According to JP Morgan DB Realty is fully priced at the current market price,
DB Realty’s core area of expertise i.e. execution of large scale redevelopment projects in South-Central locations in Mumbai, is a fairly big and attractive opportunity where competence is hard to replicate. However, this is a time intensive process and risks on cost escalations / litigation are correspondingly high as well. While a portfolio of almost 64msf of land in Mumbai (most of it city-centric) is attractive, we will wait for pre-sales to improve in a slowing market before we turn positive. Initiate with Neutral.
Mumbai real estate market is slowing down with volumes in 2Q10 down 22% vs. 2Q09. Pricing takes the blame for this as on ground fundamentals in terms of wage growth/hiring activity remains robust. While there are medium-term concerns on oversupply in South/Central Mumbai (5,000 units expected by 2013), the current take-up rates at 1,700-2,000 units p.a provide an offset. In FY11, we model new sales bookings at Rs29B vs. Rs15B achieved in FY10 and inline with current sales run rate.
Our Mar-11 PT of Rs480/share is based on 12x FY11 stabilized cash EPS, and equates to 3.3x FY11 P/B, 35% FY11 NAV discount. A 12x multiple is inline with our target for UT and at 20% premium to other Mumbai developers. DBRL’s valuations at FY11/12 P/B – 3.2x/2.6x and FY11/12 P/E 22x/13x are expensive relative to the peer group. Key downside risk: possible stake disposal by pre-IPO private equity investors, holding 22% of the company, could create a potential stock overhang.
