Sunday 3 February 2008

Emaar MGF Land - IPO Review

Investors can consider applying to the initial public offer of real-estate company, Emaar MGF Land (EMGF), but should retain at least a three-year perspective. The company’s shares are on offer from February 1-8 at a price band of Rs 540-630 (revised).

Backed by a strong promoter with a global presence, EMGF has swiftly accumulated a solid land bank in India and has demonstrated its marketing abilities through strong demand for its recently launched residential projects. In its targeted pan-India presence and ambitious plans across segments, the company could well be compared to large players such as DLF and Unitech. The drawback would be its lack of track record in the Indian market. Successful execution of its plans would, therefore, hinge on the support from its international parent, Emaar, and domestic partner, MGF. The company now appears to have built a strong base — sufficient land bank, tie-ups with international construction players for project execution and a diversified portfolio with joint ventures in hospitality and infrastructure.

On the company and offer

EMGF is a real estate company incorporated in 2005, co-promoted by Emaar Properties of UAE and MGF Developments. The company is into residential, commercial and retail projects and has plans to foray into hospitality and airport projects. At the higher end of the price band, the offer would raise about Rs 6,400 crore to be utilised towards land acquisition, construction cost and loan repayment. Post-listing, the market capitalisation would be Rs 53,000-62,000 crore.
Strong promoter background

EMGF’s promoter, Emaar Public Joint Stock Company (Emaar), is an international real estate player with a presence spanning Saudi Arabia, UAE, Egypt and the US. Emaar PJSC is building the world’s largest tower and Mall in Dubai and is also involved in the prestigious King Abdullah Economic City in Saudi Arabia.

Apart from skill sets and cash infusion of over Rs 3,000 crore into EMGF, Emaar brings to the table an ability to forge business and funding ties. This lends confidence on two key success factors — execution capability and meeting fund requirements. Emaar’s interest in this venture is also evident from the agreement to route all its Indian projects only through EMGF.

MGF Developments, the other promoter, specialises in retail space and has an established presence in North India, with local knowledge to handle issues such as land identification, procurement and dealing with local procedures. That the company has managed to add 13,024 acres to its land reserves in a short span of time — a high proportion of it also being fully paid — suggests that the local partner’s knowledge has played a pivotal role.
Comfort from land holding

As much as 89 per cent of EMGF’s land reserve is fully paid, thus locking in to prices; reducing risks of escalation in prices at a later date. This proportion is higher than Emaar’s peers in the listed space. Though the land bank is spread across regions, the north accounts for 75 per cent. This probably arises from the MGF’s strength in the region and suggests caution in testing new waters.

Buoyant take-off

EMRF has already made available for sale about 80 per cent of the 17.3 million square feet of residential projects under development. This provides comfort on the company’s execution capabilities, given that it otherwise lacks a track record in the country.

Of the total developable area of 566 million sq ft., residential segment accounts for over 75 per cent with about 15 per cent in commercial and the rest planned for retail and hospitality.

The focus on residential appears appropriate for two reasons. The demand for residential area is expected to be higher than the other segments over the long term. This would also enable the company to cash-in on projects, replenish the land bank and move ahead to other projects. This build-sell model prevents locking-in of capital. However, projects coming up over 2008 and 2009 are tilted towards the commercial and retail space, with plans to adopt a lease model.

This strategy appears to be targeted at building a high-grade asset basket, targeting Real Estate Investment Trusts (REIT). Even if EMGF is able to complete 50 per cent of the targeted 89 million sq ft of commercial space, it could garner a sizeable share of the REIT market.

In the residential segment, the company has chosen a strategy of ‘integrated master planned communities’ (similar to the integrated township concept) in many Tier-II and Tier-III cities.

This provides flexibility to the company to sell plotted land or full fledged housing, depending on the response in these areas. The sale of plotted land would also aid regular infusion of cash to meet working-capital requirement.

The strategy appears well thought out, as it may result in regular cash infusions, while building a portfolio of income-yielding assets.

Sound joint ventures

EMGF has used international joint ventures to access technology, and make up for lack of experience in dealing with local contractors. Exclusive tie-ups with Australia-based companies, Leighton International and Multiplex, and the US-based Turner Construction are cases in point.

The company has also formed a consortium with Dubai Aerospace Enterprise to venture into opportunities in port privatisation, modernisation and management in India. Given that this segment in the infrastructure space has just taken off in India, the move to focus on it appears well-timed.

The company’s foray into hospitality is supported by tie-ups with the Hyatt, Accor, Marriot and Four Seasons.

While the JV is desirable, we are cautious about prospects for up-market and luxury hotels in places such as Kolkata, where attractive pricing may remain a key.
No cheap valuations but..

EMGF has managed to break even within two years of incorporation; profits for the half year-ended September 2007 fully offset the earlier losses. Consolidated revenue for the half year stood at Rs 473 crore, while net profits were Rs 130 crore.

We conservatively estimate revenues crossing Rs 3,000 crore by FY-09 with per share earnings close to Rs 10.

This estimate does not factor in earnings from the hospitality segment and the leased commercial and retail spaces. The latter, especially, could provide significant upside to the earnings estimate.

EMGF’s operating and net profit margins for the half-year ended September 2007 stood at 39 per cent and 27 per cent respectively. This compares well with the industry average but is slightly lower than the leading players.

A recently accumulated land bank may explain the lower margins. This factor may see more steady margins on the company’s projects compared to peers, as the latter may witness contraction as they move over to recently replenished land reserves.
Risks

We are concerned about a chunk of EMGF’s present projects being concentrated in Mohali. While purchasing power in this location no doubt remains high, the market is yet to be tested for projects of such huge scale. Risks of excess supply also remain high.

As is the case with most other big players, Emaar’s targets for development appear aggressive given that no player has so far proven such capabilities.

While Emaar has a good track record, the size of total projects executed so far is only about 50 million sq ft (although huge developments are under way) across the world.