takeaways from site visits visited mahindra world city,...

8 February 2011

Visited Mahindra World City, JaipurSteady progress in SEZ; NPA still in concept stage

We visited Mahindra World City (MWC), Jaipur. We were given a tour of the site,and we interacted with the senior management and Head of Operations of a keytenant. We also met local brokers. The 3,000 acres of integrated developmenthas received notifications for three SEZs: (1) IT/ITES, (2) Light Engineering -including Automobiles and Automobile Components, and (3) Handicrafts. Thecompany plans to expand coverage to include segments such as Gems andJewelry, Apparel, and Logistics. When fully operational, this business city will

employ ~100,000 people and will have an annual export potential of Rs50b.

Steady progress in early stage of monetization: The Jaipur SEZ is inthe early monetization phase, with sale of the processing area underway.While ~280 acres of the IT SEZ area have been leased out to key tenants,another 90 acres have been leased out in the Handicraft and Light Engineeringspace. The current customer base at the Jaipur SEZ is 37, of which three(Infosys, Deutsche Bank KPO and EXL) have started operations and 11 havecommenced construction. The current employment base of the SEZ is 2,200v/s projected employment of 100,000.

Monetization of non-processing area yet to cross conceptualizationstage: MWC has ~1,000 acres of non-processing area (NPA), where it plansto develop residences, hospitals, schools, etc. The total estimated saleablearea for the planned residential projects is ~30msf, implying a supply potentialof ~20,000 apartments. However, the company does not have any immediatemonetization plan for the NPA. Even the product-mix and mode of monetizationare not finalized. While joint development with co-developers such as theparent, Mahindra Lifespaces (MLL) is one option, bulk deals on plotted land isanother. The management has indicated that it would be a couple of yearsbefore it starts developing the NPA.

Valuing MWC, Jaipur at Rs181/share of MLL - 30% of FY13E NAV ofRs604/share: We have valued MWC on an NPV basis at Rs7.3b or Rs181/share (30% of MLL's FY13E NAV of Rs604). We estimate the processing areato contribute ~31% of gross value, and the residential and institutional areato contribute ~69%. MLL has (1) a sound business model, (2) strong brandequity, (3) established client relationships, and (4) a strong balance sheet.Our FY13E SOTP value for MLL is Rs604/share: (1) Chennai SEZ at Rs167/share, (2) Jaipur SEZ at Rs181/share, (3) residential vertical at Rs185/share,and (4) other rental assets at Rs60/share. We expect earnings to grow at aCAGR of 34% over FY11-13, due to strong contribution from the Chennai SEZ,sale of the processing area in the Jaipur SEZ, and increased contribution fromresidential projects. The stock trades at 7.6x FY12E EPS of Rs43.5 and 5.7xFY13E EPS of Rs57.6, at ~45.5% discount to our FY13E SOTP value. MaintainBuy with a target price of Rs453 (25% discount to FY13E NAV).

Siddharth Bothra ([email protected]); Tel:+912239825407/Sandipan Pal ([email protected]); Tel:+912239825436

Takeaways from site visitsThe InSites

Mahindra Lifespaces

MWC, Jaipur: Master Plan

MWC, Jaipur: IT SEZ

Financial snapshotY/E March FY10 FY11 FY12 FY13

Net Sales (Rs b) 4.2 6.3 8.0 10.4

EBITDA (Rs b) 1.2 2.1 2.8 3.5

NP (Rs b) 0.8 1.3 1.8 2.4

EPS (Rs) 19.0 32.2 43.5 57.6

EPS Growth (%) 23.0 69.3 35.2 32.4

BV/Share (Rs) 240 268 308 362

P/E (x) 17.1 10.1 7.5 5.7

P/BV (x) 1.4 1.2 1.1 0.9

EV/EBITDA (x) 13.9 8.0 5.6 3.6

EV/Sales (x) 3.9 2.7 1.9 1.2

RoE (%) 7.9 12.0 14.1 15.9

RoCE (%) 8.9 13.7 16.5 19.4

The InSites

8 February 2011 2

We visited Mahindra World City (MWC), Jaipur. We were given a tour of the site, and weinteracted with the senior management and Head of Operations of a key tenant. We alsomet local brokers. We present our key takeaways.

Mahindra World City (MWC), Jaipur - an overview

Mahindra World City (MWC), Jaipur is a joint venture between the Mahindra Group (74%)and the Government of Rajasthan through RIICO (26%). Constituted in July 2005, thisproposed Integrated Business City will be developed as a multi-product SEZ and DTAover 3,000 acres. The company has acquired ~2,650acres as on date and is acquiring theremaining land in primarily non-processing zone.Notifications have been received for threeSEZs: (1) IT/ITES, (2) Light Engineering - including Automobiles and AutomobileComponents, and (3) Handicrafts. The company plans to expand coverage to includesegments such as Gems and Jewelry, Apparel, and Logistics. When fully operational, thisbusiness city will employ ~100,000 people and will have an annual export potential ofRs50b. Given (a) the strong infrastructure development in/around Jaipur, (b) increasingwater problem in Gurgaon SEZ, (c) lower land cost, and (d) strong resource base withincity, the SEZs in Jaipur would have tremendous growth opportunity.

Overview of MWC, JaipurMoU Signed in Year 2005

Began Operations in Year 2008

Growth Partners

JV Partner RIICO (Government of Rajasthan)

Master Planner Jurong, Singapore

Landscaping Consultant Site Concept Internation, Singapore

Knowledge Partner Hewitt

Sustainability Partner Clinton Foundation (Clinton Climate Initiative)

Focus Sectors

Developed/ Under Development IT/ITES

Light Engineering including Automotive

Handicrafts

Proposed Domestic Tariff Area (DTA)

Apparel

Gems & Jewelry

Logistics and Warehousing

Social Infrastructure –Institutional, Recreational,

Commercial, Health, Residential etc

Source: Company/MOSL

Early phase of monetization gathering pace

The Jaipur SEZ is in the early monetization phase, with sale of the processing area underway.According to the management, ~380 acres have been leased out, with realizations betweenRs6m-Rs10m/acre. The total customer base at Jaipur SEZ is 28 with 3 operational (Infosys,Deutsche Bank KPO and EXL) and 11 under construction (includes Ratan Textiles inHandicrafts SEZ, Knit Pro in Light Engineering SEZ, and ICICI Bank and SBI in DTAzone). MLL has entered into MoUs with 10 more customers, taking the total potentialcustomer base to 38. The current employment base of the SEZ is 2,200 v/s projectedemployment of 100,000. Till 2QFY11, the company has invested ~Rs11b against theprojected investment of Rs100b.

WMC, Jaipur: JV Partners

MLL 74%

RIICO 26%

MWC has received

notifications for three SEZs

(1) IT/ITES, (2) Light

Engineering and

(3) Handicrafts

Sale of the processing area

is underway; ~380 acres

leased out with realizations

of Rs6m-10m/acre

MWC, Jaipur: IT SEZ

The InSites

8 February 2011 3

MWC, Jaipur: Master Layout Plan

Mfg Area (Light Engineering)

200ft wide road connecting NH-8 is 70% complete

Mfg Area (Handicraft)

Proposed Ring road connecting city

NPA (Residential, school)

Proposed 250ft road connecting Airport

IT SEZ DTA

(SBI area)

DTA

Ongoing and upcoming residential projects by Emar Group, Omaxe, Ansal, local developers such as MahimaGroup, Mangalam Group and Government low-cost housing projects


MWC, Jaipur: Entrance MWC, Jaipur: IT SEZ


The InSites

8 February 2011 4

MWC: Land Usage Plan and Current StatusLand Usage Plan Land Leasable Lease Remarks Status

area Area Commited

(acres) (acres) (acres)

IT SEZ -Phase I 383 268 ~240 Infosys (190 acres), Notified

Nucleus Software

(18 acres),

Deutsche Bank

KPO and EXL

IT SEZ -Phase II 80 56 ~40 Wipro (23 acres), Applied for

Tech Mahindra (15 acres) Notification

IT SEZ -Phase III 287 201 Not notified

Total IT Zone 750 525

Handicraft 250 180 40 Ratan Textile, Stone Notified,

Age, Amani Overseas, 75 acres

Samurai Export, developed

Artasia etc

Light Engineering 250 175 50-60 Knit Pro, Marsons, Notified,

Polymed, Talbros, 100 acres

Dynamic Cable etc developed

Gems and Jewelry 25 18 Not notified

Total Manufacturing Zone* 750 530

DTA 500 350

NPA- Residential** 750 525

NPA- School and Hospital** 250 175

Total 3,000 2,105

* Area could be changed post approval of multi-product SEZ;

** Product mix is tentative Source: Company/MOSL

Key Client ProfilesIT SEZ Handicrafts SEZ Light Engineering SEZ DTA

Nagarro Software (Jaipur) Ratan Textiles Marsons Industries ICICI Bank

Truworth KPO Services Rajdhani Craft Veto Polymers & Metals SBI

Connexxions IT Services Rediprint International Veto Electricals

Nucleus Software Samurai Designs & Interiors QH Talbros Limited

Infosys BPO Limited Kirat Crafts Dynamic Powertech

Infosys Technologies Limited Seesham Handicraft House Tijaria International Limited

Girnar Software GAD Industries Knitpro Designs

Tech Mahindra Limited Jaipur Crafts India Agrovision

Wipro Rustic Furniture Veto Power Products

IsysSoftech Art Age Furnishings Poly Medicure Limited

Deutsche Bank Heritage Prime Furniture Genus Power Infrastructure

EXL Service Rama Handicrafts


IT zone: Phase I and II witnessing steady leasing momentum

The fully developed IT zone will be spread over 750 acres, making it the largest planned ITSEZ in India. The company has divided its IT SEZ into three phases.

Phase I of the IT zone, which is spread over 383 acres, has been notified as an IT SEZ.Infrastructure development for the first phase is complete and two anchor customers,Infosys BPO and DBOI Global Services along with EXL are operational, generating directemployment for ~2,200 people (~1,100 in DBOI and ~800 in Infosys) and posting annualexports of ~Rs1b.

MWC has ~1,400 acres of

leasable area in SEZs/DTA

and ~700 acres in non-

processing zone

The current customer base

at the Jaipur SEZ is 38,

of which three have

started operations

IT Park at IT/ITES SEZ

The InSites

8 February 2011 5

The management has indicated that total leasable area for phase-I would be ~268acres, ofwhich it has committed lease agreement for ~90% area. It has concluded lease transactionswith blue chip companies such as Infosys Technologies, Nucleus Software, Connexions,Truworth, Nagarro and Tech Mahindra.

Besides the leasing of land for development, the IT SEZ includes Evolve, a 1.4msf multi-tenanted IT park, spread over 25 acres. Out of the completed construction of 0.23msf inthe project, 0.11msf has been leased to DBOI Global Services and 0.04msf to EXL ServiceBPO. Another 0.06msf has been committed to Deutsche Bank. Given the demand forspace in the segment, MLL is constructing another 0.08msf (not visible in the below picture).This is expected to be completed in 3-6 months.

Infosys has already started operation at Phase I of IT SEZ Evolve- the IT Park (Office of DBOI and EXL)


Phase II of the IT zone is spread over ~80 acres. Wipro and Tech Mahindra are the keytenants who have entered into lease agreements in this area. While the company has only383 acres of notified area in the IT SEZ, the management has mentioned ~200 acres ofadditional area under formal approval, which includes the entire phase-II. Construction hascommenced by several tenants, Nucleus Software being one.

Phase III of the IT zone is spread over ~287 acres and is not yet notified.

Key takeaways from our interaction with Mr Anurag Shukla, Director andSite Head, DBOI Global Services, Jaipur

On growth plan: DBOI, Jaipur currently employs ~1,100 people, expected to growto 1,700 over the next one year.

On attractiveness of MWC, Jaipur: Cost inflation and higher land prices haveled most companies to opt for a tier-III location as a new business destination.Jaipur's attractiveness is high on account of (a) good infrastructure, (b) large talentpool due to presence of several reputed educational institutions, (c) good socio-economic environment, and (d) favorable government.

Approval for notification has

been applied for ~200 acres

of additional area at IT SEZ

IT SEZ includes Evolve, a

1.4msf multi-tenanted IT

park, spread over 25 acres

DBOI office at Evolve

The InSites

8 February 2011 6

On residential demand: The long-term outlook for residential demand within MWCis robust. However, for the next 3-4 years, buyer response could be limited, as (a)only 30% of its total employees are from outside Jaipur, and (b) connectively withinthe city is robust, which gives people the flexibility of living in the city and commutingto MWC, rather than staying there.

Infrastructure development in full swing

MWC is witnessing strong traction in infrastructure development, with a state supportagreement already in place for supply of power and water to the project. The stategovernment is likely to establish substations as per demand. The management has indicatedthat while ~66% of water demand will be met with re-cycled water, the remaining demandwill be taken care of by fresh supply from the municipality. The management has estimatedthe maximum demand for power to be 400MW and for water to be 62MLD at its fullcapacity.

Internal Road at IT SEZ Amphitheater at Evolve

Other Amenities (Water Works, Police Station, etc.)


MWC has established state

support agreement for power

and water supply

The InSites

8 February 2011 7

Handicrafts and Light Engineering zones: Construction has commenced

The company has also made progress in its Light Engineering and Handicrafts SEZs of250 acres each. Infrastructure development at the SEZ is witnessing steady progress, withwater re-cycling process, water body, etc visible on the site. MWC has signed severalMoUs with renowned companies in both the SEZs. In the Handicrafts SEZ, it has signedan MoU with Rama Handicrafts and lease-related agreements with Rajdhani Crafts, RatanTextiles, Kirat Crafts, Rediprint, GAD Industries and Samurai. In the Light EngineeringSEZ, MLL has signed an MoU with India Agrovision and lease agreements with TijariaInternational, Knit Pro, QH Talbros, Dynamic Powertech and Arjay Creations LLP. Amongthe key tenants that have already start construction are Ratan Textiles in the HandicraftsSEZ (single floor construction already done) and Knit Pro in the Light Engineering SEZ.The management mentioned that MWC has robust growth potential in the Light Engineeringzone due to (1) proximity to major auto production hubs of like Noida, Gurgoan and Daruhera,(2) ~26% of India's total wire & cable production takes place in Rajasthan, and (3) proximityto proposed rail freight and industrial corridor/ICD/dry port.

Entry to Handicraft and Light Engineering SEZ


Internal Road in Handicraft SEZ Construction in Progress at Light Engineering SEZ


Handicraft

SEZ

Light

Engineering

SEZ

MWC has entered into lease

agreement for ~90 acres of

Handicrafts and Light

Engineering SEZs

Robust growth potential in

the Light Engineering zone

due to proximity to major

auto production hubs

Strong progress in

construction activities

visible in Handicrafts and

Light Engineering zones

The InSites

8 February 2011 8

Gems & Jewelry and Apparel zones: Awaiting approvalMWC plans to expand coverage to include segments such as Gems & Jewelry (25 acres)and Apparel (225 acres). While these portions of the SEZ are not notified, the companyhas applied for multi-product SEZ status for the whole 750 acres of manufacturing area,which provides it with flexibility to change the product mix within the SEZ depending ondemand potential.

Meaningful progress in DTA plotsMWC also has entered into lease agreements with ICICI Bank and SBI in the DTA.While it has concluded the agreement with SBI for ~30 acres of land for the bank to set upits North India hub, construction on the ICICI building (data processing centre) is alreadyover plinth area.

Location of SBI and ICICI Bank plots in DTA


Monetization of non-processing area yet to cross conceptualization stageMWC has ~1,000 acres of non-processing area (NPA), where it plans to develop residences,hospitals, schools, etc. The total estimated saleable area for the planned residential projectsis ~30msf, implying a supply potential of ~20,000 apartments. However, the company doesnot have any immediate monetization plan for the NPA. Even the product-mix and mode ofmonetization are not finalized. While joint development with co-developers such as theparent, Mahindra Lifespaces (MLL) is one option, bulk deals on plotted land are another.The management has indicated that it would be a couple of years before it starts developingthe NPA.

Strong residential supply in surrounding areasWhile the development of the residential portion within MWC is unlikely to commence inthe near-term, we saw a robust supply pipe-line in nearby areas (MWC and across AjmerRoad) by various local and outside developers. Among the key projects are: (1) Emar

ICICI Data Processing centre

SBI area (30acres)

MWC has applied for multi-product SEZ for remaining

750 acres

MWC has entered into leaseagreements with ICICI Bank

and SBI in the DTA

Monetization of NPA iscouple of years away

Road to DTA

The InSites

8 February 2011 9

Group's 155-acre Jaipur Green, (2) Managalam Group's villa and plotted developmentprojects over 150 acres, (3) Mahima Group's Project Nirwana, (4) Project SK-125 bysome local developers near Jaisingpura, (5) Omaxe Group's upcoming projects over ~450acres. Our interactions with local brokers and sales persons of a few projects suggest thatmost of these projects are banking on the strong RE demand the area is likely to witness inthe medium term due to increasing employment in MWC, especially the IT SEZ. Theongoing rates in these projects are (a) Rs1,800-2,300/sf for apartments, (b) ~Rs4,500/sffor villas, and (c) Rs5,000-Rs6,000/square yard for plotted development. With better outlookfor infrastructure such as water and electricity, these projects are attracting considerableresponse from prospective buyers.

Supply Pipeline in Neighboring Areas


Jaipur Greens by Emaar Group Projects by Mangalam Developers


Omaxe Projects

Mangalam Projects

Jaipur Green, Emaar Group

Most of the upcoming

residential projects are

banking on the strong RE

demand from IT SEZ

Jaipur Greens project by

Emaar Group has witnessed

strong response with plot

rate increasing from

Rs5,400/sf (2009) to

Rs6,500/sf (currently)

The InSites

8 February 2011 10

Strong supply, good connectively within city bodes negatively for MWC

Jaipur City enjoys strong connectivity among different locations including MWC. Transportinfrastructure is reasonably good. Besides, projects located in the center of the city do notcommand a huge pricing premium (average realization of Rs2,500-4,000/sf) to the growthcorridor of MWC. This provides home buyers flexibility to stay in the main city and commuteto the SEZ area. This coupled with increasing supply pressure near the SEZ area couldexert strong pressure on the monetization potential of MWC's residential area.

MWC, Jaipur valued at Rs181/share of MLL

We have valued MWC on NPV basis at Rs7.3b or Rs181/share (30% of MLL's FY13ENAV of Rs604). We expect the processing area to contribute ~31% of gross value, while~69% of the value would be contributed by residential and institutional area.

NPV-based valuation of MWC, JaipurSaleable Area Value(Rs m) NAV/share (Rs)

Residential 23 msf 5,380 132

Insitutional Area 7.6 msf 3,409 84

Processing area (PA) 1,500acres of SEZ PA +500acres of DTA 3,926 96

Net Debt -2,756 -68

Equity Value 9,958 244

MLL's Share (%) 74 74

MLL NPV 7,369 181

Source:MOSL

Valuation and viewMLL has (1) a sound business model, (2) strong brand equity, (3) established clientrelationships, and (4) a strong balance sheet. Our FY13E SOTP value for MLL is Rs604/share: (1) Chennai SEZ at Rs167/share, (2) Jaipur SEZ at Rs181/share, (3) residentialvertical at Rs185/share, and (4) other rental assets at Rs62/share.

MLL has two ongoing SEZs in Chennai and Jaipur. It is acquiring two more SEZs in NorthChennai (~1,000 acres) and Mumbai-Pune Expressway (~3,000 acres). The company haspaid an advance of Rs1.3b. We expect clarity on these acquisitions to emerge in 6 months.During 3QFY11, MLL entered into two more MoUs with the government of Gujarat at theVibrant Gujarat Summit: (1) an Integrated Business City of ~3,000 acres in Dholera SpecialInvestment Region (DSIR) along the upcoming Delhi Mumbai Industrial Corridor (DMIC),and (2) a high quality and professionally managed industrial park of ~500 acres nearAhmedabad. With the potential acquisition of two more integrated development projects inGujarat, we believe MLL is strongly positioned to augment the scalability of its businesssignificantly. While it has ongoing SEZ projects at Chennai and Jaipur with ~4,550 acresarea, its project pipeline comprises four attractive integrated development projects of ~6,500acres.

However, our valuations do not include its pipeline SEZs (a) in North Chennai, (b) near theMumbai- Pune Expressway, and (c) new MoUs at Dholera Special Investment Region.

MLL's IntegratedDevelopment ProjectsProject Location Acres

Ongoing Projects 4,550

Chennai 1,550

Jaipur 3,000

Pipeline Projects 6,500

North Chennai 1,000

Mumbai-Pune EY 2,000

Delhi-Mumbai Corridor 3,000

Ahmedabad 500


MWC residential properties

likely to witness significant

competition

Poised for significant scale-

up with pipeline SEZs of

~6,500 acres

The InSites

8 February 2011 11

We expect earnings to grow at a CAGR of 34% over FY11-13, due to strong contributionfrom the Chennai SEZ, sale of the processing area in the Jaipur SEZ and increasedcontribution from residential projects. The key near term catalyst for the company wouldbe (1) progress on new SEZ acquisition, and (2) addition of value accretive projects throughthe joint-development route or outright purchase.

The stock trades at 7.6x FY12E EPS of Rs43.5 and 5.7x FY13E EPS of Rs57.6, at~45.5% discount to our FY13E SOTP value. Maintain Buy with a target price of Rs453(25% discount to FY13E NAV).

SOTP value of Rs604/shareAcres Method Value Rs/sh % of total

Jaipur SEZ 3,000 DCF 7,369 181 30

Chennai SEZ 250 DCF 6,824 167 28

Residential Development 6 NAV 7,551 185 31

Land Bank - Land Value 1,237 30 5

Rental Properties - Actuals 1,303 32 5

Add: Adjustments 364 9 1

Total - - 24,647 604 100

The InSites

8 February 2011 12

Mahindra Lifespaces: Financials and Valuation

The InSites

8 February 2011 13

N O T E S

The InSites

8 February 2011 14

This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal OswalSecurities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solelyfor your information and should not be reproduced or redistributed to any other person in any form.

The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt orany of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the informationcontained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matterpertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients ofthis report should rely on their own investigations.

MOSt and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency,MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.

Disclosure of Interest Statement

The MOSt group and its Directors own shares in the following companies covered in this report: Nil

MOSt has no broking relationships with the companies covered in this report.

MOSt is engaged in providing investment-banking services in the following companies covered in this report: Nil

This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be requiredfrom time to time. Nevertheless, MOSt is committed to providing independent and transparent recommendations to its clients, and would be happy to provideinformation in response to specific client queries.

For more copies or other information, contactInstitutional: Navin Agarwal. Retail: Manish Shah

Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: [email protected]

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