16th July, 2021
CMP – 144
Industry- Real Estate
- As many readers would know, IB Real Estate will soon be merged with Embassy Group and NCLT & board merger approval is a formality that needs to be addressed. Total clarity should emerge in another 6 months, post-merger process the merged entity has some exciting future and immense fundamentals at current market cap.
- Jitu Virwani is the Chariman & Managing Director of Embassy Group, India’s leading property developer. Over the last three decades, Embassy together with its promoters has developed over 55 million sq ft of commercial, residential, industrial & warehousing, retail and hospitality spaces in India and overseas.
- Assets of Embassy Group to merge into Indiabulls Real Estate (“IBREL”), to create one of India’s largest listed real estate Company in India.
- The Merged Entity will have a balance mix of commercial & residential assets which should provide a perfect blend and hedge against cyclicality of the sector.
- Jitu Virwani will be the new promoter of the listed entity ie Embassy Developments.
- Existing IBREL promoters will seek to declassify themselves as Promoters.
- Strong Pipeline– Total Net Surplus from completed inventory and projects that are currently ongoing is ₹10,754 Cr. With an additional spend of 200 cr post-merger, the company can execute projects worth 10,000 cr.
Project Wise break up of Inventory
Note- This inventory to be executed over next 3-5 years in the merged entity, around 25-30% is already being executed and sold in pre-sales & soft launches. The company can make an EBIDTA of 7,000 cr over the expected time frame.
- Largest Real Estate– Post merger Embassy developments would be the largest Real Estate developer in India. Merger will create one of the leading marker players among listed companies in the real estate sector in context of surplus launched projects + land bank ownership + planned area development in India.
Size of Combined Entity
Land Bank Potential of Combined Entity
Embassy Development, to be an enormous real estate giant in times to come. The company has development visibility for the next 10-15 years. The sheer size of their growth plans can fetch them commercial rental yields to the tune of 4,000-4,500 cr (developed over next decade).
- Calculation of Post-merger Equity
Current No. of shares of India Bulls – 45.466 Cr.
Current Embassy holding in India Bulls – 6.31 Cr. (will get cancelled)
Current Shares of Nam Estate – 92.026 Cr.
Current Shares of Opco – 16.16 Cr.
New shares to Nam Estate – 60.91 Cr.
New Shares to Opco – 8.74 Cr.
Total New shares – 69.65 Cr.
Plus existing shares of India bulls – 45.466 Cr.
Minus Current holding of Embassy – 6.31 Cr.
Net o/s share post-merger – 108.81 Cr.
New Entity Shareholding Pattern
- Merger- A Perfect Marriage
India bulls is more skewed towards residential portfolio whereas Embassy group is more focused on commercial real estate. The combined entity will have a perfect blend of both which will help create diversification and hedge against segment wise cyclicality.
The geographical benefits are also immense, Embassy group is more focused in the South Indian market whereas IBREAL Estate presence is more in West, Central & North Indian markets.
- Embassy REIT- A Catalyst in Real Estate Sector
Embassy was the first in the country to launch a REIT on the exchanges in 2019. India is just taking baby steps into this space, a vehicle which is being used by developed economies for over 50 years.
The space has exciting prospects, given the geopolitical situation and recent focus shift from China to India as a preferred investment destination. India presents a ready-made ground for commercial and manufacturing infrastructure development. With this insight, global investors are looking at India for better yields, and many international funds are venturing into commercial real estate investment in India.
Embassy REIT, a ready buyer for the Raw Material The REIT won’t be part of the listed entity but will provide a ready opportunity for IBREAL ESTATE (Embassy Developments) to monetize their commercial portfolio at best cap rates at par with global standards.
EMBASSY REIT has a finished asset & Embassy Developments will have a ready buyer for its commercial portfolio, it’s a win win for both entities, and in turn the shareholder.
Conclusion: The Numbers
- Revenue Visibility & Valuations Net Surplus of 11,000 cr. from Residential Projects. EBIDTA potential in existing business can be 6,000-7,000 cr over 3-4 years.
5,200 cr. of combined debt ie 4,300 cr of Embassy Groupp & 900 cr of IBREAL Estate. Management has guided the combined debt will reduce to 3,700 cr at the time of merger.
109 cr shares plus combined debt gives an EV of 18,000-19,000 cr. The existing inventory can help company achieve annualEBIDTA of 1,200-1,500 cr post-merger, growing annually at 20% CAGR.
IBREAL (Embassy Developments) is available at a highly attractive valuation of 8-10x EV/EBIDTA post-merger. Largest Real Estate developer available happens to be the cheapest in valuations, this can be a potential 300% return from current market price of 144.
We are not yet factoring in any revenues from the available land bank mentioned in our report and only taking into account the existing inventory.
- Optionality Long Term Vision
4 cr sq. ft of potential commercial space with Annual rent potential of Rs. 4,200 cr. (Which may get sold to Embassy REIT with 8% yield cap).
4.5 cr sq ft of potential residential space to be developed.
Fully paid land bank of 3,353 acres
- Nasik SEZ – 1424 Acres (89% Economic interest)
- Mumbai – 1140 Acres / NCR – 637 Acres / Chennai – 167 Acres
Pls Note- By optionality, we don’t mean the above are available but not obligated by Embassy to execute. What we mean is the whole cycle of execution will run for decades and no public financial information, annual report or balance sheet is available for the combined entity, hence we are assigning a value only to the available built up inventory & receivables.