Corporate Finance News Letter
Content
CORPORATE FINANCE
September 2010 www.bdoindia.co.in
REAL ESTATE
AN UPDATE FROM BDO INDIA CORPORATE FINANCE
With India’s recovery well underway, its commercial real estate market is beginning to stabilize. Indeed most cities in India have already witnessed an uptick in the volume of transactions in commercial and residential space. The real estate industry can be segmented into the following classes: Housing Commercial Retail Hospitality SEZ/FTZs
DID YOU KNOW...?
FACTS
REAL ESTATE SECTOR •
STATISTICS
Real estate sector is 2nd only to agriculture in terms of employment generation and contributes heavily to Gross Domestic Product (GDP) of the country Within a short span of time it has evolved from highly fragmented and unorganised market into a semi-organised market with a large number of listed companies Expected to reach a size of USD 180 bn by 2020 (DIPP) Market analysis pegs returns from real estate sector in India at an average rate of 14% annually The lease rentals have been picking up steadily Residential space is growing at an average rate of 34% Commercial space is growing at an average rate of 10- 15% per year Current contribution of real estate sector to India’s GDP is about 5% One of the highest FDI attracting sector in India FDI Inflows in 2008-09 were USD 2.80 billion as per Department of Industrial Policy & Promotion (DIPP) Affordable housing expected to be the key factor in driving the real estate sector growth (Source: Confederation of Real Estate Developers Associations of India)
•
GROWTH PROSPECTS
• • • • •
CONTRIBUTION FDI INFLOWS
• • •
OUTLOOK
•
REAL ESTATE – AN UPDATE FROM BDO INDIA CORPORATE FINANCE NEWSLETTER
2
RECENT AMENDMENTS AFFECTING REAL ESTATE SPECIAL ECONOMIC ZONES (SEZs) Income Tax Act Provision (Current Provision) • Units in SEZs get 100% income tax exemption on export income for the first five years and 50% for the next five years. They also get exemption on 50% of the ploughed back export profit for the next five years after the first 10 years. They are exempted from MAT payment as well Developers – 100% tax exemption for 10 years in a block of 15 years
•
Honourable Bombay High Court has granted an interim stay in the case of Maharashtra Chamber of Housing Industry (MCHI) vs. Union of India against recovery of service tax on real estate. The constitutional validity of the levy of service tax is subjudice. Courts in other states have stayed recovery till the matter is decided by Bombay High Court
CERTAIN REGULATORY ASPECTS Round Tripping Round tripping is usually referred to routing of domestic investments through tax haven and taking advantage of the Double Tax Avoidance Agreement (DTAA) i.e. paying lower taxes on profits. Example: • • An Indian company can invest up to 400% of its net worth in a JV/ WOS abroad An investment by JV/WOS in Indian realty stocks listed abroad would lead to round tripping since the money would come back to India. This is prohibited by regulatory authorities in India
•
Direct Tax Code (DTC) (Proposed Provision) • Units in SEZs that commence commercial operations by March 31, 2014, shall be allowed profit-linked deductions permitted under the Income Tax Act, 1961. Thereafter exemption would be linked to investment It is proposed that MAT would also be applicable to such units. However, the MAT credit would be allowed to be carried forward for 15 years Developers would continue to get profit linked incentives if SEZ is notified prior to March 2012. Thereafter, investment linked incentive as contemplated under DTC 2009 will be allowed
Real Estate Mutual Funds (REMFs): In May 2008, SEBI allowed mutual funds to launch real estate mutual fund schemes to allow retail investors to participate in the booming realty market. Fluctuating market prices in real estate sector in last two years have seen very few REMFs being launched. Real Estate Investment Trusts (REITs): REITs are investment pools formed to invest in real estate assets. Globally, REIT is a popular route to invest in realty sector. SEBI has been slow in announcing the REIT guidelines whose draft was released in December 2007. Some recent reports suggest that REITs may take some more time to take off in India. TRENDS IN REAL ESTATE FDI IN HOUSING AND REAL ESTATE:
•
•
Impact • It could be interpreted that since the incentive provided to developers has been linked to investments, there could be a spurt in lease rentals to pass on the tax benefit forgone. This would not have any impact on valuation If the developer does not increase the rentals, the outgo on account of tax would be borne by developers. This would reduce the valuation of the project considering the projected profitability • • • The highest FDI inflows during the period beginning from April 2000 to May 2010, has been from Mauritius (42%) Total FDI inflow, in housing and real estate, during the period beginning from April 2005 to May 2010 is $ 8,492 mn FDI in real estate as a percentage of total FDI investments has increased from 0.7% in 2005-06 to 11% in 2009-10. For 2010-11 (till May 2010) it stands at 7.4%.
•
Service Tax • Finance Bill 2010 introduced service tax on sales of under-construction property from July 1, 2010. It increased abatement on construction from 67% to 75% if gross value of commercial or residential complex includes cost of land. This reduces the effective tax rate to approx. 2.575% (10.3% * 25%) of gross value
REAL ESTATE – AN UPDATE FROM BDO INDIA CORPORATE FINANCE NEWSLETTER
3
INDICES MULTIPLES SINCE 2008 Book Value Multiple It could be inferred from the table to the left that the realty index book value multiple is 73% down from its peak in 2008. Whereas BSE Sensex book value multiple is down by 13%
PERFORMANCE OF BENCHMARK INDICES SINCE 2008. • It can be observed from the graph to the right that Nifty is 14% lower than its all time high in 2008. As against this, the Realty Index is 77% lower from its peak
INDEX RETURN VIS-À-VIS REALTY INDEX RETURN FROM JAN. 2007 • It can be observed from the graph to the right that since inception of Realty Index on 29 Dec 2006, the Nifty has given a positive return of 36% while Realty Index has given a negative return of 57%
REAL ESTATE – AN UPDATE FROM BDO INDIA CORPORATE FINANCE NEWSLETTER
4
VALUATION MULTIPLES: THE TABLE ALONG SIDE LISTS THE MULTIPLES OF REALTY COMPANIES: • • It can be observed from the table that DLF tops the realty pack in terms of Sales Multiple, EBITDA Multiple & PE Multiple. The high valuation of DLF seems to be influenced by the worth of its land bank. Also, DLF is the one of the few companies to have a pan India footprint in terms of projects and is more diversified in terms of various segments in real estate development Peninsula Land is trading at lower multiples. This may be attributed to the lower visibility of the future projects and also that the company is more focused in Mumbai region. Another factor impacting the valuation of Peninsula is that it is more focused on commercial projects
Average Price Company Name
D L F Ltd. Unitech Ltd. Housing Dev & Infra Ltd. Sobha Developers Ltd. Parsvnath Developers Ltd. Orbit Corporation Ltd.
Sales EBITDA
16.56 9.42 6.16 3.04 3.28 1.49 7.49 53.13 2.58 11.46 6.16 27.69 19.63 12.02 13.12 9.96 4.57 10.55 86.86 5.87 21.14 12.02
P/E
68.98 38.47 16.51 24.85 20.02 7.68 21.36 315.85 6.81 57.84 21.36
•
Ackruti City India Bulls Real Estate Peninsula Land Ltd. Mean Median
* Based on financials for FY 2009-10 and average share price of July - Aug.
EMERGING OPPORTUNITIES IN REAL ESTATE SECTOR There is a gradual shift of real estate developers from the traditional development in residential and commercial space to areas like logistics, warehousing, hospitals, schools and affordable housing. This shift is mainly due to limited players in the segment and also on account of the rising demand for development in these segments.
Logistics and Warehousing
• • • Booming trade both international and domestic MNCs around the globe are establishing operations in India Food processing sector, large infrastructure and engineering projects require logistics facilities Large warehouses occupy space. The right kind of logistics is re q u i re d t o o v e rc o m e t h e shortage of space in towns •
Healthcare Infrastructure
Health care industry is estimated to grow over a CAGR of 12% over the next 5 years. The industry size was USD 38.8 billion in the year 2008 Moreover, Health care BPO is a growing segment Medical tourism growth is driven by low cost and high quality services •
Education Infrastructure
Growing interest of leading global educational institutions in setting up institutions in India Growing working class population with an increased demand in higher studies Need for development of world class educational infrastructure Huge market with untapped potential • • • •
Low-cost Housing
Growing demand for housing among nuclear families Easy access to various avenues of finance Shift in attitudes from rented to owned house concept Housing shortage expected as a result of migration of working population from rural areas to urban areas
• • •
•
• •
•
DRIVERS IN REAL ESTATE FOR INVESTMENT & VALUATION Raw Land
• • Supply/Demand Planning & zoning
Apartments/Residential Commercial Premises /Office Building Warehouses
• •
Population Growth Income Growth
• •
Local Economic Expansion Tenant Mix
• • • • • • • • •
Commercial/Industrial Activity Favourable Status Tenant Mix Population and Income Adequate Parking Suitable Tenant Mix Lease Term Demand by Business and tourist Facility and Service Mix
Shopping Malls/Retail
Hotels/Motels
REAL ESTATE – AN UPDATE FROM BDO INDIA CORPORATE FINANCE NEWSLETTER
5
VALUATION APPROACH Valuation of Real Estate companies is unique in comparison to other sectors. In case of most sectors, the EBITDA multiple and revenue multiple etc. are the key indicators used for deriving the fair value of the company under the Comparable Companies Multiple Method. There are other approaches like Net Asset Value Method, Discounted Cash Flow Method, and Profit Earning Capacity Method for deriving the fair value. However in Real Estate, the valuations have been based on the projected profitability of the projects in development and also on the land bank value. DUE DILIGENCE ASPECTS KEY FOCUS AREA DURING DUE DILIGENCE OF REAL ESTATE DEVELOPER Areas
Land Bank and Asset assessment • • • • • Work in Process • • • • Agreements and Important Documents • • • • • • • • • • Loans • • • Capital Structure • • Financial Impacts • • • • • • • Important points • • • • • • The total land bank of the developer and the valuation thereof The Clear title of the land in the name of the developer and supporting documents i.e. lease agreement, purchase agreements, copy of property card etc. Status of the land assets in terms of agricultural/non-agricultural land, ready to developed plots, reserved/unreserved plots etc. Any revaluation of assets made in the past and its impact on the financials Mortgage or pledge of land creating a right over the land The number of projects under construction and the estimated date of completion, reasons, if any, for delay in development, increase in any liability due to delay, status of the project and any contingencies on its completion Revenue recognition in case of bookings made and any onus of interest or penalties payable due to delay of possession Liability in terms of increased committed costs Litigation pending against the property making the project dead In case of projects which are developed by the entity but the land owned by other party, the agreements for terms and conditions with respect to development rights and revenue sharing or any other elements Status of Long-term Lease contracts and any onus on its expiry and the terms of renewal of same Long-term construction contracts entered into by the entity with the contractors/contractees and commitments thereof Title Certificate/Title card, Power of Attorney Alternatively Land Purchase Agreement and Non-Agricultural (NA) land permission Change of Land Use Permission, Environment Clearance, Pollution control board Clearance Fire, Water, Electricity NOC, Commencement Certificate The land is not in the area of high attention line Permissions and Certificate from Airport Authorities of India or Railway Authorities Land Allotment terms and issues as laid by conditions of the respective statutory body or the government Status of Loans availed against specific projects along with its repayment terms If the loans are repayable within short term the entity may face cash flow crisis due to non-completion of the project or slow moving/non-moving properties Rates of interest on the loans Any confiscation of pledged property due to non-repayment of loans in the past The capital structure of the entity in terms of over dependence on debt for financing the projects leading to high interest costs In case of overdependence on equity, whether the entity has failed to raised finance from other sources and the reasons thereof The impact of defaults in the receipt of instalments on the cash flow of the entities The piling of non-moving inventories thus affecting recovery price and the cash flow Fixed commitments of the municipal taxation payable at a regular interval The change in valuations of the property due to litigations or otherwise affecting the net worth of the entity Any contingent liabilities against litigations and their probability of materialisation Financial impact due to non -adherence of various regulatory provisions Debt service coverage ratio/interest coverage ratio/ROCE of the entity Financials of the SPV Company Revenue recognition policy Accounting of costs incurred till date, escalations and cost to complete Land Documents Verification and Statutory Compliances Verification of payment of Direct and Indirect Taxes Verification of the acquisition cost of Land and amount recorded in Books
REAL ESTATE – AN UPDATE FROM BDO INDIA CORPORATE FINANCE NEWSLETTER
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RECENT REPORTED TRANSACTIONS IN 2010: Acquirer
HDFC Venture Funds
Target
Lodha Developers
Deal Value & Stake %
USD 107 million
Remarks
Lodha Developers has sold 10% stake in one of its project to HDFC Venture Funds for Rs. 500 Crs. The project is undertaken to develop a 117-storey residential tower in Mumbai. The sale value of project is estimated at Rs. 5,000 Crs. This is the largest investment by a real estate investment trust (REIT) fund in India The Xander Group has invested Rs 520 Crs in the hospitality division of Pune-based Panchshil Realty, which is developing seven hotels in the country under the Marriott brand One of DLF’s units has bought 245 million CCPS in a group company, DLF Assets, from private equity firm SC Asia Pte Ltd. After the deal, the DLF’s unit's stake in DLF Assets has risen to 91.9 per cent, while SC Asia through its investment arm would continue to hold a 4.59% stake The Joint Venture proposes to develop 200,000 affordable houses over the next five years in the price range of Rs. 8 – 12 lakhs in Bangalore, Chennai, Kochi and Pune. Lavasa Corporation, which is developing a hill township near Pune, has raised Rs. 250 Crs from ICICI Bank Ltd. through quasi-equity instruments
IL&FS Milestone Fund Xander Real Estate Partners DLF
HCC Panchshil Realty
USD 127.77 million 74% stake USD 110 million
DLF Assets
USD 696 million
Puravankara
Homex, subsidiary of Homex, Mexico Lavasa Corporation Ltd., subsidiary of Hindustan Construction Company
Joint Venture
ICICI Bank
USD 53.19 million
OUR RECENT ENGAGEMENTS CORPORATE ADVISORY SERVICES REAL ESTATE
• Undertaken Merger of the group companies of Hiranandani
POWER
MUTUAL FUNDS
• Formation of Mutual Fund for IDBI
• Undertaken Merger of Real Ispat Limited and its group company
MERGER VALUATION BANKING
• Merger of Bank of Rajasthan with ICICI Bank • Merger of State Bank of Indore with State Bank of India
MEDIA & ENTERTAINMENT
• Merger of AIMs listed company with its parent company UTV Software Communications Limited • Merger of US Subsidiary with the listed Parent in India Crest Animation Studios Limited
FMCG
• Merger of Fem Care Ltd. with Dabur India Limited
OTHERS
• Merger of Quippo Infrastructure Equipment Limited with SREI Infrastructure Limited
BRAND VALUATION PHARMA
• Brand Valuation of I-Pill brand acquired by Piramal Healthcare from Cipla
IT SOFTWARE
• Valuation of intellectual property rights of Tally transferred to Tally Solutions Pvt. Ltd.
MANUFACTURING
• Valuation of brands and related intangibles of Malibu Plastica Pvt. Ltd. transferred to a Joint Venture between Bayer Material Science and Malibu Plastica & Malibu-Tech
MEDIA & ENTERTAINMENT
• Brand Valuation of Star Vijay brand for the purpose of transfer of brand
DUE DILIGENCE REAL ESTATE
• D u e D i l i g e n c e o f V i k h ro l i Corporate Park of HCC for investment by Milestone Capital Advisors (Deal value Rs. 775 Crs)
HOSPITALITY
• DD of Asian Hotels Ltd. (West) and Aria Hotels & Consultancy Services Ltd. for investment by IL &FS (Deal Value Rs 80 Cr)
ENGINEERING
• DD of Bharat Wire Ropes Limited for acquisition by Gaja Mercantile (Deal Value Rs 200 Cr)
M & A / PRIVATE EQUITY METALS
• Sole advisors to Delta Magnets Ltd in its acquisition of MMG Magdev Ltd. (UK). and MMG India Pvt. Ltd.
ENGINEERING
• Sole advisors to the Directors of Dynatech Furnaces (Bombay) Pvt. Ltd. for sale of shares to a German Company
REAL ESTATE – AN UPDATE FROM BDO INDIA CORPORATE FINANCE NEWSLETTER
7
BDO CORPORATE FINANCE PRACTICE BDO’s Corporate Finance team offers the hands-on experience and skills to address your business needs. In addition to the valuation of Real Estate, we have the ability to support any valuation requiring expertise in machinery and equipment for a variety of applications including: • • • • • • • • • • Mergers and Acquisitions Purchase Price Allocations IFRS Valuation Intangibles Valuation Arbitration Valuation Portfolio Reviews and Valuation Impairment testing Restructuring Advisory Due Diligence Services Private Equity Placement
CONTACT:
LATA MORE Director – Valuations & Corporate Restructuring [email protected] RAJENDRA CHITALE Director – Due Diligence [email protected]
KIRTI SHAH National Head – Corporate Finance Advisory [email protected] www.bdoindia.co.in
ABOUT BDO INDIA Formerly known as BDO Haribhakti Consulting Private Limited, we are the Indian Member Firm of BDO – the world's fifth largest accountancy network with offices in more than a 110 countries powered by 44,000 employees. We strive to develop and earn our client's trust through a practice that is both dedicated to our client’s needs and driven by expertise. We realize no two businesses are the same. So whether your business is a start-up or a multi-national, we can help you achieve your goals. We proactively innovate and evolve our portfolio of services (that include Audit and Assurance, Risk Advisory, Tax Advisory, Corporate Finance Advisory, Global Knowledge) to address critical challenges that are likely to be faced by businesses. At BDO, our bedrock of values is the compass by which we orient operations on every platform – from management to dealings with our clients to our brand of service.
Disclaimer: This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Consulting Pvt. Ltd. to discuss these matters in the context of your particular circumstances. BDO Consulting Pvt. Ltd., its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it. BDO Consulting Private Limited, a private limited company incorporated in India, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.
September 2010 www.bdoindia.co.in
REAL ESTATE
AN UPDATE FROM BDO INDIA CORPORATE FINANCE
With India’s recovery well underway, its commercial real estate market is beginning to stabilize. Indeed most cities in India have already witnessed an uptick in the volume of transactions in commercial and residential space. The real estate industry can be segmented into the following classes: Housing Commercial Retail Hospitality SEZ/FTZs
DID YOU KNOW...?
FACTS
REAL ESTATE SECTOR •
STATISTICS
Real estate sector is 2nd only to agriculture in terms of employment generation and contributes heavily to Gross Domestic Product (GDP) of the country Within a short span of time it has evolved from highly fragmented and unorganised market into a semi-organised market with a large number of listed companies Expected to reach a size of USD 180 bn by 2020 (DIPP) Market analysis pegs returns from real estate sector in India at an average rate of 14% annually The lease rentals have been picking up steadily Residential space is growing at an average rate of 34% Commercial space is growing at an average rate of 10- 15% per year Current contribution of real estate sector to India’s GDP is about 5% One of the highest FDI attracting sector in India FDI Inflows in 2008-09 were USD 2.80 billion as per Department of Industrial Policy & Promotion (DIPP) Affordable housing expected to be the key factor in driving the real estate sector growth (Source: Confederation of Real Estate Developers Associations of India)
•
GROWTH PROSPECTS
• • • • •
CONTRIBUTION FDI INFLOWS
• • •
OUTLOOK
•
REAL ESTATE – AN UPDATE FROM BDO INDIA CORPORATE FINANCE NEWSLETTER
2
RECENT AMENDMENTS AFFECTING REAL ESTATE SPECIAL ECONOMIC ZONES (SEZs) Income Tax Act Provision (Current Provision) • Units in SEZs get 100% income tax exemption on export income for the first five years and 50% for the next five years. They also get exemption on 50% of the ploughed back export profit for the next five years after the first 10 years. They are exempted from MAT payment as well Developers – 100% tax exemption for 10 years in a block of 15 years
•
Honourable Bombay High Court has granted an interim stay in the case of Maharashtra Chamber of Housing Industry (MCHI) vs. Union of India against recovery of service tax on real estate. The constitutional validity of the levy of service tax is subjudice. Courts in other states have stayed recovery till the matter is decided by Bombay High Court
CERTAIN REGULATORY ASPECTS Round Tripping Round tripping is usually referred to routing of domestic investments through tax haven and taking advantage of the Double Tax Avoidance Agreement (DTAA) i.e. paying lower taxes on profits. Example: • • An Indian company can invest up to 400% of its net worth in a JV/ WOS abroad An investment by JV/WOS in Indian realty stocks listed abroad would lead to round tripping since the money would come back to India. This is prohibited by regulatory authorities in India
•
Direct Tax Code (DTC) (Proposed Provision) • Units in SEZs that commence commercial operations by March 31, 2014, shall be allowed profit-linked deductions permitted under the Income Tax Act, 1961. Thereafter exemption would be linked to investment It is proposed that MAT would also be applicable to such units. However, the MAT credit would be allowed to be carried forward for 15 years Developers would continue to get profit linked incentives if SEZ is notified prior to March 2012. Thereafter, investment linked incentive as contemplated under DTC 2009 will be allowed
Real Estate Mutual Funds (REMFs): In May 2008, SEBI allowed mutual funds to launch real estate mutual fund schemes to allow retail investors to participate in the booming realty market. Fluctuating market prices in real estate sector in last two years have seen very few REMFs being launched. Real Estate Investment Trusts (REITs): REITs are investment pools formed to invest in real estate assets. Globally, REIT is a popular route to invest in realty sector. SEBI has been slow in announcing the REIT guidelines whose draft was released in December 2007. Some recent reports suggest that REITs may take some more time to take off in India. TRENDS IN REAL ESTATE FDI IN HOUSING AND REAL ESTATE:
•
•
Impact • It could be interpreted that since the incentive provided to developers has been linked to investments, there could be a spurt in lease rentals to pass on the tax benefit forgone. This would not have any impact on valuation If the developer does not increase the rentals, the outgo on account of tax would be borne by developers. This would reduce the valuation of the project considering the projected profitability • • • The highest FDI inflows during the period beginning from April 2000 to May 2010, has been from Mauritius (42%) Total FDI inflow, in housing and real estate, during the period beginning from April 2005 to May 2010 is $ 8,492 mn FDI in real estate as a percentage of total FDI investments has increased from 0.7% in 2005-06 to 11% in 2009-10. For 2010-11 (till May 2010) it stands at 7.4%.
•
Service Tax • Finance Bill 2010 introduced service tax on sales of under-construction property from July 1, 2010. It increased abatement on construction from 67% to 75% if gross value of commercial or residential complex includes cost of land. This reduces the effective tax rate to approx. 2.575% (10.3% * 25%) of gross value
REAL ESTATE – AN UPDATE FROM BDO INDIA CORPORATE FINANCE NEWSLETTER
3
INDICES MULTIPLES SINCE 2008 Book Value Multiple It could be inferred from the table to the left that the realty index book value multiple is 73% down from its peak in 2008. Whereas BSE Sensex book value multiple is down by 13%
PERFORMANCE OF BENCHMARK INDICES SINCE 2008. • It can be observed from the graph to the right that Nifty is 14% lower than its all time high in 2008. As against this, the Realty Index is 77% lower from its peak
INDEX RETURN VIS-À-VIS REALTY INDEX RETURN FROM JAN. 2007 • It can be observed from the graph to the right that since inception of Realty Index on 29 Dec 2006, the Nifty has given a positive return of 36% while Realty Index has given a negative return of 57%
REAL ESTATE – AN UPDATE FROM BDO INDIA CORPORATE FINANCE NEWSLETTER
4
VALUATION MULTIPLES: THE TABLE ALONG SIDE LISTS THE MULTIPLES OF REALTY COMPANIES: • • It can be observed from the table that DLF tops the realty pack in terms of Sales Multiple, EBITDA Multiple & PE Multiple. The high valuation of DLF seems to be influenced by the worth of its land bank. Also, DLF is the one of the few companies to have a pan India footprint in terms of projects and is more diversified in terms of various segments in real estate development Peninsula Land is trading at lower multiples. This may be attributed to the lower visibility of the future projects and also that the company is more focused in Mumbai region. Another factor impacting the valuation of Peninsula is that it is more focused on commercial projects
Average Price Company Name
D L F Ltd. Unitech Ltd. Housing Dev & Infra Ltd. Sobha Developers Ltd. Parsvnath Developers Ltd. Orbit Corporation Ltd.
Sales EBITDA
16.56 9.42 6.16 3.04 3.28 1.49 7.49 53.13 2.58 11.46 6.16 27.69 19.63 12.02 13.12 9.96 4.57 10.55 86.86 5.87 21.14 12.02
P/E
68.98 38.47 16.51 24.85 20.02 7.68 21.36 315.85 6.81 57.84 21.36
•
Ackruti City India Bulls Real Estate Peninsula Land Ltd. Mean Median
* Based on financials for FY 2009-10 and average share price of July - Aug.
EMERGING OPPORTUNITIES IN REAL ESTATE SECTOR There is a gradual shift of real estate developers from the traditional development in residential and commercial space to areas like logistics, warehousing, hospitals, schools and affordable housing. This shift is mainly due to limited players in the segment and also on account of the rising demand for development in these segments.
Logistics and Warehousing
• • • Booming trade both international and domestic MNCs around the globe are establishing operations in India Food processing sector, large infrastructure and engineering projects require logistics facilities Large warehouses occupy space. The right kind of logistics is re q u i re d t o o v e rc o m e t h e shortage of space in towns •
Healthcare Infrastructure
Health care industry is estimated to grow over a CAGR of 12% over the next 5 years. The industry size was USD 38.8 billion in the year 2008 Moreover, Health care BPO is a growing segment Medical tourism growth is driven by low cost and high quality services •
Education Infrastructure
Growing interest of leading global educational institutions in setting up institutions in India Growing working class population with an increased demand in higher studies Need for development of world class educational infrastructure Huge market with untapped potential • • • •
Low-cost Housing
Growing demand for housing among nuclear families Easy access to various avenues of finance Shift in attitudes from rented to owned house concept Housing shortage expected as a result of migration of working population from rural areas to urban areas
• • •
•
• •
•
DRIVERS IN REAL ESTATE FOR INVESTMENT & VALUATION Raw Land
• • Supply/Demand Planning & zoning
Apartments/Residential Commercial Premises /Office Building Warehouses
• •
Population Growth Income Growth
• •
Local Economic Expansion Tenant Mix
• • • • • • • • •
Commercial/Industrial Activity Favourable Status Tenant Mix Population and Income Adequate Parking Suitable Tenant Mix Lease Term Demand by Business and tourist Facility and Service Mix
Shopping Malls/Retail
Hotels/Motels
REAL ESTATE – AN UPDATE FROM BDO INDIA CORPORATE FINANCE NEWSLETTER
5
VALUATION APPROACH Valuation of Real Estate companies is unique in comparison to other sectors. In case of most sectors, the EBITDA multiple and revenue multiple etc. are the key indicators used for deriving the fair value of the company under the Comparable Companies Multiple Method. There are other approaches like Net Asset Value Method, Discounted Cash Flow Method, and Profit Earning Capacity Method for deriving the fair value. However in Real Estate, the valuations have been based on the projected profitability of the projects in development and also on the land bank value. DUE DILIGENCE ASPECTS KEY FOCUS AREA DURING DUE DILIGENCE OF REAL ESTATE DEVELOPER Areas
Land Bank and Asset assessment • • • • • Work in Process • • • • Agreements and Important Documents • • • • • • • • • • Loans • • • Capital Structure • • Financial Impacts • • • • • • • Important points • • • • • • The total land bank of the developer and the valuation thereof The Clear title of the land in the name of the developer and supporting documents i.e. lease agreement, purchase agreements, copy of property card etc. Status of the land assets in terms of agricultural/non-agricultural land, ready to developed plots, reserved/unreserved plots etc. Any revaluation of assets made in the past and its impact on the financials Mortgage or pledge of land creating a right over the land The number of projects under construction and the estimated date of completion, reasons, if any, for delay in development, increase in any liability due to delay, status of the project and any contingencies on its completion Revenue recognition in case of bookings made and any onus of interest or penalties payable due to delay of possession Liability in terms of increased committed costs Litigation pending against the property making the project dead In case of projects which are developed by the entity but the land owned by other party, the agreements for terms and conditions with respect to development rights and revenue sharing or any other elements Status of Long-term Lease contracts and any onus on its expiry and the terms of renewal of same Long-term construction contracts entered into by the entity with the contractors/contractees and commitments thereof Title Certificate/Title card, Power of Attorney Alternatively Land Purchase Agreement and Non-Agricultural (NA) land permission Change of Land Use Permission, Environment Clearance, Pollution control board Clearance Fire, Water, Electricity NOC, Commencement Certificate The land is not in the area of high attention line Permissions and Certificate from Airport Authorities of India or Railway Authorities Land Allotment terms and issues as laid by conditions of the respective statutory body or the government Status of Loans availed against specific projects along with its repayment terms If the loans are repayable within short term the entity may face cash flow crisis due to non-completion of the project or slow moving/non-moving properties Rates of interest on the loans Any confiscation of pledged property due to non-repayment of loans in the past The capital structure of the entity in terms of over dependence on debt for financing the projects leading to high interest costs In case of overdependence on equity, whether the entity has failed to raised finance from other sources and the reasons thereof The impact of defaults in the receipt of instalments on the cash flow of the entities The piling of non-moving inventories thus affecting recovery price and the cash flow Fixed commitments of the municipal taxation payable at a regular interval The change in valuations of the property due to litigations or otherwise affecting the net worth of the entity Any contingent liabilities against litigations and their probability of materialisation Financial impact due to non -adherence of various regulatory provisions Debt service coverage ratio/interest coverage ratio/ROCE of the entity Financials of the SPV Company Revenue recognition policy Accounting of costs incurred till date, escalations and cost to complete Land Documents Verification and Statutory Compliances Verification of payment of Direct and Indirect Taxes Verification of the acquisition cost of Land and amount recorded in Books
REAL ESTATE – AN UPDATE FROM BDO INDIA CORPORATE FINANCE NEWSLETTER
6
RECENT REPORTED TRANSACTIONS IN 2010: Acquirer
HDFC Venture Funds
Target
Lodha Developers
Deal Value & Stake %
USD 107 million
Remarks
Lodha Developers has sold 10% stake in one of its project to HDFC Venture Funds for Rs. 500 Crs. The project is undertaken to develop a 117-storey residential tower in Mumbai. The sale value of project is estimated at Rs. 5,000 Crs. This is the largest investment by a real estate investment trust (REIT) fund in India The Xander Group has invested Rs 520 Crs in the hospitality division of Pune-based Panchshil Realty, which is developing seven hotels in the country under the Marriott brand One of DLF’s units has bought 245 million CCPS in a group company, DLF Assets, from private equity firm SC Asia Pte Ltd. After the deal, the DLF’s unit's stake in DLF Assets has risen to 91.9 per cent, while SC Asia through its investment arm would continue to hold a 4.59% stake The Joint Venture proposes to develop 200,000 affordable houses over the next five years in the price range of Rs. 8 – 12 lakhs in Bangalore, Chennai, Kochi and Pune. Lavasa Corporation, which is developing a hill township near Pune, has raised Rs. 250 Crs from ICICI Bank Ltd. through quasi-equity instruments
IL&FS Milestone Fund Xander Real Estate Partners DLF
HCC Panchshil Realty
USD 127.77 million 74% stake USD 110 million
DLF Assets
USD 696 million
Puravankara
Homex, subsidiary of Homex, Mexico Lavasa Corporation Ltd., subsidiary of Hindustan Construction Company
Joint Venture
ICICI Bank
USD 53.19 million
OUR RECENT ENGAGEMENTS CORPORATE ADVISORY SERVICES REAL ESTATE
• Undertaken Merger of the group companies of Hiranandani
POWER
MUTUAL FUNDS
• Formation of Mutual Fund for IDBI
• Undertaken Merger of Real Ispat Limited and its group company
MERGER VALUATION BANKING
• Merger of Bank of Rajasthan with ICICI Bank • Merger of State Bank of Indore with State Bank of India
MEDIA & ENTERTAINMENT
• Merger of AIMs listed company with its parent company UTV Software Communications Limited • Merger of US Subsidiary with the listed Parent in India Crest Animation Studios Limited
FMCG
• Merger of Fem Care Ltd. with Dabur India Limited
OTHERS
• Merger of Quippo Infrastructure Equipment Limited with SREI Infrastructure Limited
BRAND VALUATION PHARMA
• Brand Valuation of I-Pill brand acquired by Piramal Healthcare from Cipla
IT SOFTWARE
• Valuation of intellectual property rights of Tally transferred to Tally Solutions Pvt. Ltd.
MANUFACTURING
• Valuation of brands and related intangibles of Malibu Plastica Pvt. Ltd. transferred to a Joint Venture between Bayer Material Science and Malibu Plastica & Malibu-Tech
MEDIA & ENTERTAINMENT
• Brand Valuation of Star Vijay brand for the purpose of transfer of brand
DUE DILIGENCE REAL ESTATE
• D u e D i l i g e n c e o f V i k h ro l i Corporate Park of HCC for investment by Milestone Capital Advisors (Deal value Rs. 775 Crs)
HOSPITALITY
• DD of Asian Hotels Ltd. (West) and Aria Hotels & Consultancy Services Ltd. for investment by IL &FS (Deal Value Rs 80 Cr)
ENGINEERING
• DD of Bharat Wire Ropes Limited for acquisition by Gaja Mercantile (Deal Value Rs 200 Cr)
M & A / PRIVATE EQUITY METALS
• Sole advisors to Delta Magnets Ltd in its acquisition of MMG Magdev Ltd. (UK). and MMG India Pvt. Ltd.
ENGINEERING
• Sole advisors to the Directors of Dynatech Furnaces (Bombay) Pvt. Ltd. for sale of shares to a German Company
REAL ESTATE – AN UPDATE FROM BDO INDIA CORPORATE FINANCE NEWSLETTER
7
BDO CORPORATE FINANCE PRACTICE BDO’s Corporate Finance team offers the hands-on experience and skills to address your business needs. In addition to the valuation of Real Estate, we have the ability to support any valuation requiring expertise in machinery and equipment for a variety of applications including: • • • • • • • • • • Mergers and Acquisitions Purchase Price Allocations IFRS Valuation Intangibles Valuation Arbitration Valuation Portfolio Reviews and Valuation Impairment testing Restructuring Advisory Due Diligence Services Private Equity Placement
CONTACT:
LATA MORE Director – Valuations & Corporate Restructuring [email protected] RAJENDRA CHITALE Director – Due Diligence [email protected]
KIRTI SHAH National Head – Corporate Finance Advisory [email protected] www.bdoindia.co.in
ABOUT BDO INDIA Formerly known as BDO Haribhakti Consulting Private Limited, we are the Indian Member Firm of BDO – the world's fifth largest accountancy network with offices in more than a 110 countries powered by 44,000 employees. We strive to develop and earn our client's trust through a practice that is both dedicated to our client’s needs and driven by expertise. We realize no two businesses are the same. So whether your business is a start-up or a multi-national, we can help you achieve your goals. We proactively innovate and evolve our portfolio of services (that include Audit and Assurance, Risk Advisory, Tax Advisory, Corporate Finance Advisory, Global Knowledge) to address critical challenges that are likely to be faced by businesses. At BDO, our bedrock of values is the compass by which we orient operations on every platform – from management to dealings with our clients to our brand of service.
Disclaimer: This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Consulting Pvt. Ltd. to discuss these matters in the context of your particular circumstances. BDO Consulting Pvt. Ltd., its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it. BDO Consulting Private Limited, a private limited company incorporated in India, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.
