Thread by @Pritesheth88

Merger b/w #IBREL and assets of #Embassy – An overnight turnaround or a long term value play? (For educational purpose)

Expected cash flows over next 5-6 yrs:

As on Mar-21, IBREL’s ~21msf of RTMI (6msf) and U/C (16msf) projects are expected to generate ~INR6750cr of net surplus

~8msf of planned projects will generate ~2600cr of surplus. Total ~INR9350cr.

Of which ~INR5600cr or 60% from MMR projects, 33% or ~INR3000cr from Gurugram projects & rest ~INR750cr from Tier2&3 towns

(Net surplus = Sales receivables + Inventory – Pending construction costs)

Ex mktg & admin costs and taxes, net operating cash flows will amount to ~INR4700cr to be generated over next 5-6yrs

Similarly, Embassy has ~21msf of ongoing (~10msf) and upcoming projects (~11msf) which will generate ~INR5500cr of net surplus (~INR6500cr as on Aug-20)

>90% of these cash flows will be generated from projects in Bengaluru and rest in Chennai. Of the 10msf ongoing >85% are RTMI which are expected to have higher traction and sales velocity.

Operating cash flow post overheads and taxes will amount to ~INR2700cr.

Assuming they manage to fully sell out the inventory, on a combined basis both companies will generate a cumulative operating cash flow of ~INR7400cr which discounted at a WACC of 12% over 5-6 years implies a value of ~INR5200cr.

Market cap and EV of combined entity:

At CMP of INR120, IBREL has a market cap of ~INR5300cr. Existing shareholders of IBREL (both promoter and public) will hold ~42% in the combined entity implying a market cap of INR12,700cr for the combined entity.

In a media interview post the merger announcement, Jitu Virwani (Embassy promoter) had indicated that combined entity will have a net debt of ~INR4000cr. Since then IBREL has reduced its net debt by ~1200cr, thus, combined entity net debt is likely to be at ~INR2800cr.

EV of the combined entity is expected to ~INR12700cr (Mcap) + ~INR2800cr (Net debt) = ~INR15500cr. With near to mid-term cash flow valued at ~INR5200cr, large part of value creation hinges on land bank development/monetization

IBREL Land bank:

IBREL has 1929acre of fully paid out land bank which as per the company has a replacement value of ~INR5000cr. O/w ~1100acre in MMR (largely Panvel), ~640acre in Gurguram & ~170acre in Chennai. The land bank is expected to have a development potential of ~185msf

Market tends to value these land parcels based on quality. For e.g. DLF’s ~186msf land bank with a book value of ~INR15000cr implies a value of ~INR32000cr at CMP.

Correspondingly, Sobha has >200msf of developable land bank but trades at a mcap of ~INR4400cr and EV of ~INR7250cr

which also includes value of ~INR7900cr of expected cash flows from ongoing projects to be realized over next 5-6 yrs.

Interestingly, IBREL's land bank was valued at only ~INR1500cr while determining the fair value of IBREL (INR92.5 per share) for the fixing the merger ratio

Additionally, IBREL also hold 1424acre of land at Nashik SEZ (originally ~2500acre) which was allotted to the company in 2007. Since then no major development has happened apart from 1350MW thermal power plant operated by Indiabulls’ power subsidiary Rattan India.

Embassy Land bank – High quality but concentrated location

~340acre commercial land bank with a leasable potential of ~42msf across 5 locations in Bengaluru. O/w 3 assets i.e. Knowledge Park (22msf), Tech Valley (9msf) and East Business park (8msf) constitutes ~39msf of total

While at current rentals, these assets have a potential to generate INR4200cr of rental income but given its concentrated exposure and current market size (Annual absorption of 16msf in Bengaluru), monetization/development of this commercial land bank will happen at gradual pace.

For e.g.: Embassy REITs largest asset i.e. Embassy Manyata was launched in 2000 and became operational in 2006. It took 15 years for the company to reach the current operational scale of ~12msf

Similarly, Embassy Tech Village was acquired in 2013 with an operational area of 2.1msf. Over the last 8 years operational area has increased by 4msf and company will further add 3msf of operational area by end of FY24. So 7msf developed in a span of 11 years.

The above instances clearly indicates that it does take time to create such large commercial assets. Embassy likely has ~2.5msf of space planned across 2 projects i.e. Knowledge Park (1.2msf) and East Business Park (1.3msf) which will generate rentals of ~INR250cr post completion

Few key points:
· Merged entity doesn’t have any holding in Embassy REIT hence won’t receive any dividend from REIT.
· Sameer Gehlaut will be de-classified as promoter. He will still hold ~5% stake in the merged entity as a public shareholder.

@sandeepraina81