bn as an upfrontdown payment.
…And now…
"The development agreement with the RailLand Development Authority (RLDA) forimplementation of the project at SaraiRohilla-Kishanganj, New Delhi, through itsassociate company, Parsvnath Rail LandProject Private Ltd stands terminated due tocertain disputes between RLDA and PRLPPLand the disputes arising under thedevelopment agreement are pendingadjudication before tribunals," the companysaid in a regulatory filing on February 13th,2016.
Source: Media IDBI Capital Research
…Projects have failed.
53
Can NBCC count on Railways?
Case Study: Mumbai TOD plans.
Consider Mumbai local trains. Travelling inMumbai local trains is a grueling task. Whydoes it happen? They are struggling formeaningful capital expenditure. The westernand central railways, from their latest annualreport, we learn the RoCE is less than 5%. Sad,that is less than some of the bank’s depositrates. More painfully, that is nearly half ofHong Kong Metro trains. And that’s bad.
What is the reason? In Mumbai, Fare boxrevenues, that is, revenues made out of mereticket selling, contribute 93% of the totalrevenue.
Figure: The time is now—Mumbai needs highershare of non Fare box revenues.
How Mumbai railways increase non-fare boxrevenues? (1) A Japanese Metro style transitlinked real-estate development. Has Governmentthought on this? We learn, MMRDA is thinking onthis since 2013. The progress is tepid, but ourhopes are not; (2) Higher FSI for nearby railwayplots and value unlocking—a CIDCO model; (3)higher advertising revenues and operationalefficiency to squeeze profits.
93%
67%
59%
7%
33%
41%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Mumbai
Tokyo
Hong Kong
Non-Fare box Revenues Fare box revenues
Source: Industry, IDBI Capital Research
Source: Industry, MRVC, IDBI Capital Research
Even Mumbai TOD plans made no
progress.
54
Can NBCC count on Railways?
Railways may unlock Rs.146bn opportunities in the near term.
Summary of commercial sites
entrusted to RLDA Nos. Area (Hectares)
Total no. of sites entrusted 60 590.0
Commercially amenable sites -where RLDA can
take action 35 139.0
Details of sites to be proposed 6 41.0
Sites with encumberances 19 410.0
Sites de-entusted by Railway Board 42 326.0
Commercially amenable sites--addressable market for NBCC Nos. Locations
Total Nos of Sites 35With MRVC 3 Thane, Bhandup & Mulund
Developer Fixed 5
Gaya, Delhi Sarai Rohilla, Bangalore PF Road, Gola ka
Mandirm, Vijaywada
Consultancy/Valuation in progress 7
Nagapattinam, Mahalaxmi, Amritsar, Katra, Secundrabad,
Vizag, Phoonse
Consultancy tenders to be invited 14
Ajmer, Jodhpur, Agra, Jhansi, Shamtaganj, Jaipur, Hazari
Bagh, Lalgarh, Bandra, GuntkalTenders for commercial bids to be invited 4
Aurangabad, Chennai, Salem & Gwalior
Tenders for consultancy under finalisation 1 GandhinagarTenders for consultancy tender invited NILTender invited for commercial site & underfinalisation. 1 Nizamabad
Source: RLDA ,IDBI Capital Research
Thereby plans remain merely on
cards!
55
Are there other avenues?What are other avenues being looked at?
NBCC signed an MoU with NAWADCO in Sept’14 todevelop Waqf properties. NAWADCO identifiedseveral Waqf properties including one in Delhi, twoin Rajasthan, six in Madhya Pradesh and seven inKarnataka, which would be developed asinstitutional and commercial projects.
NBCC signed a MoU with Air India in December2014 to monetize the surplus land. Air India has106 properties in the country.
Further, re-development can unlock some ofAir India properties is an attempt topotentially unlock the value of ~Rs50bn overa period of 10 years.
Also, NBCC is in seeks to monetizedevelopment of sick PSUs’ land banks.Company will follow a model similar to AirIndia.
Govt. has plans to appoint NBCC inredevelopment of real estate parcels forPrinting press.
Similar to AIIMS project of Rs.58bn, companyis scouting other institutions.
Though NBCC has incorporated "NBCC GulfLLC" in the Sultanate of Oman with 70%equity participation, the stream of orderinflows are still unclear.
Registered Waqf properties (units in 000's) 490
Current Annual Income (Rs.bn) 1.63
Potential Annual Income (Rs.bn) 120
Estimated Land Bank('000s acres) 600
Market value of Land (Rs.bn) 1,200
So, if not railways, there are many
more!
56
Is the latest acquisition a worrying point? First, Why did this happen? In the past,
Govt. had plans to merge four public sectorundertakings.
We believe this is in continuation of theearlier plans. The companies which are beingconsidered for merger are National BuildingsConstruction Corporation (NBCC), HindustanPrefab Ltd (HPL), National ProjectConstruction Corporation Ltd (NPCC) andHindustan Steelworks Construction Ltd(HSCL).
The Board for Reconstruction of PublicSector Enterprises (BRPSE) has constituted atask force to examine different options,which may include project-based consortiumfor business bids.
As per BRPSE, “All these companies in oneway or other are engaged in constructionactivities and possess synergies.
A combined entity by way of merger maycreate a giant company and are capable ofbecoming a navratna firm."
National Buildings Construction CorporationLtd has informed BSE that the Board ofDirectors of NBCC have accorded in-principleapproval for takeover after restructuring itsBalance Sheet. This would involve waiver offLoans with interest up to the date oftakeover and providing further contributionfor contingent liabilities.
HSCL was established in 1964 as aconstruction organization under the Ministryof Steel, Govt of India. It diversified into aversatile infrastructure portfolio all over thecountry. It became the major player inimplementation of integrated steel plants. Ithas been a pioneer of Infrastructure projectsin the North Eastern regions includingProjects under Bharat Nirman Programme ofGovt of India .
The acquisition is by and large
synergistic!
57
Is the latest acquisition a worrying point?
What about financials? HSCL’s target orderbook was supposed to be Rs.85bn by the endof FY16. We are not clear if the orders offinalized. Further, order intake is primarilyaimed at SAIL and NMDC’s capacityexpansion program. Roads and bridgescontribute 12% of the total order book. Thetotal income is Rs.15bn in FY15. Though thiscompany is net loss at Rs.81mn, theoperational profit was Rs.1.1bn at the end ofFY15.
Other than SAIL, NMDC, Roads, Is HSCL adiversified business model? Granted, HSCL isone of the three PSUs identified by theMinistry of External Affairs to carry out theconstruction and repair of 50,000 low-costhouses in Sri Lanka. This was as a part of thecommitment of Govt. of India forresettlement of Internally Displaced Persons.Scheduled for initiation soon, the project islikely to usher in a new era of overseaspresence for the company, company hascommented in the past. Further, thiscompany has signed an MOU with theTogolese Republic for implementation ofHousing projects bears the testament offaith imposed on HSCL by the countriesoverseas also.
Debt on the target company is a
concern. However, NBCC has
asked Govt. to absorb it.
58
Are there substitutes for NBCC? Orders are one thing; profitability is
quite another. Is that the case?
No. And here is the reason why: First, AskShobbit Uppal, the Deputy managingdirector of Ahluwalia Contracts or MKrishnamurthi, the Chief Corporate affairs, ofVascon, and they will acknowledge thehardships of working with NBCC.
Second, management themselves claims thatthey are working on superior business modelunmatched. And with sovereign backing, thecompetitive advantage is forever.
Third, through a litany of high courtjudgments in litigation, we are convincedNBCC is the killer in the value chain.
Project Owner (DDA)
Project Consultant (NBCC)
Contractor(AHLU, LT, PEC)
Housing Finance (SBI, Dewan
Housing)
Materials and Building equipment
(Kajaria, Asian Paints, Cera
Sanitary ware)
If you want to play Housing, play
NBCC. Nothing else. Simple.
59
Is market microstructure an issue? What will, if any, be the impact of
additional inventory offloaded byGovt.?
• No, there is no impact.
• First, with Government owning 90% ofthe stake, and unmatched themepresent before investors, marketmicrostructure supersedesfundamentals.
• Now, as per Security Contract(Regulations) Rules, 1957, minimumthreshold of public holding is 25%. Tocomply with this rule, we speculateNBCC, with Government approval, willdilute its stake going forward.
• However, using our models, theadditional quantity of inventory, marketfears of fall in prices is overblown.
Second, NBCC can propose an FPO to raise seedmoney to invest in redevelopment projects.
But then, this money is ring fenced with returns ifnot matching, exceeding the cost of equity. Andmore importantly, this is not cash guzzling strategylike L&T.
Market impact Cost NBCC IN LT IN
6 mo avg. Daily Volume (#shares) 49,424 3,32,796
Buying quantity (#shares) 10,00,000 10,00,000
Impact factor 4.50 1.73
Daily volatility 2% 1%
Market impact 9.0% 1.7%
Bid-ask spread 0.05% 0.05%
Traded volume impact 9.0% 1.8%
Total outstanding shares (mn) 12 931
Total free float (mn) 1.2 931
Total buying quantity 1.00 1.00
Buying quantity as a % of free float 83% 0%
Free float impact 54% 2%
Total Market impact cost 63% 3.6%
Source: IDBI Capital Research
With stickiness in float, big ticket
purchase is clearly not a smart
thing.
60
Why do we think valuation is cheap?
Why the valuation is still cheap?
• First, scalability of business model isintact.
• Second, there is a visibility to that.
• Third, the Return on equity is far aheadof cost of equity.
• Fourth, from implied growthexpectations, we see the potential ofNBCC to double over the next fouryears.
• Fifth, add focus on uncertain orders, thefair value may even triple.
• Sixth, across the industrial value chain,there is hardly a stock that can matchthis theme. Thus, over the next fouryears, we will not be surprised if thestock price achieves the target price ofRs.2,000.
(Rs.bn) FY17E FY18E FY19E FY20E
Opening Order Book 361.9 607.8 838 1087
Order Inflow 322 340 400 400
Revenue 77 110 151 188
Closing order Book 608 838 1087 1299
Gross Margins 7% 9% 10% 10%
Gross Profit 5.4 9.9 15.1 18.8
Employee Strength 2547 2797 3047 3297
Per Employee annual expense 1.1 1.16 1.28 1.41
Total employee expense 3 3 4 5
Fixed expenses 0.77 1.10 1.51 1.88
EBITDA 1.9 5.6 9.7 12.3
Other Income 2.4 3.4 4.3 5.2
Depreciation 0.0 0.0 0.0 0.0
PBT 4.3 8.9 14.0 17.5
PAT 3 6 9 12
PE Multiple for core business 30
Fair value of PMC Business 351
Fair value of Real Estate Business 45
Total fair value of the company 396
Discounted Target Value(Rs.bn) 226
Market Cap Today (Rs.bn) 113
Upside 100%
Source: IDBI Capital Research
If everything goes by plans, the
stock has a long way to go
61
Annexure: On Employees Is Employee a major concern?
• First, Focus will be on newer, lower costemployee addition who will substitutehigher cost, older employees.
• Second, NBCC will focus on ticket size ofthe project.
Source: IDBI Capital Research
Employee structure 2015 2014
Number of employees 2047 2149
Average Past Service 24.26 24.26
Average Age 49.96 50.01
Average remaining working life 10.04 9.99
Employee Structure Total nos.
Gourp’A’ 738
Gourp’B’ 118
Gourp’C’ 1155
Gourp’D’ 36
Total Employees 2047
Employee productivity is not a
concern!
62
Financial Summary
Y/E (Rs mn) 2015 2016E 2017E 2018E
Net sales 46,741 59,829 77,130 89,749
growth (%) 14.8 28.0 28.9 16.4
Operating expenses (43,848) (55,879) (71,795) (83,210)
EBITDA 2,894 3,950 5,335 6,539
growth (%) 20.7 36.5 35.1 22.6
Depreciation (23) (19) (20) (21)
EBIT 2,870 3,931 5,315 6,518
Interest paid (414) - - -
Pre-tax profit 3,928 4,918 6,876 8,444
Tax (1,146) (1,607) (2,329) (2,916)
Effective tax rate (%) 29.2 32.7 33.9 34.5
Net profit 2,783 3,311 4,547 5,528
growth (%) 8.3 18.9 37.3 21.6
Shares o/s (mn nos) 120 120 120 120
Income Statement Balance SheetY/E (Rs mn) 2015 2016E 2017E 2018E
Net fixed assets 262 304 304 304
Investments 1,460 1,460 1,460 1,460
Other non-curr assets 195 195 195 195
Current assets 45,316 55,820 71,090 84,234
Inventories 11,733 14,752 19,864 23,113
Sundry Debtors 17,043 16,228 20,498 23,851
Cash and Bank 10,665 19,595 24,178 29,648
Loans and advances 5,874 5,245 6,551 7,622
Total assets 47,233 57,779 73,050 86,193
Shareholders' funds 13,384 15,774 19,121 23,449
Share capital 1,200 1,200 1,200 1,200
Reserves & surplus 12,184 14,574 17,921 22,249
Curr Liab & prov 33,806 41,962 53,886 62,701
Current liabilities 32,843 40,979 52,829 61,472
Provisions 962 983 1,057 1,229
Total liabilities 33,849 42,006 53,929 62,744
Total equity & liabilities 47,233 57,779 73,050 86,193
Book Value (Rs) 112 131 159 195
63
Y/E (Rs mn) 2015 2016E 2017E 2018E
Adj EPS (Rs) 23.2 27.6 37.9 46.1
Adj EPS growth (%) 8.3 18.9 37.3 21.6
EBITDA margin (%) 6.2 6.6 6.9 7.3
Pre-tax margin (%) 8.4 8.2 8.9 9.4
ROE (%) 22.5 22.7 26.1 26.0
ROCE (%) 23.0 26.9 30.4 30.6
Turnover & Leverage ratios (x)
Asset turnover (x) 1.1 1.1 1.2 1.1
Leverage factor (x) 3.6 3.6 3.7 3.7
Net margin (%) 6.0 5.5 5.9 6.2
Net Debt/Equity (x) -0.8 -1.2 -1.3 -1.3
Working Capital & Liquidity ratio
Inventory days 92 90 94 94
Receivable days 133 99 97 97
Payable days 273 268 269 270
Adj EPS (Rs) 2015 2016E 2017E 2018E
PER (x) 40.9 34.4 25.0 20.6
Price/Book value (x) 8.5 7.2 5.9 4.9
PCE (x) 40.5 34.2 24.9 20.5
EV/Net sales (x) 2.2 1.6 1.2 0.9
EV/EBITDA (x) 35.6 23.8 16.8 12.9
Dividend Yield (%) 0.5 0.7 0.9 0.9
Cash Flow Statement Financial RatioY/E (Rs mn) 2015 2016E 2017E 2018E
Pre-tax profit 3,928 4,918 6,876 8,444
Depreciation 24 19 20 21
Tax paid (1,107) (1,607) (2,329) (2,916)
Chg in working capital (2,822) 6,582 1,236 1,141
Cash flow from operations (a) (1,547) 9,912 5,803 6,690
Capital expenditure (61) (61) (20) (20)
Chg in investments (455) - - -
Cash flow from investing (b) (24) (61) (20) (20)
Equity raised/(repaid) - - - -
Debt raised/(repaid) - - - -
Dividend (incl. tax) (719) (922) (1,200) (1,200)
Chg in minorities - - - -
Cash flow from financing (c) (702) (922) (1,200) (1,200)
Net chg in cash (a+b+c) (2,273) 8,929 4,583 5,470
Valuations
Financial Summary (Contd.)
64
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