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Disclaimer & disclosures This report must be read with the disclaimer and disclosures on the last page that form part of it

May 14, 2008

INDIA / REAL ESTATE

Initi

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Orbit Corporation Ltd. Dipesh Sohani ([email protected]) +91 22 6667 9965 Avishek Agarwal (Research Associate) +91 22 6667 9986

Standing Tall We initiate coverage on Orbit Corporation Ltd. (OCL) with a ‘BUY’ rating at our FY09E target price of Rs 579, based on FY09E EPS of Rs 72.3, at which it trades at a PER of 8x. OCL’s business model is unique in the sense that it operates in a niche segment, which emphasizes the redevelopment of dilapidated buildings; this makes it different from normal land bank developers. A lead player in the Island city of Mumbai (ICM) where there are supply constraints, OCL caters to high-end customers with premium quality construction and interiors. OCL, currently, has 23 projects in hand, with a saleable area of 3.2 msf; it has also diversified into development of open land plots. We project earnings CAGR of ~38% for OCL through FY08E-10E on account of sales recognition of ~1.2 msf saleable space in FY09-10. Investment Rationale • Niche operating segment: OCL focuses mainly on the redevelopment of

dilapidated buildings at prime locations in ICM (Colaba-Sion-Mahim). The redevelopment involves developing “build to suit” high profile residential and commercial properties by clearing land of the existing tenants through consensus, where a pre-defined percentage of new dwelling unit sizes are given back to them and the rest remains available with OCL for free sale.

• Presence in the ICM: It is one of the most lucrative and supply-constrained property markets due to non-availability of open land plots. Also, there are around 19,642 old buildings, of which 6,386 buildings are awaiting redevelopment in the areas in which OCL currently focuses; this gives OCL significant opportunities in the redevelopment space.

• High quality premium construction: OCL caters to the premium range of the market and develops highly value-added projects with state-of-the-art amenities. These make OCL command a premium with high profit margins. With its unique offerings like seismic resistance proof buildings and warranties against defect in construction, it is a preferred developer over its peers.

• Aggressive growth plans: OCL intends to increase the number of projects up to 40 in the next three years, which includes its focus on block redevelopment of large properties, coupled with its successful cash flow model of developing open land plots.

Valuation Due to OCL’s unique business model, which does not need a land bank proposition, there is ample clarity on the project cycles along with visibility to cash flows. We have thus valued it with a conventional P/E multiple. At the CMP of Rs 483, it trades at 6.7x FY09E & 5.2x FY10E. Envisaging immense opportunity in the redevelopment space in a niche area, we believe, the fair value of the stock to be 8x FY09E. We initiate coverage with a ‘BUY’ rating with a target price of Rs 579.

Buy / Rs 483 Target Rs 579 (+20%)

Stock Rating

B OP N UP S

> 10% 5% to 10% 5% to –5% -5% to -10% < -10%

This note should be read for • OCL’s unique business model • OCL’s growth prospects • Investment Thesis Bloomberg code : ORB IN Reuters code: ORCP.BO www.orbitcorp.com BSE Sensex : 16753 NSE Nifty : 4958 Company data Diluted shares : 45mn Market cap (Rs) : 22bn Market cap (USD) : 521mn 52 - wk Hi/Lo (Rs) : 1080 / 198 Avg. daily vol. (3mth) : 575,179 Face Value (Rs) : 10 Share holding pattern, % Promoters : 60.5 FII / NRI : 11.5 Non Promoter Corp. Holdings : 3.0 Indian Public: 9.9 Others: 15.1 Price performance, % 1mth 3mth 1yr Abs 15.3 -21.4 134.0 Rel to BSE 8.7 -22.9 111.8

Valuation summary Y/E Mar, Rs mn FY2006 FY2007 FY2008E FY2009E FY2010E Net Sales 7 1915 7702 11170 14847 Growth, % NA NA 302 45 33 Core EBIDTA 36 740 3248 5394 6916 EBIDTA margin, % NA 39 42 48 47 Net profit 1 572 2196 3282 4202 Net profit margin, % 15 30 29 29 28 EPS*, Rs NA 12.6 48.4 72.3 92.6 Growth, % NA NA 173.8 42.8 11.3 PER, x NA 38.3 10.0 6.7 5.2 EV/EBIDTA, x NA 23.8 6.1 3.3 2.3 EV/Net Sales, x NA 9.2 2.6 1.6 1.1 Price/Book Value, x 5.5 6.2 3.4 1.8 1.3 ROIC, % 1.8 35.4 49.3 35.4 30.6 ROE, % 0.2 38.1 61.8 42.6 31.3 Dividend Yield, % NA 0.0 0.6 0.9 0.9 * On fully diluted basis Source: Company, MF Global India Research Estimates. Report priced as of May 13, 2008.

Price vs. Sensex

60

160

260

360

460

560

660

Apr-07 Oct-07 Apr-08Orbit Corp Rel. to BSE

Source: Bloomberg, MF Global India Research

May 14, 2008 MF Global Orbit Corporation 2

INVESTMENT OVERVIEW Sustainable competitive advantage 1) Operating in a niche segment with a unique business model, OCL focuses on the

redevelopment of dilapidated buildings. With 19,642 old and dilapidated buildings ranging from age 50 to 200 years identified for redevelopment in ICM, it provides a huge potential for growth. Also, there are very few players who are in the redevelopment space due to the complex nature of this business, as clearance of titles and negotiations with multiple tenants requires a great deal of expertise. Moreover, redevelopment projects are more time consuming as compared to open plot development as the process of land acquisition and settlement with tenants may take 18-24 months.

2) ICM is one of the most lucrative markets across the subcontinent and there exists a significant mismatch in the demand and supply of housing units. It is a supply-constraint property market due to non-availability of open land plots. With limited supply coming in, we believe the overall demand and prices to be firm. Moreover, it enables the company to operate with a premium pricing strategy.

3) All of OCL’s projects are in the premium/super-premium range with high-quality construction, innovative designs, wide range of amenities, use of stainless steel which provides protection against corrosion and an inherent strength to buildings, and deployment of advanced technologies such as seismic resistance. Also OCL has a renowned panel of architects including Hafeez Contractor and Talati & Panthky which provides OCL an edge over its competitors.

Financial structure Going forward in FY09 and FY10, leverage will decline due to allotment of 9.1 mn shares in four tranches arising from warrant exercise.

Shareholder value creation Book NAV/share is expected to reach Rs 378 in FY10E from Rs 78 in FY07.

Earnings visibility We expect 39% CAGR in revenues, during FY08E-10E on account of sales recognition of ~1.2 msf of development space in FY09-10E. EBITDA margin is likely to improve in FY09-10E on the back of sales recognition of high-premium projects, where gross margins are higher. We expect a 38% CAGR in the bottom line during FY08E-10E.

Valuation As OCL operates in the niche segment of redevelopment and is not a land bank company, we believe P/E multiple to be a fair parameter to gauge investment potential. We arrive at our FY09E target price of Rs 579, based on 8x earnings multiple. The stock currently trades at 6.7x P/E in FY09E and a P/BV of 1.8x FY09E.

MF Global vs. Consensus We are conservative on our EPS FY09E at Rs 72.3 versus consensus estimates of Rs 92.6

Future event triggers Positive sentiments of the Mumbai real estate market and further addition of projects would substantially move up our revenue estimates.

Expected price momentum We expect OCL to out-perform the market with a target price of Rs. 579 Source: MF Global India Research

Risks • Regulatory & process risk • More than expected slowdown in Mumbai realty market • Regional concentration


Rating and price target We initiate our coverage on the stock with a ‘Buy’ rating at our FY09E target price of Rs 579, based on 8x earnings multiple. We have also valued OCL on a DCF basis, which pegs the discounted fair value of equity at ~Rs 29.4bn (FY09E), implying a price of Rs 648 per share, which is at a premium of 12% to our P/E based target price of Rs 579. DCF calculation, FY09E

PV of explicit period (FY09-10E), Rs mn -1,198 -4% PV of semi-explicit period (FY11-15E), Rs mn 8,575 29% Terminal value (FY15E), Rs mn 47,808 PV of terminal value, Rs mn 20,329 69% Total firm value, Rs mn 27,706 94% Less: Net debt as on FY09E, Rs mn 468 2% Add: Warrant conversion* post FY09E, Rs mn 2,161 7% Fair value of equity, Rs mn 29,399 100% # of shares, mn 45.37 Fair value per share, Rs 648 * Warrant conversion price is assumed to be Rs 475

Source: MF Global India Research Estimates

Price Performance Rs, % CMP Close 1M 3M 6M 1Year YTD BSE Sensex 16,753 6.7 1.5 -10.0 22.2 -16.9 Nifty 4,958 4.9 3.6 -10.8 23.0 -18.3 BSE Reality 7,737 7.5 -14.4 -21.0 NA -39.2 Orbit 483 15.3 -21.4 -19.9 134.0 -47.6 HDIL 733 18.4 -4.8 9.2 NA -31.8 Puravankara 264 9.5 -10.8 -31.5 NA -42.1 Sobha 557 -5.5 -29.1 -33.5 -35.5 -38.9 Source: Bloomberg

Peer group comparison FY2009E Orbit HDIL Puravankara Sobha

PER 6.7 9.9 12.2 11.9 PBR 1.8 3.4 3.7 3.2 PSR 1.6 4.3 4.0 1.7 PEG (2-yr growth) 0.3 0.5 0.3 0.6 EV/EBITDA 3.3 7.3 8.9 4.2 EV/Sales 1.6 4.5 3.6 1.1

Source: Bloomberg, MF Global India Research Estimates


ABSOLUTE ROLLING VALUATION BAND CHARTS P/E band

(Rs)

2x

6x

10x

14x

0

200

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1200

Apr-07 Jul-07 Oct-07 Jan-08 Apr-08

P/BV band

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50000


Source: MF Global India Research


FAIR VALUE CALCULATION Realty companies are valued using the NAV approach, wherein the expected post-tax discounted cash flows of the current land bank are taken into consideration. This approach is appropriate for companies, which own a considerable land bank which will be developed over a longer period, usually varying from 8 to 10 years. However, for companies like OCL, which is not land bank-dependent and which operates in a niche segment (redevelopment of dilapidated buildings), discounting the cash flows of the existing projects would not reflect the true earnings potential, as the company would continuously vie for identifying new land parcels to launch further projects. We prefer to value OCL on a conventional earnings multiple basis. The impending huge opportunity in the redevelopment space, with a focus on the lucrative market of ICM, provides an immense opportunity to OCL’s growth prospects. We initiate our coverage on the stock with a ‘Buy’ rating at our FY09E target price of Rs 579, based on 8x earnings multiple. We have also valued OCL on a DCF basis, which pegs the discounted fair value of equity at ~Rs 29.4bn (FY09E), implying a price of Rs 648 per share, which is at a premium of 12% to our P/E based target price of Rs 579. DCF calculation, FY09E

PV of explicit period (FY09-10E), Rs mn -1,198 -4% PV of semi-explicit period (FY11-15E), Rs mn 8,575 29% Terminal value (FY15E), Rs mn 47,808 PV of terminal value, Rs mn 20,329 69% Total firm value, Rs mn 27,706 94% Less: Net debt as on FY09E, Rs mn 468 2% Add: Warrant conversion* post FY09E, Rs mn 2,161 7% Fair value of equity, Rs mn 29,399 100% # of shares, mn 45.37 Fair value per share, Rs 648 * Warrant conversion price is assumed to be Rs 475

Source: MF Global India Research Estimates


Assumptions for arriving at DCF valuation • For explicit period (FY09-10E), NOPLAT to grow at a CAGR of 35% on the

back of ~1.2 msf of revenue recognition. • For semi-explicit period (FY11-15E), annual NOPLAT growth of 10% is

assumed as compared with ~35% CAGR for the period FY08-10E. Return on incremental invested capital (RoIIC) is taken as 20% as compared to RoIIC of 35-40% pre-FY11.

• Post FY15, terminal growth rate in NOPLAT is assumed to be nil (please refer to sensitivity analysis for change in terminal growth rate). RoIIC is taken as 17%.

WACC Calculation Risk-free rate, % 8.0% Risk premium, % 6.5% Beta, x 1.5% Cost of equity, % 17.8% Cost of debt, % 14.0% Tax rate, % 34% Post-tax cost of debt, % 9.2% Debt/Equity, x 0.4 WACC, % 15.3% Source: MF Global India Research

As per the IPO document, every allottee of equity share is entitled to receive a convertible warrant in the ratio of one convertible warrant per equity share. Warrant can be exercised after the completion of the 18th month and be open up to the completion of the 30th month from the date of allotment at the time of IPO in April 2007. The outstanding equity shares of OCL stands at Rs 36.27 mn after the IPO issue of 9.1 mn equity shares and before the warrant exercise. The equity shares outstanding after the issue post warrant exercise will be 45.37 mn. We have assumed allotment of 9.1 mn shares in four tranches during FY09-10. Warrant Conversion Equity Shares outstanding prior to IPO (mn) 27.17 Add: IPO placement (mn) 9.10 Equity Shares outstanding after IPO and before warrant exercise (mn) 36.27 Add: Warrant conversion assumed during FY09, 50% (mn) 4.55 Add: Warrant conversion assumed during FY10, 50% (mn) 4.55 Equity shares outstanding post warrant exercise 45.37 Source: MF Global India Research


VALUE DRIVERS, SENSITIVITY VALUATION Value Drivers: projects at a glance

Project name Location Scheme Development

Area, msf Expected

Commencement Expected

Completion Average Selling

Price, Rs / sft Residential Villa ORB Napensea Road 33 (6) 0.05 In progress May-08 41,000 Orbit Heights Nana Chowk 33 (7) 0.08 In progress Jun-08 13,800 Orbit Arya Napensea Road 33 (6) 0.07 In progress Dec-08 34,700 Orbit Eternia Lower Parel 33 (7) 0.03 In progress Dec-08 13,500 Orbit Grand Lower Parel 33 (7) 0.05 Jun-08 Jun-10 11,300 Orbit Enclave Prarthana Samaj 33 (7) 0.02 Sep-08 Jun-10 16,600 Orbit Haven Napensea Road 33 (6) 0.04 May-08 Jun-10 41,400 Orbit View Worli Sea Face Open plot 0.04 Dec-08 Dec-10 28,500 Orbit Ambrosia Altamount Road 33 (6) 0.03 Dec-08 Dec-10 31,500 Daruwala Chawl & Iqbal Mansion Lower Parel 33 (7) 0.03 Jun-08 Mar-10 13,800 Jenson Veneer New Breach Kandy Rd. 33 (6) 0.01 Jun-08 Mar-10 18,400 Bhatia House Tardeo Road 33 (7) 0.01 Dec-08 Sep-10 18,400 Villa ORB Annex Napensea Road 33 (6) 0.05 May-08 Jun-10 47,500 Lalbaug project-II Lalbaug 33 (7) 0.20 Apr-09 Jun-12 8,200 Lalbaug project-III Lalbaug 33 (7) 0.25 Apr-09 Dec-12 10,300 NS Road block redevelopment Napensea Road 33 (6) 0.25 Mar-09 Dec-12 41,000 Kemps Corner Project-I Napensea Road. 33 (7) 0.10 Jul-08 Mar-12 28,500 Sub Total 1.30

Commercial Hafeez Contractor House Lower Parel 33 (7) 0.23 In progress Jun-09 21,800 Orbit Plaza Kalina Open plot 0.08 In progress May-08 12,500 Orbit WTC BKC Open plot 0.33 In progress Jun-09 24,200 Lalbaug Project-I Lalbaug 33 (7) 0.45 Apr-09 Mar-13 11,900 Orbit WTC-II BKC Open plot 0.30 Apr-08 Mar-12 24,000 Sub Total 1.38

Mixed development Santacruz project-I Santacruz 33 (10) 0.57 Apr-08 Mar-12 18,100 Sub Total 0.57 Total 3.26 Source: MF Global India Research


Location-wise development

0.56 msf, 17%

0.13 msf, 4%

0.07 msf, 2%

0.32 msf, 10%

0.71 msf, 22%

0.90 msf, 28%

0.57 msf, 17%

Napensea Road Tardeo + Prarthana Samaj + NanachowkWorli + Altamount Road Lower ParelBKC LalbaugSantacruz


Type of Development

1.30 msf, 40%

1.38 msf, 43%

0.57 msf, 17%

Residential Commercial Mixed


Scheme of Development

0.74 msf, 23%

2.51 msf, 77%

Redev elopment Open plots


Majority of projects are concentrated in Napensea Road, Bandra Kurla Complex and Lower Parel which are lucrative locations in Mumbai. This helps OCL to follow a premium pricing strategy.

Of the total 3.2 msf, the residential segment accounts for 40% of the total. Recently, the company has also identified a project in Santacruz, wherein it plans for a mixed development comprising of residential units, commercial office space and a retail mall. We believe this strategy would help OCL to chase better prices.

OCL is also diversifying its business through development of open land plots, which currently comprises of 23% of their portfolio; this would de-risk their business model of redevelopment.


Sensitivity Valuation Our DCF valuation is sensitive to Noplat growth rate and WACC. Sensitivity to Noplat growth rate (semi-explicit period) and change in WACC

Noplat Growth (%) 14% 12% 10% 8% 6%

-100 bps 745 728 711 694 677

-50 bps 707 693 679 663 648

0 bps 673 661 648 635 621

+50 bps 640 630 620 608 596 Chan

ge in

W

ACC

(%)

+100 bps 610 602 593 583 573 Source: MF Global India Research

Sensitivity to Noplat growth rate (terminal) and change in WACC

Noplat Growth (%) 4% 3% 2% 1% 0%

-100 bps 764 748 735 723 711

-50 bps 721 709 698 688 679

0 bps 682 673 664 656 648 +50 bps 647 639 632 626 620 Ch

ange

in

WAC

C (%

)

+100 bps 614 609 603 598 593 Source: MF Global India Research


Value Creation Sales and asset turnover

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• Asset turnover to decline in FY09E and FY10E in view of revenue recognition of some of the projects nearing completion stage. Net sales to grow at a CAGR of 39% over FY08-10E on account of sales recognition of ~1.2 msf.

EBITDA and EBITDA margin

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• EBITDA margin to improve on account of sales recognition of high-premium projects where gross margins are higher.

Noplat and OPFCF

-4,000

-2,000

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NOPLAT, Rs mn OFCF, Rs mn

• Increase in NOPLAT is due to robust revenue growth ahead and better margins in some high-premium projects. There will be a significant improvement in operating free cash flows also.

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• Dip in ROIC is due to an increase in working capital

requirements for the mobilisation of new projects. Also we have assumed full tax rate of 34% due to removal of the Section 80-IB benefits.

Source: Company, MF Global India Research Estimates


INVESTMENT THESIS Lucrative market: Island City of Mumbai in a sweet spot ICM (Colaba-Sion-Mahim) also referred to as South and South-central Mumbai is one of the most lucrative markets across the subcontinent. It is a supplier’s market, due to specific topography which makes land a scarce resource. For the past couple of years, the demand for real estate in ICM has shown a CAGR growth of over 50% and is expected to be healthy, driven by rising income levels due to robust economic growth, significant demand from the corporate sector, demand for commercial and entertainment space, and increasing immigration to Mumbai from other parts of the country due to better job opportunities. As against this, the supply of real estate in this market registered a fall due to the lack of availability of open land plots and this region particularly has witnessed rapid and dense development activity with key business and administrative offices located. Demand outstripping supply Island City Profile 2003 2004 2005 Apr- 2006 Annual supply, msf 2.70 3.24 2.61 2.65 Annual demand, msf 1.70 4.33 4.25 4.67 Source: Liases Foras

The demand-supply gap in the ICM is far greater than the suburbs, which makes it more compelling. The chart below shows the percentage change in annual demand and supply during 2004-06. Percentage change in annual demand and supply (2004-2006)

-10%

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Central Suburbs Island City Western SuburbsDemand Supply

Source: Company


Trends in Residential Capital Values Trends in Residential Monthly Rental Values*

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* For a standard apartment size of 1400-2000 sft Source: Cushman & Wakefield

Distribution of new office space by 2008 Estimated New Office Space Supply by 2008

New Supply: 13.1 msf

Mindspace12%

Thane2%

Navi Mumbai5%

Andheri33%

South Mumbai 1% Lower Parel

4%

BKC / CST Road 13%

Powai30%

0

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Total Supply (2006-08)

Area (msf) Cumulativ e Area (msf)

Source: Knight Frank

Prime & Grade 'A' Office Capital Values Prime & Grade 'A' Office Rental Values

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Source: Cushman & Wakefield

Rs/sft Rs/month

Rs/sft Rs/sft/month


Distribution of new retail space in MMR by 2008 Estimated new retail space in MMR by 2008

Total space : 17.3 msf

Navi Mumbai12%

Island City4%

Western Suburbs

37%

Central Suburbs

37%

Thane10%

0

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Ready 2006 2007 2008

Total space end-2008 : 25.93 msf

Area (msf) Cumulativ e Area (msf)


Retail lease rentals in MMR

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Huge opportunity: Redevelopment space OCL primarily focuses on the redevelopment of dilapidated buildings at prime locations in ICM. Redevelopment has evolved as a result of (1) reluctance of land owners to spend for repairs due to lower rental realization, (2) disinterest of tenants as title in the property does not vest with them, (3) fruitless government initiatives as the cost, quality and legislative issues have slowed down the process. In view of the commitment to make Mumbai an international finance hub, the redevelopment of the city will assume a lot of significance. There are 19,642 old and dilapidated buildings, ranging in age from 50 to 200 years, identified for redevelopment in ICM, which strengthens the argument for the future growth of redevelopment.


Redevelopment scenario in Island City of Mumbai Category Year of construction # of buildings A Before to 01.09.1940 16,502 B Between 01.09.1940 to 31.12.1950 1,489 C Between 01.01.1951 to 30.09.1969 1,651

Total 19,642 Source: MHADA website

Out of the total 19,642 buildings, there are 6,386 buildings awaiting redevelopment in the areas in which OCL currently focuses. This gives OCL significant opportunities in the redevelopment space. Potential target locations Total Dilapidated Under Process Target Area Buildings Redeveloped Under Construction NOC obtained Market for OCL A 936 9 5 8 914 D 2,747 71 53 73 2,550 F&G-North 2,056 212 93 75 1,676 F&G-South 1,336 35 31 24 1,246

Total 7,075 327 182 180 6,386 Source: Liases Foras

Expertise in the premium and super-premium range All of OCL’s projects are in the premium/super-premium range with high-quality construction, innovative designs, wide range of amenities, use of stainless steel which provides protection against corrosion and an inherent strength to buildings, and deployment of advanced technologies such as seismic resistance. Also OCL has a renowned panel of architects including Hafeez Contractor and Talati & Panthky which provides OCL an edge over its competitors. Robust revenue growth ahead Of the total 23 projects, undertaken by OCL, construction work is in the various stages of completion for 7 projects totaling ~0.85 msf and the remaining projects are expected to start construction in FY08 and FY09. However, OCL has already sold a volume of 0.59 msf at a value of ~Rs.13.5 bn, out of which the company has recognized revenues to the tune of ~Rs 5.8 bn. Going ahead, we believe that OCL will post robust revenues in view of the pending revenue recognition out of the sold area of 0.59 msf and the remaining 2.67 msf. We estimate net sales to grow at a CAGR of 39% over FY08-10E on account of sales recognition of ~1.2 msf of development in FY09-10. Aggressive future plans OCL expects to increase the number of projects up to 40 within the next three years and shift towards block redevelopment of large properties. OCL intends to acquire a huge parcel of land within the Mumbai Metropolitan Region (MMR), to develop green field projects and looks forward to grow business districts. In a move to further de-risk its business model, the company is acquiring land parcels in Raigarh district. OCL intends to develop a township spanning over 200 acres on this land parcel. Our estimates exclude this project as the details are still not available.


COMPANY BACKGROUND OCL, a Mumbai-based reputed real estate player with a focus on redevelopment, mainly operates in the Island city of Mumbai, starting from Coloba and ending in Mahim (majority of old and dilapidated buildings are concentrated in this area according to MHADA data). OCL, promoted by Ravi Kiran Aggarwal, Executive Chairman, and his son, Pujit Aggarwal, Managing Director, initially started as an e-commerce company called Orbit Cybertech Ltd. in 2000. However, in 2001, the company got approval to carry out redevelopment business in real estate, and subsequently, in 2006, the name was changed to Orbit Corporation Ltd. OCL has executed “Project Shivam” at Babulnath Road comprising of 11 units with a saleable area of 20,455 sft and average sale value per unit was Rs 17.4 mn. OCL is scaling up rapidly with plans to develop 23 projects in the next three to four years with a diversified portfolio mix, encompassing residential units, commercial office space and retail malls. Business Model Overview OCL largely focuses on the redevelopment space and intends to restrict the development of open plots of land up to 30% of the entire project portfolio. Redevelopment: A win-win strategy for all Parties Pre-redevelopment Post-redevelopment Owner The only income on the property is the rent,

which is very less because of Rent Control Act. Gets the value unlocked by offering the property for sale and realizes the value.

Tenants No vested rights of the place; deprived of amenities with a lesser space that to in common facility.

Gets minimum 225 sft, self contained brand new constructed space on ownership basis.

Government Lower property taxes coupled with higher cost of maintenance and risks of loss of life and property.

An improved infrastructure along with revised property tax, and a social up-liftment.

Source: Company


The key steps undertaken in executing a redevelopment project is outlined below:

Identification of Property

Acquisition of Title or

Development Rights

• Application to MHADA for issuance of NOC based on the guidelines laid down under the DCR

• Project drawings to be submitted to the BMC for approval of the project

• Issuance of IOD (Intimation of disapproval), which enables OCL to demolish the existing structure; IOD sets out the condition to be met prior to commencement of construction

• BMC issues the CC (Commencement Certificate) upon meeting the conditions stated in IOD, which enables OCL to commence the construction activity.

Legal and Regulatory Approvals

• Selection of architects and consultants• Selection of contractors• Space management, material management, preparation of the

procurement schedule, logistics, co-ordination, quality monitoring and scheduling of resources

Project Execution

• Direct mailings, special promotional events, illustrated brochures, model homes

• Customized interiors to coincide with the lifestyles of targetedbuyers

• Hand over of the completed project• After sales service in terms of facility management and

maintenance of the building

Marketing of the Project

• Negotiation with the land-owners• Negotiation with tenants; tenants may opt for outright sell of

their tenancy rights or rehabilitation scheme• Finalization of the consideration value (in case of surrender of

tenancy rights) or amenities to be provided in the rehabilitation structure, cost of accommodating tenants in the interim time frame, etc. (in case of rehabilitation scheme)

• Execution of development agreement/sale deed• Preliminary conceptualization of the project goes simultaneously

• Demographic & marketing studies• Financial Feasibility• Competition, proximity, economic trends, etc.• Primary due diligence for legal and regulatory approvals

Identification of Property

Acquisition of Title or

Development Rights

• Application to MHADA for issuance of NOC based on the guidelines laid down under the DCR

• Project drawings to be submitted to the BMC for approval of the project

• Issuance of IOD (Intimation of disapproval), which enables OCL to demolish the existing structure; IOD sets out the condition to be met prior to commencement of construction

• BMC issues the CC (Commencement Certificate) upon meeting the conditions stated in IOD, which enables OCL to commence the construction activity.

Legal and Regulatory Approvals

• Selection of architects and consultants• Selection of contractors• Space management, material management, preparation of the

procurement schedule, logistics, co-ordination, quality monitoring and scheduling of resources

Project Execution

• Direct mailings, special promotional events, illustrated brochures, model homes

• Customized interiors to coincide with the lifestyles of targetedbuyers

• Hand over of the completed project• After sales service in terms of facility management and

maintenance of the building

Marketing of the Project

• Negotiation with the land-owners• Negotiation with tenants; tenants may opt for outright sell of

their tenancy rights or rehabilitation scheme• Finalization of the consideration value (in case of surrender of

tenancy rights) or amenities to be provided in the rehabilitation structure, cost of accommodating tenants in the interim time frame, etc. (in case of rehabilitation scheme)

• Execution of development agreement/sale deed• Preliminary conceptualization of the project goes simultaneously

• Demographic & marketing studies• Financial Feasibility• Competition, proximity, economic trends, etc.• Primary due diligence for legal and regulatory approvals


The Timeline

Year 0 Year 1 Year 2 Year 3 Year 4

Completion of acquisition from existing owner

Completion of acquisition from existing owner Tenants

Vacation/permissions Start of construction

Tenants Vacation/permissions Start of construction

Project Completion & Delivery


Year 0 Year 1 Year 2 Year 3 Year 4

Completion of acquisition from existing owner

Completion of acquisition from existing owner Tenants

Vacation/permissions Start of construction

Tenants Vacation/permissions Start of construction



Source: Company


Since, OCL is in the niche segment of redevelopment, there are certain regulations and compliances which the company has to adhere to. OCL operates under three regulations of DCR (Development Control Regulations), namely Regulations 33(6), 33 (7) and 33(10). Various schemes under redevelopment Key Elements 33 (6) 33 (7) 33 (10)

Features of scheme

Existing built up area available for

development irrespective of applicable

FSI for the plot size

Higher of, 2.5 times of plot area available

for development or 50% of the

rehabilitation atria as incentive

Maximum of 2.5 times of plot area available

for development or 3 times plot area incase

of dense projects]

Identification of property Preferable in the CRZ zone All other parts of the Island City Slums situated over large areas

Ownership Strategy Direct Ownership Direct Ownership/Joint Development Development agreement

Redevelopment area per

Tenement _

Minimum 225 SFT up to a maximum of

750 SFT per Tenement Only 225 SFT self-contained apartments

Tenant Rehabilitation strategy Complete buyout of tenancy rights No buyout no buyout

Relative Acquisition cost High Low Low

Value Realization Very High High Low Source: Company

OCL primarily operates under 33 (7) which is a dynamic scheme. Almost 11 projects out of 23 projects fall under this scheme. The reward largely depends on the number of tenants which is illustrated below in the table: Scheme 33(7) Case-1 Case-2 Case-3 Case-4

Plot Area, sft 10,000 10,000 10,000 10,000 # of tenants 25 50 75 100 Dwelling unit size per tenant, sft 225 225 225 225

Rehabiliatation area, sft 5,625 11,250 16,875 22,500

Condition: Higher of (A) & (B) 2.5x plot area, sft 25,000 25,000 25,000 25,000 Less: Rehab Area, sft 5,625 11,250 16,875 22,500 Area available for free sale, sft (A) 19,375 13,750 8,125 2,500 50%of rehab area, area available for free sale, sft (B) 2,813 5,625 8,438 11,250

Free sale area, sft, higher of (A) & (B) 19,375 13,750 8,438 11,250 Source: Company & MF Global Research


Well-balanced portfolio Of the total 3.26 msf, the commercial and residential segment accounts for 43% and 40%, respectively of the total. Recently, the company has also identified a project in Santacruz, wherein it plans for a mixed development comprising of residential units, commercial office space and a retail mall. We believe this strategy would help OCL to chase better prices. OCL is also diversifying its business through development of open land plots, which currently comprises of 23% of their portfolio; this would de-risk their business model of redevelopment. Projects skewed in South Mumbai-Cushioning against the prices Given OCL’s presence in South Mumbai, its target market segment is elite and very high-end customers. Majority of projects are concentrated in Napensea Road, Bandra Kurla Complex and Lower Parel which are lucrative locations in Mumbai. This helps OCL to follow a premium pricing strategy and this region especially due to limited supply, is somewhat insulated from other macro-economic concerns. Selling in phases-Provides higher realizations OCL has the strategy of making properties available for sale in phases during the lifetime of the project, which provides it with higher realizations when the projects near completion as the prices are a function of visibility. Price trends for OCL projects

0

10000

20000

30000

40000

50000

Villa ORB, Napensea Rd.

Orbit Heights, Nana Chow k

Orbit Ary a, Napensea Rd.

Orbit Eternia, Low er Parel

-25%

0%

25%

50%

75%

100%

Av erage Realization prior to CY2007 (Rs / sf) Av erage Realization in CY2007 (Rs / sf) Increase, %



This also helps the company to avoid any pressure on sales and also reduces working capital requirements by getting periodic payments from the customers during the project execution period. The construction is in progress for ~0.86 msf and the company has pre-sold 0.59 msf in phases as of Dec 2007. Sales Status at a glance

0.57

3.26

1.381.300.86

0.630.23

0.590.42

0.170.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Residential Commercial Mix ed Total

Total (msf) Construction started (msf) Area sold (msf)



FINANCIAL ANALYSIS Net sales and EBITDA margin

0

3000

6000

9000

12000

15000

18000

FY2007 FY2008E FY2009E FY2010E

30.0

40.0

50.0

Net Sales, Rs mn (LHS) EBITDA margin, % (RHS)


Return ratios

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

FY2007 FY2008E FY2009E FY2010EReturn on equity (%) Return on capital employ ed (%)


Leverage

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1.20

FY2007 FY2008E FY2009E FY2010ETotal debt/Equity Net debt/Equity


Net sales to grow at a CAGR of 39% over FY08-10E on account of sales recognition of ~1.2 msf of development in FY09-10. EBITDA margin to improve on account of sales recognition of high-premium projects where gross margins are higher.

Return ratios to decline in FY09 and FY10 on the back of allotment of shares arising from warrant exercise.

Leverage will decline, going forward, due to allotment of 9.1 mn shares in four tranches during FY09-10.


Inventory, Rs mn

0

3000

6000

9000

12000

15000

FY2007 FY2008E FY2009E FY2010E


Working capital ratios

0

50100

150

200

250300

350

Receiv able day s Pay able day s Inv entory day s

FY2007 FY2008E FY2009E FY2010E


Increase in inventory is attributable to increased volume of project rollouts, a majority of which will be booked in revenue from FY10 onwards.

Receivable days to stabilise at 150 days, going forward. Inventory days to decline in FY08 as some of the projects approach the completion stage. Going forward in FY09 and FY10, inventory days will rise due to increased project rollouts.


KEY RISKS

• Regulatory and process risk: The redevelopment process is highly regulated

in nature, obliging various stages of compliances to be fulfilled along with guidelines to be followed by the developer. Also, the guidelines are reframed from time to time in terms of land usage norms, building rules, fiscal incentives, etc. In any such case of further modifications in DCR, the company may be impacted. Secondly, redevelopment also requires a consensus from the existing tenants (redevelopment can only be initiated with prior consent of at least 70% tenants). The next step is to relocate these tenants to a new place until the construction has been done. All these, is a time-consuming process as compared to open plot development as the process of land acquisition and settlement with tenants may take 18-24 months. All these carry an execution risk which might adversely affect the performance of the company.

• More than expected slowdown in Mumbai realty market: Any unexpected

slowdown in Mumbai realty market may affect the company’s expansion plans, going forward.

• Regional concentration: With the majority of the projects concentrated in and

around the ICM, any changes in existing local and economic conditions may impact OCL’s future prospects.


FINANCIALS Income Statement Y/E Mar, Rs mn FY2006 FY2007 FY2008E FY2009E FY2010E Net sales 7 1,915 7,702 11,170 14,847 Growth, % NA NA 302.2 45.0 32.9 Other operating income 0 0 0 0 0 Total income 7 1,915 7,702 11,170 14,847 Operating expenses 29 -1,175 -4,454 -5,776 -7,931 EBITDA 36 740 3,248 5,394 6,916 Growth, % NA NA 338.9 66.1 28.2 Margin, % NA 38.6 42.2 48.3 46.6 Depreciation -2 -8 -17 -23 -27 EBIT 34 732 3,231 5,370 6,889 Growth, % NA NA 341.5 66.2 28.3 Margin, % NA 38.2 42.0 48.1 46.4 Interest paid -33 -90 -389 -481 -530 Other income 1 7 7 7 7 Pre-tax profit 2 649 2,849 4,896 6,366 Tax provided -1 -77 -653 -1,614 -2,164 Profit after tax 1 572 2,196 3,282 4,202 Net Profit 1 572 2,196 3,282 4,202 MF Global Net profit 1 572 2,196 3,282 4,202 Growth, % NA NA 283.8 49.5 28.0 Extraordinary items: Gains/(Losses) 0 0 0 0 0 Unadj. shares (m) 22 27 36 41 45 Wtd avg shares (m) 11 26 36 38 44 Cash Flow Y/E Mar, Rs mn FY2006 FY2007 FY2008E FY2009E FY2010E Pre-tax profit 2 649 2,849 4,896 6,366 Depreciation 2 8 17 23 27 Chg in working capital -1,058 -716 -5,680 -4,481 -4,881 Total tax paid 0 0 -82 -653 -1,614 Cash flow from operating activities -1,054 -59 -2,897 -214 -102 Capital expenditure -20 -27 -60 -53 -25 Chg in investments 0 0 0 0 0 Cash flow from investing activities -20 -27 -60 -53 -25 Free cash flow -1,095 -114 -3,016 -321 -152 Equity raised/(repaid) 833 462 1,001 2,161 2,161 Debt raised/(repaid) 346 1,302 1,531 500 250 Dividend (incl. tax) 0 0 -127 -191 -212 Other financing activities 0 0 0 0 0 Cash flow from financing activities 1,178 1,764 2,405 2,470 2,199 Net chg in cash 104 1,677 -552 2,203 2,072


Balance Sheet As at 31st Mar, Rs mn FY2006 FY2007 FY2008E FY2009E FY2010E

Cash & bank 155 1,832 1,280 3,483 5,555

Debtors 55 1,085 3,165 4,590 6,102

Inventory 1,205 1,673 5,819 8,687 12,195

Loans & advances 594 1,090 1,744 3,538 3,775

Other current assets 0 0 0 0 0

Total current assets 2,009 5,680 12,009 20,298 27,627

Investments 1 1 1 1 1

Gross fixed assets 27 54 114 168 193

Less: Depreciation -4 -12 -29 -52 -79

Add: Capital WIP 0 0 0 0 0

Net fixed assets 23 43 85 115 114

Non-current assets 24 43 86 116 114

Total assets 2,033 5,723 12,094 20,414 27,741

Current liabilities 14 110 273 331 430

Provisions 416 1,674 3,282 5,792 6,618

Total current liabilities 430 1,784 3,556 6,122 7,048

Non-current liabilities 619 1,921 3,452 3,952 4,202

Total liabilities 1,049 3,705 7,007 10,074 11,250

Paid-up capital 216 272 363 408 454

Reserves & surplus 770 1,761 4,739 9,946 16,052

Shareholders’ equity 984 2,018 5,087 10,340 16,491

Total equity & liabilities 2,033 5,723 12,094 20,414 27,741 Per-share data FY2006 FY2007 FY2008E FY2009E FY2010E

MF Global EPS (INR) 0.1 22.1 60.5 86.4 96.2

Growth, % NA NA 173.8 42.8 11.3

Book NAV/share (INR) 88.0 78.0 140.3 272.3 377.7

FDEPS (INR) 0.0 12.6 48.4 72.3 92.6

Growth, % NA NA 283.8 49.5 28.0

CEPS (INR) 0.3 22.4 61.0 87.0 96.9

CFPS (INR) -94.4 -2.6 -80.0 -5.8 -2.5

DPS (INR) 0.0 0.0 3.0 4.0 4.0 Financial structure FY2006 FY2007 FY2008E FY2009E FY2010E

Total debt/Equity, x 0.63 0.95 0.68 0.38 0.25

Net debt/Equity, x 0.47 0.04 0.43 0.05 -0.08


Profitability, Productivity, Liquidity and Valuation Ratios FY2006 FY2007 FY2008E FY2009E FY2010E

Return on assets (%) NA 16.5 27.5 22.1 18.9

Return on equity (%) NA 38.1 61.8 42.6 31.3

Return on Invested capital (%) NA 35.4 49.3 35.4 30.6

RoIC/Cost of capital (x) NA 2.6 3.4 2.3 1.9

RoIC - Cost of capital (%) NA 21.8 35.0 20.0 14.6

Return on capital employed (%) 2.3 23.0 39.3 31.5 26.0

Cost of capital (%) 14.5 13.6 14.3 15.4 16.0

RoCE - Cost of capital (%) NA 9.4 25.0 16.1 10.0

Asset turnover (x) NA 1.1 1.5 1.1 1.0

Sales/Total assets (x) NA 0.5 0.9 0.7 0.6

Sales/Net FA (x) NA 58.2 120.6 111.5 129.8

Working capital/Sales (x) NA 1.1 0.9 1.0 1.0

Fixed capital/Sales (x) 3.2 0.0 0.0 0.0 0.0

Receivable days NA 206.9 150.0 150.0 150.0

Inventory days NA 318.8 275.8 283.9 299.8

Payable days NA 34.3 22.4 20.9 19.8

Current ratio (x) 4.7 3.2 3.4 3.3 3.9

Quick ratio (x) 1.9 2.2 1.7 1.9 2.2

Interest cover (x) 1.0 8.1 8.3 11.2 13.0

Dividend cover (x) NA NA 20.2 20.1 23.2

PER (x) NA 38.3 10.0 6.7 5.2

PEG (x) - y-o-y growth NA 0.0 0.0 0.1 0.4

Price/Book (x) 5.5 6.2 3.4 1.8 1.3

Yield (%) 0.0 0.0 0.6 0.9 0.9

EV/Net sales (x) NA 9.2 2.6 1.6 1.1

EV/EBITDA (x) NA 23.8 6.1 3.3 2.3

EV/EBIT (x) NA 24.1 6.1 3.3 2.3

EV/NOPLAT (x) NA 27.3 7.9 5.0 3.6

EV/CE 11.2 4.5 2.3 1.3 0.8

EV/IC (x) 19.7 9.7 3.9 1.8 1.1 Source: Company, MF Global India Research Estimates


APPENDIX

Source: Mapsofindia.com


ORBIT’S PROJECTS – AT A GLANCE


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