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Emaar MGF – Misleading Landbank Valuations

February 3, 2008

Emaar MGF Ltd [EML] is a JV between Dubai based Emaar Properties and MGF Realty Developers from Delhi. The JV commenced its operations in India in February 2005. Its primary business is the development of properties in the residential, commercial, retail and hospitality sectors. In addition, it has also identified health care, education and infrastructure as business lines for future growth.

In residential space (318.8 msf of residential & 136.5 msf of plots) its main focus is on developing & selling integrated master planned communities in mid to luxury segment. In commercial space (88.9 msf), it is focused on developing, selling and leasing office and SEZ properties. In retail space (18 msf), it is focused on developing sale or lease shopping centres within its integrated master planned communities & on a stand-alone basis, large regional destination malls and luxury retail space at its luxury hotel developments.

Details of the Issue:
No of shares offerd to retailers 3,07,71,187
Price band: Rs 540 to Rs 630
Retail Issue Size: Rs 1,657 crore to Rs 1,934 crore

Valuations and Recommendation:
The company had reported sales of Rs 472 crore and a net profit of Rs 128 crore for first half of FY08. Annualizing the results fully diluted EPS is expected to be Rs 2.7.

CAUTION: Unlike DLF-UNITECH most of Emaar MGF’s Landbank needs cash for part payment towards acquisition, Development and conversion after which it will be ready for construction. There is also not much of visibility about the launches of the complete land reserves. Almost Rs 4,000 crore is still required for the same and hence we term the Landbank Valuation claims of all brokerage houses as Misleading. [Emaar MGF Landbank should be pro-ratedly valued by the amount which it has paid, not on the post-IPO leveraged money which it will use to pay off and get titles cleared on the land]. The woes don’t end here, nearly ~80% comprises agricultural land for which the company has not yet obtained a certificate of change of land use.

Emaar MGF cash register will take atleast a year to start ringing in. Realty stocks can never be valued only on the basis of their Landbank which is so misleading.

Value based investors can skip the issue and look at other companies available at attractive prices in the secondary market.

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