property india nomura sept10

17 September 2010 Nomura 1

Any authors named on this report are research analysts unless otherwise indicated. See the important disclosures and analyst certifications on pages 65 to 68.

Property | I N D I A

Aatash Shah +91 22 4037 4194 [email protected]

Action The urban renewal market opportunity in Mumbai is INR5trn (US$106bn) at current

prices, on our estimates. Mumbai is possibly the only city in the world where slum rehabilitation is taken up by the private sector on a mass scale and in a highly profitable manner. Although such projects can have long gestation periods and are sometimes complex, IRR can be very high given a lack of upfront investment.

Catalysts Successful completion of some large projects now under way would heighten

investor confidence in urban renewal projects.

Anchor themes

We believe that with property and land prices rising, and land availability in Mumbaideclining, the business of urban renewal is at an inflection point. Urban renewal is a low-cost way to gain access to some of the valuable real estate in India. Winners here are likely to be firms with experience and ability to execute.

Slumlord billionaires Urban renewal in Mumbai at an inflection point

The urban renewal of Mumbai is now a necessity, with property prices at new highs, land availability constrained, and high land prices crimping margins for developers. We think urban renewal — through rehabilitation of slums and redevelopment of older buildings, backed by government incentives — is now at an inflection point in the city. With 263mn sqft of land covered by slums within Greater Mumbai and 160mn sqft covered by old and dilapidated buildings in the island city, the opportunity is worth US$106bn at current property prices, on our estimates.

Urban renewal is a highly profitable business

Government incentives come in the form of a 1:1 or 1.33:1 correlation between developers’ free sale area and the rehab area constructed, increased floor space index (FSI) for that land, and ability to trade Transfer of Development Rights (TDR). Hence, despite long gestation periods, this business can be quite profitable. In many cases, there is no significant upfront cost for buying land — the cost to the developer is the all-in cost of the rehab structure, which is much lower than the cost of land in the area. We believe IRR could be as much as five times that for a normal project where land is bought today.

Large redevelopment projects reflect belief in the renewal theme

Large slum and other redevelopment projects under way and in planning reflect a growing confidence in the urban renewal theme and in the ability of developers to execute. Projects include the rehabilitation of 85,000 slums around the airport by HDIL, rehabilitation of 26,000 slums at Santacruz by Unitech-Shivalik, and re-construction of 47,000 low-cost government-built tenements in the eastern suburbs.

HDIL set to be a prime beneficiary of this inflection

We highlight HDIL, one of the most experienced players and currently working on India’s largest slum rehab and prevention projects, as benefiting from the focus on urban renewal in Mumbai. We initiate with a BUY and PT of INR366.

N O M U R A F I N A N C I A L A D V I S O R Y A N D S E C U R I T I E S ( I N D I A ) P R I V A T E L I M I T E D

Stocks for action We think HDIL, with its significant experience and ability to negotiate and network with key stakeholders in the urban renewal business, could be an outperformer in this field. Also, we include a note on DB Realty (not rated), another major player in slum rehabilitation and redevelopment in Mumbai.

Stock Rating Price (INR) Price target

HDIL BUY* 271 366

Prices as at 15 Sep; local currency

* Initiating coverage

Analyst Aatash Shah

+91 22 4037 4194

[email protected]

NEWTHEME

Property | India Aatash Shah


Contents

Glossary 3

Large and profitable opportunity 4 Urban renewal in Mumbai close to an inflection point 4 Large opportunity for urban renewal in Mumbai 5 Slum rehab can be a very profitable business, if done right 5 Past knowledge is helping to bring down gestation period 6 Firms with experience and ability to execute are likely to win 6

Slum rehabilitation — a background 7

Where does India stand on the global slum map? 10

Potential for slum rehabilitation in Mumbai 12 Constraint of land availability in Greater Mumbai 12 Slum rehabilitation is the cheapest land source 15

Case studies of some major slum rehabilitation projects in Mumbai 20 The MUTP and MUIP slum rehab projects 20 BMC infrastructure projects 21 Mumbai International Airport Ltd. (MIAL) expansion project 23 Golibar Maidan slums, Santacruz 25

Possible future large slum rehab projects 27 Dharavi redevelopment project 27

Rules and regulations 30

Redevelopment of older buildings is a large opportunity 34

Key players in the industry 36

Latest company views

HDIL 37

DB Realty 57



Terms used in this report

Glossary

Exhibit 1. Relevant terms

Floor Space Index (FSI) This is the ratio of the built-up area to the land area. In Mumbai, this is currently 1.33, though developers can construct to a maximum of 2 by buying TDRs of 0.67x the land area. Incentives are available to hotels, hospitals and for creating public parking. Slum rehab projects get FSIs of 3 or 4 depending on the density of the slums. Redevelopment projects get FSIs of 2.5-3.

Carpet area The area covered within the four walls of the house.

Built-up area The carpet area + the area covered by walls, pillars, staircase, lifts.

Super-built-up area The built-up area + other common areas within the project.

Loading Ratio of difference between super-built up area and carpet area to super-built up area.

Transfer of Development Rights (TDRs) If a land owner gives up his land for a public project, in compensation he gets the same area in the form of a TDR, which can be sold and utilised by developers north of the area where it is generated. If a developer working on a slum rehabilitation project is unable to utilise his incentive area on the slum land itself, he gets to sell the same as TDRs or utilise these in some of his other projects.

Free sale area The area which the developer gets as an incentive for rehabilitating a slum or redeveloping an old building. It is usually equal to the rehab area constructed; in case rehab is on a land owned by the developer, the same is added to the free sale area.

Source: Nomura research



Executive summary

Large and profitable opportunity The urban renewal of Mumbai has become a necessity, not only for the city’s populace but for the property developers, for which the raw material of land has reached pricing levels where the viability of projects has to be questioned.

Urban renewal in Mumbai can take two forms: 1) redevelopment of older buildings and 2) clearing slums by rehabilitating slum dwellers and utilising the land for real estate or infrastructure projects. Mumbai is possibly the only city in the world where slum rehabilitation is taken up by the private sector on a mass scale and in a highly profitable manner. In other parts of the world it is done through government agencies or NGOs.

Urban renewal in Mumbai close to an inflection point Prices of developed property in Mumbai have breached the 2007-08 boom-time highs. Along with this, the price of land in the city has reached a level where developers, to be profitable, need to devise ways to get extra Floor Space Index (FSI) sanctioned by the authorities or charge prices from the customer where affordability is significantly weakened and demand could be subdued. For example, Sheth Developers (unlisted) paid almost INR4,737/sqft for an 18-acre land parcel in the suburb of Andheri(E) sold by Borosil Ltd in Aug’10. This compares with apartment pricing of INR9-10,000/sqft in this area.

Exhibit 2. Recent land deals in Mumbai

Location Buyer Land cost + TDR

cost (INRbn)Saleable area

(mn sqft)Cost per sqft

(INR/sqft)

Wadala Lodha Developers 37.0 7.4 4,973

Worli-Lower Parel Indiabulls Real Estate 24.4 3.2 7,549

Andheri (E) Sheth Developers 10.4 2.2 4,737


Goregaon Sunteck Realty 2.2 0.7 3,006

Ghatkopar(E) Wadhwa Developers 7.5 2.2 3,393

Note: Have added TDR costs for 0.67x plot area and FSI premium for 0.33x plot area to the Andheri, Goregaon and Ghatkopar land parcels to achieve the saleable area on a maximum of 2x the plot area with 40% loading

Source: Nomura research and estimates

Sources of land (textile mill land, government land auctions, industrial land) are being exhausted in Mumbai, and as a result, land prices are looking expensive. With the land price in many cases proving to be 40-50% of the final sale price of the developed project, we estimate developers’ operating margins on these projects could be squeezed to sub-30%, from an historical norm of 45-50%. This would mean that property prices need to move up still further, which may not be possible given they are already at an all-time peak; or a higher FSI would be necessary as compared with the current level of 2, and this may or may not be forthcoming.

Low land availability and high land prices make urban renewal a cheap source of large parcels of land in attractive locations



Exhibit 3. Property and TDR prices in Mumbai (indexed to 100)

0

100

200

300

400

500

600

FY05 FY06 FY07 FY08 FY09 FY10

Mumbai property prices at year end

TDR prices at year end

Price index

Source: CRISIL, Nomura estimates

We believe developers will now be looking for a cheaper source of large parcels of land, which they are likely to find through redevelopment of slums and older buildings.

Large opportunity for urban renewal in Mumbai On our estimates, the slum population in Mumbai is about 7.5mn, or 53% of the overall population. This is equal to the populace of Hong Kong and greater than the number of people living in Singapore. Assuming an average family size of five, there are 1.5mn slum households in the city. In our research we have found that most slum units average a ground coverage area of 175sqft, which means that some 263mn sqft of land is covered by slums within Greater Mumbai. As per the incentives offered upon rehabilitating slum dwellers, if all these people had to be re-housed, about 450mn sqft of developable area could accrue to developers for their own projects. At an average selling price of INR7,500/sqft, the market opportunity could be as large as INR3.4trn (US$72bn). Spread over 30 years, the annual market opportunity is as large as INR113bn (US$2.4bn).

On our conservative estimates, about 160mn sqft of land is covered by old and dilapidated buildings in just the island city of Mumbai. This could provide an area of at least 80mn sqft to developers as their incentive portion, worth some INR1.6tn (US$34bn). Thus, a total urban renewal opportunity of INR5trn (US$106bn) is available in Mumbai, according to our estimates. Over a 30-year period, the annual opportunity comes to INR167bn (US$3.5bn). This is against the current Mumbai city property market size of INR280bn (US$6bn).

Slum rehab can be a very profitable business, if done right For developers redeveloping a slum, the state government of Maharashtra provides incentives. These take the form of a free sale developable area equivalent to the rehab area constructed, increased Floor Space Index (FSI) of 3-4 (depending on density of slums) to develop the free sale area on the same land, and in case the FSI falls short, the spill-over can be used as Transfer of Developable Rights (TDRs) certificates which are tradable in nature. The cost of the developable area accruing to the developer through incentives is only the cost of rehabilitating slum dwellers, which on average has an all-inclusive cost of INR1,500/sqft, on our estimates.

Such projects have a longer gestation period than normal projects and can face issues such as protests, legal disputes and political pressures. But, as we see it, the important point is that the upfront investment in such projects is not that high. Given a lower effective cost of land, the IRRs on such projects are typically much higher than on normal projects where land is bought and then developed.

Opportunity worth a total of US$106bn



Past knowledge is helping to bring down gestation period Over the past several years, stakeholders in the process have become more experienced in dealing with the issues that can crop up. The slum dwellers, authorities, courts, developers and local politicians are now well aware of possible issues and can tackle them more effectively than before. As a result, developers, we have spoken to, are confident that in the next three to four years they will reduce gestation periods to two to five years, from four to 10 years currently.

Firms with experience and ability to execute are likely to win Companies that can minimise the risks of this business through their ability to negotiate and network, and shorten gestation periods through their execution capabilities, stand to be the winners, in our opinion. We believe that HDIL Ltd, which is working on India’s largest slum rehabilitation project and possibly India’s largest slum prevention project through the rental housing scheme at Virar, will be a significant beneficiary of this trend. We initiate coverage of HDIL with a BUY rating and a price target of INR366 per share.

Other companies in this business include DB Realty, Ackruti City and Orbit Corporation, the latter of which is purely into redevelopment in Mumbai. We do not cover these stocks but have a note on DB Realty later in the report.



Background

Slum rehabilitation — a background Slums emerged in Mumbai in the mid-19th century. By the time India became independent in 1947, about 5% of the city’s population lived in slums. As migration to from rural areas increased, the number of people in slums in Mumbai surged amid a lack of low-cost land and housing. According to the Municipal Corporation of Greater Mumbai (MCGM or BMC), from about 0.15mn in 1947, the slum population of Mumbai had swelled to 2.8mn, or 47% of the population, by 1976. The number had reached 6.5mn, or 54% of the overall population, by 2001. On our estimates, the slum population in Mumbai likely now stands at 7.5mn, or 53% of the overall population. This is equal to the entire populace of Hong Kong and greater than the number of people in Singapore.

Exhibit 4. Increase in slum population in Mumbai

Year Slum settlements

(number) Slum population

(mn) Total population

(mn)Proportion of slum

population (percent)

1976 1,680 2.8 5.9 47

1983 1,930 5.0 10.0 50

2001 1,959 6.5 12.0 54

2010 NA 7.5 14.6 51

Source: MCGM, World Bank Study, 2005, Nomura estimates

The early response to slums prior to the 1970s was to treat them as illegal and resort to demolition and eviction. But this just led to relocation or rebuilding of settlements, while newer slums were constantly being set up. In the early 1970s the government came around to the view that it would have to tolerate slum structures as housing and improve the civic amenities within them. The Maharashtra Slum Areas (Improvement, Clearance and Redevelopment), Act 1971 was passed and improvement works implemented. A census of dwellings was carried out in 1976 and photo passes were issued to residents. Slums on central government land, though, did not get any of the amenities, as central government agencies refused to allow them. This act remains the cornerstone on which current-day slum rehabilitation regulations are based. Under the Act, the relevant authority may, by notification in the official Gazette, declare an area to be a ‘slum’ where it is satisfied that:

any area is or may be a source of danger to health, safety or convenience of the public of that area or of its neighbourhood, by reason of that area having inadequate or no basic amenities, or being unsanitary, squalid overcrowded or otherwise; or

the buildings in any area, used or intended to be used for human habitation, are:

in any respect, unfit for human habitation; or

by reason of dilapidation, overcrowding, faulty arrangement and design of such buildings, narrowness or faulty arrangement of streets, lack of ventilation light or sanitation facilities or any combination of these factors, detrimental to the health, safety or convenience.

The government of Maharashtra issued an ordinance to prevent eviction of occupants in notified slums on private land. The notification prevented eviction of ‘occupiers from any building or land for recovery of arrears of rent without prior permission of the competent authority’.

Slum population of 7.5mn — larger than the population of Singapore and equal to the population of Hong Kong



In the mid-1990s policy again took a shift and a Slum Upgrading Programme (SUP) was implemented with the assistance of the World Bank. In this programme, the slum land was given on long lease of 30 years to a co-operative society formed by slum dwellers at a nominal lease rent. The government also gave civic amenities and soft loans for renovation of individual structures on an ‘as-is where-is’ basis. Because of the high density of slums, upgradation on the same land proved difficult. The scheme was also applicable only on state government, municipal corporation and housing board land, not on central government or private land. The difficulties faced by this programme included hostile slum dwellers who were excluded from the programme and poor availability of relocation sites. Ascertaining the eligibility of appropriate households resulted in large-scale problems. Only 22,000 households were covered under the programme, after which the SUP was closed in 1994.

All the above schemes had very minor participation from the private sector, with the government agencies taking up the bulk of the work and failing at it. The Slum Redevelopment (SRD) scheme was launched in 1991. The SRD aimed to provide incentives like increasing the Floor Space Index (FSI) allowed in slum areas and the ability to transfer development rights to other areas of the city — for private developers and builders to redevelop slums. The premise was that by selling the extra space in the open market, tenements for slum dwellers would be cross-subsidised and made affordable to them. The homes of ‘eligible’ slum dwellers thus could not be demolished without their first being resettled. Notified slums were to be redeveloped at the same site by private developers by offering the incentive of an increased total FSI of 2.5. After re-housing slum dwellers in 180sqft apartments, builders could sell the remaining floor space in the open market and make profits of up to 25% of the project cost. At least 70% of slum families had to give their consent to implement the scheme. The slum dwellers were required to pay a certain sum of money — one-third of cost as a down payment and the balance through a loan repayable over 15 years. Allottees were not allowed to transfer their apartment for a period of 10 years. This scheme did not do well because of the following factors:

Investors and private builders did not find sufficient business opportunity because of a cap on their profits.

Developers were wary of getting stuck in the projects due to quarrels with the slum dwellers.

Slum dwellers were wary of giving possession of their plots in the absence of alternative accommodation.

The cut-off date for eligibility was kept as 1985, which meant slum-dwellers who came to reside there post 1985 were not eligible for rehabilitation. This created significant problems.

This scheme had its flaws but was, in our view, on the right track in bringing about a more sustainable long-term solution to slum area redevelopment. In 1995, it was tweaked to come up with the Slum Rehabilitation Scheme (SRS). The scheme was opened to all slum dwellers who had their names on the electoral rolls as of 1995. The area of apartments to be given to the slum dwellers was increased to 225sqft and these were to be given free. Developers rehabilitating the slums were given 0.75sqft of free space component for every 1sqft of rehab space constructed in the island city, and a ratio of 1:1 was decided for the suburbs. The Slum Rehabilitation Authority (SRA) was set up as an approving, co-ordinating and monitoring agency. If the free sale component could not be completely consumed on that parcel of land itself due to the restriction of an FSI of 2.5, then the remainder was allowed to be transferred to another area north of the original area as Transfer of Development Rights (TDRs). These TDRs can also be sold to other developers for their projects. The TDRs, though, are allowed only in the suburbs of Mumbai, not in the island city. Amendments were made to various acts to curb the possibility of slum dwellers appealing to courts of law

Current slum rehabilitation laws framed in 1995



against the scheme. Police power was allowed to be used to evict those obstructing the rehab work as long as 70% of slum dwellers had given their consent.

While some of the operating parameters of this scheme have changed in the past 15 years, chiefly with a view to better incentivisation, this is the scheme on which all the slum rehabilitation projects being undertaken in Mumbai rest.

In the past 13 years, almost 120,000 slum families have been rehabilitated in various locations while another 250,000 rehab tenements are currently being constructed. Many of the projects earlier were on a very small-scale, with a few hundred houses each; but now the larger developers are focusing on efficiencies of scale and looking at projects where thousands of residents need to be rehabilitated.



Background

Where does India stand on the global slum map? According to United Nations data, while the proportion of urban population living in slums in the developing world has declined from 47% in 1990 to 37% in 2005, due to rising population and increasing urbanisation, the absolute number of slum dwellers is increasing. The UN estimates that about 1bn people lived in slums as of 2007 and this number is likely to double by 2030F.

As per the Census of India, 2001 the number of people living in slums in the country almost tripled between 1981 and 2001 from 27.9mn to 75.3mn — exceeding the population of Britain. It is expected to further move up to 104.7mn by 2017F, according to the Ministry of Housing and Urban Poverty Alleviation. As per UN Habitat, among developing countries, India’s slum population as a percentage of the urban population is one of the highest. In absolute numbers, it is the second highest after China. Note that UN Habitat estimates about 110.2mn people were living in slums in India as of 2005, which is much higher than the census numbers, possibly due to different classification norms for slums. This means that about 11% of the world’s slum population is in India.

Exhibit 5. Proportion of urban population in slums

Source: UN Habitat

Around 11% of the world’s slum population is in India



Exhibit 6. Slum population as percentage of urban population among developing countries

0

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30

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50

60

Arg

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Sou

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fric

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Vie

tnam

1990 2001 2005% of urban population

Source: UN Habitat

Exhibit 7. Slum population in some developing countries

525456585

105125145165185

Arg

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a

Bra

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Chi

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1990 2001 2005Slum population (mn)

Source: UN Habitat

Exhibit 8. Slum population in some Indian cities as of 2001

City Total population (in mn) Slum population (in mn) % of total population

Greater Mumbai 12.0 6.5 53.9

Delhi 9.9 1.9 18.7

Kolkata 4.6 1.5 32.5

Bangalore 4.3 0.4 10.0

Chennai 4.3 0.8 18.9

Ahmedabad 3.6 0.5 13.5

Hyderabad 3.5 0.6 17.2

Kanpur 2.6 0.4 14.4

Pune 2.5 0.5 19.4

Source: Census, 2001



Business opportunity

Potential for slum rehabilitation in Mumbai Constraint of land availability in Greater Mumbai Mumbai Metropolitan Region (MMR), the financial centre of India, is the second-largest urban agglomeration in the world, with a current population of approximately 21mn. The Mumbai Municipal Corporation limits (Greater Mumbai) covers 438 sq km of developed area, with a population of about 14.1mn people. Mumbai consequently has one of the highest population densities in the world, with a human density of 32,191 people/sq km (source: United Nations). This kind of density combined with the geographic and regulatory factors (explained below) leads to land being limited in availability, as well as expensive.

Exhibit 9. Average population density

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Chi

cago

New

Yor

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Mex

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Jaka

rta

Bei

jing

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Seo

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Mum

bai

(Persons/sq.km.)

Source: City Mayors, United Nations

Geography shapes the city

Most urban agglomerations in the world develop in a circular and outward manner. But Mumbai’s geographical limitations — it being a narrow peninsula — mean it has developed in a linear manner, with the prime commercial business district (CBD) of Nariman Point, Cuffe Parade and Fort at the bottom end, and the new business districts of Lower Parel and Bandra-Kurla Complex at the centre of the linear development.

These are the prime employment-generating centres in the services sector, especially finance. Alternative employment-generating centres in Thane and Navi Mumbai have developed over the past five years on the outskirts, primarily for the IT/ITeS sectors.

Affordable residential areas are to the north-west, north-east and on the mainland, which is to the east.

Geography has constrained urban development



Exhibit 10. Employment regions in Mumbai Metropolitan Region

Note: Size of the circle represents higher employment generation.

Source: Wikimapia, Mumbai Metropolitan Regional Development Authority (MMRDA)

Development controlled due to geography and infrastructure

While the narrow linear geography constrains physical development, the local government has restricted the floor space index (FSI, ie, floor-to-area ratio or plot ratio) in the well developed Greater Mumbai or island city to just 1.33 (increased in 2008 from 1.0, with payment to be made for utilising the extra 0.33 FSI) and in the suburbs to a maximum of 2.0. This is due to the belief that increasing the FSI would lead to a greater inflow of people into the city, which would burden the weak civic infrastructure in terms of the resultant traffic, water requirements, power supply and sewage transport, and prevent economic forces from dispersing the population to areas further away from the city.

The restrictive planning regime in Mumbai is in stark contrast to other cities across the world, where FSI/plot ratios are significantly higher. Plot ratios in the CBD of major cities include: Singapore with an FSI of 12-15, New York with an FSI of 15, and Seoul with an FSI of 10.

In addition to the low FSI, Mumbai is subject to a Coastal Regulation Zone (CRZ) restriction preventing any construction within 500m of the high tide zone, except for the redevelopment of existing structures.

Navi Mumbai/Panvel

Thane/Dombivali/Kalyan

Bandra-Kurla Complex/Andheri

South-Central Mumbai

Malad/Vasai/Virar

Restrictive planning regime



Planning guidelines hamper development in the city centre

A large part of Mumbai comes under environmental regulations and geographical features which prevent development.

Exhibit 11. Land use

Land use (sqkm) Island city Western suburbs Eastern suburbs Total

Urban zone 55 106 81 241

Industrial Zone 6 10 18 34

Green Zone 2 51 44 97

National Park - 32 19 51

Recreation - 22 - 22

Harbour/Airport 10 5 - 15

Coastal Wetland - 0 - 0

Waterbody - - 8 8

Total 72 227 168 468

Source: Mumbai Metropolitan Region Development Authority (MMRDA)

Exhibit 12. Property prices in major cities of the world vs South Mumbai

City Property price (INR/sf)

London 94,889

Manhattan 73,093

Hong Kong 69,523

Paris 65,543

Tokyo 62,266

Singapore 51,042

South Mumbai 50,000

Source: Global Property Guide

Exhibit 13. Built-up area against distance from CBD (Mumbai vs Seoul)

05

101520253035404550

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43

Distance from CBD (km)

Mumbai built up area Seoul built up area

(sq. km)

Source: Alain Bertaud and Jan Breuckner, 2003

All these factors lead to land availability being low and expensive in the Greater Mumbai region. Some of the land deals which have taken place in the recent past are also at elevated prices.



Exhibit 14. Recent land deals in Mumbai

Location Buyer Land cost + TDR

cost (INRbn)Saleable area

(mn sqft)Cost per sqft

(INR/sqft)

Wadala Lodha Developers 37.0 7.4 4,973

Worli-Lower Parel Indiabulls Real Estate 24.4 3.2 7,549



Goregaon Sunteck Realty 2.2 0.7 3,006

Ghatkopar(E) Wadhwa Developers 7.5 2.2 3,393

Note: Have added TDR costs to the Andheri, Goregaon and Ghatkopar land parcels to achieve the saleable area on an FSI of 1

Source: Nomura research and estimates

Slum rehabilitation is the cheapest land source Given the absence of any freehold open land in Greater Mumbai, there are only four ways to acquire land in the city:

Textile mill land: Most of the textile mills in Mumbai have closed down and are being sold off to developers for real estate purposes. Such textile mills are mainly concentrated in the Central Mumbai area of Dadar, Parel and Worli. This area is witnessing significant construction activity in both residential and commercial real estate, and in our opinion is likely to face an over-supply of both over the next three to four years. Also, cost of such land has increased appreciably over the past five years as the number of available mills declines. For instance, Indiabulls Real Estate acquired two mill lands in Lower Parel in 2005 and 2006 for what is now an effective price of INR2,200/sqft of saleable area. In August 2010, it acquired another two mill lands in the same location at an effective price of INR7,550/sqft of saleable area (assuming the same FSI of 5 as for earlier mills through public parking incentive and adding cost of building the public parking facility).

Government land auctions: Government agencies own a few open land parcels in Wadala, Bandra, Bandra-Kurla Complex, among others, and are likely to offer the same to developers. Given the paucity of such land and its attractive location, it is likely to attract strong bidding competition, likely pushing up prices and resulting in only premium housing or commercial development being viable on such land. For instance, Lodha Developers paid an NPV value of INR37bn in Wadala, Mumbai, in May 2010 at a land auction by a government agency, resulting in India’s largest land deal by value.

Industrial land: Realising that the land they are sitting on is much more valuable than the returns being generated, industries in Mumbai have been shifting out and selling off their land or offering it for development. But these land parcels do not come cheap, since industrial companies are likely to hold out until they get high valuations. For example, we understand Sheth Developers paid almost INR4,737/sqft for an 18-acre land parcel in the suburb of Andheri(E) sold by Borosil Ltd. This compares with apartment pricing of INR9-10,000/sqft in this area.

The above sources of land are slowly getting exhausted in Mumbai and hence prices are starting to get expensive. With the land price in many cases proving to be about 40-50% of the final sale price of the developed project, we estimate operating margins of developers on these projects could get squeezed to sub-30%, versus a historical norm of 45-50%. This would mean that property prices need to move up still further, which may not be possible given that they are already at an all-time peak; or a higher FSI would be necessary as compared with the current level of 2, and this may or may not be forthcoming.

Developers, we believe, will now be looking for a cheaper source of large parcels of land, which they are likely to find in the fourth option: slum rehabilitation and other redevelopment.

Sources of land in Mumbai are declining. Bidding for land is competitive, pushing up prices to very high levels



Rehabilitating slums and other redevelopment: On our estimates, Mumbai has 7.5mn slum dwellers spread across the city. Assuming an average family size of 5, there are 1.5mn slum households in the city. In our research we have found that most slum units average a ground coverage area of 175sqft, which means that approximately 263mn sqft of land is covered by slums within Greater Mumbai. These slum dwellers need to be rehabilitated in houses of 300sqft built-up area (269 sqft carpet area), and in most slum rehab projects the developer gets 1sqft of free sale area for every 1sqft of rehab area constructed. Also, for such projects an FSI of 3-4 is allotted against an FSI of 1 + TDR of 1 (maximum FSI of 2) for normal projects. Thus, the amount of free sale space which can be generated through rehabilitating all current slum dwellers is about 450mn sqft, as outlined below:

Exhibit 15. Potential for free sale space to be generated from slum rehab in Greater Mumbai

No. of slum dwellers (mn) (a) 7.5

Average occupants per slum unit (b) 5

No. of slum units (mn) (c=a/b) 1.5

Average size of a slum unit (sqft) (d) 175

Land covered by slums in Greater Mumbai (mn) (e=c*d) 263

Rehab built-up area per slum unit (sqft) (f) 300

Total rehab potential (mn sqft) (g=c*f) 450

Free sale portion generated (on a 1sqft for 1sqft basis) (mn sqft) (h=g) 450

Source: Nomura estimates

This 450mn sqft of free sale portion can largely be generated in the form of developable land after clearing the slums, while some portion may be generated as Transfer of Developable Rights (TDRs), depending on the density of the slum, prevalent FSI and other regulations regarding development of a particular slum land parcel. At an average selling price of INR7,500/sqft, the market opportunity could be as large as INR3.4trn, on our estimates. Even spread over 30 years, the annual market opportunity is as large as INR113bn. Many of the slums in Mumbai are situated on private land and the land owners would likely be eager to join hands with developers to rehabilitate these slum dwellers.

Exhibit 16. Land ownership of slums in Mumbai, 2001

Land ownership No. of slum pockets % of slum pockets

Municipal 313 16.0

State government 431 22.0

Central government 88 4.5

Railways 13 0.7

Private 924 47.1

Mixed 190 9.7

Total 1,959 100.0

Source: Yuva and Montgomery Watson Consultants, India (2001)

The important point is that land generated in this manner is the cheapest source of land currently in Mumbai. The cost of this land is equivalent to the cost of approvals, providing transit accommodation or rentals for 18 months, and constructing the rehab tenements, which combined averages about INR1,500/sqft currently. Compare this with the cost of recent land purchases shown in Exhibit 14, and one can see why slum rehabilitation will likely increasingly be the method of ‘purchasing’ land. Another benefit comes from the fact that the rehab cost is spread over a few years, whereas in land purchases one generally needs to pay upfront, which can be stressful to a company’s cash flows and balance sheet. So, why is slum rehab not the preferred method of ‘purchasing’ land already? What is the catch?

Land generated in this manner is the cheapest source of land currently in Mumbai

450mn sqft of free sale developable area can be generated from slums in Mumbai; an opportunity of US$72bn



Slum rehab does have a long gestation period and can be complicated

Slum rehab projects are not easy to execute and have long gestation periods. They also require developers to build up their capabilities, in terms of being able to interact with slum dwellers, the SRA, courts and quite often local politicians. Depending on the size of the slum, it can take anything from three months to two years to get consent from 70% of the families, post which the eligibility of the slum dwellers is decided (only families resident before the year 2,000 are eligible for rehab) and other approvals are sought (for a detailed description, see the section entitled ‘Rules and regulations’), which can take another six months.

The investments to be made in this period are generally limited, however. Once the Letter of Intent (LOI) is issued by the SRA, the process of clearing the slum starts by constructing transit accommodation for a few families or compensating them for 18-month rentals, clearing their dwellings, constructing a rehab building in that cleared space, shifting the original families there and repeating the process until the entire slum is cleared and rehabilitated. It usually takes 18 months before enough land has been cleared to start work on the free sale portion, though the pre-sales may have started earlier and the entire rehabilitation can be completed in 24-36 months. If TDRs are being created, then the developer starts receiving them in proportion to the rehab area being constructed. On the whole, a slum rehab project along with the free sale or TDR part can take anywhere between four and 10 years from identification of slum to completion depending on the size. It thus becomes essential to compare the IRRs generated by a slum rehab project with those of a direct land purchase project.

…but IRRs are still much stronger than a normal development project

We take the example of the Borosil Ltd. land purchased by Sheth Developers (unlisted) in Andheri (E), called Project A, and compare it with a hypothetical similar-sized slum project in the same location which Sheth identifies today. Sheth has acquired a land parcel of ~0.8mn sqft and at the current max FSI of 2 can achieve a saleable area of 2.2mn sqft. If we assume a similar slum with a land area of 0.8mn sqft and an average slum tenement size of 175sqft, the mechanics of slum rehabilitation explained earlier will result in a rehab area of 1.4mn sqft and a free sale saleable area of 1.4mn sqft (includes 40% loading). Since the FSI of 3 will be consumed with this development, 0.3mn sqft of Sheth’s compensatory area is left over which can be sold as TDRs. We assume that the free sale portion of the slum project will be similar to Project A but priced 10% lower because of its proximity to the slum rehab project. The timelines to sell and construct the free sale portion and Project A will be similar, but the slum rehab work will start only in FY13 while Project A will start development and sales from FY11 onward. Thus, Project A has a two-year head-start and will be monetised in five years, while the slum rehab project will take nine years from now to be completely monetised.

Below we show a simple IRR model for the two projects:

Gestation period of 4-10 years depending on size and density of slum

IRRs can still be five times those of a normal land purchase project



Exhibit 17. IRR for slum rehab project

Assumptions

Land cost (INRmn) -

No. of tenements 4,571

Area per tenement (sqft) 300

Land area (mn sqft) 0.8

Rehab area (mn sqft) 1.4

Free sale area (mn sqft) 1.4

TDR generated (mn sqft) 0.3

Total cost of rehab (INR/sqft) 1,500

Cost of free sale construction (INR/sqft) 2,000

Cost of generating TDR (INR/sqft) -

Sale price of free sale (INR/sqft) 9,000

Sale price of TDR (INR/sqft) 2,500

Infrastructure and amenities costs (INR/sqft) 100

Maintenance costs (INR/sqft) 10

Security deposit and guarantee (INR/sqft) 50

Discount rate (%) 15.0

Working FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Land cost (INRmn) -

Rehab area constructed (mn sqft) 0.3 0.3 0.3 0.3

Rehab cash outflow (INRmn) 514 540 567 595

Residential free sale area sold (mn sqft) 0.4 0.5 0.6

Area on which cash realized (mn sqft) 0.1 0.4 0.5 0.3 0.1

Residential free sale cash outflow (INRmn) 288 801 1,143 783 140

Residential free sale cash flow (INRmn) 1,296 3,606 5,144 3,526 630

TDR area sold (mn sqft) 0.1 0.1 0.1 0.1

TDR cash outflow (INRmn) - - - -

TDR cash inflow (INRmn) 214 214 214 214

Maintenance + deposit+ guarantee cash outflow (INRmn) 82

Infrastructure cash outflow (INRmn) 46 46 46

Cash flow before tax (INRmn) - - (428) (371) 610 2,424 4,001 2,742 490

Tax outflow @ 20% (INRmn) - (86) (74) 122 485 800 548 98

Net cashflow (INRmn) - - (342) (297) 488 1,939 3,201 2,194 392

Present value of net cashflow (INRmn) - - (259) (195) 279 964 1,384 825 128

Net present value (INRmn) 3,125

IRR (%) 90


Exhibit 18. IRR for Project A

Assumptions

Land cost (INRmn) 8,300

Land area (mn sqft) 0.8

TDR area purchased (mn sqft) 0.8

Cost of buying TDR (INR/sqft) 2,500

Saleable area (mn sqft) 2.2

Cost of residential construction (INR/sqft) 2,000

Sale price of residential (INR/sqft) 10,000

Discount rate (%) 15.0

Working FY11 FY12 FY13 FY14 FY15

Land cost + TDR cost (INRmn) 10,260

Residential free sale area (mn sqft) 0.5 0.8 0.9

Area on which cash realized (mn sqft) 0.2 0.5 0.8 0.5 0.2

Residential free sale cash outflow (INRmn) 439 1,054 1,537 1,010 351

Residential free sale cash inflow (INRmn) 2,195 5,269 7,684 5,049 1,756

Cash flow before tax (INRmn) (8,504) 4,215 6,147 4,040 1,405

Tax outflow @ 30% (INRmn) (2,551) 1,265 1,844 1,212 422

PAT (INRmn) (5,953) 2,951 4,303 2,828 984

Present value (INRmn) (5,953) 2,566 3,254 1,859 562

Net present value (INRmn) 2,288

IRR (%) 18




As shown in the preceding tables, the slum rehab project with an IRR of 90% is much more profitable than Project A with an IRR of just 18%.The lack of large upfront investment in the slum rehab project more than makes up for the longer timelines and hassles involved. The only way for Project A to achieve an IRR as high as the slum rehab project would be if Sheth were to develop public parking in the project and get an extra FSI of at least 2.75 on the project, negating the need to purchase TDRs. In this case, even the NPV would be much higher. In our opinion, while some projects in Mumbai could get permission for a public parking FSI incentive, not all would be able to, otherwise it would lead to oversupply of parking space and misuse of the regulation.

We cover the business opportunity from the redevelopment of older properties in the section entitled ‘Redevelopment of older buildings is a large opportunity’.

The opportunities for slum rehabilitation are spread across Mumbai, particularly in the eastern and western suburbs. As the map below shows, the area in the centre of Mumbai has a fairly strong concentration of slums, and this is where Dharavi and the slums around the airport are located. The land on which these slums are sitting is extremely valuable given the location’s proximity to the financial centres of the city.

Exhibit 19. Percentage of slum population in various areas of Greater Mumbai as of 2001

Note: Numbers within the picture refer to the area no. and not the percentage

Source: Census 2001

Exhibit 20. Percentage of slum population in the three parts of Mumbai (2001)

Area % of area population to Gr. Mumbai population

% of slum population to areas population

Island city 27.9 32.7

Western suburbs 42.9 54.0

Eastern Suburbs 29.3 74.4

Total 54.1

Source: Census 2001



Past experiences of slum redevelopment

Case studies of some major slum rehabilitation projects in Mumbai According to the SRA, there are 450 slum rehab projects ongoing in Mumbai involving 250,000 tenements. To date, most large slum rehab projects have been taken up to make way for infrastructure in the city, but now many slum rehab projects are being taken up for their real estate potential. Key among the infrastructure-based projects are the Mumbai Urban Transport Project (MUTP), Mumbai Urban Infrastructure Project (MUIP) and Mumbai International Airport Ltd. (MIAL) expansion project.

The MUTP and MUIP slum rehab projects The MUTP and MUIP are World Bank-funded projects aimed at bringing about improvement in traffic and transportation in the city under the aegis of the Mumbai Metropolitan Region Development Authority (MMRDA). The MUTP project was started in 2002; the MUIP commenced in 2003. Both are ongoing. Implementation of these projects required shifting of 53,000 slum- and pavement-dwelling families and commercial establishments with 350,000 people from various locations. The MMRDA to date has created 31 townships for almost 50,000 tenements of 225sqft carpet area each, on land acquired by the MMRDA in various areas of Mumbai (source: MMRDA). A total built-up area of about 12.5mn sqft has been developed for the rehabilitation. Involvement of private developers was minimal in these projects, but delays encountered led to greater involvement by private developers in later slum rehab projects of both the MMRDA and BMC.

Issues faced:

Protests by slum dwellers led to NGOs having to be brought in to convince them of the benefits and monitor the development

Inexperience of authorities, courts and slum residents led to significant delays

Exhibit 21. Various rehab sites for MUTP and MUIP marked on map

Source: MMRDA, Wikimapia

250,000 rehab tenements under construction in Mumbai

350,000 slum residents have been rehabilitated in this project



Exhibit 22. Rehab site at Mankhurd

Source: MMRDA

Exhibit 23. Rehab site at Majas

Source: MMRDA

Exhibit 24. Rehab site at Ghatkopar

Source: MMRDA

Exhibit 25. Rehab site in Mumbai

Source: MMRDA

BMC infrastructure projects The Municipal Corporation of Mumbai is engaged in certain infrastructure projects like the Brihanmumbai Storm Water Drainage Project (BRIMSTOWAD), strengthening the distribution system of water supply in Mumbai, and the Mithi river development project.

The BRIMSTOWAD project has resulted in a need for rehabilitating 26,000 slum families who have been affected by the project, while the water supply and Mithi river projects will displace about 71,000 families. DB Realty has been constructing a rehab colony in Mahul, Mumbai, on a 39-acre land since May 2007, where it is developing 14,116 rehab tenements on a total area of 5.18mn sqft on land it owns. About 12,000 tenements are almost ready and 4,500 have been handed over to some of the BRIMSTOWAD-affected families. DB Realty will receive TDRs on both the land it owns and for constructing the rehab development. Since this project has been classified in the ‘difficult’ category, DB Realty will receive 1.33sqft of TDRs for every 1sqft of rehab constructed and 1sqft of TDRs for every 1sqft of land surrendered. In total, DB Realty will receive 8.7mn sqft of TDRs which it can sell or utilise on its projects. Since Mahul is the southern-most suburb in Mumbai, TDRs generated here receive the highest value as they can be used in high-priced locations like Bandra. DB Realty has already

DB Realty has developed 14,116 rehab tenements for this project



sold 5.0mn sqft of TDRs to date for a value of INR10.3bn, while it is spending some INR8.6bn on the entire project.

Issues faced:

Proximity of rehab buildings to BPCL’s oil refinery led to security concerns and delays in shifting.

Distance of Mahul from original slum locations led to protests by slum dwellers.

Exhibit 26. Mahul rehab by DB Realty (circled in map)

Source: Man Infraconstruction, Wkimapia



Mumbai International Airport Ltd. (MIAL) expansion project Slum dwellers have over the years encroached on some of the 276 acres of land belonging to MIAL around the Mumbai airport (source: MIAL). The airport now needs space for expansion while, after privatisation, the owner, GVK, wants to use the land for airport-related commercial ventures. This has made it imperative for slum dwellers to be rehabilitated in other areas and the land cleared. We believe this is the largest slum redevelopment project being undertaken in India, if not the world.

In October 2007, HDIL was awarded the contract for rehabilitating 85,000 families resident on those 276 acres and evicting others who do not meet the eligibility criteria (those who do not have proof of pre-1995 residency). HDIL has to acquire land, transfer it to the SRA, construct rehab tenements of 269sqft carpet area each, and maintain the structures for a period of 12 months after handing over. The government has classified this as a ‘difficult’ SRA project and hence HDIL in compensation will be able to utilise an FSI of 4 on the land it acquires (of which it can use a minimum 25% for its own project), receive 1sqft of TDRs in lieu of 1sqft of land area transferred to SRA and 1.33 sqft of TDRs in lieu of 1sqft of rehab tenement constructed. HDIL will also receive 65 acres of land for its own use from the 276 acres which have been cleared around the airport. In total, HDIL would be able to generate 44.8mn sqft of TDRs for sale by the end of the project. HDIL has taken up this project in three phases, with the construction of phase 1 of the project, rehabilitating 28,000 families, likely to be complete in the next six months. A survey of the slum dwellers is being taken in September 2010 and shifting of eligible families can start in December 2010. The 2nd phase is likely to commence in the next three to six months, with completion likely within 30 months. The 3rd phase will possibly start 24 months from now and end 30 months thereafter. Our view is that the project could be completed by September 2015 — eight years after it began.

Issues faced:

Lack of water supply to rehab buildings led to delays.

Survey of slum dwellers yet to be done to decide eligibility. Some families may protest relocation and take legal recourse.

Areas to be cleared around the airport are shown below:

Exhibit 27. Areas encroached by slums and to be cleared around airport

Source: HDIL

HDIL is undertaking the largest slum rehabilitation project in India



Exhibit 28. Rehab areas for Phase 1

Source: HDIL

Exhibit 29. Rehab construction under way at Kurla (W)

Source: HDIL, Nomura research

Airport Airport



Exhibit 30. Rehab construction under way at Kurla (W)

Source: HDIL, Nomura research

Golibar Maidan slums, Santacruz This is the largest slum rehab project in India currently which is meant solely for realising the real estate value of the land after rehabilitating the slum dwellers.

This project is being undertaken by Unitech Ltd. in a 50:50 JV with Shivalik Ventures at Santacruz (E) on the Western Express highway. It involves rehabilitating 26,000 families mainly on the 127 acres of land itself (30 acres is under litigation as the title records are not clear). Because of the high density of the project, the developer is allowed an FSI of 4 on the land. About 7.8mn sqft of built-up area would be required to rehabilitate all the families. The developer JV will be able to generate a total of 14.3mn sqft of developable area or 19mn sqft of saleable area. About 3,500 families have already been rehabilitated in 269sqft carpet area flats since 2008. About 1mn sqft of the free sale area is expected to be launched in the next six months.

Issues faced:

Opposition of some slum dwellers to the project was struck down by the High Court but led to delays.

Unitech’s funding problems in late 2008 and early 2009 led to delays in the project.

30 acres of land is the subject of litigation between the Indian Air Force and the MHADA. Failure to get this land may affect the free sale area of the project.

A third-party fund of Lehman Brothers had invested in the initial 1mn sqft of free sale portion. There is a possibility that the fund may exercise its put option and pull out its investment.

Largest slum rehab project in India not linked to any infrastructure project — meant solely for real estate and being undertaken by Unitech-Shivalik JV



Exhibit 31. Location of Golibar slum rehab project


Exhibit 32. Rehab buildings under construction




Possible future large slum rehab projects

Dharavi redevelopment project The proposed redevelopment of Dharavi would be the largest slum rehab project — even larger than the MIAL expansion project. Until a few years ago Dharavi was considered the largest slum in Asia, and it is estimated that 0.75-1mn people may be resident there currently. The slum is spread over 223ha of land in the middle of Mumbai, and is arguably one of the most attractive parcels of land in the city.

Exhibit 33. Location of Dharavi


The state government has been contemplating redevelopment of this area for quite a few years. It was only in 2006, when real estate prices were booming, that momentum increased. A redevelopment plan was formed where Dharavi was to be redeveloped as an integrated suburb with residences, income-generating activities and social infrastructure in place. The residents were supposed to be rehabilitated in 300sqft tenements on the land itself. Dharavi was divided into five sectors and each was to be given to one developer based on an auction. In the auction, the developer who would pay the highest premium to the government for a certain sector would get to redevelop that sector. The developer would be given an FSI of 4, using which he could construct the rehab buildings, social amenities, infrastructure and free sale portion in situ, according to a previously prepared master plan. The government undertook a large awareness campaign among residents and all the other authorities and agencies, as well as local politicians. Regulations were also amended to allow the redevelopment as per the plan. About 27.5mn sqft was to be constructed for rehabilitation and 36.6mn sqft for free sale. A cost of INR92.5 bn was envisaged for the entire project.

One of the largest, most attractively located and most controversial slum redevelopment projects, in our view



The government floated a global tender in 2007, where 26 companies, including global ones, participated in various consortia and 19 were selected after meeting technical requirements. But the global slowdown followed in 2008 and about 12 developers opted out, leaving just seven to submit financial bids. The process has stopped at this stage due to a lack of bidders. Developers opting out cited lack of clarity in the rehabilitation programme, as well as issues of funding availability. We believe that with the recovery in the economy and Mumbai’s real estate prices touching new highs, the project could soon be brought back to the table after earlier mistakes are corrected.

Issues faced:

The government only recognised about 57,000 tenements on the ground floors as eligible for redevelopment. This left a large population staying in hutments built on top of other hutments in danger of being evicted. If carried out, the project could have resulted in large-scale protests.

Earlier only 225sqft tenements were to be given to those eligible. The residents demanded 300sqft, which was agreed to after some delay.

Dharavi is not only a residential area. A vast array of small-scale commercial activities are carried out, including recycling, processed food manufacturing, leather goods manufacturing, chemical manufacturing, pottery and textiles. Dharavi exports over US$500mn of goods every year, according to the BBC and Nyenrode Business Universiteit. The government was willing to rehabilitate only non-polluting industries in the area and only then with a maximum free area of 300sqft. Residents feared this would lead to significant loss of livelihood.

Some redevelopment had already taken place in piece-meal fashion over the years, resulting in added complications.

A committee appointed by the government to guide the redevelopment process itself protested against the plan, calling it ‘a land grabbing exercise’ and wondering whether making a dense area still more dense made sense.

Exhibit 34. Dharavi divided into sectors for redevelopment

Source: www.urban-age.net, Mukesh Mehta



There are other large slum pockets in Mumbai which could come up for redevelopment in the next three to five years. We have marked some of these on the following map. While these are the mega-sized ones, several smaller-sized slums are undergoing redevelopment which could contribute to a large free sale area.

Exhibit 35. Some large slums which could be redeveloped


Large slums spread out across Mumbai could be future targets for redevelopment



The legal platform

Rules and regulations Every slum structure existing on or before 1/1/1995 is eligible for rehabilitation. The

state government recently extended this deadline to 1/1/2000, but the move is currently sub-judice.

As of 2008, slum dwellers got a self-contained 225sqft carpet area tenement free of cost. This area was subsequently increased to 269sqft.

Cost of construction of the rehabilitation tenements is cross-subsidised from the sale of free sale tenements in the open market.

The free sale area is generated from the rehab to sale ratio, which is 1:0.75 for City, 1:1 for suburbs and 1:1.333 for difficult projects (>650 tenements/ha)

The FSI is generated on the basis of the number of rehab units on the plot, NOT as per size of the plot. The FSI was limited to 2.5 for such projects until 2008, but was later hiked to 3. For high-density projects (>650 tenements/ha), it was hiked to 4.

In case the free sale area cannot be completely built on the same land due to height restrictions or complete consumption of FSI, transfer of development rights (TDRs) are issued to the developer which can be traded or utilised anywhere north of the area where they are generated. In cases where land on which the slum is rehabilitated is owned by a private party, the party gets 1sqft TDRs for every 1 sqft of land. The developer gets 0.75sqft or 1sqft or 1.33 sqft for every 1sqft constructed, depending on location and density. TDRs cannot be utilised in the island city.

No financial involvement by the government.

A sum of INR20,000/tenement is recovered from the developer for subsidising the monthly maintenance of the building. INR78/sqft on additional FSI utilised above the permissible FSI of the area in normal circumstances.

70% of slum dwellers should consent to rehabilitation.

Commercial users will get 269sqft free and any area in excess of this would be sold on a preferential basis at the market rate.

Slums and old buildings which are located in the Coastal Regulation Zone (CRZ) area (<500m from sea line) can be redeveloped if state government agencies get a 50% stake in the project at no cost. This rule is still in the proposal stage.



Process by which a slum is rehabilitated

Exhibit 36. Flowchart of the process of rehabilitating a slum

Source: SRA



All slum dwellers residing on the plot prior to 1/1/1995 and in use of the structure are eligible for rehabilitation.

First stage:

At least 70% of slum dwellers in a slum unite under a slum dwellers co-operative housing society.

They appoint a chief promoter and collect share capital of Rs50/- per member and Rs1/- as entrance fee. This is deposited in the name of the proposed housing society in the Mumbai District Central Co-operative/Maharashtra State Co-operative Bank Ltd.

Documents regarding the title of the land are collected by the society. The plot is measured and the slum structures properly demarcated.

Survey of structures on the plot is carried out and the structures are numbered on the plan. A table of house numbers as per plan and the name of occupants is prepared.

A suitable developer is appointed by the society through a general body resolution. The developer appoints professionals, such as architect/licensed surveyor and structural engineer, among others.

The developer enters into individual agreements with all the slum dwellers agreeing to participate in the scheme.

A proposal enclosing requisite plans, annexures and documents is submitted by the architect to the SRA.

Second stage:

Initial scrutiny of the proposal is carried out by the concerned sub-engineer. It is ensured that all requisite documents are submitted along with the proposal.

If the proposal is in order, the scrutiny fee to be paid is worked out by the sub-engineer.

The scrutiny is paid by the developer.

Annexure II is forwarded to the competent authority for certification.

Annexure III is simultaneously forwarded to the financial wing for scrutiny.

Annexure I is scrutinised by the engineering wing.

After Annexures II and III are certified by the competent authorities, approvals to LOI, layout, Intimation of Approval and the commencement certificate for the first building for work up to plinth are processed. Efforts are made to issue all four approvals at one go, at least for the first rehabilitation building.

Third stage:

The society draws lots for allotment of the tenements to members ready to participate in the scheme. A draw for non-participating members from the remaining tenements is also undertaken.

The developer arranges for transit accommodation for the slum dwellers, which can be either on-site or off site, as mutually agreed between the slum dwellers and the developers.



In case the developer has difficulty in arranging suitable transit accommodation due to site constraints, the SRA extends all help to the developers to locate a suitable site in the vicinity for construction of transit camps and helps to obtain permission from relevant authorities for the same. In case no suitable site is available in the vicinity, transit camps of the MHADA and MMRDA, among others, can be taken on a rental basis by the developers. The SRA extends all possible help for obtaining these transit tenements from these authorities.

Lots are drawn for allotment of transit tenements.

The slum dwellers are shifted to the transit camps and their hutments demolished. Slum dwellers who do not agree to participate in the scheme are given notice by the society stating the allotment details and requesting them to participate in the scheme.

If these members do not agree to participate within 15 days of the approval of the proposal, they are physically evicted from the site under the provisions of Sec 33 and 38 of Maharashtra Slum Areas (Improvement, Clearance and Redevelopment) Act, 1971, to ensure there is no obstruction to the scheme.

After demolition of the structures, work up to plinth is completed.

After checking the plinth dimensions, further permission to carry out construction beyond plinth is granted.

Fourth stage:

Plans for further buildings, both for sale and rehabilitation, are then approved.

Building permissions for the sale buildings are given in the proportion of the permissions given to the rehabilitation buildings.

Upon completion of rehabilitation building/wing, a list of allotment is drawn up. The allotment is done in the joint name of the head of the household and the spouse.

Building completion certificate is submitted by the architect.

After checking of the building and compliance of the IOA conditions, occupation permission for the building is granted. The slum dwellers as per the allotment list are given possession of the tenements.

The SRA issues identity cards to the slum dwellers.

Fifth stage:

Further construction of the remaining building/s is then taken up.

Further building permissions as well as occupation permissions to the buildings are granted in due course.

Upon completion of the last buildings in the layout, the underlying land is transferred on lease to the society of slum dwellers. In case of government land, the lease rent is nominal.

Separate property cards for the rehabilitation building plot and the sale building plot, as well as for the reservation plots to be handed over, are prepared. The SRA acts as facilitating agency in case of any difficulty with the revenue authorities.



Other redevelopment

Redevelopment of older buildings is a large opportunity While this is slum rehabilitation, redevelopment of old buildings including government agency housing colonies is a very large business opportunity, too. In Mumbai, mainly in the island city, there are 16,104 old and dilapidated cessed buildings in urgent need of redevelopment. Cessed buildings are those where rentals have been frozen at extremely low levels, leaving the landlords with no funds for maintenance. There are about 13,307 buildings constructed prior to 1940 and classified as class ‘A’. These can be redeveloped with an FSI of 2.5 or FSI for rehabilitation area + 50% to 70% of the same area as an incentive FSI for developers, whichever is higher. The rehabilitated tenants get a free apartment of 300sqft carpet area on the same land while the landlord is paid off. While the redevelopment takes place the developer has to pay rehabilitated tenants rentals or re-house them. Class ‘B’ buildings are those constructed from 1940-1950, and there are about 1,474 of them. Redeveloping them will enable the developer to get 50-70% of the rehabilitated area as an incentive FSI. Class ‘C’ buildings are those constructed from 1950-1969. Redeveloping these buildings would mean the developer getting a total FSI of 2.5. If a developer undertakes redevelopment of a cluster of buildings, whether cessed or uncessed, in an area of 1 acre or more, it will get a total FSI of 4. In this case, the developer will have to enter into a JV with the Maharashtra Housing and Development Authority (MHADA).

While the exact area covered by these buildings is unknown, even if we conservatively assume that the average area to be rehabilitated per building is 10,000 sqft (about 35 tenants), it means about 160mn sqft of land just in the island city is available with a free sale area of at least 80mn sqft, worth INR1.6tn (US$34bn). The magnitude of this redevelopment is large and hence the time required will be significant too, possibly about 30 years, we believe.

Apart from this, there are several buildings in Mumbai, in the island city and suburbs alike, which are not utilising the full FSI available to them. Given high property prices currently, the societies of these buildings are entering into tie-ups with developers to redevelop them. The developer pays an upfront negotiated corpus amount to the society and compensates the owners for rentals for the construction period. The developer gets the FSI which was unutilised as his free sale portion, while the owners get new and possibly larger homes along with the corpus amount. This is a relatively ‘clean’ business, especially compared with slum rehab, and hence is subject to more competition among developers. Still, we believe the potential is vast. Orbit Corporation has based its business model on such redevelopment.

The government has also started giving out its old staff housing colonies to be redeveloped, with the first being the Government Colony at Bandra.

Redevelopment of Government Colony, Bandra

In July 2010, the government cleared the way for the 107-acre government colony at Bandra to be redeveloped. It has been divided into three parts and given to DB Realty, Ackruti City and Kakade Infrastructure for redevelopment. The plan is to build 5,466 new flats, an administrative building, hospitals, schools, plazas and a community centre over an area of 75 acres. In return the developers will get 20 acres for themselves on lease for 99 years. The developers are expected to pay the government INR5bn as an upfront payment, INR3.3bn for buying hospital machinery, and another INR4bn as maintenance corpus. They are to spend INR12bn on constructing the project. Possession of the 20 acres will be given in proportion to the development finished on the 75-acre tract. Existing tenants will be shifted to other accommodation temporarily. An FSI of 3 is being allowed for residential development and 4 for commercial development on the land, but only after a premium to the MMRDA has been paid. The total free sale area available after development over a period of seven years would be about 13mn sqft, on our estimates.

Opportunity to generate 80mn sqft of free sale developable area worth US$34 bn out of redevelopment of dilapidated buildings in the city



Exhibit 37. Location of Govt. colony, Bandra


If this project proceeds smoothly we expect more such government and government agency housing colonies to be bid out for redevelopment. Upcoming developments could also include low-cost housing constructed by the government several decades ago, such as BDD chawls (community housing) and MHADA housing colonies. The MHADA has 56 colonies in Mumbai with 3,701 buildings in them. Developers will get an FSI of 2.5 if these are redeveloped. The MHADA is looking to redevelop its Kannamwar Nagar and Tagore Nagar housing localities in Vikhroli, an eastern suburb of Mumbai, spread over 16,000 houses (0.8mn sqft). The MHADA is also looking to get an additional 31,370 houses from the developer spread over 12.6mn sqft.

BDD chawls, built in various parts of Mumbai as far back as 1923, have been the subject of redevelopment interest for a few years now. We believe a number of developers have been eyeing the total 93-acre tract at Worli, Naigaum, Sewri and Lower Parel. There are a total of 16,544 families in 207 buildings, and each family in this chawl occupies an area of 180sqft. Private developers are likely to be allowed to redevelop this tract once the government makes a decision.

Redevelopment of older buildings is getting to be an attractive opportunity for private equity funds too. According to a report in Mint, 7 September, 2010, about INR20bn of private equity funds could be pumped into redevelopment projects in Mumbai over a period of time.

Upcoming redevelopment projects could include MHADA buildings in Vikhroli and BDD chawls in Worli



Competitors

Key players in the industry The industry is fragmented, with many local and small developers operating in the space. But the key listed players in the slum rehabilitation and redevelopment industry are Housing Development and Infrastructure Ltd (HDIL), DB Realty, Ackruti City, Orbit Corporation. Among the major private companies are Unitech Ltd- Shivalik Venture JV, Lokhandwala Developers, Ahuja Group, Rizvi Group and Omkar Group. Many of the smaller players specialise in getting the consent of the developers and working with the authorities for approvals. They then bring in some of the larger developers in a joint venture to invest and construct the rehab portion, and design, brand and market the free sale project. This enhances the viability of the entire project and presents a win-win situation for both partners in the JV.

HDIL is currently working on India’s largest slum rehabilitation project around the Mumbai airport, along with smaller projects in Bandra and Santacruz. One of the pioneers in this business, it started out in 1996. It is also working on redevelopment projects in Kandivali and Goregaon, along with slum prevention projects in Virar, where it will construct cheap rental housing for the government to allot. It is targeting several new projects in various parts of Mumbai.

DB Realty is another major in the slum rehabilitation and redevelopment business in Mumbai. It has constructed almost 5mn sqft of rehab housing in Mahul, Mumbai, for BMC infrastructure projects. It has also bagged part of the prestigious government staff colony Bandra redevelopment project from the government. Further, it is starting work on a slum rehab project spread over 6mn sqft in Goregaon, Mumbai, and redevelopment projects in Jogeshwari and Sewri, Mumbai, among other projects in South and Central Mumbai. It is one of the major competitors of HDIL.

Ackruti City has completed 4.7mn sqft of slum rehab area since 1997 and has 5.4mn sqft of rehab area under construction currently. This company, along with HDIL, is one of the pioneers in the business, though of late it has focused more on old building and industrial area redevelopment projects. It has 38mn sqft (its economic share) of projects under development with 27% from slum rehab.

Orbit Corporation ventured into real estate in 1989. Its primary focus is on redeveloping older buildings in South and Central Mumbai into premium properties. It is one of the leading companies in this niche. The company has developed about 1.2mn sqft of properties and is working on another 0.4mn sqft of high-end projects from redevelopment. It also has a potential 2.3mn sqft of redevelopment projects in the pipeline, on our estimates.

Players include HDIL, DB Realty, Ackruti City, Orbit Corporation


Housing Development & Infrastructure HDIL IN

PROPERTY | INDIA


Turning coal into diamonds Deeply experienced player in the slum rehab business

Over the past 15 years, HDIL has worked on more than 10mn sqft of slum rehabilitation projects, gaining significant experience in urban renewal, an area that provides high returns, albeit one with long gestation periods and where things can become complex or stall out. This experience has helped HDIL garner India’s largest slum rehabilitation project around the Mumbai airport and should support more project additions to its pipeline. The airport project has made HDIL into the largest supplier of transfer of development rights (TDRs) in Mumbai, adding more than 44mn sqft of TDRs to its portfolio.

Utilising slums to become a branded property developer

Owing to a higher floor space index (FSI) of three/four in redeveloping slums, HDIL is now constructing its own branded projects on cleared slum land, not just selling TDRs. This may lengthen its cashflow cycle but should bring in the benefit of reining in exposure to the volatility of the TDR market. In the past 15 months, it has launched 4.5mn sqft of projects, either by rehabilitating slums or redevelopments.

Discount to NAV to narrow as leverage eases and new projects are added

HDIL sold 5.5mn sqft of projects worth Rs28bn in FY10. Cashflow from these projects, alongside continued strong demand for TDRs at current prices, future sales of new launches and FSI, and infusion of funds through QIP and by promoters, could lead to a significant reduction in net leverage in the next two years, from 0.47x in FY10 to 0.17x in FY11F. This could help HDIL add new and large projects to its portfolio and speed execution; we think this would boost NAV accretion, or at least reduce the NAV trading discount from 26%. Another potential re-rating driver is an EPS CAGR of 41% over FY10-12F. But note: for each year our assumed timelines are pushed back, our NAV falls 8%, while every 10% fall in TDR prices knocks 5% off our NAV.

Key financials & valuations31 Mar (Rsmn) FY09 FY10 FY11F FY12F

Revenue 18,146 15,996 19,333 31,068Reported net profit 8,304 5,967 7,495 13,842

Normalised net profit 7,212 6,024 7,495 13,842

Normalised EPS (Rs ) 26.20 17.85 18.92 32.83

Norm. EPS growth (%) (62.7) (31.8) 6.0 73.5

Norm. P/E (x) 10.3 15.2 14.3 8.2

EV/EBITDA (x) 10.1 10.7 8.5 4.6

Price/book (x) 1.7 1.4 1.2 1.1

Dividend yield (%) 1.4 0.0 0.0 0.0

ROE (%) 20.6 10.5 9.4 13.8

Gearing (%) 44.9 34.1 23.9 16.8

Earnings revisions

Previous norm. net profit na na na

Change from previous (%) na na na

Previous norm. EPS (Rs) na na na

Source: Company, Nomura estimates

Share price relative to MSCI India

1m 3m 6m

(5.0) 9.7 (9.9)

(4.2) 10.1 (11.5)

(10.8) 0.2 (19.8)


52-week range (Rs)

3-mth avg daily turnover (U S$mn)

Stock borrowability

Major shareholders (%)

Wadhawan family 43.2

Absolute (Rs)

Absolute (US$)

Relative to Index

Estimated free float (%)

Market cap (US$mn) 2,172

62.1402.6/204.8

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Key financials & valuations31 Mar (Rsmn) FY09 FY10 FY11F FY12F

Revenue 18,146 15,996 19,333 31,068Reported net profit 8,304 5,967 7,495 13,842

Normalised net profit 7,212 6,024 7,495 13,842

Normalised EPS (Rs ) 26.20 17.85 18.92 32.83

Norm. EPS growth (%) (62.7) (31.8) 6.0 73.5

Norm. P/E (x) 10.3 15.2 14.3 8.2

EV/EBITDA (x) 10.1 10.7 8.5 4.6

Price/book (x) 1.7 1.4 1.2 1.1

Dividend yield (%) 1.4 0.0 0.0 0.0

ROE (%) 20.6 10.5 9.4 13.8

Gearing (%) 44.9 34.1 23.9 16.8

Earnings revisions

Previous norm. net profit na na na

Change from previous (%) na na na

Previous norm. EPS (Rs) na na na



1m 3m 6m

(5.0) 9.7 (9.9)

(4.2) 10.1 (11.5)

(10.8) 0.2 (19.8)


52-week range (Rs)

3-mth avg daily turnover (U S$mn)

Stock borrowability


Wadhawan family 43.2

Absolute (Rs)

Absolute (US$)

Relative to Index

Estimated free float (%)

Market cap (US$mn) 2,172

62.1402.6/204.8

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Closing price on 15 Sep Rs270.8

Price target Rs366.0

Upside/downside 35.2%Difference from consensus 12.6%

FY11F net profit (Rsmn) 7,495Difference from consensus -9.3%Source: Nomura

Nomura vs consensus We do not set a discount to NAV, as we believe HDIL may add more projects to its portfolio soon. If this happens, the consensus discount to NAV may narrow.

Initiation

BUY


Action We initiate coverage of HDIL with a BUY rating and a price target of Rs366. We

believe that with its vast experience in slum rehab and redevelopment projects in Mumbai, and leadership position in the TDR market, HDIL is poised to take advantage of an expected boom in slum and other redevelopment projects in Mumbai, which would help narrow the 26% discount to our FY11F NAV of Rs366.

Catalysts If the imminent shifting of slum dwellers from Mumbai Airport land to HDIL’s rehab

housing proceeds smoothly, investor confidence is likely to swell, in our view.

Anchor themes

We believe that with rising property and land prices and less availability of land in Mumbai, the business of urban renewal is at an inflection point. Urban renewal is a low-cost way to gain access to some valuable real estate in India and firms with experience and ability to execute are likely to be the winners, in our view.

Housing Development & Infrastructure Aatash Shah


Land reserves and key projects

Tight focus on the Mumbai region Breakdown by geography and by segment

HDIL is the largest slum rehabilitation company in India, with a focus on the Mumbai Metropolitan Region (MMR) market, which is one of the most attractive real estate markets in India. Since incorporation in 1996, the company has developed 34mn sqft of saleable area through slum rehab projects, plots and regular housing and commercial projects in the MMR.

The company has a portfolio of 200mn sqft of saleable area spread across sale of TDRs from slum rehab projects, FSI sale (developable rights on land), and residential and commercial free sale projects, which are primarily concentrated in the MMR region with some small pockets in Pune and Hyderabad. About 96% of the company’s saleable area is in the MMR, of which 36% is within the core city of Mumbai. We estimate some 50% of the company’s current saleable area is likely to be developed and sold in the next 10-12 years, and we believe the company may sell development rights through FSI and TDRs of up to 50% of its saleable area.

Exhibit 38. Saleable area by segment

TDR20%

FSI30%

Residential33%

Commercial17%

Source: Company data, Nomura research

Exhibit 39. Saleable area by city

MMR96%

Pune0.4%

Hyderabad4%


Within the MMR region, 100mn sqft is in the Virar-Vasai location, north of the city limits, which has been developed as an affordable housing hub (Rs2,500-3,000/sqft for an apartment); 66.2mn sqft is in the core city of Mumbai (of which 37.4mn sqft has to be sold as TDRs), where as of today prices of residential apartments have bottomed out at Rs7,000/sqft; 12.8mn sqft is in Palghar, which is north of Vasai-Virar (Rs1,800/sqft for an apartment) and is an industrial hub; and 9.44mn sqft is in Navi Mumbai and Panvel, which are affordable housing hubs in the eastern part of the region (Rs3,500-6,000/sqft for an apartment). HDIL’s saleable area is thus well located to tap both the mid- to higher-end housing in Mumbai and the affordable housing segment in the extended suburbs, in our opinion.

With 37.4mn sqft of TDRs available for sale over the next seven years, the company will be by far the biggest supplier of TDRs in Mumbai, in our opinion, and would able to control the supply and pricing of the same — and hence indirectly control the construction and costs of other developers in Mumbai. According to management, the company currently controls 75% of the TDR market in Mumbai, which could move up to 90% in a year or two. Generating and selling TDRs, however, is a business loaded with risks and volatility, which we explain under the Risks section.

About 96% of the company’s saleable area is in the MMR, of which 36% is within the core city of Mumbai

According to management, the company controls 75% of the TDR market in Mumbai, which could increase to 90% in a year or two

We think the company can move about half its saleable area over time



Key projects

Mumbai Airport slum rehab project

HDIL is working on rehabilitating and clearing 85,000 slum tenement units from around the perimeter of Mumbai Airport. The contract was awarded by Mumbai International Airport Ltd, which has owned the airport since October 2007. Right now, this project is the largest slum rehab project in India. Key details of the project are as follows.

HDIL will rehab 85,000 families currently residing around the airport to land that it acquires in other locations of Mumbai.

HDIL will receive 1sqft of TDRs for every 1sqft of land that it hands over to the Slum Rehabilitation Authority (SRA) and given the high density of the slums, 1.33sqft of TDRs will be given for every 1sqft of rehab construction. It will receive an FSI of four for the construction and it can use 25% of this developable area for own free sale purposes, which is an incentive from the government.

Exhibit 40. Calculation of TDRs that HDIL will generate from this project

Number of families 85,000

Built up area of each tenement (sqft) 315

Total built up area required (mn sqft) 26.8

FSI allowed for slum rehab 4

Land area required (mn sqft) 8.9

TDR for land (mn sqft) 8.9

TDR for rehab construction (mn sqft) 35.6

Total TDR generated (mn sqft) 44.5


HDIL will also get 55% of the land, meant for non-aero usage, cleared around the airport. According to the company, this works out to 65 acres. There has been confusion among investors regarding when HDIL will take possession of the land. According to the company, it will get land proportionate to the area cleared from slums if that land is meant for non-aero purposes.

HDIL has bought land at various locations in Mumbai, including Kurla (E&W), Bhandup, Mulund, and Andheri (E), as well as other places which the company is yet to reveal. It has budgeted Rs40bn for land purchasing and has so far spent about Rs37bn, according to the company.

HDIL started the first phase of the rehab building construction for 28,000 families in May 2008, and has since almost completed the 8.8mn sqft in the first phase. The state government will select eligible slum dwellers in September-October 2010 and move them into the newly constructed rehab sites from December 2010 onwards. The shift will happen in phases over a period of three to six months. We think this a very crucial phase for both HDIL and the overall slum rehab business in Mumbai. If the shifting proceeds smoothly with minimal glitches, protests and legal issues, it could result in a re-rating for HDIL and also greater belief among developers and investors that slum rehab could be a very attractive opportunity.

HDIL has increased the size of the second phase of rehab from 28,000 families previously to almost 50,000 families now and is likely to start in the next three to six months, while the third phase is a couple of years away and will involve as of now 7,000 families. This number may go up later as further details from the government survey of the slum dwellers and their eligibility to be rehabilitated come out. In case the number increases then HDIL will get further TDRs as compensation.

HDIL has already generated and sold 10.5mn sqft of TDRs from the first phase over the past two years.

Mumbai Airport slum rehab is the single largest slum rehab project in India

May underscore that slum rehab is a profitable business



Exhibit 41. Building plan for airport rehab tenements at Kurla (W)

Source: PK Das and Associates

Exhibit 42. Amenities plan for airport slum rehab tenements at Kurla (W)

Source: PK Das and Associates

Exhibit 43. Floor plan of a rehab tenement at Kurla (W)

Source: PK Das and associates



Rental Housing, Virar

The Mumbai Metropolitan Region Development Authority (MMRDA) has been appointed by the state government as the implementing agency for rental housing projects, so-called ‘slum prevention projects’. It has an aggressive target of procuring 0.5mn rental housing units of 160sqft carpet area each, which would be allotted on a lottery basis at affordable rentals. As an incentive to developers that construct rental housing on their land, the government allows an FSI of four on the entire land area against a normal FSI of one or 1.33. An FSI of four on a maximum of 75% of the total land area (excluding infrastructure area) will be used by the developer to sell his own project, and an FSI of four on a minimum 25% of the land area will be used for rental housing construction and the land will be conveyed to the MMRDA. The required social infrastructure will be built by the MMRDA.

In June 2009, HDIL offered to build such rental units on 525 acres of its land (keeping 210 acres as open space) in Virar, just north of Mumbai’s city limits. HDIL will build 43,000 rental units on a total area of 13mn sqft for the MMRDA. This would enable HDIL to avail a total built-up area of 41.1mn sqft for its own projects or to be sold as FSI (developable rights). We believe HDIL is likely to start constructing the rental apartments from FY12F after getting approvals in place. This is a ‘win-win’ alliance, in our opinion, as the MMRDA gets the rental housing built for free and HDIL gets a higher developable area to sell than what it had earlier.

Exhibit 44. Extra area which HDIL gets from this scheme

Now Earlier

Acres on which construction will take place 315 525

FSI 4 1

Total developable area (mn sqft) 54.9 22.9

Area for rental housing (mn sqft) 13.7 -

Developable area for free sale (mn sqft) 41.2 22.9

Extra developable area (mn sqft) 18.3


We believe HDIL can more than recover the cost of constructing the 13.7mn sqft of rental housing by selling 18.3mn sqft of extra developable area. Management has said that the cost of constructing the rental housing will be around Rs700/sqft. The company plans to sell some of the development rights or FSI initially over a period of three to four years to recover its rental housing construction costs while commencing developing the land for its own projects a couple of years from now. At an FSI selling price of Rs650/sqft, we estimate the company would need to sell 15mn sqft to recover the costs and this may take about five years from FY12F. HDIL may actually sell more FSI than just 15mn sqft, which would mean a faster cashflow cycle.

The MMRDA is the implementing agency for rental housing projects



Exhibit 45. Rental housing and free sale area plan

Source: Company data

Exhibit 46. Location of rental housing, Virar




HDIL Meadows, Goregaon

HDIL Meadows is a 6.6mn sqft residential project in Goregaon, one of the north-western suburbs of Mumbai. It targets higher-end buyers and is designed to be a premium offering. This is part of a redevelopment project in which the free sale proportion is on the same land parcel. HDIL has already launched 1mn sqft and sold more than 75% of the project at Rs7,500/sqft.

Premier/Premier Exotica, Kurla (W)

On a 53 acre land parcel in Kurla (W), which is an eastern suburb, HDIL is rehabilitating 23,000 families from the airport slums. The 25% free sale part of this land is being used to create over 2.5mn sqft of Premier and Premier Exotica residential projects and over 2mn sqft of a commercial cum retail project. The Premier project, launched at a very attractive price of Rs5,250/sqft in March 2009 when the entire housing sector in India was in the doldrums, was priced 40% lower than those of surrounding projects and almost the entire housing units were snapped up in two to three days. This launch and sale signalled a revival for the property market in Mumbai and since then it has risen to new heights. The Premier Exotica project launched in June 2010 was priced at Rs6,800/sqft, a higher-end version of Premier and has clocked good sales too.

Exhibit 47. Premier Residences construction is well under way


Projects to be launched in the next year

The company is gearing up to launch 8.5mn sqft of projects in the next 12 months, possibly with about 3.5mn sqft to be launched in 2H FY11F, ending March 2011. The table below give details of the projects.

Exhibit 48. Projects to be launched in next 12 months

Project Location Area (mn sqft) Type

Bombay Oxygen Mulund 1.5 Airport slum rehab free sale portion

Ekta Nagar Kandivali 1.5 Redevelopment

Premier Phase 3 Kurla(W) 0.8 Airport slum rehab free sale portion

Daulat Nagar Santacruz(W) 1.2 Through slum rehab

Pant Nagar Ghatkopar(E) 0.5 Redevelopment

Meadows Phase 2 Goregaon (W) 1.0 Redevelopment

Residency Park Phase 2 Virar 1.0 Normal development

Virar rental housing Virar 1.0 FSI


A foot in the high-end market

The Premier project broke a nation-wide housing sector slump



Exhibit 49. Locations of to-be launched projects


HDIL is also working on gaining access to 2-3mn sqft of new rehabilitation and redevelopment projects in various locations in Mumbai and is likely to announce the addition of the same to its portfolio in the next six months. The government, through the Maharashtra Housing and Area Development Authority (MHADA), is also looking to tender large redevelopment projects in eastern Mumbai (Vikhroli), where we believe HDIL can be a leading bidder based on its track record.



Key strengths

A player with experience and scale HDIL’s vast experience in slum rehab is a big advantage

As we explained earlier in the industry section, slum rehab projects have long gestation periods and can quite often turn complex with protests, political involvement and legal issues. Thus, not every developer is keen to take up such projects and it usually takes an experienced player to pull off successful execution. HDIL has been involved in this business over the past 15 years and has successfully executed 10mn sqft of slum rehab projects. HDIL has shown its ability to identify appropriate slum rehab projects and work with authorities while convincing slum dwellers to consent to projects.

A MMR-focussed player

The property sector in the MMR region was the first and the quickest to recover from the housing slump of 2008, displaying its resilience. By the third quarter of calendar 2009, housing pricing had quickly recovered to near 2007-08 peak levels and has since exceeded that level by 10%, on average. Sales volumes were in a drag in February 2010-May 2010 (owing to the price rise), but have since rebounded as buyers appear to have accepted the higher prices. The inventory in terms of months of sales is also touching new lows, leading support for price increases.

Exhibit 50. Monthly property volumes and inventory with developers in MMR

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Total absorption (LHS)

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Source: Propequity

As explained earlier, HDIL has 186mn sqft of saleable area in the MMR region (96% of overall saleable area), of which 64mn sqft is in the core city of Mumbai (including 37mn sqft of TDRs and ~6mn sqft of FSI). This is one of the largest saleable areas of any developer within the MMR and the largest saleable area in the core city of Mumbai for any developer. Almost all of this saleable area is generated through low up-front costs, and hence HDIL has a higher IRR slum rehabilitation and redevelopment model compared to other developers.

While we expect supply in Mumbai to increase over a period of time, especially in the island city, the supply may not be evident for another 18 months, especially in the suburbs where HDIL has most of its saleable area. At the same time it is necessary to remember that out of HDIL’s saleable area in Mumbai, 37mn sqft are TDRs to be generated over the next six to seven years, and this will likely be sold to other developers to a large extent rather than adding to its supply. We are of the view that the increased supply in Mumbai can be absorbed by latent demand but may put a lid on prices.

HDIL has been involved in this business over the past 15 years and has successfully executed 10mn sqft of slum rehab projects

HDIL has a higher IRR slum rehabilitation and redevelopment model compared to other developers

We believe a large chunk of HDIL’s sales even past our forecast horizon will be to other developers, so won’t add to direct supply



An iron grip on the TDR market in Mumbai

HDIL looks set to generate 37mn sqft of TDRs in the next six to seven years through the airport slum rehab project and another project in Bandra, of which it may utilise some but sell a major proportion. This is the largest amount of TDRs that a single company will generate in Mumbai. According to regulations, developers in suburban Mumbai can construct up to a maximum of 2x the plot, of which they can construct 1x as free FSI, 0.33x as FSI after paying a premium to the authorities at 30-40% of ready reckoner rates and the rest 0.67x through buying TDRs. As such, 33.5% of the project in the suburbs has to be constructed using TDRs. Developers in the island city can construct only up to 1.33x free FSI and cannot use TDRs. According to our estimates, HDIL supply is likely to be 62% of the market’s demand for TDRs.

Exhibit 51. TDR demand in Mumbai

Total annual sales of new property in Mumbai (mn sqft) 35.0

Total annual construction of new commercial property in Mumbai (mn sqft) 8.0

Percentage sold in the suburbs (%) 70

Total annual sales of new property in suburbs (mn sqft) 26.6

Annual TDR requirement at 33.5% requirement (mn sqft) 8.9

HDIL's estimated annual supply of TDR (mn sqft) 5.5

HDIL's supply to market demand (%) 62


While this may seem significant and hence a risk to the company, from our conversations with other larger companies in the slum rehab space, DB Realty and Ackruti City, we learned that they have decided not to sell any large amount of TDRs in future owing to price volatility. They will either use in-house TDRs within their projects or target slums and redevelopment projects that they can develop into their own projects in-site. If this materializes, we think HDIL will be able to gain market share in the TDR business. HDIL believes that it has a market share of 75% in annual TDR sales and so an uptick from here would lead to it being able to largely control the supply and pricing of TDRs. The risk here, in our view, would be if Mumbai property prices tumble, leading to a fall in TDR demand and pricing, or if the government further increases the FSI.

Execution abilities have only improved

In the past 15 years the company has developed 34mn sqft of saleable area including plots and TDRs, suggesting about 2.2mn sqft on average each year. Since May 2008, HDIL has almost completed 7.9mn sqft of rehab construction for the airport project. From March 2009 to March 2010, the company launched about 8mn sqft of residential and commercial projects and constructed almost 30% of the overall launched area. Thus, just in the past 30 months the company has constructed almost 10-11mn sqft of projects, showing its much improved execution capabilities.

Exhibit 52. Galaxy, Kurla (E) - 0.5mn sqft


Exhibit 53. Metropolis, Andheri (W) - 0.65mn sqft


According to our estimates, HDIL supply is likely to be 62% of the market’s demand for TDR

In the past 30 months, HDIL has constructed almost 10-11mn sqft of projects, showing its much improved execution capabilities

Vulnerable to a fall in Mumbai property prices — that’s the nature of the business



Financials

Revenues and profits from sales made yet to be reflected Accounting policy leads to delayed revenue recognition

HDIL’s revenue recognition policy is different from all the other developers in India and is IFRS compliant. The company recognises revenues from projects sold only when all significant risks and rewards of ownership have been transferred to the buyer. In other words, the company recognises revenues and profits on the same only when the project is completed rather than on a percentage of completion-method basis. Sales of TDRs and FSI are recognised when they are sold.

This means that the sales of residential and commercial projects made by the company over the past 15 months will be reflected only in FY12F and FY13F, when they are handed over.

Exhibit 54. Projects launched and sold since March 2009 by HDIL

Project Location Area launched

(mn sqft) Average price

(Rs/sqft) Sold (%) Sold (mn sqft) Completed (%) Launch date

Premier Kurla (W) 1.00 5,350 95 0.95 50 Mar'09

Galaxy Kurla (E) 0.48 4,251 90 0.43 50 Apr'09

Metropolis Andheri (W) 0.65 8,500 95 0.62 45 Mar'09

Industrial Park Virar 1.50 2,200 93 1.40 80 Sep'09

Majestic Bhandup 1.10 5,750 40 0.44 25 Oct'09

Residency Park Virar (W) 0.40 2,300 75 0.30 15 Jan'10

Harmony Oshiwara 0.11 7,740 95 0.10 50 May'10

Meadows Goregaon 1.00 7,740 75 0.75 5 June'10

Premier Exotica Kurla (W) 0.76 6,800 60 0.46 0 June'10

Total 7.00 5.45


The 5.5mn sqft of sales made by HDIL to date is worth about Rs28.1bn, based on the average price shown in the table above. This amount is likely to be recognised in FY12F, FY13F and FY14F.

Unlike other developers, the company does not capitalise project-related interest costs and hence its profitability may also be lower than those of other developers. We believe both these accounting policies are conservative in nature.

Key assumptions

We believe our pricing assumptions across projects are well within the current range for those locations, suggesting robust sales and enabling HDIL to develop its land reserves and sell its TDRs in the next 10-12 years. For the airport TDRs, we assume a price of Rs2,750/sqft as of FY11F, with this moving up by 5% every year.

Our cost assumptions are in the range of Rs1,700-1,800/sqft for residential projects. Where slums have to be rehabilitated or other redevelopments have to be undertaken we estimate a cost of Rs1,050-1,100/sqft for the same and load it onto the cost of the free-sale proportion. We estimate costs will increase by 5% every year.

HDIL recognises revenues from projects sold only when all significant risks and rewards of ownership have been transferred to the buyer …

… so revenues will lag cash flow

Accounting policies are conservative, in our view, and may understate profits relative to others



Exhibit 55. Pricing assumptions

Location Sale price (Rs/sqft)

Airport slum related TDR 2,750

Bandra slum related TDR 3,400

MIAL FSI 5,000

Goregaon 7,950

Santacruz(W) 11,000

Kandivali-Ekta Nagar 6,800

Mulund 6,500

Carmichael Road 65,000

Virar 2,300

Panvel 3,500

Virar-Vasai FSI 450-650

Virar commercial 3500-4000

Navi Mumbai commercial 4500

Leasing rates for commercial Lease rental (Rs/sqft/month)

Andheri(W) 80

Kurla(W) 70

Mulund(W) 70

Worli 175

Pune 40


We assume a development timeline of 13 years for the entire saleable area of HDIL. We estimate the peak year for sales and construction is likely to be FY16F as far as the current saleable area is concerned. The sold area is likely to be larger than the constructed area because TDR and FSI sales do not need to be constructed.

Exhibit 56. Saleable area sales and construction timeline

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10

15

20

25

30

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FY

11

FY

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FY

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FY

14

FY

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FY

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FY

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FY

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FY

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mn

sqft

Sold(mn sqft) Constructed (mn sqft)

Note: FY10 are actual numbers


Sales of TDRs from the airport slum rehab project are shown above. We have assumed volumes slightly below 5mn sqft a year. This is against a volume of 6.5mn sqft of TDRs sold by HDIL from this project in FY10.



Exhibit 57. Sales volume of TDRs from airport slum rehab project

-

1.0

2.0

3.0

4.0

5.0

6.0

FY11F FY12F FY13F FY14F FY15F FY16F FY17F FY18F

mn

sqft


The table below shows our revenue and profit margins estimates:

Exhibit 58. Revenue, EBITDA, PAT and margins

FY11F FY12F

Revenue 19,333 31,068

EBITDA 13,754 21,894

EBITDA margin (%) 71.1 70.5

PAT 7,495 13,842

PAT margin (%) 38.8 44.6


Cashflow and balance sheet

We expect the company to receive cash inflows of Rs30bn in FY11F and Rs50bn in FY12F from TDR and FSI sales, old projects and new launches. The company may spend about Rs20bn and Rs29bn on land purchases and overall construction and other costs in FY11F and FY12F, respectively. Interest and tax costs may total about Rs6.2bn and Rs7.9bn, respectively. Based on these assumptions, we estimate HDIL stands to make positive cashflow of Rs3.8bn and Rs13.1bn in FY11F and FY12F, respectively. Apart from this there has been a QIP issue of Rs11.6bn in September 2010, so the promoters are likely to infuse Rs7bn into the company through a warrant conversion. HDIL has issued 26mn warrants to promoters at a conversion price of Rs272 per share, which should lead to dilution of 6.3% on conversion in late-FY12F. Out of the QIP funds raised, we expect the company to use Rs3.5bn for buying out land for the remaining phases of the airport slum rehab project and Rs6bn for funding the initial part of the rehab construction for 50,000 families in the second phase. The airport slum rehab project is now fully funded, and this should be positive for the stock and investor sentiment, we believe.

In our opinion, this cashflow is likely to help the company de-leverage significantly from a debt/equity ratio of 0.47:1 as of FY10 to 0.17:1 by FY11F and to almost zero net debt by FY12F. This is assuming that the company does not spend on acquiring land or redevelopment projects (apart from Rs3.5bn it needs to spend) in the next two years. We believe the company may use the cash generated to acquire a number of small and large redevelopment projects, which may not have a TDR component to them. However, our valuation captures no possible new projects in the future.

HDIL stands to make positive cashflow of Rs3.8bn and Rs13.1bn in FY11F and FY12F, respectively



Valuations

Attractively priced and poised We value HDIL on an NAV basis in line with other property companies under our coverage. We believe that valuing it on an earnings multiple basis or using a multiple to book value would be difficult given lumpy earnings for the next few years and lack of comparables owing to different accounting policies followed by companies. NAV captures the value creation of the current landbank through the entire development timeline and is our preferred valuation metric at the current growth stage of the Indian property sector.

Apart from the key assumptions mentioned in the financial analysis, some of our other assumptions are:

Exhibit 59. Other NAV assumptions

Assumption Value (%)

Cap rates for commercial space 9

Cost of equity 15

Tax rates 20 for TDR sold until FY13F and for free sale projects associated with airport slum rehab given tax benefits under Section 80IB; 34 in other cases

Interest rates 12

Price escalation 5

Cost escalation 5

Selling expenses as percentage of sales 2

Other expenses as percentage of sales 5


Our September 2011 NAV for HDIL, based on these assumptions and the pricing and timeline assumptions shown earlier, works out to be Rs366 per share. Our 12-month price target is thus Rs366 per share, as we do not apply any premium or discount to NAV. The stock is trading at a 26% discount to our NAV and our price target and we see it offering potential upside of 35% from current levels.

The geographical and segmental split of HDIL’s gross asset value (NAV+ net debt) is shown below:

Exhibit 60. GAV: by segment

Commercial19%

TDR25%

FSI14.5%

Residential41%


Exhibit 61. GAV: breakdown by geography

Pune0.3%

Mumbai79%

Navi Mumbai

4%

Virar-Vasai16%

Hyderabad1%


NAV is our preferred valuation metric We believe valuing HDIL on an earnings multiple basis or using a multiple to book value would be difficult given lumpy earnings for the next few years and lack of comparables

Our 12-month price target is INR366; potential upside of 35%



The free sale residential projects from the slum rehab and redevelopment projects and from Virar, Panvel etc. form 41% of total GAV while the value from TDR sales forms 25% of the overall GAV. The MMR region comprises 99% of the total GAV with the core city of Mumbai contributing 79%.

We estimate the airport slum rehab project contributes 49% of the total valuation of the company through the sale of TDRs, sale of 65 acres of land around the airport in the form of FSI and sale of the free sale projects in Kurla, Bhandup and Mulund on the land meant for the slum rehab. The sole contribution of TDR sale from this project to overall GAV is 24%. We have valued the 65 acres of land around the airport as sale of FSI (thrice the plot area) from March 2015 to March 2018.

Exhibit 62. GAV as of March 2012 by type of project

Type GAV (Rsmn) GAV (Rs/share)

Airport slum rehab TDR 42,023 95

65 acre land around airport 20,052 45

Free sale portion on airport slum rehab land 22,867 52

Other residential 57,955 131

Other commercial 24,205 55

Other FSI 5,150 12

Other TDR 1,825 4

Total 174,077 395


Catalysts for the stock to reach our price target

Given the prevalent high prices in Mumbai along with the expected increase in supply, there has been a certain amount of scepticism from investors regarding Mumbai-focussed property developers. As we explained earlier, volumes in the Mumbai property market have not suffered from the high prices so far. We think this festive season starting September-October 2010 could see Mumbai property volumes remain strong. Recognition of this by investors could help HDIL’s stock price reach our price target.

Leaving aside this point, one of the bigger catalysts for the stock could be just around the corner. The shifting of slum dwellers from their current location around the airport to the rehabilitation sites could begin in two to three months, according to the company. The shifting will happen in phases over a period of three to six months. We think this a very crucial phase for both HDIL and the overall slum rehab business in Mumbai. If the shifting proceeds smoothly with glitches, protests and legal issues kept to a minimum, it could result in a re-rating for HDIL and also a greater belief amongst developers and investors that slum rehab could be a very attractive opportunity. Clarity on the location of the 65 acres of land which HDlL is entitled to around the airport and the timing of its monetisation will also act as share-price catalysts, we believe.

Exhibit 63. Peer comparison

P/E (x) P/BV (x)

Ticker Co Name Rating CMP (Rs)

NAV/share (Rs)

Disc. to NAV (%)

FY11F gearing (x)

Mcap (Rsbn) FY11F FY12F FY11F FY12F

DLFU IN DLF NEUTRAL 341 296 15 0.53 579.1 23.2 17.0 1.9 1.7

UT IN Unitech BUY 86 100 (14) 0.35 216.6 18.1 11.6 1.8 1.5

PVKP IN Puravankara Projects BUY 123 168 (27) 0.44 26.2 17.1 9.6 1.6 1.4

HDIL IN HDIL BUY 271 366 (26) 0.17 100.7 12.9 8.2 1.2 1.1

GPL IN Godrej Properties BUY 753 490 54 0.69 52.6 46.1 13.6 5.8 4.3

DBRL IN DB Realty Not rated 442 107.6 20.5 8.3 3.0 2.3

IBREL IN Indiabulls Real Estate Not rated 179 71.9 15.7 - - -

SOBHA IN Sobha Not rated 372 36.5 28.1 13.4 1.9 1.7

ARCP IN Anant Raj Not rated 139 41.0 17.7 10.9 1.1 1.0

MLIFE IN Mahindra Lifespace Not rated 458 18.7 17.0 12.2 1.8 1.5

PHNX IN Phoenix Mills Not rated 251 36.4 37.4 24.2 2.1 1.9

Pricing as of 15 Sep 2010. Source: Nomura estimates for rated stocks, Bloomberg consensus for not rated stocks

Festive season starting September–October 2010 could see Mumbai property volumes continuing to remain strong

If the shifting of slum dwellers to the rehabilitation sites proceeds smoothly, it could result in a re-rating for HDIL

Greater Mumbai is 99% of GAV; the core city is 79%



Sensitivity analysis We present an analysis of our price target’s sensitivity to change in cost of equity and premium to NAV in the table below:

Exhibit 64. Sensitivity table (Rs/share)

Cost of equity

15.5% 15.0% 15.5%

-10.0% 324 330 335

0.0% 360 366 373

Pre

miu

m

to N

AV

10.0% 396 403 410


Also, if we extend the average development timeline by one year, then the negative impact on our NAV and price target is approximately 8%. If TDR prices were to fall by 10% from our assumed level of Rs2,750/sqft on average for the airport project TDR, NAV could reduce by 5%.



Risks to our investment view

Where we could go wrong Risks for the TDR model

Demand and pricing of TDRs are derivatives of the Mumbai property market. If volumes in the property market in Mumbai take a tumble, demand for TDRs is likely to follow. TDR prices are also likely to follow the price movement in the Mumbai suburban market. Given that TDRs are a derivative, volatility in demand and pricing is likely to be more than that in the actual property market. This means that slum rehabilitation players may have to take the risk of having to hold on to the TDR inventory they generate if demand and prices are low. TDRs being an over-the-counter traded commodity are also bought and sold by financial investors, which add to volatility. The chart below shows the volatility in TDR prices vs. property prices in Mumbai on an index scale:

Exhibit 65. TDR prices more volatile than property prices (indexed to 100)

0

100

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600

FY05 FY06 FY07 FY08 FY09 FY10

pric

e in

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Mumbai property prices at year end TDR prices at year end

Source: CRISIL, Nomura research

Risk of increasing component of FSI within the cap of 2x plot area

The Indian government recently came out with an ordinance, increasing the FSI from one to 1.33 in the suburbs. This means only 33% of a project will need TDRs to be constructed as compared to the earlier 50%. If this component is increased further, demand and pricing of TDRs could be affected, leading to revenues coming in lower than expectations.

Interest rate risk

Demand for property in India is affected by the prevailing levels of mortgage rates and the availability of bank finance. Given the current high inflation, if the Reserve Bank of India (RBI) hikes policy rates and mortgage rates follow, then demand for property will likely be adversely affected.

Execution risk

The company works in the area of slum rehabilitation and redevelopment. These projects have a long gestation period and execution can be weighed by delays on numerous fronts from getting consent of 70% of residents, protests by slum dwellers for larger apartments, securing approvals from authorities, interference from local politicians and slumlords, legal issues etc. However, we think this risk is reducing every year given the growing experience with slum rehab projects by slum residents, developers, courts, authorities and politicians.

Given that TDRs are a derivative, volatility in demand and pricing is generally more than that in the actual property market



Political risk

With the high density of the slums and especially as large slums are viewed as vote-banks for politicians, who may not like to see their well-cultivated constituency being spread out across the city and hence losing out on votes, many times this has resulted in local level politicians trying to prevent slum rehab schemes from taking place, especially around election time. This could lead to an extended process for long-gestation projects. Also, given that the land beneath the slums may be valuable, there may be demand for sharing some of the gains made by the developer.

Concentration risk

Ninety-six percent of HDIL’s saleable area and 99% of its value comes from the MMR. Also 48% of the value comes from the benefits of the airport slum rehab project. This leads to significant concentration risk for the company if the shifting of the airport slum dwellers faces problems and leads to delays in the subsequent phases for the company.

Financial market risk

A change in perceived risks due to a change in property market conditions (eg, higher/lower competitive supply) and/or other economic events (an unexpected improvement/deterioration of economic conditions) and/or unrelated events (force majeure) and/or clamping down of foreign investments in India and real estate in particular, would ultimately impact future availability of funds for HDIL and the scheduled completion of projects along with investor perception of the sector.



Financial statements

Income statement (Rsmn)

Year-end 31 Mar FY08 FY09 FY10 FY11F FY12F

Investment propertiesProperty development 23,799 17,193 14,920 18,096 29,831Hotels/serviced apartmentsOther Revenue 525 953 1,076 1,237 1,237Revenue 24,323 18,146 15,996 19,333 31,068EBIT contributionsInvestment propertiesProperty development 17,331 13,907 12,122 13,113 21,657Hotels/serviced apartmentsOther income 525 953 1,076 1,237 1,237Management expenses (449) (925) (690) (679) (1,148)EBITDA 17,420 13,959 12,559 13,754 21,894Depreciation and amortisation (14) (24) (51) (82) (148)EBIT 17,406 13,935 12,508 13,672 21,746Net interest expense (1,385) (5,782) (5,155) (4,587) (4,279)Associates & JCEsOther incomeEarnings before tax 16,021 8,153 7,353 9,085 17,467Income tax (1,917) (941) (1,329) (1,590) (3,626)Net profit after tax 14,104 7,212 6,024 7,495 13,842Minority interests - - - - - Other itemsPreferred dividendsNormalised NPAT 14,104 7,212 6,024 7,495 13,842Extraordinary items 1 1,092 (56)Reported NPAT 14,105 8,304 5,967 7,495 13,842Dividends (1,063)Transfer to reserves 14,105 7,242 5,967 7,495 13,842

Valuation and ratio analysisFD normalised P/E (x) 3.9 10.3 15.2 14.3 8.2 FD normalised P/E at price target (x) 5.2 14.0 20.5 19.3 11.1 Reported P/E (x) 3.9 9.0 15.3 14.3 8.2 Dividend yield (%) - 1.4 - - - Price/cashflow (x) na na na 8.4 5.3 Price/book (x) 1.6 1.7 1.4 1.2 1.1 EV/EBITDA (x) 7.4 10.1 10.7 8.5 4.6 EV/EBIT (x) 7.4 10.1 10.7 8.6 4.7

EBIT margin (%) 71.6 76.8 78.2 70.7 70.0 Effective tax rate (%) 12.0 11.5 18.1 17.5 20.8 Dividend payout (%) - 12.8 - - - ROA (pretax %) 38.2 17.1 12.3 11.3 15.5

Growth (%)Revenue 99.9 (25.4) (11.8) 20.9 60.7 EBITDA 162.7 (19.9) (10.0) 9.5 59.2 EBIT 162.7 (19.9) (10.2) 9.3 59.1 Normalised EPS 133.1 (62.7) (31.8) 6.0 73.5 Normalised FDEPS 133.1 (62.7) (31.8) 6.0 73.5

Per shareReported EPS (Rs) 70.2 30.2 17.7 18.9 32.8Norm EPS (Rs) 70.2 26.2 17.9 18.9 32.8Fully diluted norm EPS (Rs) 70.2 26.2 17.9 18.9 32.8Book value per share (Rs) 169.9 160.5 196.3 219.9 251.1DPS (Rs) - 3.9 - - - Source: Nomura estimates

Revenues from sales already made to be recognised mainly in FY12F; until then, TDR sales to drive revenues



Cashflow (Rsmn)

Year-end 31 Mar FY08 FY09 FY10 FY11F FY12F

EBITDA 17,420 13,959 12,559 13,754 21,894Change in working capital (52,256) (19,757) (15,317) 623 3,296Other operating cashflow (1,930) 128 (1,437) (1,672) (3,773)Cashflow from operations (36,766) (5,671) (4,194) 12,705 21,416Capital expenditure (410) (541) (3,410) (2,852) (5,921)Free cashflow (37,176) (6,211) (7,604) 9,853 15,496Reduction in investmentsNet acquisitionsReduction in other LT assets (337) (576) 62 (2,000) (1,100)Addition in other LT liabilities 7 15 33 - - AdjustmentsCashflow after investing acts (37,506) (6,773) (7,509) 7,853 14,396Cash dividends - (1,063) - - - Equity issue 14,968 562 20,243 13,385 5,612Debt issue 27,371 10,306 (416) (5,587) (5,028)Convertible debt issueOthers (1,385) (5,782) (5,155) (4,587) (4,279)Cashflow from financial acts 40,954 4,023 14,672 3,211 (3,695)Net cashflow 3,448 (2,750) 7,163 11,064 10,701Beginning cash 57 3,505 755 7,918 18,982Ending cash 3,505 755 7,918 18,982 29,683Ending net debt 27,622 40,678 33,099 16,448 720Source: Nomura estimates

Balance sheet (Rsmn)

As at 31 Mar FY08 FY09 FY10 FY11F FY12F

Cash & equivalents 3,505 755 7,918 18,982 29,683Properties held for sale 55,229 69,128 87,567 96,269 105,381Accounts receivable 567 1,669 2,030 2,453 3,943Other current assets 13,132 17,104 15,689 18,827 22,592Total current assets 72,432 88,656 113,203 136,531 161,598Investment properties 359 374 1,346 3,511 7,017Other fixed assets (net) 328 854 3,292 3,978 6,393AssociatesOther LT assets 1,915 2,491 2,429 4,429 5,529Total assets 75,034 92,375 120,270 148,449 180,537Short-term debtAccounts payable 3,878 3,304 3,081 3,724 5,984Other current liabilities 3,599 3,389 5,680 17,924 33,326Total current liabilities 7,476 6,693 8,761 21,648 39,310Long-term debt 31,127 41,433 41,017 35,430 30,402Convertible debtOther LT liabilities 15 30 63 63 63Total liabilities 38,619 48,156 49,841 57,141 69,775Minority interest 0 0 0 0 0Preferred stock 780 1,200Shareholders' Equity 2,143 2,755 3,588 4,151 4,411Other equity and reserves 34,272 41,463 66,060 85,957 106,351Total shareholders' equity 36,415 44,218 70,429 91,309 110,762Total equity & liabilities 75,034 92,375 120,270 148,449 180,537

LeverageInterest cover 12.6 2.4 2.4 3.0 5.1 Gross debt/property assets (%) 41.5 44.9 34.1 23.9 16.8 Net debt/EBITDA (x) 1.59 2.91 2.64 1.20 0.03 Net debt/equity (%) 75.9 92.0 47.0 18.0 0.6

Dupont decompositionNet margin (%) 58.0 45.8 37.3 38.8 44.6 Asset utilisation (x) 0.5 0.2 0.2 0.1 0.2 ROA (%) 29.8 9.9 5.6 5.6 8.4

Leverage (Assets/Equity x) 2.2 2.1 1.9 1.7 1.6 ROE (%) 64.5 20.6 10.5 9.4 13.8 Source: Nomura estimates

Equity issuance through QIP and warrants to promoters to result in reduced leverage


DB Realty DBRL IN

PROPERTY | INDIA


Key findings DB Realty is a Mumbai Metropolitan Region (MMR)-focussed developer working

mainly in the urban renewal space. It currently has 19.5mn sqft of saleable area under development and another 41.5mn sqft in forthcoming and under planning projects. The company recently added to its portfolio large redevelopment projects such as the Government Colony, Bandra, which management believes will substantially enhance its brand and profile with stakeholders if executed well.

Business model SUPERIOR SUSTAINABLE INFERIOR

Earnings/cashflow growth HIGH AVERAGE LOW

Earnings/cashflow quality HIGH AVERAGE LOW

Financial strength STRONG ADEQUATE WEAK

Corporate governance TRANSPARENT ADEQUATE LIMITED

Investment liquidity HIGH ADEQUATE LOW

Volatility LOW MEDIUM HIGH

Focus on re-development projects Low up-front cost model focussed on MMR

The company has 19mn sqft of ongoing projects and 33mn sqft of future projects in the MMR region, which has been one of the most resilient property markets in India, based on sharply rebounding volumes and prices. MMR is a supply deficient, high-demand market, leading to prices in the range of Rs4,000-60,000/sqft. In this scenario, DB’s ability to generate land cheaply through urban renewal has been a source of strength for the company. DB Realty has 5.1mn sqft of projects in the Mumbai Central area, which is very close to high-end South Mumbai. It has a JV model where its upfront cost requirement is further lowered and the cash saved is used for project construction and expansion.

New large redevelopment projects could enhance profile

The company added redevelopment projects like the government staff housing colony in Bandra (8mn sqft) and is close to bagging the Abhyudaya Nagar colony, Sewri (4.6mn sqft), Mahal studio, Jogeshwari (10.7mn sqft) and Prem Nagar slum, Goregaon (6mn sqft) projects. These large projects will require a substantial scaling up of DB Realty’s execution capabilities, according to management, and if done well could increase the company’s profile with key stakeholders.

Funding requirements exist in the near-term

For the over 30mn sqft worth of new projects mentioned above, the company estimates it would need to pay an amount of Rs30bn upfront. It currently has leverage of 0.23x and has enough room to leverage further, management believes, though it is also looking at P/E funding for a couple of projects.

Shifting focus away from TDR sales

Management indicated it no longer wants to focus on selling TDR and would rather utilise whatever it receives from the rehabilitation construction in its own projects, preferring to avoid the volatility in the TDR market.


N U G G E T S Non-rated ideas from Nomura

Company description DB Realty has a total of 61mn sqft of saleable area in hand, mainly in the MMR region, and has large redevelopment projects in the pipeline.

Key financials

2008 2009 2010 Guided

Revenue 63 4,712 9,803 Reported net profit (246) 1,459 2,520 Reported EPS (29.61) 175.77 10.39 Rep EPS growth (%) - - - Rep P/E (x) na 2.5 42.7 Price/book (x) 0.5 0.5 3.5 Dividend yield (%) - - - ROE (%) 18.95 13.06 Net debt/equity (%) 68.6 142.8 16.7



350370390410430450470490

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707580859095100105Price

Rel MSCI India

(Rs)

1m 3m 6m

Absolute (INR) 4.5 16.4 (2.3)

Absolute (US$) 6.3 16.2 (3.5)

Relative to Index (3.2) 1.2 (16.5)

Market cap (US$mn) 2312.3

Estimated free float (%) 19.7

3-mth avg daily turnover (US$mn) 2


Neelkamal Tower Construction 42.99

Walkinson Investment 8.09

Source: Bloomberg

Closing price on 15/09/2010 Rs442.25

NOTRATED

DB Realty Aatash Shah


Drilling down

Large projects in the pipeline DB Realty was promoted in January 2007 by Mr Vinod Goenka and Mr Shahid Balwa. The families of the promoters have been in the real estate and allied businesses for more than 25 years and 95 years, respectively, and have developed several projects in and around Mumbai. They have together completed 14.4mn sqft of projects in Mumbai, including Gokuldham and Yashodham in Goregaon, Mumbai. The table below shows the company’s ongoing projects and share of the saleable area.

Exhibit 66. Details of ongoing projects

No. Project Name Location Saleable area (mn sqft) Sold (mn sqft) Start date

1 Orchid Ozone Dahisar (East) 1.6 1.4 Aug’09

2 Orchid Woods Goregaon (East) 0.9 0.6 Feb’07

3 Orchid Heights Jacob Circle 0.6 0.3 Nov’09

4 Orchid Suburbia Kandivali (West) 0.5 0.4 Jan’09

5 Orchid Turf View Mahalaxmi 1.5 0.1 Jan’10

6 Orchid Crown Dadar 0.9 0.3 Jan’10

7 Mahul Nagar Mahul 8.7 5.0 Mar’07

8 Orchid Hills Powai 2.8 0.3 Mar’09

9 Ascot Centre II Andheri (East) 0.3 - Feb’07

10 Orchid Center Pune* 0.5 - Jan’09

11 Orchid Corporate Park Andheri (East) 1.2 - Jan’10

Total 19.5 8.4

Note: Saleable area and area sold is for DB’s share only *ongoing project outside Mumbai


Exhibit 67. Location of ongoing projects


New company but promoters have significant experience in real estate



The company’s upcoming projects and its share of the saleable area is shown in the table below. The government staff housing colony and some of the other projects mentioned earlier are not yet part of this list.

Exhibit 68. Details of forthcoming projects

Project name Location Saleable area (mn sqft) Start date

Orchid Hill Park Goregaon 7.9 Sept’10

Orchid Garden Dahisar (East) 2.2 Aug’11

Orchid West View Malad 0.7 Dec’10

Orchid Views Mumbai Central 0.7 Apr’10

Orchid Enclave II Mumbai Central 0.6 Sep’10

Orchid Skyz Byculla 0.3 Mar’11

DB Tower BKC 0.2 Apr’10

Orchid Town* Pimpri, Pune 6.7 Sept’10

Orchid Acre Mira Road 17.9 Mar’11

Orchid Enclave III Mumbai Central 0.7 Dec’10

Orchid Apartments Mankhurd 1.2 Mar’11

Orchid Splendor Byculla 0.4 Dec’10

Orchid Central Mumbai Central 0.3 Dec’10

Orchid Lawn* Sangamwadi, Pune 1.7 Mar’11

Total 41.5

* Projects outside Mumbai


The company has 68% of its overall saleable area focussed on the residential segment, with 27% being made up by TDRs. A significant portion of the TDRs will actually be used in-house by DB Realty for its own residential and commercial projects, which are part of the current land reserves, and the new projects mentioned earlier. According to management, this would help the company reduce dependence on TDR sales for revenues and cash flow, thus protecting it from volatility in the TDR market.

Exhibit 69. Segmental division of overall saleable area

TDR27%

Commercial5%

Residential68%




Key projects

Projects across Mumbai Mahul Nagar – Mahul, Mumbai

As discussed in the sector report, this project is a rehabilitation project that DB Realty constructed for BMC project-affected people. The company is constructing over 14,000 houses here and, in return, is in the process of receiving a total of 8.7mn sqft of TDRs. The project is scheduled for completion in March 2012, as per the company.

Orchid Ozone – Dahisar, Mumbai

Orchid Ozone a residential project located in Dahisar, a north-western suburb of Mumbai. The project has a total developable area of 2.6mn sqft, and the company’s share of the saleable area is 1.6mn sqft. DB Realty has sold 2.27mn sqft here at an average price of Rs3,650/sqft and has expensed about 36% of the project cost thus far.

Orchid Woods – Goregaon, Mumbai

Orchid Woods is located in Goregaon, Mumbai. The project has a total developable area of 1.9mn sqft, and the company’s share of the saleable area is 0.88mn sqft. DB Realty has sold 0.6mn sqft at an average price of Rs8,700/sqft and has expensed about 71% of the project cost to date.

Orchid Turf View – Mahalaxmi, Mumbai

Orchid Turf View is located in Mahalaxmi, Mumbai. The project has a total developable area of 2.3mn sqft, and the company’s share of the saleable area is 1.5mn sqft. About 0.2mn sqft of the project has been sold at an average price of Rs24,350/sqft. The project is yet to begin construction.

Orchid Hill Park – Goregaon, Mumbai

In this slum rehab project, the company’s share of saleable area in the project is 7.9mn sqft with 1.7mn sqft of development and 4.6mn sqft as TDRs and the rest yet to be decided. The project is yet to start sales.

Abhyudaya Nagar Housing Board Colony, Sewri

DB Realty is currently in negotiations with the residents of this colony for redeveloping it. Management believes it has a 90% chance of success. The area is 33 acres, and the company is looking at a JV with Shreepati Infrastructures LLP with a profit share of 60%. The overall free sale area is likely to be 4.6mn sqft. The company has received consent from 12 of the 48 buildings and, according to management, is working on the remainder for 70% consent in each building. It would likely be able to start work on the free sale portion only in 2013, assuming it gets the required consent.

Prem Nagar, Goregaon

This is slum-cum-private land spread over 65 acres in Goregaon, a suburb in western Mumbai. DB Realty has partnered with the owner of the private land and will share 51% of the profits while paying Rs2bn upfront. The free-sale area will be spread over 6mn sqft and the implementation timeline is five years.

Mahal Studios, Jogeshwari

The owners of this movie studio decided to close it down and use the land for real estate purposes. The studio has 16 acres of open land and 42 acres of slum adjoining it, which are to be included in the project. The slum dwellers will be rehabilitated on the same land. The free-sale area is 6.3mn sqft of saleable area and 4.5mn sqft of TDR. DB Realty will have a 33% profit share in the project and will pay Rs1.7bn upfront, according to management.



Exhibit 70. Location of Abhyudaya Nagar and Prem Nagar


Exhibit 71. Redevelopment areas marked in outline




Company focus

Company focus Land acquisition strategy directed towards lowering upfront cost DB Realty is focused on acquiring well-located land and saleable area through various strategies that require a relatively low up-front investment. Some of the strategies as described by management and examples of the same are presented below:

Exhibit 72. Land acquisition strategies

Type of land acquisition Project

Saleable area (mn sqft) Comment

Orchid Turf View, Mahalaxmi

1.5 Rehabilitating old tenants

Redevelopment Government Housing colony, Bandra

8.0 Redeveloping homes for existing govt. staff and getting 8mn sqft of saleable area as compensation

Mahul Nagar 8.7 Constructing rehab tenements on owned land and getting TDR in return

TDR

Orchid Hills, Powai 2.8

Orchid Crown, Dadar 0.9 JV with land owners lowers upfront land cost to just deposit cost level Joint venture

Orchid Ozone 1.6

Orchid Town, Pune 6.7 Free-sale component received in return for development done on behalf of government agencies

Public Private Partnership

Orchid Centre, Pune 0.5


For example, the company is paying just Rs2bn upfront for a slum redevelopment project in Goregaon, Mumbai where it gets a 51% share in the profits from a free-sale area of 6mn sqft — ie, paying just Rs654/sqft where land would usually cost Rs3,000/sqft, as per our estimates.

Large area to be developed leads to internal absorption of TDR The company has 44.5mn sqft of saleable area that needs to be developed and has much more in the pipeline. This development should be enough to absorb most of the 16.5mn sqft of TDRs to be generated from the existing projects in hand, according to management. This means that the company, while almost exiting the TDR market, should be protected from the volatilities of this business, which usually requires an experienced and strong hand like HDIL.

Good relationships with business associates The company believes it has built good relationships not only with customers but also with government authorities, private equity investors, banks and financial institutions, along with contractors and architects. Private equity investors in the company include IL&FS, Trinity Capital and Walkinson. It also has developed relationships with contractors such as L&T, Man Infraconstruction etc. Management believes this relationship building could result in better execution going forward, as well as better access to capital.



Financial statements

Income statement

Year end Mar-08 Mar-09 Mar-10

Investment properties

Property development 0 4,644.3 9,512.1

Hotels/serviced apartments

Other Revenue 63.2 68.0 291.3

Revenue 63 4,712 9,803

EBIT contributions


Property development 139.5 2580.1 4042.3

Hotels/serviced apartments

Other income 63.2 68.0 291.3

Admin expenses (282.8) (396.1) (482.5)

EBITDA (64) 2,326 3,947

Depreciation and amortisation (15.7) (73.9) (95.5)

EBIT (80) 2,252 3,851

Net interest expense (154.5) (746.8) (726.1)

Earnings before tax (235) 1,505 3,125

Income tax (1.1) (66.9) (413.3)

Net profit after tax (236) 1,438 2,712

Minority interests 18.4 (21.4) (191.9)

Other items (28.5) 42.1

Normalised NPAT (246) 1,459 2,520

Reported NPAT (246) 1,459 2,520

Dividends

Transfer to reserves (246) 1,459 2,520

Valuation and ratio analysis

FD normalised P/E (x) na 2.5 42.7

FD normalised P/E at fair value (x) na - -

Reported P/E (x) na 2.5 42.7

Dividend yield (%) na na na

Price/cashflow (x) na na na

Price/book (x) 0.5 0.5 3.5

EV/EBITDA (x) na 51.4 28.7

EV/EBIT (x) na 53.1 29.4

EBIT margin (%) (126.8) 47.8 39.3

Effective tax rate (%) na 4.4 13.2

Dividend payout (%) na - -

ROA (pretax %) na 11.0 11.4

Growth analysis

Revenue - 7,358.6 108.0

EBITDA - na 69.7

EBIT - na 71.0

Normalised EPS - na (94.1)

Normalised FDEPS - na (94.1)

Per share

Reported EPS (29.61) 175.77 10.39

Norm EPS (29.61) 175.77 10.39

Fully diluted norm EPS (29.61) 175.77 10.39

DPS - - -

Operating cash flow per share (1,495.96) (843.68) (15.20)

BVPS 877.33 977.58 125.33


Revenues mainly from TDR sales in FY09 and FY10



Cash Flow statement

Year end Mar-08 Mar-09 Mar-10

EBITDA (64) 2,326 3,947

Change in working capital (9,131) (7,130)

Other operating cashflow (12,352) (197) (504)

Cashflow from operations (12,416) (7,003) (3,687)

Capital expenditure

Free cashflow (12,416) (7,003) (3,687)

Reduction in other LT assets 1,783 (8,941)

Addition to other LT liabilities (2) 2

Cashflow after investing acts (12,416) (5,222) (12,626)

Cash dividends

Equity issue 7,527.57 (626.73) 19,852.8

Debt issue 6,030.26 6,327.02 (6,408.85)

Convertible debt issue

Others (154.45) (746.81) (726.11)

Cashflow from financial acts 13,403 4,953 12,718

Net cashflow 987 (268) 92

Beginning cash 50 1,037 769

Ending cash 1,037 769 860

Ending net debt 4,993 11,589 5,088


Balance sheet

As at Mar-08 Mar-09 Mar-10

Cash and equivalents 1,036.95 768.73 860.23

Properties held for sale 5,337.85 10,578.5 13,195.0

Accounts receivable 90.79 426.17 3,057.85

Other current assets 9,847.72 12,441.6 18,553.6

Total current assets 16,313 24,215 35,667


Other fixed assets (net) 147.23 223.22 218.77

Associates

Other LT Assets 1,785.17 2.49 8,943.18

Total assets 18,246 24,441 44,829

Short-term debt

Accounts payable 345.01 282.67 1,402.39

Other current liabilities 4,034.71 3,135.67 6,246.44

Total current liabilities 4,380 3,418 7,649

Long-term debt 6,030.26 12,357.3 5,948.43

Convertible debt

Other LT liabilities -1.82

Total liabilities 10,410 15,774 13,597

Minority interests 553.93 552.97 744.83

Preferred stock

Shareholders' Equity 93.7 91.2 2,432.59

Other equity and reserves 7,188.1 8,022.72 28,053.9

Total shareholders' equity 7,281.8 8,113.92 30,486.5

Total liabilities and equity 18,246 24,441 44,829


Raised funds through an IPO in Feb ’10

Jump due to investments in land and redevelopment projects



ANALYST CERTIFICATIONS

I, Aatash Shah, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

ISSUER SPECIFIC REGULATORY DISCLOSURES

Issuer TickerPrice

(as at last close) Closing Price Date Rating Disclosures

DLF DLFU IN 340.65 INR 15 Sep 2010 Neutral

Godrej Properties Ltd GPL IN 753.70 INR 15 Sep 2010 Buy 3,8,47,48

Housing Development & Infrastructure Ltd HDIL IN 271 INR 15 Sep 2010 Not Rated

Puravankara Projects PVKP IN 122.25 INR 15 Sep 2010 Buy

Unitech UT IN 85.90 INR 15 Sep 2010 Buy

Disclosures required in the U.S.

47 Manager/Co-Manager in the past 12 months Nomura Securities International Inc. and /or its affiliates in the global Nomura group have managed or co-managed a public offering of the subject company's securities in the past 12 months.

48 IB related compensation in the past 12 months Nomura Securities International Inc. and /or its affiliates in the global Nomura group have received compensation for investment banking services from the subject company in the past 12 months.

Disclosures required in the European Union

3 Lead manager/co-lead manager of securities/related derivatives offering Nomura International plc or an affiliate in the global Nomura group has been lead manager or co-lead manager over the previous 12 months of a publicly disclosed offer of the issuer's securities or related derivatives

8 Investment banking services Nomura International plc or an affiliate in the global Nomura group is party to an agreement with the issuer relating to the provision of investment banking services which has been in effect over the past 12 months or has given rise during the same period to a payment or to the promise of payment.

Previous Ratings

Issuer Previous Rating Date of change

DLF Reduce 02 Feb 2010

Godrej Properties Ltd Not Rated 18 Feb 2010

Housing Development & Infrastructure Ltd Not Rated

Puravankara Projects Reduce 17 Jun 2009

Unitech Reduce 17 Jun 2009

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