1. About
Started in 2000 as a stock broking firm, India Bulls Financial Services was listed in 2004, and India Bulls Real Estate was demerged into a separate entity in 2006. The company is focused on selling residential and commercial properties in Delhi and Mumbai.
It was started by 3 IIT’ian friends named Sameer Gehlaut, Rajiv Rattan, and Saurabh Mittal. The group split up in 2014, and the entities’ management control was divided among the following:
Indiabulls Real Estate Ltd. is a well-diversified presence in residential real estate development across the price spectrum, from mid-income to premium to super luxury. Geographically, the Company’s strategic focus is in key markets of the Mumbai Metropolitan Region and the National Capital Region.
2. Historical Performance of the company
At first glance, the business appeared to be doing okay until 2019. However, when concerns about corporate governance began to surface against the company’s promoter, Mr. Sameer Gehlaut, and the India Bulls group as a whole, he began to sell off his stake in the businesses. The Embassy group quickly took advantage of this sinking ship (thanks to the sizable 3200-acre land parcel) and bought Gehlaut’s stake in the company.
Embassy Group, along with other strategic investors like Blackstone, etc., has recently infused INR 3,911 Cr (Equity Shares and warrants) to recapitalize the balance sheet, mainly for completing existing projects and other working capital needs.
In the Q4 FY 24 investor presentation, new management pointed out that they are going through a transition or clean-up phase. Starting H2 FY25, we can see a revival in the company’s financial performance supported by
- infusion of new funds for launching of existing projects and for working capital requirements
- additional of certain assets from the Embassy and Blackstone Group
- They also have ample land for new projects (which will be decided by the new management of Embassy and Blackstone).
3. Industry Outlook
If we look at the nifty realty index, we can see that the real estate industry has been more or less in a sideways trend for around 14 years. The 2008–2009 housing market crisis marked the beginning of the decline. The market has faced difficulties, including demonetization, GST, and RERA.
There used to be times when Developers diverted money from one project to another and failed to deliver residential properties. However, the introduction of RERA had short-term negative implications but long-term healthy changes in the sector.
If we look closely, we will find that the reason for the sideways movement of the Nifty Realty Index can be co-related with the revenue and profitability trend of the last 10 years (bifurcated between pre and post-COVID).
So, COVID turned out to be a blessing in disguise for the real estate industry, along with the positive numbers in the form of GDP growth, Government push for infra, and introduction of RERA, which increased transparency and better utilization of home buyers’ funds.
RERA also had an impact on the consolidation of the industry as smaller players could no longer match the regulatory requirement; hence, they either ended up selling the lands or joined hands with larger players (Joint ventures).
Even Govt. authorities in Karnataka and Maharashtra slashed stamp duties, which positively impacted the overall rally in the Nifty realty Index, which has given more than 500% returns over the last 4 years.
But isn’t the real estate industry cyclical?
Yes, it is better if we understand this with the help of the Real Estate Cycle, which is a tool to forecast the best times to invest in properties.
Recovery: This is the phase after the market has seen a recessionary impact on the industry; during this phase, new projects and rental growth are minimal.
Expansion: This phase is associated with robust economic growth, which leads to higher demand for properties, and even the rentals start moving up.
Hyper supply: This is the phase where supply catches up with the increased demand as the construction phase ends. Here, prices will start maturing and even witness a certain decline.
Recession: This is the final phase of the cycle, and due to a supply-demand mismatch, lower or negative rental growth for property owners will result. This phase will also see rock-bottom property prices.
This is the management outlook of Macrotech Developers Ltd.
So, considering India’s economic outlook, we can say that we are in the second phase, i.e., expansion, and there is still some time for the industry to grow before we start witnessing a downturn.
4. But Why Indiabulls Real Estate?
- New Management and Restructuring of the business:
- Embassy Group bought the promoter’s stake from erstwhile Promoter Mr. Sameer Gehlaut in 2019.
- In Aug 2020, new management proposed a merger of Indiabulls Real Estate with Embassy group companies.
- With the proposed merger between Embassy and Indiabulls, new promoters (i.e., Embassy Group) are focused on restructuring debt and the company with a focus on both commercial and residential business.
- Portfolio diversification: While IndiaBulls was mainly focused on Mumbai and Delhi NCR, the merger will give it access to the markets of Bengaluru and Chennai. The merged entity will have 31 projects (totaling 78 Mn sq. Ft.) spread across Tier-I and Tier-II cities in India, with a balanced asset class mix of 44% Residential and 56% Commercial, providing portfolio diversification and a hedge against residential or commercial downturns.
- The Scheme had been approved by the Competition Commission of India (“CCI”) and SEBI/Stock exchanges. The Company’s Equity shareholders, at their meeting held on February 12, 2022, have also approved the Scheme with a 99.9% majority. Further, the NCLT Bengaluru Bench approved the Scheme on April 22, 2022. However, the matter is pending before NCLT Chandigarh.
- The combined entity will be the second largest by net revenue. On the shareholding front, the Embassy will have 45%, 19% with Blackrock & other Embassy institutional investors, and the balance with the Public post-completion of the Open offer.
- Under this, company has recently issued share and warrants to Embassy, Blackstone. Also, in April 2024, a preferential allotment of equity shares & warrants of 3,911 Cr. properties worth INR 1,853 Cr were transferred from Embassy and Blackstone to Indiabulls Real Estate.
- It has to be noted that India Bulls has one of the largest land banks, with 3,353 acres in prime locations in Mumbai and Delhi NCR (including 1424 acres in SEZ Nashik).
- So, considering the Embassy’s track record with large project deliveries (for example, Embassy REIT), we can say that we can soon witness utilization of this prime location land bank, which will ultimately reflect in the company’s revenue and profitability.
2. Undervalued
Relative Valuation method: Price-to-book value is commonly used to value real estate companies. The table below shows that the median price-to-book value is 6. It may surprise you to learn that Indiabulls Real Estate is trading at one of the lowest prices among Nifty Realty shares, with a price-to-book value of just 2.5 and a market cap of just INR 7000 Cr. This could be due to the well-known corporate governance issues involving the company’s former promoter, Mr. Sameer Gehlaut.
However, given that Blackstone and Embassy are the new, experienced promoters, we can anticipate a reversal in the form of a revaluation and that the new business can fetch a price-to-book value multiple of 6, leading to a market cap of approximately INR 21,000 Cr, i.e., 2.4x returns from current levels.
Asset Valuation method:
Net Profits (surplus) that can be generated from the company’s projects and the conservative value of the land parcel give us a value of around INR 21,200 Cr by the end of FY26, which is around 2.4x the company’s market capitalization of INR 8,700 Cr.
So, relative and asset valuation methods indicate that Indiabulls Real Estate is undervalued and can reach INR 325 to 500/—per share (2.4X returns) over the next couple of years.
5. Conclusion
So, the Industry is going through an up-cycle, which provides a window of opportunity for companies with a large land pool and execution capabilities (along with a good brand name in the market). Under the new leadership, India Bulls ticks all these boxes while being available at significantly cheaper valuation levels. Hence, we believe that the company will go through a valuation re-rating in the coming years along with the financial growth, and investors can consider this stock for long-term investment.
