Mahindra Lifespaces Developers - Initiating coverage - Angel Broking

As clean as it comes

Mahindra Lifespaces Developers (MLIFE) is a mid and premium housing developer catering to strong demand in tier-1 cities and small metros in the country. Apart from real estate development, MLIFE also operates two integrated business cities - Mahindra World City (MWC) Chennai and Jaipur [special economic zones (SEZ) and domestic tariff area (DTA)]. MLIFE's strong balance sheet (FY2013E D/E ratio - 0.2x), good corporate governance, diversified land bank and solid brand name sets it apart from many of its peers. We also prefer MLIFE's high turnover real estate business model, which is more focused on development rather than land bank accumulation. We Initiate Coverage on the stock with a Buy recommendation.

MLIFE in the right markets: With slowing demand in super metros (Mumbai and NCR), we favor MLIFE's exposure to tier-1 cities (Pune and Nagpur) and small metros (Hyderabad), given their strong demand dynamics. Pune, Nagpur and Hyderabad now form 68% of MLIFE's exposure in terms of saleable area. With 5.2mn sq. ft. of forthcoming projects (~4.3x its FY2012 sales), we expect strong sales momentum during FY2013E and FY2014E, which is our primary catalyst. We also note that with the initiation of the rate cut cycle, mid-market housing will lead the recovery in demand, which has been a focus area for MLIFE.

Being conservative on MWC is the key: Impact on demand due to direct tax code has been an overhang on MWC's portfolio. We note that ~53% of MLIFE's invested capital is in the MWC portfolio; however, we have conservatively valued it at Rs.97/share (contributes 20.6% to our SOTP value of Rs.470). Moreover, MWC Chennai's current occupancy levels, at 92%, provide stable revenue visibility.

MLIFE deserves a premium to its peers: MLIFE is currently trading at 1.0x and 0.9x on our FY2013E and FY2014E BVPS estimates. On PB basis (one-year forward), MLIFE is trading at a 35% premium to BSE Realty Index, which we hold is justified, given its strong balance sheet, good corporate governance, asset-light model and solid brand name along with solid parent backing. We value MLIFE on an SOTP basis to arrive at a value of Rs.470, we apply a 20% discount to our SOTP value to arrive at our target price of Rs.376, implying a PB (FY2014E) of 1.1x.

Source : Equity Bulls

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