Anand Rathi Financial Services, its affiliates and subsidiaries, do and seek to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1. Anand Rathi Research India Equities Property Sector Report Samar Sarda +9122 66266726 [email protected]Dhaval Dama [email protected]4 October 2010 Mumbai Property The old order changeth, yielding place to new Overweight Nifty/Sensex: 6143/20445
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Anand Rathi Financial Services, its affiliates and subsidiaries, do and seek to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1. Anand Rathi Research India Equities
Anand Rathi Financial Services, its affiliates and subsidiaries, do and seek to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1. Anand Rathi Research India Equities
Mumbai-based developers would continue witnessing high profits over the next 3-5 years given: i) low ready-inventory in the market, ii) high demand, iii) lower land cost vs high margins, iv) low execution due to regulations. Given the city’s unique geography and dense population (in slum areas, chawls), acquisitions via the rehabilitation/redevelopment mode will give access to prime land at low cost, with the older construction giving way to large areas for new projects (higher FSI). Although we expect slight correction in the next 3-4 months, we believe inflation-adjusted prices would remain stable in the long term (4-5 years). We have an Overweight stance on the sector.
� Land limited, area unlimited. Due to its tight geography, Mumbai market has limited land; however, its old constructions viz. slums, chawls, cessed buildings are opening up for redevelopment (higher FSI) via slum rehab schemes (SRS) and urban renewal schemes (URS), thereby freeing up land for organised development. Such projects involve lower (and deferred) acquisition costs, leading to higher profits for developers.
� Residential demand high. With an estimated 1.2% population CAGR over the next decade, demand would remain strong owing to Mumbai continuing to attract commercial activity and, hence, high immigration, for which +300m sqft of residential space will be required. Although we do not expect a major price correction, we believe prices will soften on account of affordability concerns in the near-term. Inflation-adjusted stable prices over the next few years are likely to lead to volumes, given healthy economic growth. We are positive on central suburbs and Bandra (E) and expect them to outperform vis-à-vis other micro-markets.
� Stock ideas. We favour HDIL (on execution & location skills) and Ackruti City (on niche developments). We initiate coverage with Buy on DB Realty, Orbit Corp, Peninsula Land and Sunteck Realty.
� Risks. i) Economic slowdown ii) Regulatory risks iii) De-coupling of MMR from Mumbai City.
Overweight
Nifty/Sensex: 6143/20445
BSE Realty vs Sensex
BSE Realty
Sensex
60
70
80
90
100
110
120
Oct
-09
Dec
-09
Feb-
10
Apr-1
0
Jun-
10
Aug-
10
Oct
-10
Source: Bloomberg
Sector valuation matrix
Company Rating Price
(`/share) Sep'11 Target
(`/share) M Cap (` bn) PE(x) (FY11e) PBV (x)(FY11e)
Sep '11 NAV
(`/share)
Ackruti City Buy 510 872 37 13.3 2.1 967
DB Realty Buy 410 564 100 20.4 3 564
HDIL Buy 270 375 112 18.6 1.2 419
Orbit Corp Buy 123 181 13 11.4 1.1 181
Peninsula Land Buy 66 78 18 6.9 1.3 78
Sunteck Realty Buy 685 811 43 722 6.8 957
Source: Company, Anand Rathi Research
4 October 2010 Mumbai Property – The old order changeth, yielding place to new
Anand Rathi Research 2
Mumbai Property
The old order changeth, yielding place to new
Investment Argument and Valuation ............................................ 3
Land limited, area unlimited…....................................... 3
4 October 2010 Mumbai Property – The old order changeth, yielding place to new
Anand Rathi Research 3
Investment Argument and Valuation Mumbai-based developers would continue witnessing high profits over the next 3-5 years given: i) low ready-inventory in the market, ii) high demand, iii) lower land cost vs high margins, iv) low execution due to regulations. Given the city’s unique geography and dense population (in slum areas, chawls), acquisitions via the rehabilitation/redevelopment mode will give access to prime land at low cost, with the older construction giving way to large areas for new projects (higher FSI). Although we expect slight correction in the next 3-4 months, we believe inflation-adjusted prices would remain stable in the long term (4-5 years). We have an Overweight stance on the sector.
Land limited, area unlimited… Based on niche developments (SRS, URS, redevelopment etc) peculiar to Mumbai, high entry barriers and demand superseding supply, we expect Mumbai developers to ride the growth wave over the next few years, given lower land costs (52% projects are SRS). Although we expect prices to remain stable ahead, NAV would depend on sales volume.
Being the most densely populated city in India (over 27,000 people/sqkm) and largely sea-locked, vacant land, especially around the present commercial locations (off the central business district-CBD and new CBD), is difficult to obtain. Various development offerings, most of these peculiar to the city – slum rehabilitation scheme (SRS), urban renewal schemes (URS), public private partnerships (PPPs), re-development projects and defunct mill land development – not only entail access to prime parcels but also large tracks of land. Given higher-than-normal floor space index (FSI) for such developments, extremely low land costs offer the highest conversion margins for relatively high selling price. This coupled with mounting demand (and low ready inventory) make Mumbai the most valuable property market in India.
However, the current prices exceeding ’07 peaks in certain micro-markets are likely to see correction in the next few months due to affordability concerns. Although price movement would stabilise in the long term, a major correction is likely only in the case of available ready housing owing to increased pace of execution or economic slowdown.
Fig 1 – Development models followed in Mumbai
Type Avg gross margins (%) FSI Profitable Locations
PPP 35-55 3-4 Suburbs 15-50 Gov, Private land converted
Medium
Mill land 25-40 1.33 South-Central 40-80 ~200 acres Low
Virgin land 20-40 1 + 1* Suburbs 60-80 NA Low/Medium
Old industrial units 25-40 1 + 1* Suburbs 40-70 NA Low/Medium
Source: Anand Rathi Research *TDR addition
Of the 17 developers in our sample, SRS is the most favoured route in building land bank in Mumbai; virgin land, defunct mills and factory lands are other areas that are being utilised by developers in building land bank.
Organised development is estimated at 55-60% of the total development
in Mumbai
Rising demand and low current ready-inventory make Mumbai the most sought-after property market
4 October 2010 Mumbai Property – The old order changeth, yielding place to new
Anand Rathi Research 4
The huge scope of and enhanced focus on re-development (private and public colonies) in Mumbai lead to 15% contribution from such projects (which is likely to further increase).
Fig 2 – Land acquisition mode of large developers
SRS52%
Redev4%
Factory Land/Mill Land
16%
Virgin land16%
PPP9%
URS3%
Source: Companies
Asset class contribution
The national average of residential development is 80% of the total property market; 60-70% of total development for Mumbai-based developers is residential. Given no free land and higher density than other micro-markets in the city, South Mumbai has minimum new supply. The central and western suburbs share ~80% of space, (~55% is in the form of developments and ~25% in the form of transferable development rights (TDR), which acts as a supplement for additional FSI. South-central Mumbai), with its opening up of defunct mill land and redevelopment/URS, contributes ~14% of the supply.
Over the years, SRS (~8,600acres), URS (~1,500 acres), mill land (~200 acres of undeveloped), redevelopment of Maharashtra Housing & Area Development Authority (MHADA), private colonies (+4,500 acres combined) and part lease of port trust land will release large supply in the market. This could eventually lead to price correction, which is, however, dependent on execution scaling up.
Residential remains the most favoured and profitable vertical to
be offered by developers
Fig 3 – Asset class contribution
Hotel1%
Others1%
Retail2%
Comm21%
TDR22%
Resi53%
Source: Companies
Fig 4 – Location spread
Others (TDR)23%
Western Suburbs
28% Bandra6%
Central Suburbs
28%
South Central Mumbai
14%
South Mumbai1%
Source: Companies
4 October 2010 Mumbai Property – The old order changeth, yielding place to new
Anand Rathi Research 5
Residential demand high Residential
Mumbai is the most densely populated city in India, with some pockets even more populous than an average Mumbai micro-market (e.g., the Dharavi slum: 13x of average; C Ward in South Mumbai: 2.6x). The natural population growth in Mumbai is less than the rate of immigration into the city (80% of these migrants stay over a decade) over the past five decades. Although MMR still depends on commercial activity in Mumbai, we believe that over the years, given the infrastructure constraints in the City, Mumbai Metropolitan Region (MMR) would become self sufficient. Hence, we believe that Mumbai city population would see slowdown in growth. Even so, demand for quality residences would be much higher than supply, till execution picks up.
According to our estimates, ~324m sqft of non-slum space in Mumbai would be required by ’21 and another 193m sqft by ’31. Slums in Mumbai and slum population set to reduce at a relatively high pace (vis-à-vis past four decades) would release more space for organised development.
Of the listed developers, Ackruti City, DB Realty and HDIL have the largest offerings of space in Mumbai City. The Mumbai property industry remains fragmented and an equal number of unlisted as well as many small developers crowd the market.
According to our assumptions (from our sample of 17 developers), residential space would remain in short supply unless: i) the proportion of planned commercial space reduces, ii) population growth slows more-than-expected and iii) slums decline is lower than expected. Till then, property prices in Mumbai are likely to remain high/stable.
Fig 6 – Estimated space addition Sample as a % of total Total (m sqft) Residential (m sqft)
35 891 466
40 780 408
50 624 326
Source: Anand Rathi Research
Micro-markets
None of Mumbai’s micro-markets are in the infancy stage. Hecne, the new CBD at BKC near Bandra (E) as well as available land and better infrastructure at the central suburbs of Ghatkopar (E), Vikroli and Bhandup would witness higher price appreciation than other micro-markets in Mumbai.
There are over 1.1m households (ex slums) in Mumbai
In the near term, we expect prices to correct in certain micro-markets,
as they are above their ’08 peaks already
Fig 5 – Population growth rate estimates
Year ending People (m) 10-year CAGR (%) Slums Family Size No. of Houses Size of a house
(sqft) Area req (non-slum)
(m sqft) CY 1971 6.0 50% 6 497,548 550 274
CY 1981 8.2 3.3% 50% 6 686,950 500 343
CY 1991 9.9 1.9% 59% 5 813,923 475 387
CY 2001 12.0 1.9% 59% 5 982,232 450 442
CY 2011e 14.2 1.7% 55% 5 1,276,006 450 574
CY 2021e 16.0 1.2% 50% 4 1,996,797 450 899
CY 2031e 17.6 1.0% 45% 4 2,426,229 450 1,092
Source: Census, Anand Rathi Research
DB Realty, Ackruti City and HDIL have the largest residential
offerings in the city
4 October 2010 Mumbai Property – The old order changeth, yielding place to new
Anand Rathi Research 6
Fig 7 – Micro-markets to look at Emerging Maturing Established
Bandra (E) South Central Mumbai South Mumbai
Gharkopar (E) along highway Parel Bandra (W)
Vikroli (E) Sewri Worli
Source: Anand Rathi Research
Of the listed developers, HDIL and Ackruti City have 32m sqft and 31m sqft of land projects under construction and planned in the central suburbs respectively. Also, most of these are in the form of low-cost SRS and PPP projects and, hence, are primed for high returns.
Commercial
Commercial property is still lagging residential as regards price performance, given high oversupply in the vertical. Even with increased leasing in the past 2-3 quarters, vacancy levels are rising, as continuous supply hits the markets. But micro-markets such as BKC, with little new space available in the near future, have already seen rentals picking up for transformation into the new CBD.
Fig 8 – Commercial stock and vacancy levels
0
10
20
30
40
50
60
70
80
1QC
Y08
2QC
Y08
3QC
Y08
4QC
Y08
1QC
Y09
2QC
Y09
3QC
Y09
4QC
Y09
1QC
Y10
2QC
Y10
7
9
11
13
15
17
19
21
23
Stock Vacancy(RHS)
(msqft) (%)
Source: DTZ, Anand Rathi Research
Valuation Given lumpy earnings in the property sector and no standard accounting policy, it is not meaningful to value all companies on an earnings basis. We believe a project-level DCF-based method is apt for most property developers, with a few companies valued at PE. Also, as each company has various asset classes – normal development, SRS, PPP and re-development projects.
Fig 9 – Valuation (%)
Company Rating FY10-13e EPS
CAGRValue contribution
from Mumbai
Value contribution from ongoing
projects FY11e net D/E
Ackruti City Buy 78.6 68 41 84.4
DB Realty Buy 137.1 80 40 38.9
HDIL Buy 35.7 83 40 19.9
Orbit Corp Buy 28.2 85 20 54.7
Peninsula Land Buy 2.7 47 38 (4.5)
Sunteck Realty Buy 171.8 82 38 63.7
Source: Anand Rathi Research
Even with absorption of over 3m sqft in the past two quarters, vacancies in Mumbai are as high
as 21%
We believe central suburbs to outperform western suburbs on
pricing in the next decade
4 October 2010 Mumbai Property – The old order changeth, yielding place to new
Anand Rathi Research 7
� For companies focusing on SRS, PPP and re-development, a project commences only after clearing the land for development (e.g., shifting families in SRS projects) – Land is available to developers only after the rehab/redevelopment/PPP portion has been constructed. Hence, we have determined development schedules for all such projects, taking into account the required timeframes, given their long gestation period.
� For residential projects, we have assumed selling prices in accordance with prices ruling in particular micro-markets, depending on the stage of construction. City-centre projects nearing completion and constructed by reputed developers usually command premiums over those that are in the preliminary stage of construction.
� For commercial and retail properties under the ‘lease’ model, considering a development schedule depending on brand and location, we have assumed two years or more for 95% threshold occupancy and cap rates of 11-13%, given a developer’s grading and project location.
� Some companies (Peninsula Land) having been into development and following an asset-light model warrant a terminal value for the high cash on books and a small land bank.
� For each property, we have assumed costs as per product offered. This includes construction costs, selling & marketing fees and other costs.
� For future projects, we have assumed tax rate of 34% for the residential sub-segment and 20% for leased assets for normal projects.
� Premiums/discounts to the NAV usually arise from factors such as management capability, land-bank quality, marketability of land, new value-accretive land parcels, delay in execution, sales rate and capex planned. For most cases, we have made necessary assumptions in our model for the aforementioned parameters. In certain cases, development models have not yet been cemented and may not be in sync with our assumptions. Also, regulatory risks in Mumbai play a major role. Hence, we have calculated a discount to the NAV for certain companies.
� We have assumed a standard WACC per company rather than for individual projects.
Fig 10 – Accounting policy followed by Mumbai developers Developer Accounting policy for revenue recog Remark
Ackruti City POCM*: Threshold 25% of total cost Aggressive
DB Realty POCM: Threshold: 25% of const cost and 30% of total cost Relatively conservative
HDIL Project completion method Most conservative
Orbit Corporation POCM: Threshold: 25% of free sale const cost Relatively conservative
Peninsula Land POCM: no threshold Aggressive
Sunteck Realty Project completion method Most conservative
Source: Companies, Anand Rathi Research *POCM – percentage of completion method
Risks � Economic slowdown
� Regulatory risks
� De-coupling of MMR from Mumbai City and ~1000m sqft of projects from developers
For project completion method of accounting companies, one should
look at movement of customer advances
4 October 2010 Mumbai Property – The old order changeth, yielding place to new
Anand Rathi Research 8
Recommendations Ackruti City (Buy, Target Price: `872/share)
Ackruti City has had a good run in property sales, with over `15bn of stock sold since the upturn in the property market and corporate sales of ~`1bn in 2QFY11. We expect the company to continue its strong sales, with 2.9m sqft in FY11e. New projects add high value, and under-construction projects would contribute `6bn in FY11e. We reiterate Buy on Ackruti and rollover Mar ’11 price target of `831 to `872 in Sep ’11.
DB Realty (Buy, Target Price: `564/share)
We initiate coverage on DB Realty (DBRL) with Buy and Sep’11 target price of`564. DBRL is Mumbai’s biggest real-estate developer in the residential space. The company has the most valuable stock of real estate in Mumbai, owing to its presence in high-value markets and high land utilisation. Robust cash flows from launched stock are likely to aid business growth, without stressing the balance sheet.
HDIL (Buy, Target Price: `375/share)
HDIL raised `11.57bn via QIP and further strengthened its balance sheet (FY11e net D/E: 0.24x). Given renewed focus on residential properties, we expect it to sell `18bn of stock in FY11 and TDRs worth `12bn. Mumbai International Airport (MIAL) ph-2 will start construction in Oct ’10. We reiterate Buy and trim our target price to `375/share in Sep ’11 (from `388 in Mar ’11).
Orbit Corporation (Buy, Target Price: `181/share)
We initiate coverage on Orbit Corporation (OCL) with Buy and Sep ’11 price target of `181 on the back of proven execution in redevelopment projects and 100% pre-sales in all projects. OCL is a Mumbai-based property redeveloper, with South Mumbai being its key focus market. New large projects (as against current mid-size projects) in micro-markets, ex South Mumbai, are likely to commence and provide strong thrust to cash flows.
Peninsula Land (Buy, Target Price: `78/share)
We initiate coverage on Peninsula Land (PLL) with Buy and Sep ’11 price target of `78 on the back of its asset light model, healthy balance sheet (net cash) and cash of `12.7bn to flow in from projects nearing completion. We believe PLL would use the cash to acquire value-accretive projects.
Sunteck Realty (Buy, Target Price:: `811/share)
We initiate coverage on Sunteck Realty (SRL) with Buy at Sep ’11 price target of `811, based on its high-value BKC residential projects bearing fruit and JDA/JV strategy that mitigates acquisition risks & costs. SRL made a unique foray in the property sector by acquiring residential projects in the commercial BKC. The company is already in the money for its maiden project, which has helped it acquire & expand via prudent JDAs in city-centre properties (mainly Mumbai) and resulted in low debt levels. Execution is the key factor to watch.
4 October 2010 Mumbai Property – The old order changeth, yielding place to new
Anand Rathi Research 9
Land limited, area unlimited Due to its tight geography, Mumbai market has limited land; however, its old constructions viz. slums, chawls, cessed buildings are opening up for redevelopment (higher FSI) via slum rehab schemes (SRS) and urban renewal schemes (URS), thereby freeing up land for organised development. Such projects involve lower (and deferred) acquisition costs, leading to higher profits for developers.
Greater Mumbai Present statistics
Greater Mumbai (Mumbai City) is spread across 437.77sqkm (~108,173 acres) and is made up of a group of seven islands, separated by creeks and channels, which have been filled up reclaimed. The city’s geographic spread is linear, stretching from the South (Nariman Point) to the western (Borivili), central (Mulund) and eastern (Mankhurd) suburbs that form ‘Greater Mumbai’.
The city is the most densely populated in India, with over 12m residents at present, ~55% of which are slum dwellers. The city being largely sea-locked along with its high density renders further horizontal expansion impossible. The government remains the largest owner of land in Mumbai City.
Mumbai, although a combination of seven islands, is linear
Fig 11 – Mumbai City – Earlier
Source: Wikimapia
Fig 12 – Mumbai city – At present
Source: Indian Properties
4 October 2010 Mumbai Property – The old order changeth, yielding place to new
Anand Rathi Research 10
Avenues for development Of the 312m sqft (total projects area) of our sample of listed and unlisted developers, ~53% is earmarked for residential development, followed by commercial at 21%. HDIL and DBRL are the largest generators of TDR in Mumbai and contribute 22% to total projects development. The high-value South and South-Central Mumbai offer a healthy 46m sqft, while the suburbs display an evident concentration of developers with 92m sqft in the central and 86m sqft in the western suburbs.
Fig 13 – Project profiles of Mumbai developments Acquisition routes
SRS51%
Redevelopment4%
Factory Land/Mill Land17%
Virgin land16%
PPP9%
URS3%
Source: Companies
Asset class
Residential53%
Commercial21%
TDR22%
Hotel1% Others
1%Retail
2%
Source: Companies
4 October 2010 Mumbai Property – The old order changeth, yielding place to new
Anand Rathi Research 11
Slum Rehabilitation Schemes Slum redevelopment is the most profitable source of land for developers in Mumbai, with average gross margins of the three major players at +55%. Such projects do not require upfront payment for land; the cost of land for rehabilitation projects is usually much lower than the ready-reckoner rate and is spread over the rehabilitation tenure. The saleable area per plot for a slum project is much higher than for a normal project. The higher conversion rate in Mumbai results in much higher value of a project vis-à-vis other metros. The rate varies from a normal FSI cap of 2 to an SRS FSI cap of 4.
Fig 14 – Profitability in an SRS vs virgin land project Case 1: Assuming virgin land Case 2:Assuming SRS
Area (acres) 7 7
Plot area (sqft) 0.3 0.3
Rehab area (sqft) - 0.9
Free-sale area (sqft) 0.6 1.2
FSI 1.3
Loading (%) 40 40
Stake (%) 1.0 1.0
Land cost paid (`m) 8,000 -
Rehab cost (`m) - 2,183
Avg Selling Price `/sqft 23,200 23,200
Sale Value (`m) 13,737 27,840
Avg total cost `/sqft 16,614 3,293
Total Costs (`m) 9,837 6,134
Land Acquired/Project acquired Oct'10 Oct'10
Sales Launch/Rehab start Jan'11 Jan'11
Free Sale Const Start Apr'11 Oct'13
Duration (months) 48 72
Cost of equity (%) 14 14
Tax Rate (%) 34 34
IRR (%) 14 61
Source: Anand Rathi Research
Evolution of SRS
SRS is the most favoured route for large Mumbai developers for acquiring prime land parcels in Mumbai. Of the six listed developers in our sample, three are large-scale SRS developers (of which one is a pioneer in the field – Ackruti City). Returns in SRS are substantial (with average gross margins of +55% in most projects), given their prime location and higher conversion rate. This has led to the foray of the two largest Indian developers (DLF and Unitech) from the national capital region (NCR) into the Mumbai market, albeit via JVs. The JV route indicates presence of high level of entry barriers and requirement of localised, niche skills.
Slum rehabilitation in Mumbai dates back to 1954, with the BMC Act under Section 34A for complete evacuation of slums. This was followed by the Government of India approving a slum-clearance (pilot) plan for slum removal in six cities. The slum improvement programme gathered steam again, in the 1970s, with the first Slum Act being passed in 1971 by the government of Maharashtra, albeit with little movement in the rehab process. In the 1980s, the concept of TDR was introduced. As the World Bank-funded scheme for upgrading slums in 1985, TDR was introduced for slum projects also. In 1991, the state government introduced a slum
8% of land area in Mumbai is encroached by slums
19,000 slums till 1990 and 60,000 till 1995 had been rehabilitated due to policies
changing since 1954
4 October 2010 Mumbai Property – The old order changeth, yielding place to new
Anand Rathi Research 12
rehabilitation development (SRD) scheme, offering FSI of 2.5 and a unit size of 180sqft for slums, at upfront payment of one-third the cost and the remaining over 15 years. It kept the profit ceiling for developers at 25% and was the first time that the 70%-consent concept was introduced. Even so, such regulations led to clearing of only 60,000 slums.
The current governing body – Slum Rehabilitation Authority (SRA) –which was formed in 1995, has the authority to grant rights for redevelopment of slums and rehabilitation of slum-dwellers, and acts parallel to the Municipal Corporation. For the first time in India, the concept of free housing was introduced for slums on the electoral role before Jan 1995 and a 75% free sale of the rehabilitation built-up area for the participating private developer. The first project under SRA (SRA/001) was completed by Akruti Nirman (now Ackruti City) in 1997 in Dharavi (the largest slum in Asia). Since 1997, ~150,000 slum rehabilitation units (mostly in tie-ups with private developers) have been constructed and handed over by the government; 210,000 units are under development at present.
Fig 16 – Slum rehab – stats 8% of Greater Mumbai occupied by slums
Over 9m people stay in slums (~55% of the population)
300,000 people migrate to Mumbai annually
Average density is six times higher than the density of Mumbai (Mumbai is highest in India)
Average home size is less than 100 sqft for slums
Average people per family: 6-8
Approx. `200bn of tax / land rehab loss to State exchequer*
Maharashtra is the only state that gives free homes to slum dwellers
Source:, Industry, Anand Rathi Research *approximate
Major players
Of the many small and medium-size SRS-focused developers, 10-11 lead the pack in terms of number and type of project. Amongst listed developers, HDIL has the largest development of rehabilitating slum-
Maharashtra is the only state to give free houses
Fig 15 – Evolution of SRS
BMC Act Sec 34A
1954
GoI approval for slum clearance plan
1956
Slum improvement programs starts
1970
First world bank funded project commenced
1985
Use of TDR started in Mumbai
1980
First census of slums, I card issued
1976
Slum Rehab Development formed
FSI 2.5 Unit size 180sqft 25% profit ceiling One-third payment by slums
1991
SRA formed free houses for slums
Surplus to be given as TDR Carpet area 225sqft 1:0.75 free sale
1995
Some changes in regulations
Rehab area up to 269sqft FSI increase 3-4 25% premium for land
2008
Source: Government of Maharashtra, Anand Rathi Research
Currently, as per SRA, 210,000 rehab units are under construction
4 October 2010 Mumbai Property – The old order changeth, yielding place to new
Anand Rathi Research 13
dwellers encroaching airport land – the Mumbai International Airport (MIAL) project. The other large project nearing completion is a DCR 3(11) project executed by DBRL, which has constructed +14,000 rehab units for project-affected people (PAP). Ackruti City has been a pioneer in slum rehab in Mumbai and the only developer to complete large projects as of date (two projects which entailed rehab of +4,000 tenants each). Though slums in Mumbai average 2.5-3.7 acres, there are larger ones such as in Santacruz (Golibar), Wadala (Swami Samarth) and HanumanNagar (Kandivili), across +100 acres. High-density slums are those in Ghatkopar (W), Vikhroli, Worli, Goregaon and Ghatkopar (E), where density is over 743 tenants per hectare.
Fig 17 – Large slum rehab developers Project Remark
Ackruti City Pioneer in SRS; 30+ projects under development / planned
DBRL Large PAP scheme nearing completion, TDR holder, SRS in form of JDAs
HDIL Currently biggest slum redeveloper in Mumbai, largest TDR holder
Kiran Hemani Numerous small projects
Lokhandwala Infra Schemes in South-Central Mumbai
Omkar 20+ SRS projects across Mumbai
RNA Undertakes large-scale slum rehab projects
SD Corp Tie-ups with developers across Mumbai, completed ‘Imperial Heights’ SRS
Sahana Developers Five to seven projects, Oberoi is a JDA in a Worli slum
Shivalik Ventures (Unitech JV) Around 10 in various stages, Golibar the largest; first '3K" notified project
Sumer Group Projects across suburbs, National Park (Borivili), Worli; TDR holder
In a slum rehab scheme, the government/developer undertakes rehabilitation of slum-dwellers from the horizontally-spread shanties to organised 1-bedroom-hall-kitchen (1-BHK) units of 269sqft carpet area (225sqft till ’08), with basic amenities and a corpus of `20,000 for maintenance.
These slum rehab schemes fall under the purview of various Development Control Regulations (DCRs), with the most profitable under DCR 33(10), which is an ‘in-situ’ scheme, where rehabilitation and the free-sale portion are on the same plot.
52% of the land offering from the top developers arises from SRS
Milestones for a slum rehab project
Annexure 1: Development Agreement, Power of Attorney, Individual & Common Consent, Society Formation, No-Objection Certificate (NOC) from owner of plot
Annexure 2: Biometric Survey, Eligibility Check
Annexure 3: Financial Capability and Bank Guarantee (20% of cost of rehab)
LOI: Given by SRA – indication of FSI, permissible FSI, Rehab and Free sale component area finalisation
Plans approval: IoA (Intimation of Approval)
Clear construction related NOCs
Payment premium (40% of the 25% of ready reckoner rate)
To get Commencement Certificate for Rehab
Pay (60% of the 25% of ready recokner rate) before obtaining commencement certificate for free-sale building
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DCR 33(10) – in-situ scheme
This is the most-sought-after redevelopment route for SRSs, 80% of which are under DCR 33(10). Here, rehabilitation and free sale happen at the same site. This implies that a developer can exploit prime properties in Mumbai, where there is a slum. This is termed an ‘in-situ’ scheme. The ratio between the rehab component and the free-sale component is:
� 1:0.75 for the island city
� 1:1 for suburbs
� 1:1.33 for extended suburbs and ‘difficult’ (e.g., Dharavi) areas
Permissible FSI is 3 for low-density slums and 4 for high-density ones.
Under this scheme, the owner of a vacant plot can use the land for constructing PAP tenements and is compensated in the form of TDR (both for the land and the construction).
Tata Nagar Mankhurd Ackruti City & Hiranandani 4,199
Major under construction Project Location Developers Tenants
MIAL Across Mumbai HDIL ~85,000
PAP Mahul DB Realty ~14,000
Source: Companies, Anand Rathi Research
DCR 33(14) – Transit camp tenements for SRS
Under this Scheme, higher FSI is permitted to construct transit camp tenements for slum rehabilitation. FSI permitted is:
1. 2.5 for suburbs and extended suburbs
2. 2.99 for difficult areas
3. 2.33 in the island city (applicable only for land belonging to the government and public-sector undertakings in the island city)
DCR 33(10) is the most widely used for rehabilitation of slum-
dwellers; it is the most profitable for developers
DCR 33(14) is the least favoured scheme for development
DCR 3(11) is economically not viable, unless land is very cheap
and TDR sales are at higher realisation
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The additional FSI can be used to construct transit camp tenements for accommodating slum dwellers on a temporary basis for ten years; in return, the developer gets rent by the Slum Rehabilitation Authority (SRA). After ten years, the tenements can be used by the owner for any purpose.
HDIL’s SRS-2 at BKC is partly under the DCR 33(14).
Fig 20 – DCR 33(14) projects
Location Total Additional FSI
FSI for SRA tenements
FSI for free sale
Suburbs and Extended suburbs 1.5 0.8 0.8
Difficult areas 1.7 0.7 1.0
Island city (applicable only on lands belonging to the government and public sector undertakings in the island city)
1.0 0.6 0.4
Source: SRA
3K projects
The 3K scheme is for large and difficult slums that have not moved despite smaller societies being formed by local developers for piece-meal development. Such schemes are directly cleared by the chief minister, post which a developer becomes the master planner for the whole area.
Fig 21 – Major ‘3K’ projects Project Location Area (acres) Families Status Developer
Swami Samarth Sion, Wadala 106 30,750 Planning Ackruti City consortium
Hanumannagar Kandivili 100 10,000 Planning K Hemani Group
Source: SRA, Anand Rathi Research
The Golibar (SantaCruz) slum rehabilitation project of ~137 acres is one of the largest SRSs in Mumbai. Shivalik Ventures (a Unitech JV) is developing the project and has successfully raised ~`17bn through private equity investment and build-to-suit deals (this would be received in phases), as well as shifted +3,500 families from the site. 800 slum rehab homes have already been built and handed over to families.
Fig 22 – Golibar project Started CY 2003
Area (acres) 137*
Number of slum societies 158
Free-sale area (m sqft) 18
Number of families 26,570
FSI 2.8
Phase 1 Phase 2
Area (acres) 97 40
Slum units 17,000 9,000
Rehabilitation area (m sqft) 6.4 3.4
Current status
Rehabilitated families 870 -
Letters of Intent (LoI) 5,079 -
Lehman Investment 1m sqft – US$175m
Build-to-suit sale 1m sqft at US$180m
Source: Company, Anand Rathi Research
The Sion-Wadala project allotted to a consortium led by Ackruti City is one of the larger projects in the central suburbs. The project has +75 slum societies and was awarded to Ackruti in Nov ’09; the company is in the planning stage.
Till now, more than 3,500 families have been vacated from Golibar, the most for a single site vacation
Other large listed developers are also looking at ‘3K’ projects
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Fig 23 – Sion-Wadala ‘3K’ project Awarded in 4QCY09
Area (acres) 106
No. of slum societies +75
No of families 30,750
FSI 4
Rehab area (m sqft) 12.4
Free sale area (m sqft) 11.3
Estimated duration (years) 16
LoI 2 societies
Development stage 1 Free sale building launched (Vedant) Rest under planning
Funding arrangement Equity (Ackruti) - Debt (GMO)
Ackruti's stake (%) 50
Source: Company, Anand Rathi Research
MIAL project – Major urban-infra project under DCR 33(10) and 3(11)
MIAL is the largest slum-rehabilitation project as of date and involves shifting of ~85,000 families from encroached sites on / around the airport land. The project is classified as an infrastructure development project and is being developed under the combination of DCR 33(10) and DCR 3(11).
Fig 24 – MIAL: snapshot Total airport land 276 acres
Families to clear 85,000
Slum societies 33
Rehabilitation time-frame 4-5 years
After rehabilitation of 28,000 families HDIL gets 65 acres
HDIL area for development 10m sq. ft.
TDR that would be generated 45m sq. ft.
Land required for rehab* ~160 acres
FSI for the project 4
Source: Company, *Anand Rathi Research
Phase-1 almost complete; phase-2 to commence soon
Securing the contract for the airport rehabilitation project in Oct ’07, HDIL started work on phase-1 in May ’08, construction of which is likely to be completed by Jan-Feb ’11. Subsequently, 18,000-20,000 families would be shifted in Mar-Jun ’11. Most of the land for the subsequent phases has been tied up, with advances already paid for most land parcels. Construction of phase-2 is expected to commence by Oct ’10.
Fig 25 –Clearance of the airport land (per phase) Priority 1 2 2.A 3 Total
Airport land recovery (acres) 104 28 103 41 276
Societies to be rehabilitated 10 9 10 4 33
Source: SRA
HDIL is entitled to the TDR generated from the airport project. It is also entitled to 65.2 acres near the airport for commercial use, once it completes shifting of 28,000 families.
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Fig 26 – Rehabilitation in phases 1 & 2 Phase Locations Area (acres) Tenants
Kurla W 38 18,000
Kurla E 4 2,000Phase 1
Bhandup 5 2,500
Mulund 6 4,000
Andhri E 5 3,000
Mahul 8 5,000Phase 2
Eastern suburbs* ~25 10,000
Source: Company, * Anand Rathi Research
TDR
Customarily, TDR is obtained when a land owner surrenders land to the government or local authority for public purposes such as construction of gardens and roads. An equivalent right to land is given on paper, which can be sold in the open market. Developers who wish to increase the saleable area, from the basic FSI of 1 to an allowable 2, purchase such TDRs.
The MIAL project also falls under DCR 3(11) of the SRA Scheme, where a company has to acquire plots and shift slum-dwellers from encroached-upon land on/around the airport land to the new plot. For this, it obtains TDR for the land as well as for the construction.
Fig 27 – TDR-generating process
Developer
Landeg 100 sq. ft
Rehab constructioneg. 500 x 1.5*
Sum Rehab Authority (SRA)
Conveyed to SRAConstructed building
handed to SRA
TDR (1097.5 sq. ft.)Land TDR: in proportion to the land conveyed. eg 100 sq. ft. X 1 = 100 sq. ftConstruction TDR: 33% incentive to the rehab construction done. eg 500 X 1.5 X 1.33 = 997.5 sq. ft.
Developer
Source: Anand Rathi Research; *loading assumption
The ‘land TDR’ is equivalent to the land handed over to the SRA; the ‘construction TDR’ is 1.33x the rehabilitation construction, 33% of which is the incentive to the developer.
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Fig 28 – Milestones for release of TDR (%) Plinth completion 18
Past the mid-level slab 14
RCC work complete 12
Masonry work complete 14
Internal plaster complete 10
External plaster complete 7
Plumbing 12
Occupation certificate 11
Defect liability 2
Source: SRA
Slum rehab – New regulations
� Although they are a profitable business with high entry barriers, most SRS projects are skewed towards South Mumbai locations as well as few locations in the western and central suburbs. Slums in northern Mumbai are not viable for private developers as, although the rehab cost is the same (and increasing), the free-sale prices are relatively much lower. Hence, developers do not generate high profits. The government is considering ways to render such schemes viable.
� Many projects in South Mumbai (or seaward) are not allowed for development owing to proximity to the sea and destruction of natural habitat. The government, under the CRZ Act of 1991, allows only half the permissible area for CRZ-2 and no development if classified as CRZ-1. In a recent development, the government proposed to allow, with some caveats, SRS in CRZ-2 locations. This bill, if passed, would clear ~165 acres of slums in South Mumbai alone.
� Amendment in the Maharashtra Regional and Town Planning (MRTP) Act – The government intends to increase the FSI in suburbs to 1.33 (currently at 1), keeping the total developable area capped at 2 FSI. Post this, there will be slowdown in TDR demand and, hence, prices of the additional FSI (0.33) sold by the government will be lower than the ongoing TDR prices.
Redevelopment – Next best option Redevelopment is usually undertaken for old buildings/chawls (other than slums) that are either dilapidated or where FSI is under-utilised (usually old buildings). Here, too, a developer gets FSI of 2.5-4, as per type of development.
Urban Renewal Schemes (URS) – Big potential in South-central Mumbai
URS for cluster development targets any scheme in the island city with a minimum area of 4,000sq metre. Under this scheme, no new tenancy, after Jun 1996, would be considered.
Fig 29 – Urban Renewal Scheme cleared till date (LoI got) Project Location Developer Status
Pimpalwadi Girgaon Shreepati Group Rehab underway
Bhendi Bazaar C Ward Saifee Burhani Trust Planning
Turf Estate Mahalaxmi DB Realty Development commenced
Source: GoM, Anand Rathi Research
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DCR 33(9)
Cluster redevelopment considers only those buildings erected before Sep 1960 (or after Sep 1969 with tenancy till Jun 1996) and with minimum area of 4,000sq metres. Such buildings are classified by the government authorities (MHADA or BMC) as unfit for living. Applicability of this regulation is so wide that even structures of mixed characteristics are included in the scheme that may include slums on the total plot area.
The island city comprises ~16,759 acres, of which ~30% could come under cluster development. One of the largest components is residential chawls, constructed for mill workers in the last century, and for immigrant blue-collar workers in other industrial units.
Fig 30 – Proposed projects under cluster development Project Location Developer Status
Tulsiwadi Tardeo Ackruti City, DLF Rehab on; part slum part URS
Orchid Heights Jacob Circle DB Realty Construction commenced
Orchid Views Mumbai Central DB Realty Rehab process commenced
Orchid Enclave II Mumbai Central DB Realty Planning
Orchid Central Mumbai Central DB Realty Planning
Orchid Splendor Byculla DB Realty Planning
Orchid Skyz Byculla DB Realty Planning
Orchid Enclave III Bacchuwadi DB Realty Planning
Orchid West View Malad DB Realty Approval stage
Orchid Apartments Mankhurd DB Realty Planning
Abhudaya Nagar Parel DB Realty Acquisition ongoing
MC Project Mumbai Central DB Realty Acquisition ongoing
Source: Companies
Important know-how for DCR 33(9)
70% consent if private developer (nothing if developed by MHADA)
FSI for development: 4
Incentive FSI:
4,000-8,000 square metres, then FSI would be 55%
8,001-12,000 square metres, then FSI would be 65%
12,001-16,000 square metres, then FSI would be 70%
16,001-20,000 square metres, then FSI would be 75%
+20,000 square metres, then FSI would be 80%
Characteristics: Given the density and size of the projects, the projects under DCR 33(9) will be long gestation, depending on how big the cluster and its demographics
Source: GoM
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Redevelopment of dilapidated buildings
Cessed and dilapidated buildings occupy +225 acres in prime locations of the island city. The last authorised records state 19,642 old & dilapidated buildings in Mumbai.
Fig 31 – Details about cessed buildings (as per category) Category Year of construction No of buildings
A Before 1940 16,502
B Between 1940 and 1950 1,489
C Between 1951 and 1969 1,651
Total 19,642
Source: MHADA
Mumbai-based developers focus on acquiring redevelopment projects. This provides developers access to prime locations in Mumbai at reasonable costs. Successfully buying-out owners of existing properties promises higher margins to developers.
DCR 33(6)
� Under this provision, reconstruction, in whole or in part, of a building that existed on or after 10 Jun 1977 and which has ceased to exist as consequence of an accidental fire, natural collapse or demolition for having been declared unsafe by or under a lawful order of the Corporation or the Bombay Housing and Area Development Board, shall be allowed.
� FSI of the new building will not exceed that of the original building.
� This rule applies only to projects located within 500 metres of the coast (CRZ zone)
Positive changes are likely after passing of the new CRZ Bill.
DCR 33(7)
� This provision is applicable for reconstruction/redevelopment of a cessed building of ‘A’ category in the Island City that attracts the provisions of the MHADA Act, 1976
� FSI shall be 2.5 on the gross plot area or the FSI required for rehabilitation of existing tenants plus incentive FSI as specified under Appendix III to the DCR, whichever is higher
� This rule applies to all projects within the Island City of Mumbai
� DCR 33 (7) allows incentives in the form of additional FSI of 50-70% (of rehab area) for the redevelopment of buildings in cessed Category A-buildings depending on the number of plots. Incentive FSI allowed for one plot is 50%, 2-5 plots is 60%, and +5 plots is 70%.
MHADA schemes – Under modified DCR 33(5)
MHADA had been created with the objective of constructing residential buildings under various housing schemes for different sections of society. There are ~104 MHADA colonies across Mumbai, covering ~3,680 acres. Of these, 56 are +50 years old. Further, more than 70% of these colonies were built for the economically weaker section (EWS) and low-income group (LIG) categories where tenement sizes are small. The Maharashtra government, in its Housing Policy ’07, highlighted the need for redevelopment of old MHADA colonies that would enable better accommodation for present occupants and create additional housing stock.
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Fig 32 – MHADA colonies – Location spread
Western suburbs58.5%
Bandra9.1%
Central suburbs29.3%
South Mumbai0.1%
South central mumbai
3.0%
Source: MHADA
In Dec ’08, the government of Maharashtra modified DCR 33(5) to allow higher FSI for redevelopment of existing MHADA colonies. Key features of the DCR are:
� The DCR permits up to 2.5 FSI on gross plot area for redevelopment of existing MHADA colonies
� Incentive FSI that can be availed of against the FSI required for rehab is:
I. In the island city, 50% incentive FSI for area up to 4,000sq metres and 60% for area over 4,000sq metres
II. In the suburbs, 60% incentive FSI for area up to 4,000sq metres and 75% for area over 4,000sq metres
� If the difference between the FSI required for rehab + incentive FSI is less than 2.5, the balance FSI would be shared between MHADA and the developer in the ratio of 2:1
� For additional built-up FSI over & above the FSI permissible as per DCR 32, MHADA would charge premium at a rate decided by the government
Fig 33 – MHADA colonies being developed
Colony Location Area (m sqft) Developer Status
Siddharth Nagar Goregaon 4.5 HDIL Rehab and Free sale Started
Pantnagar Ghatkopar 0.5 HDIL Rehab 50% complete; free to be re-launched
MIG Colony 1 Bandra (E) 1.1 DB Realty Rehab, Free sale to start in 2HFY11e
Jade Gardens Bandra (E) 0.8 Happy Homes
Rehab, Free sale nearing completion
Sparkle Bandra (E) 0.9 Kalpataru Properties
Rehab on. Free sale to launch in 2HFY11e
Oriana Bandra (E) 0.6 Rustomjee Rehab, Free sale under construction
Source: MHADA
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BDD chawls – Prime properties (potential redevelopment)
The chawls are housing schemes that were developed by the Bombay Development Department (BDD), set up in 1920, to tackle the problem of political unrest in Mumbai by providing housing for the city’s population.
Each chawl room covers 160sqft; the chawls were constructed between 1921 and 1925 and house ~67,000 occupants. Given that the chawls were constructed over 80 years ago and that the FSI on the plots has been under-utilised, the government plans to undertake their redevelopment. At present, residents are demanding an area of ~550sqft in the redevlopment.
Fig 34 – BDD chawls for development
Location No. of chawls Acres No. of
tenants
Area occupied (m
sqft)
Rehab area (m sqft)
Free sale carpet (m
sqft)
Free sale saleablearea* (m
sqft)
Worli 121 59.8 9,680 1.5 5.3 5.1 7.1
Naigaum 42 13.5 3,344 0.5 1.8 0.5 0.7
Lower Parel 32 13.9 2,560 0.4 1.4 1.0 1.4
Sewri 12 5.7 960 0.2 0.5 0.5 0.7
Total 207 92.9 16,544 2.6 9.1 7.1 9.9
Source: MHADA *40% loading assumption for free-sale building
The State Housing Department has proposed that MHADA prepare a master plan for redevelopment of BDD chawls. Redevelopment is proposed to be carried out by private developers through a competitive bidding process. Under the urban renewal/cluster redevelopment scheme, i.e., DCR 33(9), developers who win a project to redevelop these chawls are likely to get FSI of 4. Given such development, a likely saleable area of 10m sqft would be added over the years for ~9m sqft of redevelopment area.
Public Private Partnerships (PPP) To resolve the issue of shortage of land for residential use in Mumbai, the Maharashtra government is exploring the PPP model to take up new projects. PPP projects leverage on the private sector’s expertise in technology, management, quality, efficiency and financing, while government agencies look at policy, planning, regulation and governance and facilitating economic growth and development. The PPP model allows the government to overcome resource crunches and increase housing supply. Land, incentive FSI and policy grants are elements controlled by government authorities.
Fig 35 – PPP projects improve margins, reduce land cost Earlier Now
Project Saleable area (m sqft) Land cost (`/sqft) PPP area (m sqft) Saleable
area (m sqft) Land cost (`/sqft)
AKCL 1 0.4 623 0.2 0.9 457
AKCL 2 0.5 1,169 0.2 0.9 862
Source: Company
To promote the PPP model for creating affordable housing, the Maharashtra government introduced DCR 33(23A & 24A) that deals with rental housing projects, and formulated schemes to develop affordable homes on private land in partnership with MHADA.
~10m sqft could be made available for development in South-Central
Mumbai after clearing such schemes
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Fig 36 – PPP projects improve margins, reduce land cost
Source: Anand Rathi Research
Key schemes under PPP
Rental housing projects – DCR 33(23A) and DCR 33(24A)
The DCR was formulated to facilitate Maharashtra government’s objective of providing affordable homes to the poor on a rental basis.
� MMRDA is the project-implementing agency for all rental housing projects undertaken in MMR
� In case of construction of rental houses on unencumbered land by the land-owner or any other agency approved by the MMRDA, the FSI would be 3. However, an FSI of 4 could also be availed in this case, subject to the following conditions: i) FSI of 1 would be used for rental housing projects on a minimum 25% of the total area. The land owner has to hand over the rental units and appurtenant land to MMRDA free of cost; ii) FSI of 3 would be used by the land owner to construct housing units on a maximum of 75% of the total land area and sold in the open market to subsidise the rental-housing component
� FSI of 4 can be availed-of to construct rental houses on unencumbered land by MMRDA on land vested with them. Of the 4 FSI, 25% would be allowed for commercial use and open-market sale
� Rental units would have a carpet area of 160sqft each Affordable housing – in a JV with MHADA
� FSI of up to 2.5 can be availed under these schemes. Extra FSI would be shared between MHADA and the developer
� Minimum land area required for such a project would be 5,000sq metres. The scheme is limited to the municipal limits of Greater Mumbai and Thane
� 60% of the 2.5 FSI would be used to construct affordable housing in the EWS/LIG/MIG categories.
� Of the additional FSI of 1.5 over the present permissible 1 FSI, 0.75 would have to be given to MHADA in built-up form, for which MHADA would pay cost of construction based on the DSR (District Schedule of Rate). The developer can use the remaining 0.75 FSI for affordable housing
� The total FSI that a developer would get is 1.75 and MHADA would not charge any premium for this additional FSI
Under the Rajiv Awas Yojna (RAY) GoI gives `50,000 per
unit for development
Rental housing schemes are proposed more in MMR than
Mumbai city
Residential project planned on virgin land
Converted into rental housing scheme (PPP)
Residential + PPP project Higher FSI (3), Sellable area up with no TDR requirement, cost per sqft down
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DCR 33(24) – Parking schemes; the new FSI multiplier
Besides housing, the government has adopted the PPP approach to improve urban infrastructure. It introduced DCR 33(24), which offers incentive FSI to develop multi-storeyed parking lots on privately-owned land.
� The incentive FSI given would be over & above the permissible FSI under any other provision of the DCR; also, the FSI would be allowed for use on the same plot, in conformity with the DCR
� The minimum area of a plot that could be considered under this DCR is 1,000sq metres in the island city and 2,000sq metres in the suburbs and extended suburbs
Fig 37 – Parking schemes proposed by developers in South-Central Mumbai Project Name Area (acres) Developable area (m sqft) Saleable area (m sqft)
Orchid Heights 4.8 0.2 1.2
Turf View 5.8 0.3 2.2
Corporate Park 6.2 0.3 1.2
Hill Park 20.0 0.9 2.1
West View 5.4 0.2 1.3
Orchid Crown 6.1 0.3 1.8
Orchid Views -Shantinagar 7.1 0.3 1.4
Orchid Enclave 2 7.8 0.3 0.6
Skyz - Unity 3.5 0.2 0.6
Enclave 3 6.4 0.3 0.7
Orchid Splendor - Jubliee 2.2 0.1 0.4
Central 1.5 0.1 0.3
DLF 17.0 0.7 4.2
IBREL 7.8 0.3 3.4
Lodha World One 10.5 0.5 2.0
Source: Companies
� The Municipal Corporation of Greater Mumbai (MCGM) has been empowered to grant permission to develop parking lots and additional FSI, depending on location,. Incentive FSI available is: i) If the location is within 500 metres of railway stations, state transport bus depots, metro stations, jetties, existing government and semi-government and corporation offices, tourist places, important places of worship that do not have adequate public parking facilities, such locations would be given 50% additional FSI, subject to a maximum FSI of 4 for the island city and 3 for the suburbs & extended suburbs; ii) For other areas in the city, incentive FSI would be 40% of the existing FSI, subject to a maximum of 3.5 for independent buildings and 3 for composite buildings in the island city, and 3 for independent buildings and 2.5 for composite buildings in the suburbs & extended suburbs
� The minimum number of vehicles that have to be accommodated in a parking lot is 50, with minimum parking space of 700sq metres
� The landowner or developer or society concerned would not be permitted to operate the public parking
DCR 33(24) was introduced to solve inadequate public parking in
the city
Of 35+ proposals for parking lots, 15 have been cleared
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Mill-land development Prime properties not cheap anymore
Defunct textile mills
Mumbai has ~598 acres of textile mill-land (0.5% of the total area), which is lying unused. Of this, 300 acres are from 25 mills belonging to National Textile mills (NTC) while the remaining are private mills in the same locations. On closure of the mills and transformation of South-central Mumbai, from a labour-class area to an upmarket residential and alternative commercial property, space is available in the form of large tracts of the defunct mills.
Fig 38 – Value from mill lands – We prefer a JDA model vs outright purchase
Case 1: Assuming JDA Case 2: Assuming Outright
Development
Area (acres) 6.1 6.1
Developable area (m sqft) 2.8 2.8
Free-sale area (m sqft) 1.8 1.8
Stake (%) 50.0 100.0
Land cost paid (`m) 1,846.0 10,980.0
Average selling price (`/sqft) 22,000.0 22,000.0
Sale value (`m) 19,748.3 39,496.7
Average construction cost (`/sqft) 3,407.8 9,524.1
Total costs (`m) 6,118.0 17,098.7
Land acquired Sep '09 Sep '09
Sales launch Oct '09 Oct '09
Construction start Jan '10 Jan '10
IRR 78% 25%
Source: Anand Rathi Research
Most mill-land transactions till now have been outright purchases (from private parties or in government auctions). Acquisition prices have risen ~13x in the past eight years and average selling prices around 3x.
The textile mill lands were given to owners on long-term (perpetual)
lease by government for industrial use
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Also, with less than half the mill-land in South-central Mumbai developed and development likely to soon begin on the remaining (at higher FSI – e.g. parking schemes), we believe pricing in the South-central market will not see a considerable rise given the variety of launches, despite good demand. Also, the redevelopment potential of +0.2m people residing in the South-central region is likely to churn out more space. DCR 58 – For mill-land development
DCR 58 was tabled in 1991 to develop mills. Major space distribution was:
� 1/3rd to the BMC
� 1/3rd to MHADA, for public housing
� The rest to be used by the owners for commercial purposes
Most private developers did not abide by these regulations and, after a long-drawn-out case, amendments were made in ’01, to the DCR 58 – Now, only open land is allotted for distribution, with the constructed portion remaining with mill-land owners.
Acquisition prices have gone up 13 times as against 3 times of selling
price
Fig 39 – Mill land – Statstics Date of Acq / sale Mill Location Developer Area (Acres) Acq Cost (`m)
Acq Cost (`m / acre)
Acquisition Type Status
2003 Matulya Mills Lower Parel Ashford Group 5.3 NA NA Developed
NA Shri Ram Mills Lower Parel Shri Ram Urban 13.0 0 0 Not sold Under Construction
NA Phoenix Mills Lower Parel Phoenix Mills 19 0 0 Not sold 90% developed & operational
NA Great Eastern Spinning Mills Parel Mahindra GESCO 5.0 NA NA Under Construction
FY03 Simplex Mills Byculla Godrej Properties 9.0 JDA NA JDA Developed
Q1, 2003 Standard Mills Prabhadevi Seth Builders 10.1 1,300.0 128.7 Out-right Developed
Q3, 2004 China Mills Sewri Dosti Builders 9.5 530.0 55.8 Out-right Developed
Q2, 2004 Swan Mills Parel Peninsula Land 12.0 390.0 32.5 JDA Developed
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Industrial units
After textile mills, several other large & medium-scale industries were established in the post-independence era. Development plans made provision for them, earmarking industrial zones for manufacturing, trade and logistics. Following a similar pattern as mills, industrial plots in the city are being converted into commercial zones, with industrial units being shifted to farther locations. Such factory land transactions across Mumbai have increased in the past decade.
Fig 41 – Factory land transactions in the past decade
Period Buyer Area Seller Area
(acres) Price (` m) ` m /acre
Dec '99 – Sep '05The Oberoi Group
Goregaon (E) Novartis 83.9 1,068 13
Apr ’05 The Neptune Group
Bhandup GKW Land 22.0 1,010 46
May ’05 NA Mulund Wellcome - Glaxo 19.0 2,500 132
Sep ’05 Oberoi Mulund GSK 18.8 2,210 118
Dec ’05 Kalpataru Mulund Schrader Duncan 7.0 520 74
FY06 The Oberoi Group
Worli GSK 4.0 1,500 375
Jun '06 Ackruti Bhandup The National Industrial Corp
Fig 40 – Usage of mill land Original DCR (58) – 1991
Other Amenities
33%
Mill owner37%
MHADA30%
Source: Government of Maharashtra
Modified DCR (58) – Amended in 2001
Other Amenities
8%
Mill owner86%
MHADA6%
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Anand Rathi Research 28
Buoyant land deals
Across regions, Mumbai has been in the forefront of land acquisitions and auctions. Rising prices in auctions and in land acquisitions last year indicate the robustness of the property market as well as the strong balance sheets of developers. More than `153bn in land deals has announced/transacted, much higher than the national average. In fact, of the listed developers, other than a few acquisitions in Bangalore, Mumbai and the MMR are the only markets with such land acquisitions/JDAs.
4 October 2010 Mumbai Property – The old order changeth, yielding place to new
Anand Rathi Research 29
Residential demand high With an estimated 1.2% population CAGR over the next decade, demand would remain strong owing to Mumbai continuing to attract commercial activity and, hence, high immigration, for which +300m sqft of residential space will be required. Although we do not exect a major price correction, we believe prices will soften on account of affordability concerns in the near-term. Inflation-adjusted stable prices over the next few years are likely to lead to volumes, given healthy economic growth. We are positive on central suburbs and Bandra (E) and expect them to outperform vis-à-vis other micro-markets.
Residential Population
The increasing population and resultant demand for quality housing (depending on price) would be the deciding factors for the amount of absorption of space. In the past three decades, population growth rate has varied. Also, as Mumbai is a hub for commercial activity, migration plays an important role in gauging residential demand from such migrant population. MMR (ex Mumbai) has grown faster than Mumbai, but economic activity is still largely dependent on Mumbai city.
Fig 42 – Population growth in Greater Mumbai
0
2
4
6
8
10
12
14
1901
1911
1921
1931
1941
1951
1961
1971
1981
1991
2001
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
People CAGR
(m)
Source: Census
Natural growth in population
Natural growth in population factors in fertility rate, balance of birth and death rates as well as annexation of new areas. While the fertility rate is slipping, death rate is decreasing even faster. Owing to limited land and deteriorating infrastructure, we estimate population CAGR of 1.2% over the next decade, and at a decreasing rate ahead.
Migration contributing to population growth
Since 1961, migrants have been a major contributor (as high as 64%) to Mumbai’s population in 1961; it was down to 43% in ’01, albeit having doubled over the past four decades, in absolute terms. Most migrants to Mumbai have been residing in the city for over a decade. Given the present annual inflow of ~300,000 people (and assuming it will reduce), 4.3-5.1m people are estimated to immigrate into the city by ’31 and reside for more than a decade.
Prices in most suburbs crossed affordable levels in ’07/08, then dropped and rose in the past two
years. They are now within an affordable range
4 October 2010 Mumbai Property – The old order changeth, yielding place to new
Anand Rathi Research 30
Estimated population
According to various government and independent estimates, the population of Greater Mumbai is expected at 15-21m by ’31. According to our estimate, it would be ~17.5m (with a slowing growth rate) by ’31 versus 13m in ’06 and 14.1m in ’21. The depletion is mainly owing to lack of infrastructure and decoupling of MMR from Mumbai city.
Fig 43 – Estimated population growth in the next two decades
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
CY1
971
CY1
981
CY1
991
CY2
001
CY2
011e
CY2
021e
CY2
031e
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Population 10 years CAGR
(m) (%)
Source: Anand Rathi Research
Per capita
In FY07, Mumbai’s per-capita income was ~`65,361, more than twice that of India’s average `29,382; we estimate it at ~`82,500 in ’11 as against `57,500 in ’01. Further, the city’s annual household income is expected to grow 10% till ’16 and Mumbai would continue to have the highest household income among metro cities in the foreseeable future.
Fig 44 – Increase in Mumbai’s per capita income
0
10,000
20,000
30,000
40,000
50,000
60,000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
(`)
Source: Census 2001
Given such high demand and the lack of matching supply, Mumbai is the most expensive property market in India. Capital values of property in both suburbs and the island city are much higher than those in other metropols. Property prices in Mumbai grew rapidly, from ’04 to ’07, and outpaced income growth in the city, resulting in declining affordability. The average cost of a house in Mumbai, as a multiple of average annual income, was 5.1 in ’07, up from 4.3 in ’04; it fell to 4.5 in the ’08-09 slowdown. With the bounce-back in property prices, the multiple has now moved up to 4.7. Ideally, to ensure affordability, property prices should not exceed 5x annual income.
Post rising above affordable levels in ’07/08 and subsequent price drop as well as increase over the
past two years, prices in most suburbs are still in an affordable
range
Along with per capita, household income too is an important
indicator for buying, in which Mumbai leads
4 October 2010 Mumbai Property – The old order changeth, yielding place to new
Anand Rathi Research 31
Fig 45 – Affordability in Mumbai
22.0
15.6
11.18.3
6.6 5.9 5.3 5.1 4.7 4.3 4.6 5.0 5.1 5.0 4.5 4.80
5
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40
1995
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-09
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Property value Annual income (RHS) Affordability
(`Lac) (`Lac)
Source: HDFC
Even with the huge demand for quality homes in Mumbai, affordability along with economic growth is one of the main volume drivers for residential absorption ahead. Also, rental housing is an important avenue along with SRS to accommodate 50% of the population (considering 40% still living in slums by ’31).
Density – Micro-markets may see increased supply/de-congestion
There has been a four-fold rise in density in the past four decades. Dividing Mumbai city into three parts, the Island City (comprising South and South-central Mumbai till Mahim-Sion) has population density of +48,000/sqkm. In the past decade, however, the density has not moved much, except for slum population growth and minimum new organised development. Major increase in density has been in the western and southern suburbs, stemming from population increase and migration. Also, MMR (ex Mumbai) is supported and complementary to commercial activity in Mumbai. Hence, its population has increased tremendously, and is now more than that of Mumbai.
Fig 46 – Population density in Mumbai city
-
10,000
20,000
30,000
40,000
50,000
60,000
1951
1961
1971
1981
1991
2001
Island City Western Suburbs Central Suburbs
(per sqkm)
Source: Census 2001
Surrounded on three sides by sea, and its ever-growing population is the key factor behind Mumbai’s
high density
4 October 2010 Mumbai Property – The old order changeth, yielding place to new
Anand Rathi Research 32
Micro-markets to watch
While looking to expand land banks in Mumbai, over & above project viability, developers generally look at density spread, commercial activity concentration, land available in micro-market, targeted conversion margins, gestation period etc.
We believe price appreciation in Vikroli, Ghatkopar (E) and Bhandup would be high versus other micro-markets of Mumbai, with the movement of industrial units from Vikroli and Bhandup to farther locations, thereby freeing cheap land. Further, we expect Bandra (E) to witness high price appreciation as: i) the only developments in BKC (super-luxury) are selling at twice the current offerings in the region; and ii) development of BKC as the new CBD and limited land availability in the form of MHADA colonies and slum pockets would see outperformance.
Fig 48 – Price movements in the central suburbs and Bandra
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
2005
2006
2007
2008
2009
2010
Bandra (East) Vikhroli Ghatkopar (East) Bhandup
(`/sqft)
Source: Industry
South-Central Mumbai. Although many projects are being launched in South-central Mumbai, most are in the form of ambitious (+65 stories) skyscrapers aimed at the higher-income segment. Execution of such projects is not proven yet; developers seem to have over optimistic timeframes for completion of such projects. Also, with the opening-up of mill-lands, movement of third generations (larger families) from South Mumbai and location advantage from both CBDs (South and central Mumbai), South-central Mumbai has and would continue to be a demand-driven location, owing to proximity to offices. Hence, we believe absorption would be strong in the region, at maintained price points.
Given its proximity to the new CBD, Bandra (E) would see price
Industrial locations moving further away, affordable Mumbai development Ghatkopar (E) near highway
Larges tracks of land available, better infra than other locations in the city Infancy
Bandra (E), Santacruz (E)
No space offering ex MHADA colonies (East); closet to new CBD, Airport
South Central Mumbai
Huge scope for Redevelopment, URS, Mill and MHADA Land to be developed - expediting execution can result in volumes and rationalisation in prices Emerging
Sewri, Parel
Closet non developed locations in old and new CBD, proximity to state highways
Western Suburbs Infrastructure growth minimal post metros, highest density amongst suburbs Maturing
Chembur Space Constraints
Established South Mumbai Worli Space to offer only in form of Redevelopment; majority already living in organised manner, higher density places vs Mumbai City
Source: Anand Rathi Research
4 October 2010 Mumbai Property – The old order changeth, yielding place to new
Anand Rathi Research 33
Fig 49 – Price movements in South-Central Mumbai
0
5,000
10,000
15,000
20,000
25,000
2005
2006
2007
2008
2009
2010
Mumbai Central Lower Parel Sewri
(`/sqft)
Source: Industry
Recent examples of sales, after the market moved up, are the Orbit Terraces project at Lower Parel, Orchid Heights near Jacob’s Circle and IBREL Sky Suites at Lower Parel, where bookings have been healthy at lower prices. Orbit Terraces (0.225m sqft) and Raheja Vivaria (0.86m sqft) would be the only Grade-A residential projects to be completed in the next two years. Overall, the already launched projects (in phases) and planned launches stand at ~27m sqft, with additional supply expected from large URS projects, MHADA redevelopment and BDD chawls. Hence, pricing in the area would be driven by execution of such projects, with better execution or more projects reaching completion at the same time, leading to price rationalisation (i.e., higher correction in prices).
Fig 50 – Price assumptions for South-Central Mumbai projects Developer Project Name Location Area (m sqft) Avg selling price `/sqft
DB Realty Orchid Crown Lower parel 1.70 24,725
DB Realty Orchid Views Mumbai central 1.40 16,993
DB Realty Turf View Mahalaxmi 2.23 35,315
DB Realty Orchid Heights Jacob circle 1.23 23,400
DB Realty Enclave 2 Mumbai Central 0.60 20,929
DB Realty Skyz Unity Byculla 0.60 20,075
DB Realty Enclave 3 Mumbai central 0.70 21,746
DB Realty Splendor-Jubilee mills Byculla 0.40 21,271
4 October 2010 Mumbai Property – The old order changeth, yielding place to new
Anand Rathi Research 34
The western suburbs have seen a major price increase (in the past few years) for larger high-quality developments, and infrastructure. Though lately, given the higher rate of population, increase in the western suburbs as well the extension towards MMR (Vasai and Virar), infrastructure is taking a hit. Strengths include good schools, entertainment, medical facilities and offices near major residential markets. We believe that pricing in the western suburbs would grow selectively, though overall pricing (real price rise) would largely sustain over the next five years.
Fig 51 – Price movements in western suburbs
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
2005
2006
2007
2008
2009
2010
Andheri (West) Andheri (East) Goregaon Borivali
(`/sqft)
Source: Industry
South Mumbai comprises the considerably densely populated C Ward and the green & most expensive belt of Mumbai (Malabar Hill, Napean Sea Road, Walkeshwar). No vacant land can be found here, with most pieces falling under CRZ norms (non-development and part-development), no development zones (NDZs) and port lands (to be kept development-free). The only URS scheme cleared till now is that of Bhendi Bazaar near Kalbadevi, which is yet to commence construction, Redevelopment projects in these locations offer smaller areas (number of units) for sale, given the application of DCR 33(6) and DCR 33(7). Major listed and unlisted development concentration is in the high-value Napean Sea Road and Altamount Road locations, where most projects have been pre-sold. Also, the proportion of those purchasing two apartments in new developments is also higher here.
Fig 52 – Price movements in South Mumbai
25,000
30,000
35,000
40,000
45,000
50,000
55,000
60,000
2005
2006
2007
2008
2009
2010
Napeansea Road
(`/sqft)
Source: Industry
4 October 2010 Mumbai Property – The old order changeth, yielding place to new
Anand Rathi Research 35
Although developers are planning larger projects in south Mumbai (in terms of total saleable area), we believe execution would be the key challenge in converting redevelopment projects. Also, even if execution improves, prices will not increase from current peaks as this location is among the most expensive globally.
Commercial property market Mumbai, the commercial capital of India, is home to the country’s banks and financial institutions that have their headquarters in the city. Apart from being a banking & finance hub, the city has several IT/ITES companies and, given high literacy levels and availability of intellectual talent, Mumbai is a key centre for BPO functions of several MNCs.
Fig 53 – Rental movements in Mumbai
-
100
200
300
400
500
600
2005
2006
2007
2008
2009
2010
2011
e
2012
e
2013
e
(`/sqft/month)
Source: DTZ
Till recently, Mumbai’s CBD was Nariman Point (19 Grade-A developments of 4.9m sqft), Fort and Ballard Estate in South Mumbai. However, in the past decade, demand for office space has moved northwards, to locations such as Lower Parel, BKC, Andheri-Kurla, Malad and Powai. This mainly owing to availability of modern workplaces, large areas at lower prices and proximity to residential locations.
Fig 54 – Stock and vacancy movement
2025303540455055606570
1QFY
08
2QFY
08
3QFY
08
4QFY
08
1QFY
09
2QFY
09
3QFY
09
4QFY
09
1QFY
10
2QFY
10
7
9
11
13
15
17
19
21
23
Stock Vacancy (RHS)
(msqft) (%)
Source: DTZ
IBREL Towers at Lower Parel are 3.4m sqft (initially ~4.5) vs
4.9m sqft in entire Nariman Point
Trailing 12 months, of the seven key metros, Mumbai has absorbed 23% of the total space, second only
to Bangalore
4 October 2010 Mumbai Property – The old order changeth, yielding place to new
Anand Rathi Research 36
Between ’03 and ’07, supply of office space in Mumbai ranged at 3-5m sqft, with absorption at 1.5-4m sqft. In ’08, supply and absorption jumped almost twofold, following widespread economic growth and healthy expansion in hiring. However, during the ’09 economic slowdown, absorption of office space in Mumbai fell to 5.5m sqft from the peak of ~8.5m sqft in ’08. Given falling demand, several commercial projects were put on hold and some were even converted to residential projects.
Fig 55 – Supply vs absorption
0.0
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Supply Absorption (RHS)
(msqft) (%)
Source: DTZ
In spite of developers slowing down commercial projects, supply of office space touched an all-time high of ~17m sqft in ’09 compared with ~15m sqft in ’08. Greater supply but lower absorption resulted in increased vacancies and declining rentals. With recovery in the economy, absorption of office space has picked up over 2HCY10. However, supply continues to exceed absorption; hence, average vacancy levels in the city are as high as 18-21%.
Even though overall vacancy levels are high, rentals in certain micro markets (Lower Parel and BKC) have risen yoy, since they are fast becoming preferred alternatives to Nariman Point and Fort, especially for companies operating in the BFSI segment. Ahead, Lower Parel and BKC will emerge as the new CBDs of Mumbai. Nariman Point and Fort are saturated and have very little potential for further office development. As offices in these locations look to expand, they are likely to move to BKC and Lower Parel that offer modern formats of commercial spaces with large floor plates and better amenities. We, therefore, expect absorption levels to be robust in these micro-markets.
Fig 56 – New CBD and off-CBD movements over a year Q2CY09 Q3CY09 Q4CY09 Q1CY10 Q2CY10
New supply (sqft) 413,000 851,000 96,762 - 420,000
Source: DTZ
4 October 2010 Mumbai Property – The old order changeth, yielding place to new
Anand Rathi Research 37
Other micro-markets such as Malad, Andheri-Kurla and Powai largely cater to IT/ITES companies and BPO/back-office operations. Absorption levels in these areas would be driven by prospects in the software sector and offshoring by MNCs. We expect absorption levels to improve, following healthy economic growth and more hiring. However, we expect overall rentals to be stable in the next 6-12 months, till absorption picks pace and vacancies ease.
Of the listed companies, most of the larger ones have planned commercial spaces (ex IBREL, PLL – projects nearing completion). Of the planned projects, the largest commercial plans are of HDIL (16.8m sqft) with most around the existing airport, and DBRL (~7m sqft) with most planned at Bandra (E). But both these commercial space plans are long term, with not much construction to be seen in the next 12 months.
The high-value residential market in Mumbai has seen a slew of launches in the past year. Most projects launched in the past 12 months have recorded healthy sales across micro-markets in Mumbai.
Anand Rathi Financial Services Limited does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1 Anand Rathi Research India Equities
We initiate coverage on Sunteck Realty (SRL) with Buy at Sep ’11 price target of `811, based on its high-value BKC residential projects bearing fruit and JDA/JV strategy that mitigates acquisition risks & costs. SRL made a unique foray in the property sector by acquiring residential projects in the commercial BKC. The company is already in the money for its maiden project, which has helped it acquire & expand via prudent JDAs in city-centre properties (mainly Mumbai) and resulted in low debt levels. Execution is the key factor to watch.
� BKC residential – Unique foray. SRL’s strategy of bidding for residential properties in the commercial BKC is bearing fruit. We estimate that with `9.6bn investment (deferred) for 1.5m sqft of residential space, SRL is likely to see gross cash flow of +`42bn from the project. It has already sold stock worth `9bn in its three BKC residential projects as of date.
� Prudent partnerships (ex BKC). SRL’s JV with the Ajay Piramal Group contributes 37% to its NAV, mitigates land-acquisition risks and offers a mix of locations. Given its city-centre properties, land acquisition cost of only `127/sqft would buoy success of its asset-light, high-conversion strategy.
� Acquisition in place, low debt; execution key. 80% of SRL’s projects are city-centred, with 66% being residential. All-inclusive land acquisition cost in Mumbai is `1,100/sqft. The small size of projects aids faster turnaround and generates more cash (`13bn in FY12e). SRL would be a net-cash company FY12e onwards, till it largely retains its JDA approach.
� Valuation and risks. Our price target of ̀ 811 is at 15% discount to Sep ’11 NAV of ̀ 957. At CMP, the stock trades at 40% discount to our NAV and 18% discount to our target price. Risks: Delay in execution; weakness in property market.
Rating: Buy Target Price: `811 Share Price: `685
Key data SRIN IN/SUNT.BO
52-week high/low `714/480Sensex/Nifty 20445/61433-m average volume US$1.2mMarket cap `43bn/US$967m
4 October 2010 Sunteck Realty – Smart foray, prudent tie-ups; initiate with Buy
Anand Rathi Research 117
Investment Argument and Valuation We initiate coverage on Sunteck Realty (SRL) with Buy at Sep ’11 target price of `811, which is at 15% discount to our NAV. We like the company for its high-value BKC residential projects bearing fruit and JDA/JV strategy that mitigates acquisition risks & costs. SRL made a unique foray in the property sector by acquiring residential projects in the commercial BKC. The company is already in the money for its maiden project, which has helped it acquire & expand via prudent JDAs in city-centre properties (mainly Mumbai) and resulted in low debt levels. Execution is the key factor going forward
BKC residential – Unique foray
SRL’s strategy of bidding for residential properties in the commercial BKC is bearing fruit. We estimate that with `9.6bn investment (deferred) for 1.5m sqft of residential space, SRL is likely to see gross cash flow of +`42bn, contributing 33% or `20.8bn to its NAV. It has already sold stock worth `9bn in its three BKC residential projects – Signature Island, Signia Pearl and Signia Isles – as of date. We believe that BKC, the new central business district (CBD), with launch of the diamond bourse and lack of residential supply would witness heightened demand.
Residential space of 1.5m sqft would see gross cash of +`42bn and gross
margin of over 70%
Fig 7 – BKC properties
Area (1.5m sqft) breakdown
Signature Island48%
Signia Isles - I26%
Signia Pearl26%
Total costs* (`15bn) breakdown
Signature Island36%
Signia Isles - I32%
Signia Pearl32%
NAV contribution*
Signature Island63%
Signia Isles - I18%
Signia Pearl19%
Source: Company, Anand Rathi Research; * as of date
4 October 2010 Sunteck Realty – Smart foray, prudent tie-ups; initiate with Buy
Anand Rathi Research 118
Prudent partnerships (ex BKC)
SRL entered into a JV – Piramal Sunteck Realty Pvt (PSRPL) – with APG in ’08 to develop the closed-down units of Piramal Healthcare. Along with Estella Batteries in Sion, the Mulund and Thane units were the first to be earmarked for development. The India REIT Fund, owned by APG, was the first investor in SRL’s project at BKC. The Fund came on board during the land acquisition stage. SRL’s partnership with APG not only provides project visibility, but also reduces acquisition cost, as half the cost of any venture would be borne by APG. More importantly, a corporate tie-up, given successful implementation, would help the JV secure more defunct mills and private-land parcels held by industrialists, for joint development.
Acquisition in place, low debt; execution key
SRL uses different methodologies to add to its existing land bank, 84% of which has been acquired through the JDA approach. Eighty percent of its projects are in the city centre, with 66% being residential. SRL has projects across Mumbai in areas such as BKC, Goregaon, Borivali, Ghatkopar and Mulund; this wide location mix reduces risks, in terms of margin/costs. The average land acquisition cost in Mumbai (including FSI) is `1,100/sqft. Also, the small size aids quicker turnaround. We estimate the company growing from its low base and becoming a net-cash company in FY12e (assuming that its land acquisition largely through JDA’s are not trough auctions), given the key land parcels have already been acquired and fully paid.
The PSRPL JV not only bears 50% cost and mitigates location
risk, but also adds value through a corporate tie-up with aim to secure
more projects
Fig 8 – PSRPL projects: Area vs value
Area
PSRPL80%
Leased properties
1%SRL19%
NAV*
PSRPL69%
SRL28%
Leased Properties
3%
Source: Company, Anand Rathi Research; * as of date
4 October 2010 Sunteck Realty – Smart foray, prudent tie-ups; initiate with Buy
Anand Rathi Research 119
Valuation
We have used a DCF-based approach to arrive at Sep ’11 NAV of `957. Our target price of `811 is at 15% discount to the NAV.
Fig 9 – Net asset value Sep ’11 Value (`m) NAV/share (`) % contribution to NAV
SSPL (an SRL subsidiary) 20,847 331 33
PSRPL 23,689 376 37
SRL 17,664 281 28
Leased Properties 1,901 30 3
Debt (3,994) (63)
Cash 145 2
NAV 957
Source: Anand Rathi Research
� We have assumed a development schedule for all projects (total land bank of ~29m sqft) under consideration.
� Given low base of construction activity, we raise expenditure to `16bn in FY14e from `3.1bn in FY11e on execution of more projects ahead.
Fig 10 – Execution scale-up over the next few years
1.20
6.556.16
8.28
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
FY11
e
FY12
e
FY13
e
FY14
e
0
1
2
3
4
5
6
7
8
9
Total Construction cost Total project launches (RHS)
(`m) (msqft)
Source: Anand Rathi Research
� We assume 17% cost of equity, 15% cost of debt, and 14% WACC.
� The 15% discount primarily stems from risk of regulatory approvals for the FY11 and FY12 launches and minimum payment in JDA projects as execution has yet to commence.
Risks
� SRL focuses on luxury/super-luxury residential development only. The first impact of tapered demand or slowdown in the industry is felt by high-end products. This is a risk to our NAV.
� Execution assurance. SRL has yet to prove its execution ability. Although we have built an appropriate execution schedule, given SRL’s low base, lower-than-expected execution could trim our NAV.
� Risks to JDA model. 92% of projects are modelled on JDA and JV methods. Any difference of opinion among the partners could affect project prospects and, hence, cash flow.
� PSRPL JV. 81% of projects and 70% of value arise from the PSRPL portfolio. Any risk to such a JV significantly affects SRL’s value.
4 October 2010 Sunteck Realty – Smart foray, prudent tie-ups; initiate with Buy
Anand Rathi Research 120
BKC residential – Unique foray SRL’s strategy of bidding for residential properties in the commercial BKC is bearing fruit. We estimate that with `9.6bn investment (deferred) for 1.5m sqft of residential space, SRL is likely to see gross cash flow of +`42bn. It has already sold stock worth `9bn in its three BKC residential projects as of date
A bold call
SRL took a contra-call in CY06 and bid for residential properties in the commercial-dominated BKC, when others were focussing on acquiring commercial space in the new, planned CBD of Mumbai. Also, the company won two plots adjacent to the present Signature Island plot at BKC. The three plots are the only residential properties that have been auctioned at BKC and form part of the prestigious ‘G’ block, with higher FSI, Grade A commercial developments, convention centres, an international school, a hotel and the soon-to-be launched diamond exchange. The only other residential property (less than 0.2m sqft), which is under development in the ‘G’ block of BKC, is the Tata colony, albeit in the initial stages of rehab construction.
Acquisition mode – Minimum capital employed for high returns
SRL’s approach in bidding for its first residential property in a commercial-dominated place (BKC) was innovative. With capital of `0.7bn, the company bid for property worth `1.4bn and partnered with India REIT for the remainder. The signed deal included an upside of 15% if cash flows exceeded `3bn of PBT. This implied average selling price of `18,000/sqft for the entire project. The company has already achieved average selling price of `32,000 as on date, with sales of ~33%.
Fig12 – Signature Island: Acquisition mode
Source: Company, Anand Rathi Research
Sunteck secured 60% stake for `70m of the `1.4-bn land payment
Also, given certain new regulations, the saleable area is likely to increase
in residential projects
Average acquisition rate of saleable area is `6,371/sqft
� SRL Investment `70m
Signature Island
Total Land cost `1.4bn
� India REIT `630m
� Debt `700m
If� Project PBT > `3bn � PCM of Revenue
SRL 87.5%
Repayment within 4 months
� Cash from initial few bookings
4 October 2010 Sunteck Realty – Smart foray, prudent tie-ups; initiate with Buy
Anand Rathi Research 121
In the lead
In the past four years, with expanding commercial activity and acceptance of BKC as a new CBD, many developers have started focusing on new residential development around the areas. Bandra (E) has developed as a prospective destination for most Grade-A developers in Mumbai, who are undertaking redevelopment projects for high-end residential complexes. Not many have broken ground yet for free sale construction, and those launched are in the preliminary construction stage.
The total planned residential supply coming up at Bandra (E) stands at +9m sqft.
Fig 13 – Bandra (E) – Proposed residential projects Developer Name Project name Location Remarks
Sunteck Realty Signature Island BKC – G Block Construction commenced Sunteck Realty Signia Isles - I BKC – G Block Construction commenced Sunteck Realty Signia Pearl BKC – G Block Soft launched DB Realty MIG 1 Bandra (E) Soft launched Kalpataru Constructions Sparkle Bandra (E) Rehab commenced Suhyog Jade Gardens Bandra (E) Free sale nearing completion Rustomjee Oriana Bandra (E) Free sale and rehab commenced Kalpataru Constructions MIG 5 Bandra (E) NA Ackruti city Sunstone Bandra (E) Rehab underway, Launched for sale DB Realty Bandra government colony Bandra (E) LOA received Ackruti city Bandra government colony Bandra (E) LOA received Sanjay Kakade Bandra government colony Bandra (E) LOA received
Source: Company, Anand Rathi Research
Fig 14 – BKC projects and other important projects
MIG Colony
Government Colony
BKC projects of SRL
BKCTata Colony
Source: Wikimapia; Anand Rathi Research
Heavy cash flow
SRL has sold ~33% of the stock offered for sale in the residential BKC projects. As it targets higher realisations (with aim to match the sales rate at NCPA, Nariman Point), we have assumed a sales period of four years hereon for its three residential projects (at BKC) on offer. We estimate that SRL would selectively sell Signature Islands and might keep some stock even after completing construction (in order to realise higher value) and pre-sell most of Signia Isle and Signia Pearl launched in 4QFY10 and 1QFY11 respectively.
4 October 2010 Sunteck Realty – Smart foray, prudent tie-ups; initiate with Buy
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Fig 15 – BKC projects – Status and future assumptions Till Mar '10 FY11e FY12e FY13e FY14e
Sales (m sqft) 0.3 0.4 0.5 0.2 0.1
Sale value (`m) 8,618 13,169 18,559 9,369 8,052
Sales value received (`m) 1,658 5,569 21,552 17,021 11,968
Total cash outflow (`m) 4,958 4,815 3,004 1,802 378
Source: Company, Anand Rathi Research
Based on more launches in Bandra (E) from tier-1 developers with proven execution capacity, we believe SRL would expedite sales at its flagship properties.
4 October 2010 Sunteck Realty – Smart foray, prudent tie-ups; initiate with Buy
Anand Rathi Research 123
Prudent partnerships (ex BKC) SRL’s JV with the Ajay Piramal Group contributes 37% to its NAV, mitigates land-acquisition risks and offers a mix of locations. Given its city-centre properties, land acquisition cost of only `127/sqft would buoy success of its asset-light, high-conversion strategy.
PSPRL offers access to land
SRL’s first venture with APG involved investment by APG’s India REIT fund in the company’s Signature Island project at BKC. SRL and APG then entered into a JV in ’08 to develop industrial land held by the Group. Estella Batteries (ex Piramal) in Sion followed by non-functional industrial units at a prime location in Mulund and a suburb of Thane.
SRL’s partnership with APG not only provides higher project visibility, but also halves its acquisition and development costs, as it is a 50-50 JV. More importantly, its JV with APG, a well established corporate house, gives leverage for acquisition of properties held by other industrial houses in Mumbai. Excluding APG properties, the JV has tied up (JDAs/JVs) with other industrial mill land owners across Mumbai city centres at Dadar, Mahalaxmi and Sion as well as a huge piece of open land at the prime Bani Park, Jaipur.
SRL’s JV with APG establishes a healthy brand for leverage in joint development of properties with other
industrial houses
Fig 16 - JV with Ajay Piramal Group (PSRPL)
� South Central Mumbai � Mulund � Japiur � Thane and others
Location Spread
50% 50%
SRL APG
PSRPL JV
� South Central Mumbai � Mulund � Thane � Future factory Lands
AP Group Properties
� Defunct mills / Industrial units � Eg. Sion, Dadar and
Mahalaxmi
Corporate Brand � Tie-Ups
� Pay only 50% of costs
Cost Halved
Source: Anand Rathi Research
4 October 2010 Sunteck Realty – Smart foray, prudent tie-ups; initiate with Buy
Anand Rathi Research 124
Prime projects in kitty
PSRPL follows SRL’s asset-light model strategy of acquiring projects across as well as outside Mumbai’s micro-markets. The cost of acquiring development rights for projects across PSRPL’s 23.5m sqft is a mere `647/sqft, including BKC land parcels (`127/sqft excluding BKC parcels). Most of PSRPL’s projects are in JDAs or JVs, whose low acquisition costs place them in a better position than Mumbai peers holding city-centre projects.
Fig 17 – SRL’s asset-light model for PSRPL (ex BKC projects)
Land bank spread
Jaipur38.9%
Mulund8.8%
MMR22.2%
South Central Mumbai23.6%
Oman0.4%
Nagpur6.0%
NAV* contribution
Jaipur24%
Mulund12%
South Central Mumbai
42%
MMR20%
Nagpur1%
Oman1%
Average land cost
24 54 70 71
359
2,289
0
500
1,000
1,500
2,000
2,500
Jaipur Mulund Nagpur MMR SouthCentralMumbai
Oman
(`/sqft)
Source: Company, Anand Rathi Research; *as of date
4 October 2010 Sunteck Realty – Smart foray, prudent tie-ups; initiate with Buy
Anand Rathi Research 125
Development pipeline
Eighty percent of PSRPL projects are at city centres, with three already launched; SRL plans to launch another two in 2HFY11.
PSRPL has added many non-APG land parcels since the formation of its JV with SRL.
Fig 18 – PSRPL projects – Details
City Location Area (m sqft) PSRPL stake Avg selling price (`/sqft)
Avg cost rice (`/sqft) Value (`m) Est. launch period Current status
4 October 2010 Sunteck Realty – Smart foray, prudent tie-ups; initiate with Buy
Anand Rathi Research 126
Acquisition in place, low debt; execution key Eighty percent of SRL’s projects are city-centred, with 66% being residential. All-inclusive land acquisition cost in Mumbai is `1,100/sqft. The small size of projects aids faster turnaround and generates more cash (`13bn in FY12e). SRL would be a net-cash company FY12e onwards, till it retains its JDA approach
Maximising benefit
SRL has used the JDA approach for most projects (84%); more importantly, these are on virgin land, un-encroached and less problematic for development, with or without the necessary land-use changes. Most industrial land parcels were tied up in ’09, with PSRPL holding the notable ones.
Total acquisition cost for 29.1m sqft of land stood at `12.01bn. Acquisition of global FSI and TDR for SRL’s projects in Mumbai and the Mumbai Metropolitan Region (MMR) would entail additional cost of `6.18bn.
Fig 20 – Land acquisition continues in tough times too
1.102.20
1.00
19.50
6.70
0
1000
2000
3000
4000
5000
6000
2006
2007
2008
2009
2010
0.0
5.0
10.0
15.0
20.0
25.0
Land acquisition cost Land payments during the year Area (RHS)
(`m) (msqft)
Source: Company
84% of SRL’s properties are in JDA with total outgo of `5.85bn
from SRL
SRL has been aggressively acquiring properties, albeit selectively
Fig 19 – Land acquisition mode of land
Mode of acquisition
JDA84%
JV2%
Outright8%
Auction6%
Type of land
SRS & Redeve10%
Mill Land9%
Old Factories30%
Virgin land51%
Source: Company
4 October 2010 Sunteck Realty – Smart foray, prudent tie-ups; initiate with Buy
Anand Rathi Research 127
SRL acquired most of its projects in CY09/FY10, benefiting from low rates and adding land in the PSRPL portfolio. Also, in CY08, SRL was one of the few developers to bid for auctioned properties (especially at BKC). It plans acquiring 2-3 properties in Mumbai post the Goregaon acquisition in 1QFY11.
Properties owned by SRL
Although most land acquisitions have happened in the PSRPL portfolio, SRL (ex PSRPL) has acquired 5.5m sqft (91% of which is in Mumbai) at `475/sqft; of this, 90% is already either in the execution stage or likely to commence execution in FY11.
Fig 21 – SRL land acquisition (ex PSRPL) – 5.5m sqft Project Location SRIN
Stake Project Type
Launchperiod
Value (`bn)
Current Status
Sunteck Samruddha Hubli 26% Commercial FY09 393 Construction Commenced
Sunteck Grandeur Andheri 100% Commercial FY10 574 Construction Commenced
Sunteck Kanaka Goa 50% Commercial FY10 209 Construction Commenced
Signia High Borivali 100% Residential FY11 1,548 Launched for sale
Sunteck Classic Andheri 50% Commercial FY11 443 Construction Commenced
Signia City1 Goregoan (W) 100% Residential FY11e 6,340 Acq in 1Q11, launch in 3/4QFY11e
Signia Gardens Vile Parle 100% Residential FY12e 1,213 Planning stage
Signia Star Ghatkopar 84% Residential FY13e 2,035 SRA – LOI got
Signia Star Ghatkopar 84% Commercial FY14e 4,539 SRA – LOI got
Source: Anand Rathi Research
Evenly spread portfolio across Mumbai
SRL has 13.7m sqft of saleable area in Mumbai. Nearly 45% of its projects under this area constitute three (one each) in the central suburbs of Ghatkopar, Sion and Mulund. The Mumbai projects have been acquired at `556/sqft, SRL’s share being `2.5bn (`1.9bn payable in FY11).
Majority of the offerings in the market are smaller-sizes units. SRL has 488 units overall, of which it has already sold 117. The company has launched ten projects and will be launching another two in FY11e, in our view. Overall Mumbai projects contribute `52.5bn or 82% to SRL’s NAV.
Fig 22 – Mumbai Projects: Location spread vs asset class spread
Location
Western29%
South-central26%
Central45%
Vertical
Residential79%
Commercial21%
Source: Company
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Anand Rathi Research 128
Fig 23 – Mumbai: Launch schedule and value contribution
Project Location SRL stakeProject Type
Launch period
Value (`bn)
Launch price (`/sqft)
Avg price (`/sqft)
Signia High Borivali E 100% Residential FY11 1,548 10,000 10,864
Sunteck Classic Andheri E 50% Commercial FY11 443 13,500 14,185
Signia Star - Resi Ghatkopar E 84% Residential FY13e 2,035 7,500 8,607
Signia Star - Comm Ghatkopar E 84% Commercial FY14e 4,539 11,500 15,215
Source: Company, Anand Rathi Research
Jaipur: Bani Park
PSRPL has signed a JDA for an 82-acre, city-centre development at Bani Park, Jaipur, the land/deposit outgo for which would be `210m; SRL would realise `6.1bn. As Bani Park is one of Jaipur’s prime localities, the 8.5m sqft residential and commercial development would add ~10% to SRL’s NAV. We estimate Bani Park to be a major volume contributor to cash flows once launched.
Fig 24 – Bani Park
Project name Location Area (m sqft) Type Start date End date Avg selling price (`/sqft)
Signia City Bani Resi P1 Bani Park 1.1 Residential FY12e FY14e 5,793
Signia City Bani Resi P2 Bani Park 1.1 Residential FY13e FY16e 6,128
Signia City Bani Resi P3 Bani Park 1.1 Residential FY15e FY18e 7,605
Signia City Bani Resi P4 Bani Park 1.0 Residential FY16e FY19e 7,720
Signia City Bani Comm P1 Bani Park 1.1 Commercial FY13e FY16e 8,344
Signia City Bani Comm P2 Bani Park 1.1 Commercial FY14e FY17e 8,917
Signia City Bani Comm P3 Bani Park 1.1 Commercial FY15e FY18e 10,095
Signia City Bani Comm P4 Bani Park 1.0 Commercial FY17e FY20e 10,835
Source: Company, Anand Rathi Research
4 October 2010 Sunteck Realty – Smart foray, prudent tie-ups; initiate with Buy
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Financials SRL’s project-completion method results in lumpy revenue, which is set to spike up in FY12e with completion of its flagship ‘Signature Island’ project at BKC. Also, advances would rise on high cash inflows from pre-sales of projects and new launches.
Revenue recognition Project completion
SRL follows the project-completion method for revenue recognition (as against the percentage-completion method followed by most peers). According to this method, revenue is recognised only when all risks and rewards of a property are transferred to the buyer on completing a project.
Revenue would grow manifold in FY12 and FY13, primarily from the high-value residential BKC projects. We have assumed that other developments already under construction and to be completed by FY13 would add to the company’s revenue.
EBITDA margin would be staggered, given the nature of properties being recognised. It is likely to be higher in FY12 owing to higher margin in the Signature Island project and would decline in FY13 due to the higher acquisition cost of Signia Isles and Signia Pearl. However, average realisation of these two projects would be similar to that of Signature Island’s.
Fig 25 – Revenue recognised from major projects (`m) Project Name FY11e FY12e FY13e
Since SRL follows the project-completion method of accounting, advances from the customer would build up on the balance sheet (depending on forthcoming launches and cash realisation from pre-sales as of date) till completion and handover of a project. With continuing project launches through FY11, we expect customer advances to shoot up to `15.5bn and `24.2bn in FY12e and FY13e respectively.
4 October 2010 Sunteck Realty – Smart foray, prudent tie-ups; initiate with Buy
Anand Rathi Research 130
Fig 26 – Customer advances vs net debt
(30,000)
(20,000)
(10,000)
-
10,000
20,000
30,000
FY11
e
FY12
e
FY13
e
Customer Advances Net Debt
(`m)
Source: Anand Rathi Research
Fig 27 – Income statement (`m) Year end 31 Mar FY09 FY10 FY11e FY12e FY13e
4 October 2010 Sunteck Realty – Smart foray, prudent tie-ups; initiate with Buy
Anand Rathi Research 133
Company Background & Management
Company Background Commencing real estate operations in ’00, SRL now has five leasable commercial properties of 219,350sqft. It has a 50-50 JV – PSRPL – with the Ajay Piramal Group. Kotak Real Estate Fund is a 9.53% stakeholder in SRL. Of its projects under development (with ~28.6m sqft of saleable area), 12.6m sqft is SRL’s share. The company has 18.1m sqft in Mumbai, of which 75% is residential. SRL has significant operations in select areas in Mumbai.
It focuses on developing, designing and managing high-end and premium residential and commercial office properties in Mumbai. It is developing projects in Andheri, BKC, Vile Parle, Mulund, Ghatkopar, Thane and Sion. It is selectively expanding to other regions in India, and has recently commenced projects at Nagpur (Maharashtra) and Panjim (Goa); also, it has development plans in Jaipur (Rajasthan).
Key management personnel
Chairman & Managing Director Kamal Khetan, a first-generation entrepreneur, is founder and managing director of the Sunteck Group. On completing his BE (Electronics & Communications) from MIT-Manipal in 1990, he joined his family business and gained experience in various fields such as construction, finance and services.
President (Operations) Jignesh Sanghavi is a qualified civil engineer and a post-graduate in Business Administration (MBA) and Construction Management (MCM). He is Head - Projects with SRL and also overlooks the company’s entire construction activities. Prior to joining SRL, he was with Relcon Infraprojects Pvt, a company engaged in executing infrastructure projects.
President (Finance) Darshan Gangolli has over 13 years of experience in real estate and infrastructure development and private equity investment with IL&FS, Kotak Realty Fund, AIG and Actis. He has successfully led investment commitments of over US$14bn and holds a Master’s in Business Management from The Asian Institute of Management, Manila, and a Bachelor’s in Mechanical Engineering from The University of Pune. He was a Hubert Humphrey (Fullbright Fellow) with Michigan State University.
Appendix 1 Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.
Anand Rathi Ratings Definitions
Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below.
Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >20% 5-20% <5% Mid/Small Caps (<US$1bn) >30% 10-30% <10%
Anand Rathi Research Ratings Distribution (as of 20 July 10) Buy Hold Sell Anand Rathi Research stock coverage (114) 66% 14% 20% % who are investment banking clients 8% 0% 0% Other Disclosures This report has been issued by Anand Rathi Financial Services Limited (ARFSL), which is regulated by SEBI.
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