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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

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

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

India I Equities Property

Sector Report


[email protected]


4 October 2010

Mumbai Property


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


Investment Argument and Valuation ............................................ 3

Land limited, area unlimited…....................................... 3

Residential demand high............................................. 5

Valuation ..................................................................... 6

Risks............................................................................ 7

Recommendations ....................................................................... 8

Land limited, area unlimited ......................................................... 9

Greater Mumbai .......................................................... 9

Avenues for development.......................................... 10

Slum Rehabilitation Schemes ................................... 11

Redevelopment – Next best option ........................... 18

Public Private Partnerships (PPP)............................. 22

Mill-land development ............................................... 25

Residential demand high............................................................ 29

Residential................................................................. 29

Commercial property market ..................................... 35

Company section........................................................................ 38

Ackruti City......................................................................... 39

DB Realty........................................................................... 49

HDIL................................................................................... 72

Orbit Corp .......................................................................... 82

Peninsula Land ................................................................ 100

Sunteck Realty................................................................. 115



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

Land Cost (% of total cost)

Land availability Entry barrier

SRS 50-75 3-4 Across 10-25 ~8,600 acres High

Redevelopment/MHADA 35-55 2.5-4 South, South-Central

25-50 ~4,500 acres Medium-to-high

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



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



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



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


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


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



� 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



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.



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



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



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


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



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



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

Source: Industry, Anand Rathi Research

Slum schemes – Numerous slums, numerous rehab schemes

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



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.

Fig 18 – DCR 33(10) projects Major Completed Projects Location Developers Tenants

Imperial Towers Tardeo Shapoorji Pallonji and SD Corp ~2,600

MIDC Andheri Ackruti City 4,589

IRIS phase 1 Andheri Ackruti City 2,169

Major under construction Project Location Developers Tenants

Tulsiwadi Mahalaxmi Ackruti, SP Real Estate, DLF 4,146

Oasis Worli Sahana Developers, Oberoi 3,260

NA Sewri RNA 2,200

NA Worli Omkar Dev 2,159

Janu Boye Malad Omkar Dev 3,700

Kandivili Kandivili Shivalik Ventures 5,500

Ghatkopar Ghatkopar Shivalik Ventures 5,500

Whadwadi Ghatkopar Omkar Dev 4,500

Siddharth Nagar Chembur Omkar Dev 3,700

Sramik Ekta Nagar Worli Lokhandwala & Kataria 1,892

Daulat Nagar Santacruz HDIL 2,000

In JV with Chouhan Dev Santacruz Orbit Corp 2,500

Source: Companies, Industry, Anand Rathi Research

DCR 3(11) – Project Affected People (PAP) Scheme

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).

Fig 19 – DCR 3(11) Projects Major completed projects Location Developers Tenants

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



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

Golibar Santacruz 140 25,730 Rehab ongoing Shivalik Ventures

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


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



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


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.



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.



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



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

Midtown Lalbaug Orbit Corp Acquisition ongoing

NSR Block Napean Sea Road Orbit Corp Acquisition ongoing

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%




+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



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.



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



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



Fig 36 – PPP projects improve margins, reduce land cost


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



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



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%


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



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

Q3, 2004 Khatau Mills Byculla Marathon Group 13.0 980.0 75.4 JV Planned

Q1, 2005 Srinivas Cotton Mills Lower Parel Lodha Group 10.5 2,000.0 190.5 Out-right Under Construction

Mar-05 Jupiter Mills Lower Parel IBREL 11.0 2,760.0 250.9 Out-right Under Construction

Jun-05 Mumbai Textile Mills Lower Parel Jawala (DLF) 17.0 7,020.0 412.9 Out-right Planned

Jun-05 Apollo Mills Chinchpokli Lodha Group 7.5 1,800.0 240.0 Out-right Under Construction

Jul-05 Elphiston Mills Lower Parel IBREL 7.8 4,410.0 565.4 Out-right Under Construction

Jul-05 Kohinoor Mills Shivaji Park Kohinoor Group 4.8 4,210.0 877.1 Out-right Under Construction

2006 Morarjee Mills Lower Parel Peninsula Land 8 NA NA Merger Peninsula business park

Q2, 2006 Dawn Mills Lower Parel Peninsula Land 6.4 NA NA Merger Under Construction

Sep-07 Hindustan Mills Prabhadevi Ackruti City 5.2 3,690.0 705.5 Out-right Planned

Gold Mohur Mill Dadar Future Group 5.5 1,292.0 234.9 JDA Planned

Apollo Mills Mahalaxmi Future Group 3.4 828.0 243.5 JDA Planned

Sep-09 Crown Mills Prabhadevi DB Realty 6.1 1,840.0 301.6 JDA Under Construction

Jul-10 Poddar Mills Worli IBREL 2.4 4,740.0 1,983.3 Out-right Auctioned lately

Jul-10 Bharat Mills Worli IBREL 8.4 15,050.0 1,798.1 Out-right Auctioned lately

Source: Industry



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

5.4 120 22

FY08 Ashford Bhandup Ceat 7.0 1,300 186

FY08 HDIL LBS, Mulund Bombay Oxygen 10.0 2,000 200

FY08 HDIL Thane Eveready industries

15.0 1,150 77

FY08 HDIL Bhandup Kilburn Engg 8.3 1,247 150

FY08 HDIL Kurla Premier 53.0 19,000 359

Jan '09 Wadhwa Ghatkopar Hindustan Composite

18.0 5,710 317

Feb '05 The Oberoi Group

Andheri (W) Excel Industries 7.0 317 46

Oct '05 The Oberoi Group

Andheri (E) Fantasy Land 24.5 1,060 43

FY08 Sunteck Borivili 1.7 476 289

Feb '10 Sheth Juhu GTC 14.0 5,910 422

Jun '10 Sheth Andheri (E) Borosil 18.0 8,750 486

Source: Industry

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%



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.



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

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14

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2001

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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



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

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18.0

CY1

971

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981

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011e

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021e

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031e

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Population 10 years CAGR

(m) (%)


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

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60,000

1991

1992

1993

1994

1995

1996

1997

1998

1999

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(`)

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



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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25

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40

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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



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

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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

rises in the next few years

We do not expect prices to rise substantially

Fig 47 – Mumbai micro-markets to watch Stages Markets Price Trends Remarks

Vikroli, Bhandup

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


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




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

DB Realty Central Mumbai central 0.30 21,273

Orbit Corporation Orbit Terraces Lower parel 0.28 17,483

Orbit Corporation Orbit Grand Lower parel 0.08 15,428

Orbit Corporation Orbit Eternia Lower parel 0.03 14,702

Indiabulls Sky Lower parel 1.10 19,000

Indiabulls Sky Suites Lower parel 1.10 20,000

Indiabulls Forest Lower parel 1.10 19,500

Ackruti City Princess Worli 0.15 20,195

Ackruti City Turf View Lower parel 0.04 20,372

Ackruti City Emperor Towers Tardeo 1.91 26,761

Ackruti City Haji Gani Lower parel 0.02 16,034

Ackruti City Opera House Hughes Road 0.16 25,832

Source: Companies, Anand Rathi Research



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



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

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09

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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



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

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(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

Off CBD

Take-up (sqft) 204,000 60,500 125,500 465,000 430,000

Availability (sqft) 641,108 809,490 1,182,173 1,146,313 1,137,200

Availability ratio (%) 13 15 18 17 17

New supply (sqft) 34,000 465,000 1,130,000 72,900 96,000

New CBD

Take-up (sqft) 212,561 84,646 38,866 103,200 382,000

Availability (sqft) 648,120 876,590 820,771 802,454 796,999

Availability ratio (%) 11 13 12 12 11

New supply (sqft) 413,000 851,000 96,762 - 420,000

Source: DTZ



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

India I Equities


[email protected]


Property

Initiating Coverage

Key financials

Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Sales (` m) 206 284 279 21,342 20,741

Net Profit (` m) 168 62 57 9,474 6,046

EPS (`) 2.9 1.0 0.9 177.8 159.1

Growth (%) NA (64.0) (8.0) 18,643.3 (10.5)

PE (x) 239.1 664.3 722.0 3.9 4.3

P BV (x) 21.2 6.8 6.8 2.7 1.9

RoE (%) 17.8 1.6 0.9 99.8 52.2

RoCE (%) 5.7 1.5 1.1 107.8 64.3

Dividend Yield (%) - 0.03 0.04 0.15 0.15

Net Gearing (%) 60.7 60.2 63.7 (67.4) (100.3)


4 October 2010

Sunteck Realty

Smart foray, prudent tie-ups; initiate with Buy

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

Shares outstanding 63mFree float 34.7%Promoters 65.3%Foreign Institutions 5.6%Domestic Institutions 0.0%Public 29.1%

Relative price performance

Sunteck

Sensex

708090

100110120130140150

Aug-

09Se

p-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10Fe

b-10

Mar

-10

Apr-1

0M

ay-1

0Ju

n-10

Jul-1

0Au

g-10

Sep-

10

Source: Bloomberg

4 October 2010 Sunteck Realty – Smart foray, prudent tie-ups; initiate with Buy


Quick Glance – Financials and Valuations Fig 1 – Income statement (`m)


Net sales 206 284 279 21,342 20,741 Sales growth (%) - 37.9 (1.7) 7,548.0 (2.8)- Op. expenses 34 67 56 4,733 6,509 EBITDA 103 113 126 15,329 13,714 EBITDA margins (%) 50.0 39.8 45.0 71.8 66.1 - Interest 0 5 50 46 39 - Depreciation 14 12 14 17 19 + Other income 111 24 13 - -- Tax 28 58 17 4,580 4,097 PAT 172 62 57 10,686 9,560 PAT growth (%) #DIV/0! (64.0) (8.0) 18,643.3 (10.5)Consolidated PAT 168 62 57 9,474 6,046 FDEPS (`/share) 2.9 1.0 0.9 177.8 159.1 CEPS (`/share) 3.0 1.2 1.2 157.9 100.9 DPS (`/share) - 0.2 0.3 1.0 1.0 Source: Company, Anand Rathi Research

Fig 2 – Balance sheet (`m)


Share capital 114 120 120 120 120 Reserves & surplus 1,824 5,898 5,919 15,253 21,158 Shareholders’ fund 1,938 6,018 6,040 15,373 21,278 Debt 1,185 3,966 3,994 3,010 2,919 Def Tax Liab (net) 1 2 2 2 2 Minority interests 49 358 358 358 358 Capital employed 3,174 10,343 10,394 18,743 24,557 Fixed assets 90 1,229 1,269 1,285 1,304 Investments 1,808 473 473 473 473 Working capital 1,270 8,297 8,507 3,608 (1,486)Cash 8 344 145 13,377 24,266 Capital deployed 3,174 10,343 10,394 18,743 24,557 No. of shares (m) 11.4 12.0 12.0 12.0 12.0 Net Debt/Equity (%) 60.7 60.2 63.7 (67.4) (100.3)Source: Company, Anand Rathi Research

Fig 3 – Cash flow statement (`m)


Consolidated PAT 168 62 57 9,474 6,046 + Non Cash Items 15 (1,322) 14 17 19 Cash profit 184 (1,260) 71 9,491 6,064 - Incr/(Decr) in WC 1,270 7,027 210 (4,899) (5,094)Operating cash flow (1,086) (8,288) (138) 14,390 11,158 - Capex 104 1,151 54 33 38 Free cash flow (1,189) (9,439) (192) 14,358 11,120 - Dividend - 26 35 141 141 + Equity raised 1,819 4,352 0 - -+ Debt raised 1,185 2,781 28 (984) (91)- Investments 1,808 (1,334) - - -- Misc. items 0 (0) (0) - -Net cash flow (1,800) 336 (199) 13,233 10,889 + Opening cash 1,807 8 344 145 13,377 Closing cash 8 344 145 13,377 24,266 Source: Company, Anand Rathi Research

Fig 4 – Land bank spread

Jaipur29.5%

MMR16.8%

Mumbai47.1%

Nagpur4.5%

Oman0.3% Others

1.8%

Source: Company

Fig 5 – Land acquisition mode (Mumbai)

Factory Land/Mill Land

54% Virgin land24%

SRS21%

Redev1%

Source: Company

Fig 6 – Sunteck Realty vs BSE Realty

Sunteck

Realty Index60

70

80

90

100

110

120

130

140

150

Aug-

09

Sep-

09

Oct

-09

Nov

-09

Dec

-09

Jan-

10

Feb-

10

Mar

-10

Apr-1

0

May

-10

Jun-

10

Jul-1

0

Aug-

10

Sep-

10

Source: Bloomberg



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



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



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


� 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)


� 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.



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.

Fig 11 – BKC properties – Projects’ statistics Project Area (m sqft) SRL stake Land cost (`m) (%) Paid Premium cost (`m) Paid

Signature Island 0.7 88% 1,438 100 1,379 26%

Signia Isles - I 0.4 50% 2,480 53 918 20%

Signia Pearl 0.4 50% 2,480 48 916 0%


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


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



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


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.



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


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.



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




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%


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



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

Jaipur Bani Park 8.6 100% 8,180 2,355 5,725 FY11e launch Site Demarcation MMR Thane 4.8 100% 7,102 2,805 4,630 FY12e launch Planning stage Mumbai Mulund .98 50% 9,630 2,477 876 FY12e launch Approval stage Mumbai Mulund .97 100% 9,867 2,666 2,031 FY13e launch Approval stage MMR Airoli .14 100% 6,149 4,227 178 Launched Construction commenced Nagpur Sadar Bazar .17 100% 6,587 2,153 298 Launched Construction commenced Oman Madinal Al Ilam .08 50% 10,350 5,387 140 Soft launched Nearing completion Mumbai South Central Mumbai 2.2 100% 22,679 3,408 4,926 FY12e launch Planning stage Mumbai South Central Mumbai 1.4 100% 23,943 3,415 3,155 FY14e launch Planning stage Mumbai Sion 1.6 33% 17,115 3,565 1,729 FY14e launch Planning stage




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



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 Poonam Andheri 100% Residential FY12e 368 Planning stage

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


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



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 Skystar 1 Goregoan W 100% Residential FY11e 3,327 9,500 10,360

Signia Gardens Vile Parle 100% Residential FY12e 1,214 13,500 14,786

Signia Poonam Andheri E 100% Residential FY12e 368 11,500 11,788

Signia Skystar 2 Goregoan W 100% Residential FY12e 3,013 10,000 11,098

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


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 Comm P1 Bani Park 1.1 Commercial FY13e FY16e 8,344







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

Rent – Existing projects 279 334 376Signature Island - 18,944 3,530 Signia Isles - I - - 14,471 Signia Pearl - - -Oman Villas - 418 -Signia Oceans - - 843 Signia Skys Nagpur - - 1,122 Sunteck Grandeur - 1,038 -Sunteck Samruddha - 607 -Sunteck Kanaka - - 399


Customer advances; cash built up

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.



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)


Fig 27 – Income statement (`m) Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Revenue 206 284 279 21,342 20,741 - Op. expenses 34 67 56 4,733 6,509 - Employee Costs 9 15 28 427 311 - Other Administrative 61 89 70 854 207 EBITDA 103 113 126 15,329 13,714 - Interest 0 5 50 46 39 - Depreciation 14 12 14 17 19 + Other income 111 24 13 - -- Tax 28 58 17 4,580 4,097 PAT 172 62 57 10,686 9,560 + Minority Interests 4 - - 1,212 3,514 + Share of profit from Associates 0 - - - -Consolidated PAT 168 62 57 9,474 6,046 Dividend - 26 35 141 141 FDEPS (`/share) 2.9 1.0 0.9 177.8 159.1

CEPS (`/share) 3.0 1.2 1.2 157.9 100.9

DPS (`/share) - 0.2 0.3 1.0 1.0 BV (`/share) 32.3 100.1 100.5 255.8 354.1 Shares outstanding 11.4 12.0 12.0 12.0 12.0 Growth Rates Revenue (%) - 37.9 (1.7) 7,548.0 (2.8)EBITDA (%) - 9.7 11.2 12,106.9 (10.5)Net PAT (%) - (64.0) (8.0) 18,643.3 (10.5)Diluted EPS (%) - (64.0) (8.0) 18,643.3 (10.5)FY10-13e Revenue CAGR(%) 318.0 FY10-13e EBITDA CAGR (%) 360.2 FY10-13e EPS CAGR (%) 171.8 Margins EBITDA (%) 50.0 39.8 45.0 71.8 66.1 EBIT (%) 43.2 35.7 39.8 71.7 66.0 Net Profit (%) 81.7 21.8 20.4 44.4 29.1




Fig 28 – Balance sheet (`m) Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Sources of Funds Share capital 114 120 120 120 120 Reserves & surplus 1,824 5,898 5,919 15,253 21,158 Shareholders’ fund 1,938 6,018 6,040 15,373 21,278 Debt 1,185 3,966 3,994 3,010 2,919 Deferred Tax Liab (net) 1 2 2 2 2 Minority interests 49 358 358 358 358 Capital employed 3,174 10,343 10,394 18,743 24,557Application of Funds Gross Fixed Assets 144 179 233 266 304 Less: Depreciation 62 73 88 105 123 Net Fixed Assets 81 106 146 161 181 Capital Work in Progress 8 - - - -Investments 1,808 473 473 473 473 Goodwill - 1,123 1,123 1,123 1,123 Current Assets Inventories 2,723 8,864 16,040 17,912 21,467 Debtors 24 80 80 80 80 Loans and Advances 693 4,025 3,941 4,026 4,085 Current Liab and Provisions 2,171 4,673 11,555 18,411 27,119 Net Current Assets 1,277 8,641 8,651 16,985 22,780 Working Capital 1,270 8,297 8,507 3,608 (1,486)Cash 8 344 145 13,377 24,266 Capital deployed 3,174 10,343 10,394 18,743 24,557 No. of shares (m) 11.4 12.0 12.0 12.0 12.0 Net Debt/Equity (%) 60.7 60.2 63.7 (67.4) (100.3)


Fig 29 – Cash flow statement (`m) Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Consolidated PAT 168 62 57 9,474 6,046 +Depreciation 14 12 14 17 19 +Deferred Tax 1 0 - - - +Other non cash 0 (1,334) - - - Cash profit 184 (1,260) 71 9,491 6,064 - Incr/(Decr) in WC 1,270 7,027 210 (4,899) (5,094) Operating cash flow (1,086) (8,288) (138) 14,390 11,158 -Capex 104 1,151 54 33 38 Free cash flow (1,189) (9,439) (192) 14,358 11,120 -Dividend - 26 35 141 141 + Equity raised 1,770 4,044 0 - - + Debt raised 1,185 2,781 28 (984) (91) -Investments 1,808 (1,334) - - - -Misc. items 0 (0) (0) - - Net cash flow (1,800) 336 (199) 13,233 10,889 +Opening cash 1,807 8 344 145 13,377 Closing cash 8 344 145 13,377 24,266




Fig 30 – Ratio @ `685 Year end 31 Mar FY09 FY10 FY11e FY12e FY13e

Valuations PE 239.1 664.3 722.0 3.9 4.3 PBV 21.2 6.8 6.8 2.7 1.9 M Cap / Sales 189.6 144.9 147.5 1.9 2.0 EV/Sales 186.5 156.0 159.6 1.4 0.9 EV/EBITDA 373.3 392.5 354.7 2.0 1.4 Dividend Dividend yield (%) - 0.0 0.0 0.1 0.1Dividend payout (%) - 36.0 52.7 1.1 1.3 Leverage Net Debt / Equity 61 60 64 (67) (100)Int Coverage 283 21 2 336 355 Return Ratios ROE (%) 17.8 1.6 0.9 99.8 52.2 ROCE (%) 5.7 1.5 1.1 107.8 64.3




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.

The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments"). ARFSL and its affiliates may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of this issuer(s) or in related investments, and may be on the opposite side of public orders. ARFSL, its affiliates, directors, officers, and employees may have a long or short position in any securities of this issuer(s) or in related investments. ARFSL or its affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this report. This research report is prepared for private circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report.

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