Mindspace Business Parks REIT - Subscribe - IPO Note - Angel Broking

Mindspace Business Parks REIT owns a quality office portfolio located in four key office markets of India. Its portfolio has total leasable area of 29.5 msf and is one of the largest Grade-A office portfolios in India. Portfolio comprises 23.0 msf of completed Area, 2.8 msf of under construction area and 3.7 msf of future development area, as of March 31, 2020.

Positives: (1) Promoters and company have proven track record in real estate & retail space with listed companies like Chalet Hotels and Shoppers Stop; (2) 80% of leasable area attributable to Mumbai and Hyderabad, which are the key markets for India; (3) 85% of rent comes from Global and MNC companies, which are sticky in nature; (4) Exposure only to commercial office space which is the least impacted segment in real estate due to Covid-19 outbreak; (5) Healthy collections at 97.5% of revenues for March, April & May provides comfort.

Investment concerns: (1) Slowdown in demand for commercial space; (2) Increase in Work From Home (WFH) can lead to higher vacancy in key market geographies, adversely impacting rental income in the near term; (3) Renegotiation of existing contracts at lower rates could impact rental income.

Outlook & Valuation: Current dividend yield works out to ~3.5% for Mindspace REIT (M-REIT), which is projected to increase to 7.5% in FY22E. Though uncertainties due to Covid-19 related issues pose risks to earnings in the near term, we believe that in the long run there will be a steady increase in earnings. Most of the earnings will be paid out in the form of dividends, which is tax exempt for all categories of investors. Post the IPO, there will also be a debt reduction of ~ Rs. 3,000cr for the company, which will bring down debt to equity ratio from 2.95x at the end of FY20 to below 1.0x, which is a key positive.

Given the current uncertainties due to Covid-19 the listing gains may be limited. We believe that in the long run M-REIT will offer similar or better post tax yields as compared to fixed income. Steady and growing dividend stream along with capital appreciation of underlying asset makes it an attractive investment opportunity in the long run. We recommend 'Subscribe' to the issue from a long term investment perspective.

Source : Equity Bulls

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