Big fat deal

The recent meltdown and the following volatility in the broader markets has left two sets of believers on the streets: one set believes in bubbles, and expects them to burst at periodic intervals, while the other believes there is a fundamental reason innate to these so-called bubbles, which is the strong undercurrent of robust domestic macroeconomic growth. For the latter set of believers, it is just a matter of conviction in the Indian growth story, while for the former worries about a correction and the bursting of such bubbles.

For some sectors of the economy, however, these divergent sets of investors align together. With a little bit of apprehension about a correction in prices in some pockets, we would like to include the Indian real estate too, in this league. Here's why: the perennial demand-supply mismatch is likely to continue in the near future.

Though real estate buyers, and more so, investors may delay their buying decision, there is middle class demand, which has taken wings due to the rise of sectors like information technology (IT), IT-enabled services and financial services. More recently, creation of manufacturing hubs in places such as Sriperumbudur in Tamil Nadu, Manesar in Haryana and Ludhiana in Punjab make one approve of this trend.

With the rate cuts announced by the US Federal Reserve, domestic rates too are expected to soften. An interest rate cut would mean cheaper home loans and thus higher demand for real estate.

Most real estate developers are gearing up for this upsurge in demand by laying out plans to construct millions of square feet (sq ft) in various sizes and shapes, across the country. But, there are a handful of developers in India, who have the scale and pace to set up shop in every nook and corner of the vast geography.

The markets have witnessed a rally in realty stocks in both directions last year, as well as the listings of a number of players including the largest of all "� DLF. Now, Emaar MGF Land is set to join this league, with its plans to raise around Rs 6,000 crore via an IPO.

Two, tango

Emaar MGF Land is a joint venture (JV) between Dubai-based Emaar Properties PJSC and Delhi-based MGF Development, incorporated in 2005. Emaar "� better known as the company which built the Burj Dubai, the world's tallest tower, has a global presence with operations in 16 countries, while MGF is a 10-year old real estate developer from North India with developments like City Square Mall, MGF Metropolitan in Delhi, The Plaza and Megacity in Gurgaon to its credit.

Now, the Emaar MGF JV has acquired over 13,000 acres all over the country and plans to develop it into integrated townships, residential apartments, commercial "� retail and office spaces, hotels and hospitals.

Besides the parentage, the joint venture has also brought in the largest foreign direct investment (FDI) in real estate from institutions like Citigroup, JP Morgan and New York Life. As on September 2007, the company's paid-up capital of Rs 4,840 crore consisted of a 42 per cent share of Emaar, a 53.3 per cent from MGF and the rest from global financial institutions.

All the jazz

After achieving a breakeven in 27 months of inception, the joint venture is proposing to aggregate between Rs 5,540-Rs 6,464 crore through an IPO, which would amount to a post-issue stake of 10.2 per cent in the company. The price band for the issue is fixed at Rs 540-630 a share. At the upper end of the price band, the market capitalisation would thus work out to Rs 62,152 crore.

Earlier, the issue price was fixed at Rs 610-690 a share amounting to a market cap of Rs 69,382 crore. Owing to volatility in the markets the issue price has been revised downwards. Even then, this will make Emaar MGF the second largest real estate developer by market capitalisation after DLF, which has a market capitalisation of about Rs 1,39,000 crore.

"The increase in Emaar MGF's equity base will help it leverage better, since even now, the debt-equity ratio is as low as 0.86," claims Shravan Gupta, executive vice chairman and managing director, Emaar MGF Land.

Emaar MGF plans to utilise Rs 2,560.50 crore from the issue to make part payment for its land, Rs 775.50 crore toward development and construction costs of its Palm Drive project in Gurgaon, and the rest for repayment of loans.

Besides, the company has projects under development, including the 2,700 acre-plus integrated township in Mohali, a residential township in Hyderabad, Delhi, Chennai and high-end residential and commercial developments in Gurgaon. "Out of the proposed reserves, Emaar MGF has already paid up for almost 90 per cent of the land," mentions Gupta, hinting at the robustness of the developer.

Courting grandeur

Emaar MGF has mega plans for using its over 13,000 acre (about 566 million sq ft of saleable area) land reserves. The company has ongoing projects on around 18 million sq ft at present and aims to develop about the same area over the coming year.

"Going forward, we aim to expand our execution ability from 18 million sq ft a year to nearly 30 million sq ft over the coming five years," says Sanjay Baweja, chief financial officer, Emaar MGF. For this, the company has tied up with international construction majors like Australia's largest contractor, Leighton, and other players like Multiplex and Turner Construction International.

Such contractors bring along global best practices in construction, project management skills and world class equipment to the table. This ensures timely and high quality execution of Emaar MGF's projects which range from anywhere over 100 acre to 3,000 acre. For smaller projects however, the company has tied up with domestic construction majors like L&T, Ahluwalia Contracts, and the like.

The company has also forayed into the airport, hospitality, healthcare and education sectors with marquee names as its associates. It plans to set up a speciality hospital and an international school in each of its integrated township, in association with Fortis Healthcare and Singapore-based Raffles Campus, respectively.

Raffles Campus is a subsidiary of Emaar Properties, after the latter acquired the former. Dubai Aerospace Enterprise is its partner for development of airport infrastructure in India. For its hospitality venture, Emaar MGF has chalked out about 4 million sq ft properties across various cities and tied up with global hospitality brands like Accor, Premier Travel Inn, Marriott, Intercontinental, Four Seasons and Hyatt.

Strength in strategy

The business model of Emaar MGF Land is an attempt to bring about the robust international practices from Emaar as well as its partner contractors, creating a stable revenue model for what is today just a two-year old startup. "We are looking to build properties, which could be converted into real estate investment trusts (REITs) going forward, as soon as the market opens up for REITs," says Gupta.

To achieve this, the company has adopted a multi-pronged strategy. Although for residential properties it will go by the build-and-sell route, its commercial properties will be leased out for long periods. It plans to manage integrated townships and commercial properties by floating a facilities management subsidiary going forward. Besides, it will own the real estate in the healthcare venture with Fortis, which will set up hospitals in Emaar MGF townships. A similar strategy is followed for schools to be set up in tandem with Raffles. 
 

HOTEL PROJECTS
Project	Location	Number of keys	Estimated  completion
Courtyard by Marriott	Amritsar	135	FY09-FY10
JW Marriott	Kolkata	300	FY09-FY10
Holiday Inn	Kolkata	250	FY10-FY11
Holiday Inn	Dehradun	200	FY09-FY10
A luxury hotel	Jasola, New Delhi	250	FY10-FY11

For hotels, the strategy may differ depending on its partner, as some partners like Accor and Premier Travel Inn have entered into a JV with the company for a chain of hotels, while others have ventured in for select properties. For instance, Accor will set up and manage 40 hotels with an average of 80-100 rooms under its new global brand Formule 1 with Emaar MGF in a 50:50 JV. With Premier Travel Inn too, the company will set up 50 three-star hotels with over 5,000 rooms over the next seven years.

On the other hand, Marriott, Intercontinental, Four Seasons and Hyatt are going to manage some of Emaar MGF's properties in Kolkata, Hyderabad, Gurgaon and Goa. However, since the company has been in operations for just about two years, investors may have to wait and watch for its operations to yield high cash flows. 
 

EMAAR MGF'S ONGOING DEVELOPMENTS
Project	Nature	Saleable  area (in million  sq ft)	Estimated  completion
Mohali, Chandigarh Mohali Hills (Mega township)	Mohali Hills Plots	5.7	FY09-FY10
	The Views (apartments)	1.9
	The Villas	1.2
	Central Plaza (retail space)	0.5
Hyderabad Boulder Hills (Phase I)	Group housing	1.9	FY09-FY10
Gurgaon Palm Springs, Gurgaon	High-end residential project	0.7	FY09-FY10
Palm Drive	Residential	3.3	FY10-FY11
Palm Square	Commercial and retail	0.3	FY10-FY11
New Delhi The Commonwealth Games Village 2010	Residential	1.8	FY09-FY10
Chennai Chennai Esplanade (Phase I)	Residential	0.4	FY09-FY10

Though the company has paid up for almost 90 per cent of its land reserves, it may have to hold on to its land for longer periods, thus delaying its planned projects, if property prices correct or remain low for a prolonged period. Comfort can be derived from the fact that a large part of its Gurgaon and Mohali projects which were launched recently have been pre-sold, and are expected to be completed by FY10. 
 

PROFITABLE ESTATE
Rs crore	6M FY07	FY08E	FY09E	FY10E
Revenues	501.7	1020	2200	3000
Operating profit	201.4	408	836	1140
OPM (%)	40.1	40	38	38
Net profit	130	270	572	765
NPM (%)	26	26.5	26	25.5

Valuations

Emaar MGF Land has not published the valuation of its land reserve. However, based on details about payment to be made for a part of its land reserves, around 5,300 acre of its land could be attributed a value of Rs 28,750 crore "� close to Rs 5.4 crore an acre, or Rs 292 a share. If one values the remaining 7,900 acre of land reserves, which consist of contiguous land parcels in cities like Pune, Kolkata, Indore, Coimbatore, Kochi, Ludhiana, Jalandhar, Ghaziabad and a few others at a lower average valuation of Rs 4.5 crore per acre, one arrives at a value of Rs 360 a share.

This value includes the townships, residential and commercial projects already launched in New Delhi, Mohali, Gurgaon, Hyderabad and Chennai as well as the five hotel projects. Besides, the company has deals inked for setting up hotels amounting to a capacity of close to 5,000 keys and also hospitals and schools in its townships.

To sum up, this rough estimate leads us to conclude that the issue appears fairly priced. Since almost 90 per cent of the land reserves are owned and the fact that it has a room for further leverage makes the company attractive. Add to this, the set of investors in the company and the tie-ups it has entered to ensure timely execution of its projects aids in shrugging off execution risks.

Although not an exception for real estate developers, Emaar MGF, too, has a large part of its land reserves still defined as agricultural land. Hence, any change in legislation regarding use of agriculture land or any delays in conversion of use to non-agriculture, can impact its plans.

The only risk besides that could arise from a slowdown in demand leading to correction in real estate prices. Given the fair pricing, there appears to be little upside in the near term considering the uncertainty over real estate prices. However, in the long run, one could expect Emaar MGF to do an encore of DLF. Long term investors who buy into the great Indian growth story will reap handsome rewards from this issue.

Issue opened: February 01, 2008
Issue closes: February 06, 2008