Ambit RealEstate Thematic Accounting 23apr14 PDF

REAL ESTATE
April 2014
REITs
TRANSPARENCY
Regulation Bill
TRANSPARENCY
Company Act 2013
TRANSPARENCY
IDERS
MERS
CUSTO
OV
AL PR
CAPIT
TORS
GULA
S/RE
AKER
YM
POLIC
Related party
transactions
OPACITY
Non-uniform
Accounting practices
OPACITY
Wilful diversion
of funds
OPACITY
Thematic:
Analyst:
Krishnan ASV
+91 22 3043 3205
vkrishnan@ambitcapital.com
Accounting - at the crossroad
Real Estate
CONTENTS
SECTOR
Executive summary.. 4
Accounting in real estate - A b lack box........ 6
Accounting for land - Further latitude. 7
Revised guidance note (GN) strea mlines revenue recognition 10
yet not watertight
Related party transactions (RPTs) galore... 14
Category mix and leverage suggest wilful d ivers ion of funds.. 18
Methodology... 20
Valuation - a perspective. 25
What can investors look forward to?...................................................................... 27
- Companies Act 2013 - towards greater transparency. 28
yet onerous on real estate
- Impact of 2014 Gen eral Elections - lessons from 2009.. 30
- Real Estate Regulation Bill - pro-consumer; towards greater disclosures.31
- Real Estate Investment Trusts (REITs) - limited eligibility; 32
unlimited candidates
COMPANIES
Oberoi Realty (BUY): Launch pipeline crucia l. 35
Sobha Developers (BUY): Position of relative strength. 57
April 23, 2014
Ambit Capital Pvt. Ltd.
Page 2
Real Estate
NEGATIVE
THEMATIC
Accounting - at the crossroad

The real estate sector allows considerable latitude in accounting for
revenues and cost (especially land), and thus, it is no surprise that the
sector fares the worst on our accounting framework. We argue that fresh
funding needs (impending beauty parade for REITs) coupled with recent
changes to the accounting and regulatory framework is forcing greater
transparency amongst real estate companies. We identify Oberoi Realty,
Prestige Estates and Sobha Developers among larger firms and Omaxe
and Peninsula Land among smaller firms as more transparent.
Accounting in real estate - too many black boxes
April 23, 2014

Key Recommendations
BUY
Oberoi Realty
Target Price: 290
Upside : 30%
BUY
Sobha Developers
Target Price: 491
Upside : 30%
Contingent Liabilities and P/B

CL (% of
FY15 P/B
NW)
Large companies - mcap > US$500mn
In the absence of sector-specific accounting standards, accounting practices in

the real estate sector are non-homogenous, especially around accounting for
revenues and land. Key areas that contribute to the sectors relatively inferior
performance on accounting metrics are: (a) arbitrary revenue recognition; (b)
weak cash conversion; (c) expense manipulation (lack of prudent provisioning);
and (d) many related party transactions.
Companies
Prestige Estate Projects
43%
1.71
Revenue recognition harmonised yet not watertight
Unitech
72%
0.37
5%
1.82
25%
1.82
Whilst the revised guidance note (GN) prescribes a uniform threshold for firms
to begin recognising revenues from a project, our discussions with practising
auditors suggest that the revised GN is not yet completely watertight. This
includes instances such as developers entering into a separate sale of land
contract (contributing to aggressive revenue recognition), discretion exercised
around what constitutes critical approvals and ambiguity around JDAs.
DLF
Oberoi Realty
Godrej Properties
Phoenix Mills
26%
0.93
8%
1.46
Sobha Developers
29%
1.46
Mid-sized companies - mcap between
US$200mn and US$500mn
Omaxe
32%
1.32
Indiabulls Real Estate
8%
0.35
HDIL
8%
0.27
On an average, the top-three categories of RPTs account for c.70% of the total
related party transactions. A large proportion of RPTs are only ways of funding
group entities, with most categories reversing themselves during the year and
not earning any interest. We also argue that a bulk of construction finance
(working capital loans raised for under-construction projects) raised by
developers for residential projects is diverted towards either land acquisition or
stalled projects that are starved for capital (suffering from cost overruns).
Anant Raj
4%
0.42
Limited investible universe; Oberoi, Prestige - most transparent
DB Realty
Using accounting checks across four categories (P&L misstatement checks,

balance sheet misstatement checks, cash pilferage checks, and audit quality
checks) on a set of 21 real estate companies, we establish a pecking order of
transparency and identify the investible universe of real estate stocks. Based on
our analysis, Oberoi, Prestige and Sobha are relatively more transparent.
Peninsula Land
Related party transactions (RPTs) - modes of disguised lending
The road ahead - what can investors look forward to?

Our discussions with senior partners and executives across the Big-4 auditors
suggest that developers are gradually undertaking a clean-up operation. Whilst
this push towards transparency is partly driven by the impending beauty parade
for fresh capital (to become REIT-friendly), experts also attribute this effort to
their desire to comply with the revised GN, the Companies Act 2013, and the
Real Estate Regulation Bill. We highlight the impending General Elections as a
key near-term business catalyst for the sector.
Sunteck Realty
0%
1.79
Mahindra Lifespace
3%
1.07
Developers
Puravankara Projects
4%
0.70
Small-sized companies - mcap between
US$100mn and US$200mn
Parsvnath Developers
9%
0.40
52%
0.51
1%
0.66
19%
0.61
1%
1.74
Brigade Enterprises
88%
0.58
Kolte Patil Developers
28%
0.56
Hubtown
Ashiana Housing
Source: Bloomberg, Ambit Capital research; CL denotes

contingent liabilities; NW denotes net worth
Analyst Details
Krishnan ASV
+91 22 30433205
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Real Estate
Executive summary
The BSE Realty Index has delivered returns in line with the BSE Sensex since the
beginning of 2014; however, the Indian realty sector continues to suffer from a high
credibility deficit across stakeholders, which is largely attributable to a lack of
transparency in reported financials and a lack of like-for-like (LFL) comparable
parameters across companies.
To help investors with LFL comparison, we identify 21 real estate firms, categorise
them into three separate buckets by market capitalisation and use four categories of
accounting metrics (as shown in the exhibit below) to score these firms on their
accounting quality.
Exhibit 1: Categories of accounting checks
Category
Ratios
(1) CFO/EBITDA, (2) change in depreciation rate, and (3) miscellaneous expenses as a
proportion of total expenses
(1) Cash yield, (2) debtors more than six months as a proportion of total debtors, and (3)
contingent liability as a proportion of net worth
(1) CWIP to gross block, (2) cost of construction to construction work-in-progress, and (3)
cumulative CFO plus CFI to median revenues
(1) Audit fees as a proportion of standalone revenues, (2) audit fees as a proportion of total
auditor remuneration, and (3) unaudited assets as proportion of consolidated assets
P&L misstatement checks

Balance sheet misstatement checks
Cash pilferage checks
Audit quality checks
Source: Ambit Capital research
Among larger firms, Oberoi Realty, Prestige Estates and Phoenix Mills, and among
smaller firms, Omaxe, Peninsula Land and Kolte Patil, are more transparent.
Exhibit 2: The final realty check - across accounting metrics
Company
P&L checks
Balance sheet
Cash pilferage checks Audit quality checks
checks
Overall score

DLF
Oberoi Realty
Unitech
Godrej Properties
Phoenix Mills
Sobha Developers
Mid-sized companies - mcap between US$200mn and US$500mn
Omaxe
Housing Development & Infrastructure
Anant Raj
Sunteck Realty
Mahindra Lifespace Developers
Small-sized companies - mcap between US$100mn and US$200mn
DB Realty
Peninsula Land
Hubtown
Ashiana Housing
Brigade Enterprises
Source: Companies, Ambit Capital research; Note:
April 23, 2014
Strong,
Moderate,
Weak
Page 4
Real Estate
We have deliberately refrained from using the full moon ( ) in Exhibit 2 above, given
the general lack of transparency around origination and sale transactions in the
sector.
Having established a pecking order on accounting quality, we present a valuation
approach underpinned by the cash conversion cycle and the adjusted net worth to
highlight undervalued stocks. We eliminate four outliers (on cash conversion cycle)
and map the remaining real estate developers on the consensus FY14 consolidated
P/B multiple (on the X-axis) and the six-year median cash conversion cycle (in number
of days) on the Y-axis. The size of the bubble in Exhibit 3 below indicates the
contingent liabilities (as a proportion of net worth), customer advances that are yet to
go through the P&L, and unbilled revenues.
Exhibit 3: Cash conversion cycle (in number of days) vs P/B multiple - Oberoi and Sobha cheaper than Prestige
Cash conversion cycle

(number of days)
1,200
Puravankara
Unitech
1,000
800
Parsvnath
600
Hubtown
Kolte Patil
Mahindra Lifespace
Peninsula Land
DB Realty
400
200
DLF
Brigade Enterprises
Godrej Properties
Omaxe
Prestige Estates
Oberoi Realty
Ashiana Housing
Sobha Developers
Anant Raj
FY15 P/B
-200
-
0.5
1.0
1.5
2.0
2.5
3.0
Source: Companies, Bloomberg, Ambit Capital research; Note: X-axis denotes consensus FY14 P/B, Y-axis denotes the six-year median cash conversion cycle (in
number of days) and the s i z e of the bu bbl e de note s conti nge nt l i abi l i ti e s (as a pr opor ti on of ne t w or th)
Since not all contingent liabilities devolve on the parent entity (some are genuine), we
use a conditional adjustment factor on contingent liabilities to arrive at the adjusted
net worth. The higher the contingent liabilities, higher the adjustment factor that we
use to derive the adjusted net worth.
Exhibit 4: Deriving the adjustment factor for contingent liabilities
CL (% of NW)
Deduction from NW
Less than 10% of NW
10% of CL
10% - 30% of NW
20% of CL
Over 30% of NW
30% of CL
Source: Ambit Capital research; CL denotes Contingent Liabilities; NW denotes net worth
The outliers that we have eliminated from Exhibit 3 are Phoenix Mills (significantly
negative cash conversion cycle), Indiabulls Real Estate, HDIL and Sunteck Realty
(significantly high cash conversion cycle). The largest bubble in Exhibit 3 is equivalent
to 75% of net worth (Brigade Enterprises) whilst the smallest bubble is equivalent to
1% of net worth (Peninsula Land and Puravankara Projects). An ideal BUY signal
combines a low cash conversion cycle, a relatively attractive valuation and a smaller
bubble. On the other hand, the ideal SELL signal combines a high cash conversion
cycle, an expensive valuation and a large bubble.
Although the cash conversion cycle (in number of days) is the least common
denominator for most of the firms in this analysis, it is worth highlighting that
companies with a lean P&L are unduly penalised. Given that the variables in the cash
conversion cycle (inventory days, debtor days and creditor days) employ P&L elements
(either revenues or cost of sales) in the denominator, the revenue recognition
approach, especially the project completion method, disproportionately impacts such
firms. We highlight HDIL and Sunteck Realty as outliers on account of the revenue
recognition policy (project completion method) and hence, they are not strictly
comparable on the cash conversion scale.
April 23, 2014
Cash conversion cycle (in number

of days) is the least common
denominator for a majority of the
firms in this analysis
We identify HDIL and Sunteck

Realty as outliers on account of
the revenue recognition policy
(project completion method) and
hence, they are not strictly
comparable on the cash
conversion scale
Page 5
Real Estate
Accounting in real estate - A black box

As highlighted in our accounting thematic dated November 2013, the realty sector
fares the worst on our accounting framework, with an average score that is about
20% lower than the average score of the other 350 companies (within the BSE500).
Key areas that contribute to the realty sectors relatively inferior performance on
accounting metrics are: (a) arbitrary revenue recognition; (b) weak cash conversion;
(c) expense manipulation (inadequate (imprudent) provisioning policies and deferred
depreciation); and (d) high cash pilferage. This total lack of credibility has resulted in
the realty sector continually being perceived as high risk by all stakeholderscapital
providers, regulators, policymakers, auditors, property consultants and customers.
Real estate transactions - subjectivity in revenue recognition policies
Accounting practices in the real estate sector are non-homogenous - the industry is
characterised with complex arrangements such as agreement to sell, flat-buyer
agreements, joint development agreements, area-sharing agreements, revenue or
profit-sharing agreements. These agreements assume various forms depending on
the nature of agreement between counterparties. One of the most critical areas of
subjectivity pertains to revenue recognition in under-construction projects.
Real estate companies exercise

subjectivity in revenue recognition
Real estate transactions - what drives subjectivity in revenue recognition?

In the absence of a specific Accounting Standard (AS) for recognition of income from
real estate transactions, the complex nature of real estate transactions led to a wide
disparity in revenue recognition across firms in the sector. Issues around revenue
recognition arise because real estate developers often enter into agreements for
construction/sale of real estate before the construction is completed. The bone of
contention in accounting for such transactions is the identification of the applicable
accounting standard. Whilst one view suggests that such transactions are construction
contracts within the scope of AS7 (Construction Contract) and, hence, revenue should
be recognised as construction progresses (under the percentage completion method),
the contrary view is that the requirements of AS9 (Revenue Recognition) concerning
the sale of goods should be applicable.
Subjectivity lies in identifying the

applicable accounting standard
(AS) for real estate transactions should it be AS7 or AS9?
Significant divergence in revenue recognition practices

The erstwhile guidance note (GN) mandated real estate companies to use the
percentage of completion (POC) method for the purpose of revenue recognition;
however, it was silent on how developers should arrive at the POC and revenues
thereafter. As a result, there was considerable divergence in the revenue recognition
policies followed by different companies across the real estate sector.
Earlier, the GN prescribed the

Percentage of Completion (POC)
method but left the specifics to
interpretation
Exhibit 5: Revenue recognition policies under the erstwhile GN - wide disparity
DLF
Godrej
Properties
HDIL
Indiabulls Real
Estate
Kolte Patil
Mahindra
Lifespaces
Oberoi Realty
Omaxe
Threshold
policy
Minimum project sale

criteria
Minimum
collection
Land cost in POC

calculation
30%
None
No policy
Considered
20%
None
No policy
Considered
100%
NA
NA
Considered
25%
None
No policy
Not considered
20%
None
No policy
Considered
25%
None
Yes
Considered
20%
None
NA
Not considered
30%
None
No policy
Considered
Phoenix Mills
Not considered
Peninsula Land
Prestige Estates
Sunteck Realty
Considered
20-30%
None
No policy
No policy
100%
NA
NA
Considered
Unitech
Considered
Source: Companies, Ambit Capital research
April 23, 2014
Page 6
Real Estate
Accounting for land - further latitude

Another area that contributes to significant accounting disparity amongst real estate
companies is around accounting for land. Conventionally, for companies other than
those engaged in real estate development, land is a fixed asset and is accounted as
such. However, in the case of real estate companies, land is also a raw material,
which makes its way gradually from the balance sheet to the P&L statement.
Accounting for land depends on proposed end-use
The accounting for land depends on the proposed end-use - on the one hand,
residential projects treat land as inventory (in accordance with AS2) since such land is
likely to be sold in the ordinary course of business, but on the other hand,
commercial projects (where developers intend to let out the project on a lease) treat
land as a fixed asset (in accordance with AS10), flowing through the gross block. Our
discussions with auditors suggest that often, companies are undecided about the enduse at the time of land acquisition. Under such circumstances, developers often
classify the land so acquired as a fixed asset; however, any subsequent reclassification can only be triggered by an external event. We believe that a bulk of the
land acquisition transactions fall in this category (companies undecided on end-use),
which translates into companies classifying land as a fixed asset at the time of
acquisition and then transferring such land to stock-in-trade (within inventory).
Although developers are not

always certain of the end-use at
the time of land acquisition, land
has two proposed end-uses.
When held for sale, land is
treated as inventory (AS2); when
held for lease, land is treated
as a capital asset (AS10)
Exhibit 6: Accounting for land across the lifecycle of a real estate project
Balance sheet entries
Stage
Land acquisition
Development / construction
(prior to revenue recognition
being triggered)
Mix-use /
undecided
Held for sale
Held for lease
Inventory Construction
Work-in-Progress
(+ve)
Fixed assets Fixed assets Capital Work-in- Capital Work-inProgress (+ve)

Progress (+ve)
Cash (-ve)
Cash (-ve)
Work-in-Progress
(+ve)
Fixed assets Fixed assets Capital Work-in- Capital Work-inProgress (+ve)

Progress (-ve)
Cash (-ve) /
Customer
advances (+ve)
Cash (-ve)
P&L statement entries

Held for sale
Held for lease
Mix-use /
undecided
Capitalised
Capitalised
Capitalised
Capitalised
Capitalised
Capitalised
Cost of Sales Construction

costs
Depreciation
Cost of Sales Construction costs
Cash (-ve)
Inventory Construction Workin-Progress (+ve)

Cash (-ve)
Development / construction
(once revenue recognition is
triggered)
Sale is completed (risks and

rewards are transferred)
Work-in-Progress
(-ve)
Fixed assets gross block

(+ve)
Cash (+ve) /
Debtors (+ve)
Capital Work-in- Cash (+ve) /

Progress (-ve)
Debtors (+ve)
Revenue
Revenue
Revenue
Work-in-Progress
(-ve)
Fixed assets gross block

(+ve)
Inventory Construction Workin-Progress (-ve)
Cost of Sales Construction

costs
Depreciation
Cost of Sales Construction costs
Cash (+ve)
Cash (+ve)
Cash (+ve)
Revenue
Inventory Construction Workin-Progress (-ve)
April 23, 2014
Page 7
Real Estate
Accounting for land as inventory - too many cost categories loaded up
The carrying value of land, when treated as inventory, is lower of cost or the net
realisable value (NRV). Given that developers expect to earn a positive return on their
operations, the expected NRV is often typically higher than cost. However, there exists
wide disparity in cost categories that are loaded up to the carrying cost of inventory
on the balance sheet. In most instances, companies are fairly ambiguous about the
cost components that are included in the carrying cost of inventory.
Too much ambiguity exists in the

categories of costs that are
loaded into the cost of land,
resulting in over-capitalisation
Exhibit 7: Accounting for land as inventory - the myriad alternatives in practice

Company
Components of cost
Ashiana Housing Ltd.
Method of valuation
Direct materials, labour and project-specific direct and indirect expenses

Land (including development rights) acquisition cost, borrowing costs,
estimated Internal development costs, external development charges,
DLF Ltd.
construction costs, overheads, borrowing cost, development/construction
materials
Cost of land, premium for development rights, construction costs, allocated
Godrej Properties Ltd.
interest and expenses incidental to the projects undertaken by the company.
Cost of land, land development rights, materials, services, borrowing costs,
Housing Development & Infrastructure Ltd.
acquisition of tenancy rights and other related overheads.
Costs incurred upto the completion of the project viz. cost of land/rights, value
of floor space index (FSI), materials, services and other expenses (including
Hubtown Ltd.
borrowing costs) attributable to the projects. Cost formula used is average
cost.
Cost of land, premium for development rights, construction costs and
Mahindra Lifespace Developers Ltd.
allocated interest and expenses incidental to the projects undertaken by the
company.
Cost of land, development rights, rates and taxes, construction costs,
Oberoi Realty Ltd.
borrowing costs, other direct expenditure, allocated overheads and other
incidental expenses.
Cost of land, materials, construction, services, borrowing costs and other
Omaxe Ltd.
overheads related to projects.
All costs directly related to the project and other expenditure as identified by
the management, which are incurred for the purpose of executing and
Peninsula Land Ltd.
securing the completion of the project (net off incidental recoveries/receipts)
up to the date of receipt of occupancy certificate from the relevant authorities.
All costs directly related to the project and other expenditure as identified by
Phoenix Mills Ltd.
the management, which are incurred for the purpose of executing and
securing the completion of the project (net of incidental recoveries/receipts).
Aggregate of land cost, materials, contract works, direct expenses, provisions
Prestige Estate Projects Ltd.
and apportioned borrowing costs (net of material scrap receipts).
Cost of land, construction related overhead expenditure, borrowing costs and
Puravankara Projects Ltd.
other net costs incurred during the period of development.
Direct expenditure related to construction activity and other expenditure
Sobha Developers Ltd.
(including borrowing costs) during the construction period.
Land acquisition cost (including development rights) and initial development
Sunteck Realty Ltd.
cost and direct expenditure related to construction activity.
First-in-First-out
Not disclosed
Not disclosed
First-in-First-out
Average cost
Weighted average cost

Not disclosed
Average cost
Not disclosed
Not disclosed
Not disclosed
Not disclosed
Not disclosed
Not disclosed
Land not meant for self-occupation to be classified as Investment Property

It is worth highlighting that real estate developers very rarely report details regarding
the movement of inventory in their annual reports (although companies are
mandated to report the movement in inventory under the revised Schedule VI
balance sheet format). Also, Schedule VI mandates companies to classify land which
is not meant for self-occupation (applicable to all real estate companies) under the
Investment Property category within non-current investments although most
developers are not yet following this classification.
April 23, 2014
Real estate companies are

mandated to classify land in the
Investment Property category
Page 8
Real Estate
Impairment in estimated value of land is not carried out transparently
More importantly, when treated as inventory, any impairment in the estimated costs
is not routed through the P&L but adjusted directly against the inventory balance (in
projects where revenue recognition is not triggered) or adjusted in the percentage of
completion (POC) component for the project (where revenue recognition is triggered).
For instance, if the original cost of a project was estimated at `100 and the actual
cumulative cost incurred on the project was at `60, the POC method would imply
revenue recognition of 60% of the estimated revenues. However, during the following
year, if the cost incurred on the project is `30 (taking the cumulative cost incurred on
the project to `90) and the firm believes that a further `60 needs to be incurred to
complete the project (implying total project cost at `150), the POC method would
imply that revenue recognition remains at 60%.
This is especially the case when unreasonable estimates of unusual cost categories
are loaded up to the cost of inventory (cost of land including development rights and
cost of construction) that is carried on the balance sheet. It is worth highlighting that
firms have often significantly under-estimated as well as over-estimated project costs.
For instance, firms often resort to write-offs after having inflated the carrying cost of
inventory with unconventional categories of costs. On the contrary, under-estimation
of project costs results in aggressive revenue recognition (since the 25% threshold for
revenue recognition is achieved earlier on a lower denominator), which is followed by
absorption of significant cost escalation thereafter.
April 23, 2014
Impairment in the carrying value

of land is not transparently routed
through the P&L but directly
adjusted against the balance on
the balance sheet
Over-estimating the cost of land

results in impairment having to
be written off; under-estimating
the cost of land results in the firm
having to absorb significant cost
escalation thereafter
Page 9
Real Estate
Revised guidance note (GN) streamlines

revenue recognition yet not watertight
In order to achieve consistency in revenue recognition norms, the Institute of
Chartered Accountants of India (ICAI) issued a revised GN in February 2012,
which was applicable for all real estate projects commencing after 1 April
2012. Whilst the revised guidance note prescribes a set of uniform threshold
criteria for companies to begin recognising revenues from a project, our
discussions with several practising auditors suggest that the revised GN is
not yet watertight and highlight several transitional issues.
The revised GN applies to all real estate projects commencing after 1 April 2012 and
projects in which revenues are being recognised for the first time on or after 1 April
2012. The revised GN covers different types of real estate transactions such as:
Sale of plots of land with or without development;
Utilisation and transfer of development rights;
Redevelopment of existing buildings and structures; and
Joint development agreements (JDAs).
The revised GN prescribes the following conditional criteria for real estate companies
to begin recognising revenues from a project under the POC method:
All critical approvals that are necessary for project commencement have been
obtained;
At least 25% of the estimated construction and development cost (excluding the
cost of land) has been incurred;
At least 25% of the estimated project revenues has been secured by binding
contracts; and
At least 10% of the estimated revenues have been realised on each contract as of
the date of reporting.
The revised GN prescribes four

project-related criteria to be
fulfilled for revenue recognition
to be triggered
Of the above parameters, in practice, obtaining all critical approvals and incurring
25% of the estimated costs are the critical activities within any project, since the other
two activities (securing 25% of the estimated project revenues through contracts AND
collecting 10% of the estimated revenues) have a total float.
Still leaves room for subjective judgment
Whilst the revised guidance note is far more elaborate and specific in terms of
prescribing a uniform threshold for companies to begin recognising revenue from a
project, our discussions with several practising auditors suggest that the revised GN is
not yet watertight. For instance, an area where real estate companies tend to exercise
subjectivity is around what constitutes critical approvals. Developers often begin
recognising revenues from sale of units on the 10th floor even when they have only
obtained a partial commencement certificate (say, 5 floors) in a multi-storeyed tower.
This is especially true in properties in the National Capital Region (NCR) and units
that are sold to self-funded buyers (buyers who do not opt for a bank loan).
Revised GN a prescription, not mandatory on real estate companies
Whilst most listed real estate companies claim to comply with the revised GN in their
FY13 Annual Report, this practice is not being followed across all projects of a listed
entity, since a GN is only recommendatory in nature and not an accounting standard
by itself. As a result, despite the revised guidance note being in force since 1 April
2012, Sunteck Realty (SRIN) and HDIL, both listed developers, continue to recognise
revenues under the project completion method. Similarly, the revised GN prescribes
minimum 10% collections on each contract as a pre-condition for revenue
recognition; however, companies often aggregate collections from a project and
hence, end up recognising revenues aggressively.
April 23, 2014
Despite the uniform criteria being

prescribed, the revised GN is not
watertight and still leaves plenty
of scope for subjective judgment
Since the revised GN is not yet an

Accounting Standard, companies
are not mandated to follow it
Page 10
Real Estate
Exhibit 8: Illustrative example of change in revenue recognition policies since the issuance of the revised guidance note
Company
Annual Report - FY12
Annual Report - FY13*
Revenue from constructed properties, other than SEZ projects, is

recognised on the percentage of completion method. Total sale
consideration as per the duly executed agreement to
sell/application forms (containing salient terms of agreement to
sell), is recognised as revenue based on the percentage of actual
project costs incurred thereon to total estimated project cost,
subject to such actual cost incurred being 30% or more of the
total estimated project cost. Project cost includes cost of land,
cost of development rights, estimated construction and
development cost, borrowing cost of such properties.
With effect from April 1, 2012 in accordance with the Revised

Guidance Note issued by the Institute of Chartered Accountants of
India (ICAI) on Accounting for Real Estate Transactions (Revised
2012), the company revised its Accounting Policy of revenue
recognition for all projects commencing on or after April 1, 2012 or
project where the revenue is recognised for the first time on or after
the above date. As per this Guidance Note, the revenue has been
recognised on the percentage of completion method provided all of
the following conditions are met at the reporting date.
(i) at least 25% of estimated construction and development costs
(excluding land cost) has been incurred;
(ii) at least 25% of the saleable project area is secured by the
Agreements to sell/application forms (containing salient terms of the
agreement to sell); and
(iii) at least 10% of the total revenue as per agreement to sell are
realised in respect of these agreements.
The company is following the Percentage of Completion Method

of accounting. As per this method, revenue from sale of
properties is recognised in the Statement of Profit and Loss in
proportion to the actual cost incurred as against the total
estimated cost of projects under execution with the company on
transfer of significant risk and rewards to the buyer. If the actual
project cost incurred is less than 20% of the total estimated
project cost, no income is recognised in respect of that project in
the relevant period.
Effective 1 April 2012, in accordance with the Guidance Note on

Accounting for Real Estate Transactions (Revised 2012) (Guidance
Note), all projects commencing on or after the said date or projects
which have already commenced, but where the revenue is
recognised for the first time on or after the above date, construction
revenue on such projects have been recognised on the percentage of
completion method provided the following thresholds have been
met:
(a) All critical approvals necessary for the commencement have been
obtained;
(b) The expenditure incurred on construction and development costs
is not less than 25% of the total estimated construction and
development costs;
(c) At least 25% of the saleable project area is secured by contracts
or agreements with buyers; and
(d) At least 10% of the agreement value is realised at the reporting
date in respect of such contracts and it is reasonable to expect that
the parties to such contracts will comply with the payment terms as
defined in the contracts.
Mahindra Lifespace
Developers Ltd.
Income from real estate sales is recognised on the transfer of all

significant risks and rewards of ownership to the buyers and it is
not unreasonable to expect ultimate collection and no significant
uncertainty exists regarding the amount of consideration.
However if, at the time of transfer substantial acts are yet to be
performed under the contract, revenue is recognised on
proportionate basis as the acts are performed, i.e. on the
percentage of completion basis. Revenues from real estate
projects are recognised only when the actual project costs
incurred are at least 25 % of the total estimated project costs
including land and when at least 10% of the sales consideration
is realised.
In accordance with the Guidance Note on Accounting for Real Estate

Transactions (Revised 2012), in case of projects commencing on or
after 1 April 2012 or in case of projects which have already
commenced but where revenue is being recognised for the first time
on or after 1 April 2012, revenues will be recognised from these real
estate projects only when:
(i) the actual construction and development cost incurred is at least
25% of the total construction and development cost (without
considering land cost) and
(ii) when at least 10% of the sales consideration is realised and
(iii) where 25% of the total saleable area of the project is secured by
contracts of agreement with buyers.
The company follows the percentage of project completion

method for its projects. Under this method, the company
recognises revenue in proportion to the actual cost incurred as
against the total estimated cost of the project under execution
subject to completion of construction work to a certain level
depending on the type of the project.
(a) Project for which revenue is recognised for the first time on or
after 1 April 2012
The Institute of Chartered Accountants of India has issued Guidance
Note on Accounting for Real Estate Transactions (Revised 2012) in
connection with the revenue recognition for a real estate project
which commences on or after 1 April 2012 and also to real estate
projects which have already commenced but where revenue is being
recognised for the first time on or after 1 April 2012.
In this scenario, the company recognises revenue in proportion to
the actual project cost incurred (including land cost) as against the
total estimated project cost (including land cost), subject to achieving
the threshold level of project cost (excluding land cost) as well as
area sold, in line with the Guidance Note and depending on the type
of project.
(b) Project for which revenue recognition has commenced prior to 1
April 2012
In this scenario, the company recognises revenue in proportion to
the actual project cost incurred (excluding land cost) as against the
total estimated project cost (excluding land cost) subject to
completion of construction work to a certain level depending on the
type of the project.
DLF Ltd.
Oberoi Realty Ltd.
April 23, 2014
Page 11
Real Estate
Company
Ltd.
Peninsula Land Ltd.
Phoenix Mills Ltd.
Annual Report - FY12
Annual Report - FY13*
Revenue from real estate projects including

integrated
townships is recognised on the Percentage of
Completion Method of accounting. Revenue is
recognised, in relation to the sold areas only, on
the
basis of percentage of actual cost incurred thereon
including land as against the total estimated cost of
the project under execution subject to such actual
cost being 30% or more of the total estimated cost.
In accordance with Revised Guidance Note issued by

the Institute of Chartered Accountants of India (ICAI),
on Accounting for Real Estate Transactions (Revised
2012), revenue recognition for all real estate projects
commencing on or after 1 April 2012 or where the
revenue is recognised first time on or after 1 April 2012,
revenue is recognised on percentage of completion
method if: (a) actual construction and development cost
(excluding land cost) incurred is 25% or more of the
estimated cost, (b) At least 25% of the saleable project
area is secured by contracts or agreements with buyers
and (c) At least 10% of the total revenue as per sales
agreement or any other legally enforceable document is realised as at the
reporting date. However, there was no such project during the year.
The company is in the business of Property

Development. Revenue from sale of properties
under construction is recognised on the basis of
actual bookings done (provided the significant risks
and rewards have been transferred to the buyer
and there is reasonable certainty of realisation of
the monies) proportionate to the percentage of
physical completion of construction/ development
work as certified by the architect.
Revenue from sale of properties under construction
is recognised on the basis of Registered Sale
Agreements (provided the significant risk and
rewards have been transferred to the buyer and
there is reasonable certainty of realisation of the
monies), on the basis of the percentage completion
method, determined based on the physical
proportion of the work completed, as certified by
the companys technical personnel after the
construction work has progressed significantly.
During the year the company adopted the guidelines prescribed by the Guidance
note on Accounting Treatment for real estate transactions (Revised 2012) issued
by the Institute of Chartered Accountants of India, inter alia , with regard to
thresholds for commencement of revenue recognition for projects and the basis for
determining percentage of completion. The adoption of the said guidelines has no
significant effect in the revenues and costs recognised for projects during the year.
Revenue from the sale of properties under construction is recognised on the basis
of the Sale Agreements (provided the significant risk and rewards have been
transferred to the buyer and there is reasonable certainty of realisation of the
monies), proportionate to the percentage of physical completion of
construction/development work, as certified by the companys technical personnel.
Revenue from each Real Estate Developmental

Projects related to real estate vested with the
company, is recognised based on the Percentage
Completion Method. The percentage completion
method is applied on a cumulative basis in each
accounting period to the current estimates of
Ltd.
contract revenue and contract costs, when the stage
of completion of each project reaches a significant
level, which is estimated in the range of 20% to
30% of the total estimated costs of the project
depending on the size of the project.
Revenue from real estate developmental projects under development is recognised

based on the Percentage Completion Method. The Percentage Completion
Method is applied when the stage of completion of the project reaches a
reasonable level of development. For projects that commenced on or after 1 April
2012 or where revenue on a project is being recognised for the first time on or
after that date, the threshold for reasonable level of development is considered to
have been met when the criteria specified in the Guidance Note on Accounting for
Real Estate Transactions (Revised 2012) issued by the Institute of Chartered
Accountants of India are satisfied, i.e., when:
(a) All critical approvals necessary for commencement of the project have been
obtained.
(b) The expenditure incurred on construction and development costs is not less
than 25 % of the construction and development costs.
(c) At least 25% of the saleable project area is secured by contracts or agreements
with buyers.
(d) At least 10 % of the total revenue as per the agreements of sale or any other
legally enforceable documents are realised at the reporting date in respect of each
of the contracts and it is reasonable to expect that the parties to such contracts will
comply with the payment terms as defined in the contracts.
For projects that commenced prior to 31 March 2012 and where sales have
occurred prior to that date reasonable level of development is considered to have
occurred when the project costs (excluding land cost) incurred is in the range of
20% to 30% of the total estimated costs of the project (excluding land cost). For
computation of revenue, the stage of completion is arrived at with reference to the
entire project costs incurred including land costs, borrowing costs and construction
and development costs as compared to the estimated total costs of the project.
The Group follows completed project method of

accounting. Direct/Allocable expenses incurred
during the year are debited to work-in-progress
account. The revenue is accounted for as and when
the significant risks and rewards of ownership of
the units in real estate are passed or deemed to
have passed to the buyer and the projects get
completed or substantially completed, to the extent
that the economic benefits will flow to the Group
and the revenue can be reliably measured.
The Group follows completed project method of accounting. Direct/Allocable

expenses incurred during the year are debited to work-in-progress account. The
revenue is accounted for as and when the significant risks and rewards of
ownership of the units in real estate are passed or deemed to have passed to the
buyer and the projects get completed or substantially completed, to the extent that
the economic benefits will flow to the Group and the revenue can be reliably
measured.
Sunteck Realty Ltd.
Source: Companies, Ambit Capital research; Note: * in addition to revenue recognition policy disclosed in the respective 2011-12 Annual Reports
April 23, 2014
Page 12
Real Estate
Simultaneously employing two accounting policies on revenue recognition
As can be seen from the above exhibit, consequent to the issuance of the revised GN,
most real estate companies are currently following two policies simultaneously. The
revised GN is applied to all real estate projects that commenced on or after 1 April
2012 and also to projects that have already commenced but where revenue is
recognised for the first time on or after 1 April 2012. On the other hand, the
erstwhile guidance note is still applied to all the prior projects.
Most real estate companies are

currently following two policies
simultaneously
IFRS mandates revenue recognition under project completion method

Given the atypical nature of the industry, whilst the ICAI has already issued Guidance
Notes to deal with the accounting policies prevailing in the real estate sector, the
international experience on standardised accounting is no different. The International
Accounting Standards Board (IASB) issued an interpretation (IFRIC 15), Agreement for
Construction of Real Estate, to deal with accounting in real estate companies. In
general, the criteria laid down in IFRIC 15 make it difficult to recognise revenues
merely based on an agreement to sell.
Dual agreement helps bypass IFRS norms
It is worth highlighting that in the formulation of Indian accounting standards (INDAS), IFRIC 15 was rejected, as under IFRS, construction contracts were not applicable
to real estate developers. As a result, developers (especially those that have a large
proportion of overseas funding and hence, need to comply with IFRS norms) enter
into two separate contractsone contract for the sale of land and the other for
development on such landeven for residential flats. Under this scenario, income
from the first contract (sale of land) is recognised upfront (in line with AS9) whilst the
income from the second contract is recognised under the POC method (consistent
with AS7).
JDAs one size fits all approach inappropriate
Although the revised GN mentions joint development agreements (JDAs) within its
scope, there is no specific guidance or illustration to capture accounting for JDAs.
JDAs typically entail the plot owner granting the real estate developer permission to
construct a building; in return, the developer is compensated with part-ownership of
the building or some other pre-decided form of monetary return. Our discussions
with senior executives at the Big-4 as well as practising auditors suggest that every
JDA is unique in its structure, terms and conditions. Given the wide diversity of such
agreements, a one size fits all approach is inappropriate to deal with JDAs.
April 23, 2014
No specific guidance in the

revised GN for JDAs
Page 13
Real Estate
Related party transactions (RPTs) galore

The top-three categories of RPTs account for c.70% of the total related party
transactions on average. Most categories of RPTs employed by real estate
developers are merely ways of funding group entities, a large proportion of
which do no earn interest and tend to get reversed during the year, as
reflected in the fact that the end-period outstanding balances are typically
less than 20% of the maximum outstanding balances.
Most real estate companies are characterised by concentrated ownership, with half of
the 21 companies in this analysis having promoter ownership in excess of two-thirds
of the total shareholding and only 4 companies having promoter shareholding below
50%. This often manifests itself in complex ownership structures with a labyrinth of
layered subsidiaries, joint ventures (JVs) and associate entities.
Real estate developers in India are regulated under the Land Ceiling Act, 1976,
which prescribes a ceiling on the area of land that a single company can own, which
has spawned the multitude of SPVs for the purpose of land acquisition.
SPVs floated by developers to

comply with the Land Ceiling Act
Exhibit 9: Layered entities - number of related parties as of March 2013

Subsidiaries
Joint
ventures
Associates
Other related
parties
11
47
Anant Raj Ltd.
96
DB Realty Ltd.
20
17
37
266
12
17
110
15
36
83
Housing Development &

Infrastructure Ltd.
10
DLF Ltd.
Indiabulls Real Estate Ltd.
239
Kolte Patil Developers Ltd
14
12
Omaxe Ltd.
94
Parsvnath Developers Ltd.
19
Peninsula Land Ltd.
23
Phoenix Mills Ltd.
21
13
14
Mahindra Lifespace
Developers Ltd.
Oberoi Realty Ltd.
Subsidiaries include 20 step-down subsidiaries

Other related parties include entities over which key
management personnel exercise significant control
Other related parties includes entities over which key
management personnel exercise significant control
Other related parties include other listed and unlisted
entities within the Godrej Group and private equity
investment firms
Other related parties include enterprises significantly
influenced and controlled by key management
personnel
Other related parties include subsidiaries of associate
Includes limited liability companies and partnership
firms
Includes jointly controlled entities
Joint ventures refer to jointly controlled entities / assets
21
20
10
Sunteck Realty Ltd.
10
10
243
14
Unitech Ltd.
Remarks
72
Subsidiaries include 4 step-down subsidiaries; joint

ventures include 1 JV belonging to a step-down
subsidiary
Includes 19 step-down subsidiaries; other related
parties includes 7 step-down entities
Other related parties include partnership firms
Includes 6 step-down subsidiaries
Subsidiaries include 227 wholly-owned subsidiaries;
other related parties include entities owned or
significantly influenced by key management personnel
RPTs could be used for disproportionate transfer of wealth

One of the most common ownership structures involves pyramids and cross-holding
of shares, which contributes to a significant wedge (difference between cash and
control rights) between group companies. This presents controlling shareholders with
arbitrage opportunities to transfer wealth between group entities (from one in which
the controlling shareholder or promoter has lower cash flow rights to another in
which the promoters rights are higher) through related party transactions (RPTs).
April 23, 2014
Differences in cash and control

rights between group companies
provide controlling shareholders
(read: promoters) with arbitrage
opportunities to move resources
Page 14
Real Estate
RPTs - occasionally genuine but consistently misused
As captured in our real estate accounting thematic, Mirror, Mirror on the Wall dated
26 July 2011, RPTs can take various forms, especially given the number of special
purpose vehicles (SPVs) that are floated by real estate companies for the purchase of
land from the market (further details on page 26 of this note).
There are many genuine reasons for the existence of related party transactions. A few
such reasons are highlighted below:
Project-specific subsidiaries (or SPVs) are floated to segregate the risk-reward

dynamics of one project from that of others; this is an especially popular structure
with capital providers who prefer funding specific projects rather than taking
exposure at a listed entity level.
Prior to a firm listing on the BSE/NSE, transactions are carried out to sell stake in
a joint venture to an external party for a specific project to avoid sharing the
private groups consolidated accounts with the JV partner (this is also a manner of
funding).
At a very basic level, there can be

two genuine reasons for related
party transactions (RPTs):
(a) isolation of risks; and
(b) isolation of rewards
Whilst there are many genuine reasons for group structures and transactions between
group companies, there is no denying that group structures have also been used by
controlling shareholders to treat minority shareholders inequitably, often resulting in
a disproportionate transfer of wealth to the controlling shareholders.
Ideally, the operating cycle in a real estate project (from commencement to transfer
of risk) should revolve around a single entity that is responsible for land acquisition,
construction, marketing and sale/lease of properties such that cash flows can also be
mapped in a straightforward manner, as illustrated in Exhibit 10 below.
Exhibit 10: An ideal real estate operational cycle
However, in the real world, the existence of a large number of transactions between
a company and its related parties including subsidiaries, JVs and associate companies
makes the operating cycle complex and less transparent to analyse.
Exhibit 11: Possible complexities due to related party transactions - inflated costs and
balance sheet
Given the evidence that has emerged over the past few years regarding the use (or
misuse) of related party transactions to pull cash out of listed entities, investors should
be careful about companies with:
Excessive number of related parties (normalised for scale of business);
Excessive funding of related parties (as a percentage of consolidated net

worth); and
Excessive funding of related parties (as a percentage of total loans and

advances).
April 23, 2014
Page 15
Real Estate
Funding of related parties most frequent among RPTs
For the 21 companies in this exercise, we have mapped the three most frequently
employed categories of RPTs (maximum contribution to the total RPTs). This analysis is
based on the outstanding balance in the particular category as of March 2013.
Exhibit 12: Most prolific categories of related party transactions (RPTs) as of March 2013
RPT 1
RPT 2
RPT 3
Anant Raj Ltd.
Loans and advances - subsidiaries
Non-convertible debentures
DB Realty Ltd.
Corporate guarantees
DLF Ltd.
Loans and interest receivable
Sale of units
Investment / redemption of
debentures
Investments in subsidiaries
Advance against purchase of
shares
Advances received under
agreement to sell
Investment in equity
Advances for projects
Loans / advances paid
HDIL
Loans given / deposits placed

Investments
Inter-corporate deposit
Hubtown Ltd.
Indiabulls Real Estate Ltd.
Other payables
Corporate guarantees
Debtors
Kolte Patil Developers Ltd
Investment in debentures
Loans and advances given
Preference share capital
Mahindra Lifespace Developers Ltd.
Finance given
Inter-corporate deposits
Oberoi Realty Ltd.
Loans given
Deposit received
Rent income
Omaxe Ltd.
Loans and advances receivable
Inter-corporate deposits
Trade payables
Parsvnath Developers Ltd.
Advances for land purchase
Borrowings
Other payables
Peninsula Land Ltd.
Loans to associate companies
Phoenix Mills Ltd.
Loans and advances given
Inter-corporate deposit payable
Guarantees & collaterals provided
Guarantees
Investment in equity shares

Loans and advances
recoverable
Loans given / advances paid
Land advance
Receivables
Advances recoverable in cash
Deposits given
Loans taken / advances received
Sunteck Realty Ltd.
Preference shares
Current investment
Loans and advances
Unitech Ltd.
Advances received
Remuneration paid
It is worth highlighting that the top-three categories of RPTs account for ~70% of the
total related party transactions on average. As can be seen from the above exhibit, a
bulk of the categories of RPTs employed by real estate developers are merely ways of
funding the related party entities. As loans and advances attract significant
investor scrutiny, firms have resorted to other modes of providing capital
through investment in equity or quasi-equity instruments and tunnelling.
Our analysis shows that a large proportion of RPTs (especially the likes of intercorporate deposits) does not earn interest and tend to get reversed during the year.
From the limited number of companies that disclose details around end-year
outstanding balances as well as maximum outstanding balances during the year, we
observe that the end-year outstanding balances are less than 20% of the maximum
outstanding balances in a majority of the RPTs, implying year-end window dressing.
Most RPTs are merely different

modes of funding related parties
including investments in
equity/quasi-equity instruments
Majority of RPTs do not earn

interest and reverse themselves
during the year, implying yearend window dressing
Going forward, with the notification of over 280 sections under the Companies Act
2013 (more details on pages 27 and 28 of this note), we expect real estate
developers to find it progressively difficult to engage in RPTs without an adequate
explanation that justifies the rationale for such transactions.
April 23, 2014
Page 16
Real Estate
Category mix and leverage suggest wilful

diversion of funds
Our analysis of the category mix (asset classes within the real estate sector) and firmlevel leverage suggests a significant diversion of debt towards land acquisition. As
residential formats account for ~80% of the Indian real estate market and given the
self-financing economics of residential real estate (developers can generate pre-sales
at the launch/pre-launch stage that should help cover the bulk of the working capital
requirements), we find the sector-level leverage intriguing. Hence, we believe that a
large proportion of construction finance (working capital loans for under-construction
projects) raised by developers for residential projects is diverted towards either land
acquisition or stalled projects that are starved for capital.
With residential formats

accounting for 80% of Indias real
estate market, the reported
aggregate sector-level leverage
suggests diversion of construction
finance towards land acquisition
It is worth highlighting that Indian banks are not allowed to lend to real estate
companies for the purpose of land acquisition. However, given the regulatory
arbitrage (around exposure limits, extent of scrutiny, and stricter end-user
classification) between banks and NBFCs lending to real estate companies, the NBFC
route is conveniently exploited. In fact, we argue that a significant proportion of what
appears to be non-bank debt to real estate companies is also bank lending to the
sector, albeit in an indirect manner.
Exhibit 13: Regulatory arbitrage between bank lending and non-bank lending
Relatively lower
regulatory scrutiny leads
to arbitrage
Sensitive sector - hence,

greater regulatory
scrutiny
Bank
Bank
Bank
Real estate company
Housing finance
company (HFC)
Other NBFC
Real estate company
Real estate company
Construction finance from banks

remains the cheapest source of
funds for real estate developers;
however, relatively greater
scrutiny of banks exposure limits
and end-use monitoring of funds
provide NBFCs with a significant
regulatory arbitrage
Based on our analysis (captured in Exhibit 14), we argue that real estate companies
have only two primary sources of funding: banks and High Net-worth Individuals
(HNIs and ultra HNIs).
Exhibit 14: Major channels of real estate funding in India
Pre-2005
2005-2007
2008-2009
2010-2011
2012-2013
Offshore listing
Offshore listing
Offshore listing
Offshore listing
Offshore listing
IPO
IPO
IPO
IPO
IPO
QIP
QIP
QIP
PE funds
PE funds
PE funds
PE funds
ECBs
ECBs
ECBs
ECBs
NBFC lending
NBFC lending
NBFC lending
NBFC lending
NBFC lending
Bank lending
Bank lending
Bank lending
Bank lending
Bank lending
Private lending
Private lending
Private lending
Private lending
Private lending
Source: JLL publications; Note: Cells highlighted in BOL D indicate very high levels of activity in that channel
during the period, cells highlighted in Red indicate average levels of activity in the channel during the period
April 23, 2014
Page 17
Real Estate
As captured in the exhibit above, bank funding (direct) to the real estate sector has
been sporadic. On the other hand, the NBFC channel and private lending channel
have consistently seen high levels of activity nearly every year. This is reflective of the
existing regulatory arbitrage between banks and NBFCs lending to real estate.
Banks are under far greater regulatory scrutiny from the Reserve Bank of India (RBI)
on exposure to the real estate sector. In fact, bank exposure to commercial real estate
(CRE) is mandatorily classified under sensitive sector exposure as part of banks
statutory reporting. Another area that contributes to the regulatory arbitrage between
banks and NBFCs lending to real estate companies is the prevalent laxity in end-user
classification at NBFCs, where exposure to real estate is often camouflaged as MSME
(Medium, Small and Micro industries) exposure or unsecured personal lending
(whereby HNIs and ultra-HNIs leverage themselves to fund special purpose vehicles).
NBFCs are capitalising on

regulatory arbitrage and fulfilling
most incremental funding needs
in the form of last mile funding
Given this regulatory arbitrage, banks find it easier to lend to real estate companies
through intermediaries like NBFCs, as captured in Exhibit 13. Also, given the NBFC
dependence on bank funding (80%), a large proportion of NBFC lending in Exhibit 14
is, in fact, disguised bank lending. It is worth highlighting that growth in bank lending
to NBFCs has been consistently north of the headline credit growth being reported by
the banking system and also does not undergo as much regulatory scrutiny as bank
lending to other end-user industries (like infrastructure).
Exhibit 15: Growth in loan book - reflecting regulatory arbitrage
YoY growth trends (%)
2009-10
2010-11
2011-12
Non-food credit growth
2008-09
16.8
21.3
16.6
13.3
14.8
Real estate
-0.3
5.8
15.6
11.9
9.2
Housing
2012-13 2013-14*
7.7
19.3
12.3
14.0
17.6
Housing (priority sector)
10.5
10.5
10.7
0.3
10.2
NBFCs
14.8
62.3
23.9
12.6
17.6
HDFC Ltd
16.7
15.0
19.6
20.3
20.7
17.0
LIC Housing Finance
26.2
37.6
34.2
23.5
23.4
17.0
Source: RBI, Companies, Ambit Capital research; Note: * 2013-14 indicates YoY growth as of Dec13
However, it is also worth highlighting that the statutory auditors, in every case, certify
the following (or a variant of this version) in the listed companies Annual Reports:
In our opinion and according to the information and explanations given to us, the
term loans have been applied for the purposes for which they were
obtained/secured.
According to the information and explanations given to us and on an overall

examination of the balance sheet of the company, we report that no funds raised
on short-term basis have been used for long-term investment.
Statutory auditors, in nearly every

case, certify purpose compliance
and maturity matching (the fact
that short-term funds are not
being diverted towards creation
of long-term assets)
Whilst the first certification amounts to covenant compliance (this is especially critical
for banks to monitor whether the borrower is fulfilling the conditions under which the
loans were granted), the second certification is a clean chit being given by an auditor
to a firm that short-term funding is not being funnelled into creation of long-term
assets (presumably land acquisition).
Our discussions with senior chartered accountants suggest that covenant compliance,
although mandatory, is only offered in passing reference by banks. Checks around
end-use or purpose compliance are nearly non-existent in the system, as auditors
tend to treat these as mere check boxes that need to be ticked.
April 23, 2014
Page 18
Real Estate
Methodology
We identify 21 real estate firms and categorise them into three separate buckets by
market capitalisation. We use the following 12 accounting ratios, categorised into
four buckets, to score the real estate firms based on their accounting quality.
Exhibit 16: Key categories of accounting checks
Category
Ratios
P&L misstatement checks
(1) CFO/EBITDA, (2) change in depreciation rate, and (3)

miscellaneous expenses as a proportion of total expenses
Balance sheet misstatement checks
(1) Cash yield, (2) debtors more than six months as a proportion
of total debtors, and (3) contingent liability as a proportion of
net worth
Cash pilferage checks
(1) CWIP to gross block, (2) Cost of construction to construction

work-in-progress, and (3) cumulative CFO plus CFI to median
revenues
Audit quality checks
(1) Audit fees as a proportion of standalone revenues, (2) audit

fees as a proportion of total auditor remuneration, and (3)
unaudited assets as proportion of consolidated assets
Whilst we have detailed the accounting ratios under each of these categories over the
next few pages, we summarise our observations in Exhibit 17 below.
Exhibit 17: The final realty check - across accounting metrics
Company
P&L checks
Balance sheet
Cash pilferage checks Audit quality checks
checks
Overall score

DLF
Oberoi Realty
Unitech
Godrej Properties
Phoenix Mills
Sobha Developers
Omaxe
Anant Raj
Sunteck Realty
DB Realty
Peninsula Land
Hubtown
Ashiana Housing
Brigade Enterprises
April 23, 2014
Strong,
Moderate,
Weak
Page 19
Real Estate
I - P&L misstatement checks

CFO/EBITDA: This ratio assesses a companys ability to convert EBITDA (which can be
relatively easily manipulated) into operating cash flows (more difficult to manipulate).
We evaluate the extent to which these companies are cash-generative based on the
ratio of cumulative operating cash flows (post working capital changes) to cumulative
EBITDA over the six-year period of FY08-13. We penalise seven companies that have
not generated positive operating cash flows even on a cumulative basis over the sixyear period. We find that larger companies are significantly better at cash conversion
as compared to the mid-sized and smaller real estate companies.
Going forward, with many real estate firms beginning to comply with new revenue
recognition norms (in accordance with the revised GN), cash flows from a project are
likely to precede the earnings from a project. However, for companies with a portfolio
of projects, we believe that this ratio will continue reflecting a firms cash-generative
ability as long as revenue recognition does not significantly lag cash collections.
Change in depreciation rate: Given the prevalent practice of real estate companies
overcapitalising expenses, we calculate change in depreciation rates for each of the
past six years (FY08-13). Companies with the smallest change in depreciation rate
receive the best score. The rationale is to penalise companies that witness undue
volatility in their depreciation rate on a YoY basis, implying volatility in the underlying
asset base (this happens on account of over-capitalisation).
Miscellaneous expenditure as proportion of total costs: We use miscellaneous
expenses as reported by companies (not categorised under specific expense head) in
their annual reports as a percentage of their total costs. A high ratio implies that
many cost categories are unclassified and get loaded onto miscellaneous expenses.
We use a six-year median for this measure.
Exhibit 18: P&L misstatement checks - small-sized companies better off than mid-sized companies
Company
CFO / EBITDA
Change in
depreciation rate
Miscellaneous expenses
(% of total expenses)
Overall score

DLF
Oberoi Realty
Unitech
Godrej Properties
Phoenix Mills
Sobha Developers
Omaxe
Anant Raj
Sunteck Realty
DB Realty
Peninsula Land
Hubtown
Ashiana Housing
Brigade Enterprises
April 23, 2014
Strong,
Moderate,
Weak
Page 20
Real Estate
II - Balance sheet misstatement checks

Cash yield: This ratio is calculated as the yield earned on cash, investments and
deposits. A low ratio could be a cause for concern, as it could mean that either the
balance sheet is being inflated or that the cash is being mismanaged. We use a sixyear median for this measure.
Debtors greater than six months as a proportion of total debtors: We have
conventionally considered provisioning prudence as one of the accounting metrics in
our analysis (as measured by provision for doubtful debtors as a proportion of
debtors greater than six months). For instance, it is considered prudent to provide
completely towards debtors greater than six months (just to put this in perspective, in
the banking context, banks are mandated to provide for accounts that are overdue by
over three months). However, some real estate companies make a further judgmental
distinction within this, between good and doubtful debtors. As a result, real estate
companies only provide towards debtor balances that they classify as doubtful within
their books of accounts (which is fraught with a subjective bias).
To eliminate this subjective bias, we use an alternate ratio measuring ageing debtor
balances (over six months) as a proportion of total debtors. A high ratio raises the
spectre of aggressive revenue booking significantly ahead of collections. We use a
six-year median for this measure.
Contingent liabilities as a proportion of net worth: This metric measures offbalance-sheet liabilities. A high ratio raises concerns on the balance sheet strength of
a firm in the event that the contingent liabilities materialise. Given the nature of
capital structures prevalent in the real estate sector (equity infused in step-down
subsidiaries with assured returns), we include guarantees and capital commitments
whilst arriving at the contingent liabilities. We use a six-year median for this measure.
Exhibit 19: Balance sheet misstatement checks
Company
Cash yield
Debtors over 6m
Contingent liabilities
Overall score

DLF
Oberoi Realty
Unitech
Godrej Properties
Phoenix Mills
Sobha Developers
Omaxe
Anant Raj
Sunteck Realty
DB Realty
Peninsula Land
Hubtown
Ashiana Housing
Brigade Enterprises
Source: Companies, Ambit Capital research;
April 23, 2014
Strong,
Moderate,
Weak
Page 21
Real Estate
III - Cash pilferage checks

CWIP to gross block: We calculate the proportion of capital work-in-progress to
gross block for each of the last six years and take a median. A high ratio is penalised;
the idea is to punish firms that show consistently high CWIP relative to gross block, as
this may indicate either unsubstantiated capital expenditure or deferred depreciation
expense. We use a six-year median for this measure.
Cost of construction to construction work-in-progress: As highlighted on pages 7
and 8 of this note (Accounting for land), land held for sale is held as inventory and
makes its way through the construction cost line item in the P&L. Using a six-year
median, we evaluate how much of construction work-in-progress reflects cost of land
(including development rights) and construction costs. A relatively low ratio suggests
over-capitalisation of expenses (including estimated internal and external
development costs), which should be expensed in the normal course of business. A
low ratio also suggests possible direct write-downs (impairment/adjustments) from
inventory (on the balance sheet), as a result of which a lower proportion is routed
through the P&L statement.
Cumulative CFO plus CFI to median revenues: We compute this ratio by summing
up six-year cumulative cash flow from operations and six-year cumulative cash flows
from investing activities and normalise this to a firms six-year median revenues.
Given that a real estate companys return profile is typically driven by the quality of
its investments (or capital employed), this ratio helps assess how efficiently a real
estate company is re-deploying its operating cash flows. The idea is to penalise firms,
which over such a long period have failed to either generate positive operating cash
flows or have significantly stretched themselves by over-investing.
Exhibit 20: Cash pilferage checks
Company
CWIP-to- Construction costs to

gross block
Inventory (land)
Free cash flows
Overall score

DLF
Oberoi Realty
Unitech
Godrej Properties
Phoenix Mills
Sobha Developers
Omaxe
Anant Raj
Sunteck Realty
DB Realty
Peninsula Land
Hubtown
Ashiana Housing
Brigade Enterprises
April 23, 2014
Strong,
Moderate,
Weak
Page 22
Real Estate
IV - Audit quality checks

Audit fees as a proportion of standalone revenues: We calculate standalone
audit fees as a proportion of standalone revenues over FY08-13 and derive the
median for this metric. Firms with a lower ratio receive a high score on this metric as
we penalise firms that are overpaying their auditors relative to their scale. DLF,
Omaxe, Sobha and Prestige rank amongst the best companies on this metric.
Audit fees as a proportion of total auditors remuneration: We derive the sixyear median to measure the proportion of total auditor remuneration that has been
paid out as audit fees. A low proportion suggests that the share of audit in the total
business that the auditor derives from the firm is low and the auditor is compensated
for services other than statutory audit.
Assets audited by non-statutory auditors as a proportion of total
consolidated assets: Multiplicity of related parties and the magnitude of related
party transactions portend possible diversion of cash away from the listed entity. We
use a three-year median to assess the extent to which an auditor relies on
information furnished by the management (auditors outside the statutory auditor and
other unaudited financials of entities that are subsequently consolidated). The higher
this ratio, the weaker is the audit framework given the extent to which these numbers
fall outside the ambit of the audited consolidated numbers.
Exhibit 21: Audit quality checks
Company
Audit fees
Auditors
remuneration
Scope of statutory audit
Overall score

DLF
Oberoi Realty
Unitech
Godrej Properties
Phoenix Mills
Sobha Developers
Omaxe
Anant Raj
Sunteck Realty
DB Realty
Peninsula Land
Hubtown
Ashiana Housing
Brigade Enterprises
Strong,
Moderate,
Weak
Cumulating scores: We cumulate scores across these 12 parameters to arrive at the

final accounting score for each firm. Based on these parameters, we rank 21 firms on
accounting quality in this exercise.
April 23, 2014
Page 23
Real Estate
Valuation - a perspective
Deriving adjusted net worth
Having compared these companies on a range of accounting metrics, we present a

valuation approach underpinned on the cash conversion cycle and the adjusted net
worth to identify undervalued stocks.
Adjusted NW (%
of reported NW)
Company
Anant Raj
92%
Ashiana Housing
Critical valuation driver 1: Cash conversion cycle
Brigade Enterprises
Given that cash generation is the single most critical driver of valuation in real estate
firms, we derive the cash conversion cycle for each of the past six years (FY08-13).
We then use a six-year median as our first critical driver in this valuation approach.
The higher the cash conversion cycle, the longer a developer needs working capital
finance. Similarly, lower the cash conversion cycle, lesser the need for working capital
finance and lesser the idle capital employed.
Critical valuation driver 2: Adjusted net worth
Given that the P/B multiple-based approach is often used as an alternative to DCFbased valuation (the ideal approach), we argue that it is critical to adjust a firms
net worth for contingent liabilities, customer advances and unbilled revenues
to derive a fair P/B multiple.
Since not all contingent liabilities devolve on the parent entity (some are genuine), we
use a conditional adjustment factor on contingent liabilities to arrive at the adjusted
net worth. The higher the contingent liabilities, higher the adjustment factor that we
use to derive the adjusted net worth.
Exhibit 22: Deriving the adjustment factor for contingent liabilities
Adjustment factor (deduction
from NW)
CL (% of NW)
DB Realty
86%
100%
DLF
80%
Godrej Properties
118%
HDIL
115%
Hubtown
108%

Kolte Patil
Developers
Mahindra Lifespace
Developers
Oberoi Realty
121%
127%
102%
116%
Omaxe
Parsvnath
Developers
Peninsula Land
155%
Phoenix Mills
Prestige Estate
Projects
105%
Less than 10% of NW
10% of CL
Sobha Developers
10% - 30% of NW
20% of CL
Sunteck Realty
Over 30% of NW
30% of CL
Unitech
Source: Ambit Capital research; CL denotes Contingent Liabilities; NW denotes net worth
131%
88%
99%
133%
102%
97%
426%
87%

NW denotes Net Worth
Methodology
In Exhibit 22, we eliminate four outliers (on the cash conversion cycle) and map the
remaining real estate companies on consensus FY15 consolidated P/B multiple (on
the X-axis) and the six-year median cash conversion cycle (in number of days) on the
Y-axis. The size of the bubble denotes contingent liabilities (as a proportion of net
worth).
Exhibit 23: Cash conversion cycle (in number of days) vs P/B multiple - Oberoi and Sobha cheaper than Prestige

(number of days)
1,200
Puravankara
Unitech
1,000
800
Parsvnath
600
Hubtown
Kolte Patil
Mahindra Lifespace
Peninsula Land
400
DB Realty
200
DLF
Brigade Enterprises
Godrej Properties
Omaxe
Oberoi Realty
Prestige Estates
Ashiana Housing
Sobha Developers
Anant Raj
FY15 P/B
-200
-
0.5
1.0
1.5
2.0
2.5
3.0
Source: Companies, Bloomberg, Ambit Capital research; Note: X-axis denotes consensus FY14 P/B, Y-axis denotes the six-year median cash conversion cycle (in
number of days) and the s i z e of the bu bbl e de note s conti nge nt l i abi l i ti e s (as a pr opor ti on of ne t w or th)
April 23, 2014
Page 24
Real Estate
Exhibit 24: Large-sized real estate companies

(number of days)
2,000
Unitech
1,000
DLF
The largest bubble in Exhibit 24

pertains to Unitech (58% of net
worth)
Oberoi Realty
Godrej Properties
Prestige Estates
Sobha Developers
-1,000
-2,000
-3,000
Phoenix Mills
-4,000
FY15 P/B
-5,000
(0.50)
0.50
1.00
1.50
2.00
2.50
Source: Companies, Bloomberg, Ambit Capital research; Note: X-axis denotes consensus FY14 P/B, Y-axis
denotes the six-year median cash conversion cycle (in number of days) and the size of the bubble de note s the
conti nge nt l i abi l i ti e s (as a pr opor ti on of ne t w or th)
Exhibit 25: Mid-sized real estate companies

pertains to Indiabulls Real Estate
(18% of net worth)
8,000

(number of days)
7,000
Sunteck Realty
6,000
5,000
4,000
HDIL
3,000
2,000
Indiabulls
1,000
Puravankara
Mahindra Life
Anant Raj
Omaxe
FY15 P/B
-1,000
(0.50)
0.50
1.00
1.50
2.00
2.50
denotes the six-year median cash conversion cycle (in number of days) and the s i ze of the bubble de note s the
Exhibit 26: Small-sized real estate companies

pertains to Brigade Enterprises
(75% of net worth)

(number of days)
1,200
Kolte Patil
1,000
800
Parsvnath
Hubtown
600
Peninsula
400
DB Realty
200
Ashiana Housing
Brigade Enterprises
FY15 P/B
-200
(0.50)
0.50
1.00
1.50
2.00
2.50
3.00
denotes the six-year median cash conversion cycle (in number of days) and the s i ze of the bubble de note s the
April 23, 2014
Page 25
Real Estate
What can investors look forward to?

In the following pages, we highlight the potential impact of key policy developments
(likely catalysts) facing the real estate sector over the next 24 months:
Companies Act 2013
2014 General Elections
Real Estate Regulation and Development Bill 2013
Real Estate Investment Trusts (REITs)
Each of these four policy initiatives is likely to drive greater operational transparency
in real estate companies. Given the extent of financial duress that a majority of the
real estate companies find themselves under and a dangling carrot in the shape of
potential fresh funding from REITs, our discussions with senior partners and senior
executives across the Big-4 auditors suggest that developers are gradually
undertaking a massive clean-up operation. Whilst this push towards transparency is
partly driven by the impending beauty parade for fresh capital (to become REITfriendly), experts also attribute this effort to their desire to comply with the revised
guidance note and the Companies Act 2013.
The impending beauty parade for

fresh funding drives a push
towards greater transparency
As a result, some of the large developers are beginning to appoint one of the Big-4 in
an advisory capacity to help align customer sales/payment contracts with the revised
revenue recognition norms. These consulting assignments are aimed at structuring a
developers payment/sales contracts with its clients so that the cash collections are
closely aligned with the revised revenue recognition norms.
We analyse the impact of each of these policy measures on the real estate sector in
chronological order (in the order in which these are likely to occur) from page 27 to
page 33).
Exhibit 27: Key catalysts for the real estate sector over the next 18 months
Catalysts
Key highlights
Likely impact
Consolidated financial statements

Companies Act 2013
Consolidation of land-owning entities

Mandatory rotation of auditors
Likely to introduce greater disclosures and

transparency into the sector
Restriction on related party transactions

2014 General Elections
Streamlining of approvals
Incremental job creation
Will influence supply-side variables ahead of the

demand-side variables
Mandatory project registration

Real Estate Regulation and
Development Bill, 2013
Real Estate Investment Trusts (REITs)
Standard project-related disclosures

Ring-fencing of customer advances in escrow account (at
least 70% purpose compliance)
Minimum REIT asset size at `10bn
Enhances developer accountability and safeguards

customer interests
Mandatory listing of REITs within 18 months of registration Likely to restrict entry to serious and large players,
At least 90% of the REIT assets to be invested in completed broad-base the shareholding and enhance price
and rent-generating assets
discovery
At least 90% of the net income to be distributed to unit
holders
April 23, 2014
Page 26
Real Estate
Companies Act 2013 - towards greater transparency

yet onerous on real estate
We expect the notification of over 280 sections under the Companies Act 2013
to raise the compliance burden on real estate companies, especially in terms
of the nature and scope of related party transactions (RPTs), mandatory
rotation of audit firms and layered subsidiaries. Whilst these norms will force
greater transparency in the sector (towards better long-term health), we
expect the entire sector to feel the impact of higher compliance costs.
The Ministry of Corporate Affairs (MCA) notified 183 sections of the Companies Act
2013 on 26 March 2013. Together with the 98 sections that were notified earlier on
12 September 2013, the MCA has now notified 283 sections of the 470 sections
proposed in the Companies Act. The key aspects of the Companies Act 2013 that will
have a significant bearing on real estate companies (from a transparency perspective)
are the relatively watertight definitions of control, subsidiary, independent
director and related party. We highlight the following aspects of the Companies
Act 2013 that will impose an onerous compliance cost on the real estate sector:
Consolidation of land-owning entities
In India, real estate developers are regulated under the Land Ceiling Act, which
prescribes a maximum limit (ceiling) on the area of land that a single company can
own. As a result, it is common practice for developers to float multiple special
purpose vehicles (SPVs) that purchase land from the market. SPVs are structured in
either of the following formats:
Real estate firms own, directly or indirectly, 100% or a majority share in the
equity capital in such SPVs and/or have majority representation on the Board of
Directors of such SPVs.
Share capital of SPVs, a small quantum in itself, is held by a third party, which
also controls the governing body of the SPVs. In such cases, the real estate
companies are involved with the SPVs in various other transactions, such as
lending, giving exclusive rights to develop land, providing guarantee against
funds borrowed by SPVs and guaranteeing a minimum return to capital providers,
which may restrict the decision-making powers of the SPV.
The more stringent definitions of control and subsidiary under the Companies Act
2013 will impact the related party disclosure requirement.
Preparation of consolidated financial statements (CFS)
The preparation of CFS has become mandatory for all companies, which operate
through subsidiaries, joint ventures or associates. Our discussions with senior
executives at the Big-4 auditors suggest that companies that do not operate through
subsidiaries but through joint ventures (JVs) and associates may also have to prepare
CFS. This compares with the current practice of unlisted companies not having to
prepare CFS. Given the structure of a typical real estate firm in India (as explained
above), this requirement will impose a higher compliance cost on real estate
companies.
Dividend restrictions on companies relying on public deposits
The Companies Act 2013 prescribes that a company cannot declare any dividend if it
fails to comply with the provisions related to the acceptance and repayment of
deposits. Thus, if a real estate company accepts a deposit and is unable to fulfil the
provisions related to the acceptance or repayment of such deposits, the Companies
Act 2013 prohibits shareholder payback in the form of dividend. Of the 21 companies
in our analysis, we find that Godrej Properties relies heavily on public deposits.
Related party transactions - under greater scrutiny
Although at some deviation from the prevailing AS18, the Companies Act 2013, for
the first time, carries a definition of related party and related party transactions.
Instead of the erstwhile practice of securing approval from the Central Government
April 23, 2014
Page 27
Real Estate
for entering into related-party transactions (RPTs), companies will now need to pass a
special resolution at the general shareholder meeting, wherein interested members
will not be entitled to vote on such resolutions. Whilst this provision is likely to ensure
closer scrutiny of related-party transactions by shareholders (hence, less possibility of
stealth), minority shareholders may continue to be silent spectators if shareholder
activism remains weak.
Even assuming arms-length related-party transactions, such transactions will need to
be referred to in the Boards report to shareholders alongside an explanation for
entering into such transactions. This disclosure requirement is also likely to cover
non-cash transactions involving directors, if they are entered with a related party.
Against the backdrop of real estate developers increasingly entering into JDAs with
land owners, such SPVs also may come within the ambit of related party
transactions.
Limit imposed on layered subsidiaries (Section 2 Explanation (d) of clause 87)
The definition of subsidiary as included in the Companies Act 2013 prohibits certain
class or classes of holding company (to be prescribed) from having multiple layers of
subsidiaries beyond such numbers as may be prescribed. With such a restrictive
section, it appears that a holding company will no longer be able to hold subsidiaries
beyond a specified number. In the absence of any specific rules (conditions or subclauses), this is likely to have a meaningful implication on real estate developers on
account of the multi-layered subsidiaries that are typical of the sector.
Mandatory rotation of auditors/audit firms (Section 139)
The Act mandates rotation of audit firms for all companies (with the exception of
small companies and single-person companies). All real estate companies (provided
they do not qualify as either small companies or single-person companies) will now
have to appoint an audit firm for a term of 5 or 10 years, with a mandatory annual
ratification by shareholders. Real estate companies are specifically impacted because
of the usual long-term relationship that they enjoy with audit firms, which will now
face mandatory rotation.
It is worth highlighting that other than Sobha Developers, none of the other
mainstream real estate companies are audited by the Big-4. Whilst this is especially
reflective of the well-entrenched nexus between the audit firms and the real estate
companies, this is also a damning indictment of the lack of transparency in the sector.
Mandatory debenture redemption reserve (Section 71 clause 4)
The Companies Act 2013 mandates that debenture-issuing companies need to create
a debenture redemption reserve (DRR) account out of its available surplus, which can
only be used towards redeeming such debentures. The DRR should comply with the
following conditions:
Minimum DRR corpus of 50% of the value of debentures issued;
Minimum 15% of the amount of debentures maturing by March of next year

(current portion of the outstanding debentures) to be invested or deposited in
specified securities by April 30 every year
This is especially critical for the real estate sector since most developers have milked
non-convertible debentures (NCDs) as an instrument given the difficulties in securing
construction finance from banks in recent times. Whilst the minimum DRR corpus will
reduce the distributable surplus available to shareholders (for dividend payout), the
minimum 15% investment/deposit clause will reduce investible surplus and hence,
drag the investment returns for real estate companies. Most real estate developers
have a sizeable exposure (in excess of 5% of their net worth) to NCDs, a bulk of
which is unsecured and short term in nature. However, developers also carry a DRR
on their balance sheet, covering about 20% of the value of the debentures, on an
average.
April 23, 2014
Page 28
Real Estate
Impact of 2014 General Elections - lessons from 2009

As highlighted in our strategy thematic published on 11 March 2014, a political reset
synchronised with a fresh economic ideology has historically driven higher economic
growth and higher shareholder returns. As the race for the 2014 General Elections
enters its final leg, investors are looking to add beta to their portfolios to benefit from
Indias Fourth Wave. Whilst the real estate sector is an obvious beta play on the
economy, we argue that investors should be selective in the exposure that they take
within the sector for sustainably high returns.
As captured in the valuation section of this note, the core competency for real estate
firms emerges from how well a developer capitalises on the factors of production,
viz., land, labour and capital. These factors of production can be genuinely exploited
as a source of sustainable competitive advantage, as reflected in Exhibit 28.
Exhibit 28: Operating cycle for real estate companies
Ability to generate cash
and / or raise capital
Ability to identify viable

projects (deployment)
Real estate companies that can

best exploit the factors of
production (land, labour and
capital) will have a sustainable
competitive advantage over their
peers
Ability to execute (project

development) and launch
Ability to market / sell and

collect receivables
With opinion polls pointing to an NDA coalition winning the most number of seats in
the forthcoming General Elections, the fundamental catalysts are likely to be
impacted in the following manner:
Streamlining of approvals (single-window clearances or expedited approvals)
Incremental job creation led by faster economic growth
Between the two catalysts outlined above, the election outcome is likely to have an
immediate impact on the supply side (streamlining of approvals), resulting in a
further build-up in inventory levels and a medium- to long-term impact on the
demand side (faster income generation, better affordability and higher absorption
rates). We argue that an improvement in the demand-side variables is more critical to
the fundamental performance of the sector, as demonstrated in Exhibit 29.
The election outcome is likely to

impact the supply variables
ahead of the demand variables
Exhibit 29: Sales and inventory build-up since 2009 General Elections in top-3 cities
The first few quarters after the

2009 General Elections (May
2009) saw a double-digit QoQ
growth in inventory but was offset
by a very high absorption rate
driven by a revival in sales
momentum
Source: Liases Foras, Bloomberg, Ambit Capital research; Note: Sales denotes quarterly run rate (in million
square feet) in Indias top-three cities (Delhi/NCR, Mumbai/MMR and Bengaluru) with the March 2009
observation indexed to 100; Inventory (number of quarters) is scaled to RHS
April 23, 2014
Page 29
Real Estate
For the purpose of this analysis, we have cumulated the sales and inventory data for
Indias top-three real estate markets viz. Delhi (NCR), Mumbai (MMR) and Bengaluru.
The sales run rate (the red column in Exhibit 29) has been on a consistently upward
curve since the March 2009 quarter. To put this in perspective, the quarterly run rate
of sales in these three markets has grown from 20msf during the March 2009 quarter
to 49msf during the December 2013 quarter. Put differently, the average quarterly
run rate of sales since the March 2009 quarter (between the June 2009 quarter and
the December 2013 quarter) is at about 44msf.
Our analysis indicates two things: whilst on the one hand it demonstrates the March
2009 quarter as an outlier (at the lower end), it also proves that the sales momentum
has been steady through the past 19 quarters. Hence, we argue that the real estate
sector is in a crisis despite steady quarterly sales because of the equally steady rise in
inventory and consequently, lower absorption levels, as reflected in the inventory
pile-up (black line in Exhibit 29).
The quarterly sales run rate

(demand proxy) has increased
from 20msf (March 2009 quarter)
to 49msf (December 2013
quarter)
However, the inventory build-up

(supply proxy) has contributed
more to the current crisis for real
estate companies
Against this backdrop, we argue that the results of the 2014 General Elections are
likely to impact the supply-side inventory ahead of the demand-side sales
momentum.
April 23, 2014
Page 30
Real Estate
Real Estate Regulation Bill - pro-consumer; towards

greater disclosures
Like many of its counterparts, the Real Estate Regulation and Development Bill 2013
is primarily aimed at enhancing developer accountability and safeguarding consumer
interests. The key clauses of the Bill are as follows:
Mandatory registration of real estate agents
Compulsory registration of projects with a real estate regulatory authority, the

absence of which prohibits sale, booking or even offer to sell. Developers will
need to disclose standard project details and identify the brokers who will
represent the project. Developers can begin sales from a project only after all the
necessary approvals are in place and the project has been registered with the
authority. The regulatory authority will need to decide on project approvals
(clearance or rejection) within 15 days
Key clauses in the Bill include:
Developers need to open a separate bank account (escrow account) for each
project and will have to ring fence 70% of the customer advances to be used only
towards the completion of that particular project
To eliminate inordinate delays in delivery, the Bill empowers buyers to cancel

booking and claim the full amount plus interest for project delays
To enhance accountability, the Bill proposes penalties of 5-10% of project cost

and imprisonment of up to three years for misrepresentation of facts to customers
or non-compliance with regulatory norms
(a) Mandatory project

registration;
(b) Standard project-related
disclosures; and
(c) Ring-fencing of customer
advances in a separate escrow
account (minimum 70% purpose
compliance)
As with many other policy measures that involve Parliament intervention (for approval
and passing through both Houses), we expect this Bill to be enacted only once a
stable government is in place at the Centre.
Merits of the escrow mechanism
Whilst our discussions with experts suggest heavy lobbying by developers on this Bill,
if enacted in its current form, the Real Estate Regulation and Development Bill 2013 is
likely to mitigate the risk of diversion of funds (as highlighted on pages 16 and 17,
funds borrowed against one project are often deployed in another project). Such ringfencing would make cash less fungible and result in greater transparency in project
cash flows, a welcome development, especially from the perspective of capital
providers. Whilst the escrow mechanism benefits capital providers in terms of greater
transparency and reduced risk of diversion of funds, it is possible that the lower risk
profile is reflected in lower cost of capital for developers.
The escrow mechanism is likely to

introduce greater transparency in
project cash flows and mitigate
the risk of diversion of funds
Demerits of the escrow mechanism

However, the escrow mechanism will pose an impediment for purchase of new land
since banks are not permitted to lend towards land acquisition. This is likely to drive a
business model shift with developers increasingly leaning on JDAs (joint development
agreements) instead of buying land on their own accord.
Although the Bill prescribes 70% of customer advances to be ring-fenced, the precise
percentage of customer advances to be set aside for project-specific expenses will be
decided by local bodies (within each state). Our discussion with the Big 4 auditors
suggests that developers who have already deployed considerable capital in
acquisition of land will find the 70% threshold (as prescribed in the Bill) onerous.
April 23, 2014
70% threshold proposed in the

Bill is too onerous on developers hence, local bodies may need to
prescribe a lower threshold
Page 31
Real Estate
Real Estate Investment Trusts (REITs) - limited

eligibility; unlimited candidates
As discussed in an earlier section in this note (pages 17 and 18), real estate, being a
capital-intensive sector, faces a burgeoning need for capital, especially in the form of
long-term institutional capital. During October 2013, given the paucity of institutional
sources of funding (aside from banks) for real estate companies in India, the
Securities and Exchange Board of India (SEBI), Indias capital markets regulator,
published a draft consultation paper on REIT (Real Estate Investment Trust) guidelines.
In a move universally welcomed

by industry observers, the SEBI
published draft REIT guidelines,
setting the stage for introduction
of REITs over the next 18 months
The global experience with REITs - organised investment vehicles

Globally, REITs are pooled investment entities that predominantly invest in completed,
revenue-generating real estate assets and distribute a major portion of the earnings
amongst their investors. Typically, a majority of these investments are in completed
projects that provide investors with a regular stream of income from rentals derived
from such properties. About 30 countries, including most of the developed nations,
now have laws governing REITs. REITs globally have recorded a 13% CAGR in market
capitalisation from US$300bn (in 2003) to over US$1trn (in 2013).
Exhibit 30: Global REIT landscape most of the listings are in the US
Country /
jurisdiction
Year of
introduction of
REITs
Aggregate market
Number of REITs
capitalization (US$
(#)
mn)
% of global REIT
market
Permissible gearing Profit distribution

ratio (%)
obligation#
Thin capitalisation
rules
Australia
1985
52
86,169
8.0
100%
Canada
1994
50
48,526
4.5
No restriction
100%*
85% of tax-exempt
profits
France
2003
37
68,193
6.3
Thin capitalisation
rules
Germany
2007
1,657
0.2
45%
90% of the net

income
Hong Kong
2003
11
23,925
2.2
45%
90% of audited
annual net income
after tax
Japan
2000
41
64,414
6.0
No restriction
>90% of distributable
profits
Singapore
1999
32
45,538
4.2
35%-60%
90% of taxable
income
United Kingdom
2007
23
49,007
4.6
Interest cover test
90% of tax-property
rental profits
United States
1960
163
621,924
57.7
No restriction
90% of taxable
ordinary income
Source: EPRA, Ambit Capital research; Note: * Canada imposes full tax on any undistributed surplus - hence, in practice, 100% of the profits get distributed; # the
profit distribution obligation is usually imposed on the REITs ordinary income (excluding capital gains)
A look at Exhibit 30 suggests that a REIT market needs at least a decade of operations
to mature both in terms of market depth (the number of REITs) as well as capturing
investor appetite (market capitalisation as a percentage of the global REIT market).
With the exception of the United Kingdom, which has seen rapid acceptance of REITs,
most other countries gain only about 20-30bps of the global market capitalisation
share every year during the evolution stage of REITs.
Globally, REITs typically invest in real estate formats such as business parks, industrial
parks, hotels, retail space, office space, serviced apartments (between 80% and 95%
of the investible capital is employed in these formats) whilst the residential asset class
accounts for less than one-fifth of the REIT assets.
April 23, 2014
Page 32
Real Estate
REITs in India - draft guidelines broadly borrowed from Singapore

Our analysis of the SEBIs draft circular suggests that the REIT guidelines are broadly
mirrored on the regulations governing REITs in Singapore. We highlight the following
key eligibility criteria from the draft REIT guidelines as published by the SEBI:
REITs to be set up as trusts and to register themselves with the SEBI
Mandatory listing within 18 months of registration with the SEBI
Minimum REIT asset size at `10bn
Sponsor to have minimum consolidated net worth of `200mn
Sponsor to have minimum experience of five years in real estate
Sponsor lock-in of 25% for the first three years and 15% thereafter
Eligibility criteria on minimum

REIT asset size will attract
only serious and large players
Following are the key investment criteria:
At least 90% of the REIT assets should be invested in completed (post issuance of
occupancy certificate) and rent-generating assets (projects that are at least 75%
rented or leased out) in India
Remaining 10% allowed to be invested in developmental properties, government

securities, listed or unlisted corporate debt, equity shares of real estate
companies
Entire corpus can be invested in one project
Not allowed to invest in vacant land or agricultural land
At least 90% of the net income to be distributed to unit holders
Leverage (gearing ratio) capped at 50%; credit rating from SEBI-registered credit
rating agency and approval of unit holders mandatory in case leverage is in
excess of 25%
90% of the REIT assets to be

invested in completed and
rent-generating assets;
remaining 10% permitted to
be invested in underconstruction properties
Exhibit 31: SEBIs draft REIT guidelines - key clauses

Criteria
Minimum initial offer size (` mn)
Minimum public float (%)
Minimum subscription size (`)
Minimum value of single REIT unit to be traded (`)
Minimum asset size under REITs (` mn)
Prescribed value Impact

Likely to broad-base
2,500
shareholding and enhance
25
price discovery
200,000
Will restrict initial participation
to HNIs
100,000
10,000
Will attract only serious and

large players
Source: SEBI, Ambit Capital research
April 23, 2014
Page 33
Real Estate
This page has been intentionally left blank
April 23, 2014
Page 34
Oberoi Realty
BUY
COMPANY INSIGHT
OBER IN EQUITY
April 23, 2014
Launch pipeline crucial
Real Estate
Oberoi Realty emerged as the highest bidder for a 25-acre land parcel
in the western suburbs of Mumbai, which has put to rest any concerns
around the re-deployment of its surplus capital. We factor in net debt of
0.3x (to fund this land acquisition), and we expect the launch of at least
three projects during FY15 to revive Oberois operating cash flows from
` 1.7bn in FY14E to ` 9bn by FY15E. Using a project-based DCF approach,
we value Oberoi at ` 290, implying 7.3x FY15E FCFE.
Recommendation
Competitive position: STRONG
Accounting:
Predictability:
Earnings Momentum:
Changes to this position: POSITIVE
New launches critical for revival in operating cash flows

Excessive cash-guzzling projects (due to the delayed pace of construction) and a
deficit of cash-generating assets (due to weak incremental sales and delayed
launches) led to negative operating cash flows of `4.2bn during 9MFY14. With
cash collections from the existing under-construction projects ahead of the stage
of completion, the companys proposed launches in Worli and Mulund during
1HFY15 are critical to revive operating cash flows.
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
`74/US$1.2
`46/US$0.8
`224
`290
30
Flags
GREEN
AMBER
GREEN
Catalyst
Partial launch of Worli project by 1QFY15
Completion of Borivali land acquisition
Part-launch in Mulund project by 1HFY15
Accretion to land bank adds crucial growth opportunity

Oberoi has emerged as the highest bidder for 25 acres of land in Borivali that
was put on the block by Tata Steel, with a bid of `11.55bn. With 10% of the bid
amount already paid out as earnest money deposit (EMD), we expect the
balance 90% to be paid out during 1QFY15 (funded by debt of ~`8bn). Our
calculations suggest a saleable area of c.4 million square feet (msf), which is a
~50% accretion to Oberois existing inventory of ongoing projects.
Gearing for land acquisition likely to remain comfortable at ~0.3x
Performance (%)
140
120
100
80
60
We expect Oberoi to have paid the EMD of `1.15bn on the Borivali land from its
existing cash balance (of `4.5bn as of December 2013). Given that banks are
not allowed to lend towards land acquisition, we expect the balance land cost
(`10bn) to be funded through discounting of cash flows from its annuity assets
(including two upcoming annuity projects). We expect Oberoi to be cash-positive
by end-FY15 on the back of the Worli and Mulund launches.
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
40
Sensex
OBER IN
Source: Bloomberg, Ambit Capital research
Valuation at ` 290/share; we retain BUY

We use a project-based DCF approach to arrive at a valuation of `290/share
(revised upwards from `277/share). The upgrade is largely driven by the
addition of the Borivali project. Given that Oberoi is likely to restore its cash
surplus by end-FY15E on the back of its launch pipeline, we find the stock
attractively priced at 7.3x FY15E FCFE, leaving enough room for Oberoi to scout
for other opportunistic land acquisitions.
Key financials
Year to March
FY12
FY13
FY14E
FY15E
FY16E
8,247
10,476
8,599
11,742
14,370
Operating Profits (` mn)
4,836
6,121
4,218
6,832
8,347
Net Profits (` mn)
4,630
5,048
3,205
4,810
6,540
Diluted EPS (`)
14.1
15.4
9.8
14.7
19.9
RoE (%)
13.6
13.7
7.9
11.0
13.5
P/E (x)
16.0
14.6
23.0
15.4
11.3
P/B (x)
2.1
1.9
1.8
1.6
1.4
Net Revenues (` mn)
Analyst Details
Krishnan ASV
+91 22 3043 3205
Source: Company, Ambit Capital research

Oberoi Realty
Snapshot of company financials

Profit and Loss
Year to March (` mn)
Revenue from residential
projects
Hospitality services
Rentals and related income
Property and project
management income
Other operating income
Company Background
FY13
FY14E
FY15E
FY16E
7,813
5,469
7,110
9,243
956
1,146
2,336
2,453
1,398
1,504
1,798
2,096
250
330
391
485
58
150
107
92
Total operating Income
10,476
8,599
11,742
14,370
Operating costs
(3,715)
(3,698)
(4,110)
(5,029)
(640)
(684)
(800)
(994)
(4,355)
(4,381)
(4,910)
(6,023)
EBITDA
6,121
4,218
6,832
8,347
PBT
6,830
4,644
6,972
9,478
PAT
5,048
3,205
4,810
6,540
15.4
9.8
14.7
19.9
Total SG&A
Total operating expenditure
EPS (`)
Balance Sheet
Shareholders funds
Loan funds
Net Fixed assets
Investments
Cash flow
FY13
FY14E
FY15E
FY16E
38,968
41,685
45,763
51,308
8,000
8,000
10,714
10,423
10,626
12,297
4,000
Cash
10,725
9,886
6,418
280
Working capital
17,528
25,375
36,719
38,730
118.7
127.0
139.4
156.3
Book value per share (`)
Strong launch pipeline to revive operating cash flows

Year / Property
Oberoi currently operates predominantly in Mumbai, with a

diverse spread of premium developments including
residential, commercial, retail, hospitality and social
infrastructure projects. Whilst the groups promoters have
been developing real estate since 1983, the principal
business operations of various group entities was
consolidated into one group in 2006. The group was listed
in 2010 raising `10.3bn through its IPO proceeds. Oberoi
has an ongoing project slate of 7.1msf under-construction
and a planned project portfolio of 10.4msf, predominantly
consisting of residential properties. Whilst the ongoing
project portfolio is relatively more concentrated (71%
residential; 20% commercial), the portfolio of planned
projects is comparatively better diversified (65% residential;
25% commercial).
Format
Area (sft)
FY14E
FY15E
FY16E
Total pre-tax CF
2,546
13,049
14,181
Tax
(840)
(4,306)
(4,680)
CFO
1,706
8,743
9,501
FCFE
2,443
10,220
10,961
Changes in WC
7,847
11,344
2,011
Launches to stimulate free cash flow generation
Likely launch
FY15
Worli
Residential
1,783,928
1QFY15
Worli
Hospitality
336,375
1QFY15
Mulund Phase I
Residential
1,600,690
2QFY15
Splendor Phase III
Residential
274,550
4QFY15
Commerz II - Phase I
Commercial
725,769
4QFY15
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
32.1%
22.3% 21.4%
26.1% 26.8%
23.1%
5.9%
FY14E FY15E FY16E FY17E FY18E FY19E FY20E
FY16
Splendor Phase IV
Residential
118,986
Borivali
Residential
1,846,876
FCFE (% of net worth)
April 23, 2014
Page 36
Oberoi Realty
Two new project launches by 1HFY15

Launches to help revive operating cash flows
Excessive cash-guzzling projects (due to the delayed pace of construction)
and a deficit of cash-generating assets (weak incremental sales and delayed
launches) have resulted in Oberois operating cash flows receding by ` 4bn
(about 40% of opening balance) during 9MFY14. With cash collections from
the existing under-construction projects running ahead of the pace of
progress, the proposed launches in Worli and Mulund during 1HFY15 are
critical for a revival in Oberois operating cash flows.
Oberoi Realtys volume sales and cash collections remained weak during 9MFY14 on
account of a combination of limited inventory available for sale in the ongoing
projects and lack of new project launches. The limited availability of inventory was
driven by:
Delay in obtaining regulatory approvals to resume construction in Oberoi Esquire;
Availability limited to high-ticket-sized inventory in Oberoi Exquisite; and
Inventory exhaustion in completed projects, Splendor and Splendor Grande.
Weak volumes during 9MFY14

on account of limited inventory in
ongoing projects and lack of new
launches
The limited availability of inventory has contributed significantly not only towards
weak unit sales (Part A - Exhibit 1) but also towards sluggish cash collections (Part C Exhibit 1).
Exhibit 1: Quarterly project-wise snapshot - limited inventory contributing to weakness in unit sales during 3QFY14
Project-wise quarterly run rate
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14 3QFY14
Oberoi Exquisite
27,950
28,600
27,820
39,630
41,600
21,960
16,250
10,790
Oberoi Esquire
74,715
58,065
70,410
52,680
46,095
25,180
22,985
17,560
PART A: Area sold (sft)
Oberoi Seven
5,650
5,650
5,650
Oberoi Splendor Grande
41,860
23,660
20,020
18,200
10,920
1,820
Oberoi Splendor
20,727
7,896
11,844
7,896
19,740
114,744
170,902
123,871
130,094
124,056
118,355
48,960
153,979
28,350
441.9
495.2
488.3
781.2
739.6
477.6
384.7
225.7
1,036.2
926.6
1,099.5
783.5
780.4
411.0
433.1
348.9
80.0
90.0
0.0
90.0
0.0
0.0
0.0
0.0
650.6
374.2
345.2
310.7
202.0
36.1
0.0
0.0
Oberoi Splendor
455.9
190.2
287.0
198.5
504.6
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
3,178.9
0.0
2,665
2,076
2,220
2,164
2,227
925
3,997
575
Oberoi Exquisite
708.2
660.7
585.9
560.1
1,401.9
848.2
829.8
222.7
Oberoi Esquire
333.6
384.5
325.7
365.8
242.7
81.2
121.5
75.4
80.0
90.0
0.0
90.0
0.0
0.0
0.0
0.0
414.0
742.5
462.4
363.3
200.2
130.9
91.5
7.0
Oberoi Splendor
259.9
382.0
189.4
294.5
413.2
110.8
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
770.7
0.0
1,796
2,260
1,563
1,674
2,258
1,171
1,814
305
Oasis Residential#
Total area sold (sft)
PART B: Value of area sold (` mn)
Oberoi Exquisite
Oberoi Esquire
Oberoi Seven
Oasis Residential#
Total area sold (sft)
PART C: Cash collections (` mn)
Oberoi Seven
Oasis Residential#
Total cash collections (` mn)
Source: Company, Ambit Capital research; Note: # figures are cumulative until 9MFY14, as per management disclosures and include collections related to
transfers from another joint venture (with ICICI Ventures) that were originally sold during 2006-07.
April 23, 2014
Page 37
Oberoi Realty
Too many cash guzzlers; not enough cash generators
Our analysis of project-wise cash flows suggests that cash flows from the completed
projects (Seven, Splendor and Splendor Grande) have been exhausted, leaving little
headroom for incremental collections in the absence of fresh sales in these projects.
All of these three projects are nearly fully sold out, resulting in negligible incremental
inflows.
Inventory exhausted in completed

projects; slow-moving underconstruction projects not yet
cash-generative
Exhibit 2: Project-wise outstanding collections - cash collections running significantly ahead of project progress
Collections outstanding by project (` mn)
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
Oberoi Exquisite
Cumulative sales (` mn)
10,205.4 10,700.6 11,188.9 11,970.1 12,709.7 13,187.3 13,572.0 13,797.7
Cumulative cash collected (` mn)
7,901.5
8,562.2
9,148.1
9,708.2 11,110.1 11,958.3 12,788.1 13,010.8
Collection outstanding (` mn)
2,303.9
2,138.4
2,040.8
2,261.9
1,599.6
1,229.0
783.9
786.9
Collection (% of sales)
77.4%
80.0%
81.8%
81.1%
87.4%
90.7%
94.2%
94.3%
Percentage of completion (%)
47.1%
51.0%
57.0%
64.0%
71.0%
78.0%
83.0%
88.0%
Oberoi Esquire
8,537.0
9,463.6 10,563.1 11,346.6 12,127.0 12,538.0 12,971.1 13,320.0
3,036.1
3,420.6
3,746.3
4,112.1
4,354.8
4,436.0
4,557.5
4,632.9
5,500.9
6,043.0
6,816.8
7,234.5
7,772.2
8,102.0
8,413.6
8,687.1
35.6%
36.1%
35.5%
36.2%
35.9%
35.4%
35.1%
34.8%
BTL
BTL
BTL
BTL
BTL
BTL
BTL
BTL
320.0
410.0
410.0
500.0
500.0
500.0
500.0
500.0
320.0
410.0
410.0
500.0
500.0
500.0
500.0
500.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
2,876.6
3,250.8
3,596.0
3,906.7
4,108.7
4,144.8
4,144.8
4,144.8
2,147.0
2,889.5
3,351.9
3,715.2
3,915.4
4,046.3
4,137.8
4,144.8
Oberoi Seven
729.6
361.3
244.1
191.5
193.3
98.5
7.0
0.0
74.6%
88.9%
93.2%
95.1%
95.3%
97.6%
99.8%
100.0%
62.3%
69.0%
82.0%
92.0%
95.0%
98.0%
100.0%
100.0%
Oberoi Splendor
14,538.9 14,729.1 15,016.1 15,214.6 15,719.2 15,719.2 15,719.2 15,719.2
11,731.6 12,113.6 12,303.0 12,597.5 13,010.7 13,121.5 13,121.5 13,121.5
2,807.3
2,615.5
2,713.1
2,617.1
2,708.5
2,597.7
2,597.7
2,597.7
98.5%
99.8%
99.2%
99.8%
99.3%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
0.0
0.0
0.0
0.0
0.0
0.0
3,178.9
3,178.9
0.0
0.0
0.0
0.0
0.0
0.0
770.7
770.7
0.0
0.0
0.0
0.0
0.0
0.0
2,408.2
2,408.2
NA
NA
NA
NA
NA
NA
24.2%
24.2%
NA
NA
NA
NA
NA
NA
BTL
BTL
Oasis Residential#
Source: Company, Ambit Capital research; Note: # figures are cumulative until 9MFY14, as per management disclosures and include collections pertaining to
transfers from a joint venture (with ICICI Ventures) that were originally sold during 2006-07; BTL indicates below threshold level
On the other hand, cash collected from under-construction projects (Exquisite, Esquire
and Oasis) are running significantly ahead of the progress (percentage of completion)
in each of these projects. We expect Exquisite and Esquire to remain net consumers of
cash at least until 1QFY15 whilst Oasis is likely to be cash-surplus upon launch.
April 23, 2014
Page 38
Oberoi Realty
Strong launch pipeline across formats lends visibility to FY15 cash flows
We expect Oberoi to launch at least three incremental projects (across formats) over
the course of FY15. We ascribe a relatively higher probability to the launch of the
Worli project and the first phase of the Mulund project by 1HFY15.
Exhibit 3: Launch pipeline - ideal feedstock for the cash flow engine
Year / Property
Format
Area (sft)
Likely launch
Residential
1,783,928
1QFY15
FY15
Worli
Worli
Hospitality
336,375
1QFY15
Mulund Phase I
Residential
1,600,690
2QFY15
Residential
274,550
4QFY15
Commercial
800,000
4QFY15
Splendor Phase III

Commerz II - Phase I
FY16
Splendor Phase IV
Residential
118,986
Borivali Phase I
Residential
1,846,876
We expect the launch of Commerz II - Phase I to be contingent upon a revival in the

fundamental demand drivers for commercial real estate (largely driven by corporate
confidence). Given that FY15 is an election year, we expect Oberois potential clients
for Commerz II - Phase I to formalise their lease contracts only during 2HFY15.
April 23, 2014
Page 39
Oberoi Realty
Land acquisition a positive catalyst

Accretion to land bank adds crucial growth opportunity
Oberoi emerged as the highest bidder for 25 acres of land in Borivali (with a
bid of ` 11.55bn), which is likely to add saleable area of c.4msf to its
inventory, a ~50% accretion to its existing inventory. With 10% of the bid
amount already paid out as earnest money deposit (EMD), we expect the
balance 90% to be paid out during 1QFY15 (funded by debt of ` 8bn). We
expect the project to begin generating positive cash flows during FY18 and
become cumulative cash flow positive by FY20.
Oberoi has emerged as the highest bidder for 25 acres of land in Borivali that was
put on the block by Tata Steel, with a bid of `11.55bn. With 10% of the bid amount
already paid out as earnest money deposit (EMD) by end-March 2014, we expect the
balance 90% to be paid out during 1QFY15. Assuming that the company maintains a
certain quantum of cash on its balance sheet, we expect Oberoi to raise debt of `8bn
by discounting lease rentals from its annuity assets.
We expect Oberoi to raise debt of

` 8bn by discounting lease rentals
from its annuity assets
Pending approvals for transaction completion

For the transaction to go through, Oberoi Realty needs to obtain two major approvals
by June 2014. Oberoi needs to obtain the collectors permission for the sale of the
Sanad land which is part of the total property and an NOC (no objection certificate)
from the labour authority. If these approvals do not come through within three
months, the MOU (Memorandum of Understanding) for the sale of land will stand
annulled.
Saleable area of 3.7msf adds crucial inventory pipeline
Our calculations suggest a saleable area of 3.7msf, a sizeable accretion to Oberois
growth prospects in terms of addition to inventory.
Exhibit 4: Deriving the total construction area and total saleable area
Particulars
Area (sft)
Land area
1,089,000
Less: Common amenities area
272,250
Less: Recreation ground area
81,675
Base FSI
Remarks
Converted from 25 acres
25% of the land area
10% of net land area (adjusted for amenities)
735,075
Add: TDR for amenities area
272,250
Add: TDR and premium
25% of the original land area
816,750
Total FSI (before fungible FSI)
1,824,075
Add: Compensatory fungible FSI
638,426
Total FSI (with fungible FSI)
2,462,501
Saleable area
3,693,752
Total construction area
4,432,502
35% of Total FSI

Assuming 50% loading factor
Assuming super built-up area at 20% higher
than saleable area
Powerful signalling mechanism

Whilst this acquisition adds crucial saleable area to Oberois inventory pipeline, we
read this bid as a powerful signalling mechanism that sets a benchmark for Oberois
valuation appetite in land transactions. Oberois bid, at `11.55bn, for a 25-acre plot,
implies a land valuation at `4,500 per square feet (on total FSI, inclusive of fungible
FSI). From a pricing perspective, the bid provides an insight into Oberois appetite for
the acquisition cost of land, especially when the land comes with a clean title, as in
this case. Our discussion with senior property consultants suggests that Oberois
current bid is significantly north of Oberois earlier bids for such parcels of land and is
indicative of a more serious approach towards re-deploying surplus capital, given the
relatively greater comfort around the land title.
April 23, 2014
Page 40
Oberoi Realty
Project likely to be launched in two phases
We expect the Borivali project to be launched in two equal phases (c.1.85msf each),
with the first phase likely to be launched during FY16 followed by a second phase
launch during FY19. We expect the project to be sold out over 7 years.
Exhibit 5: Assumptions driving the Borivali project - Phase I launch during FY16 and Phase II launch during FY19
Borivali project economics
FY14E
FY15E
FY16E
FY17E
FY18E
FY19E
FY20E
FY21E
FY22E
0.0%
0.0%
10.0%
15.0%
15.0%
20.0%
15.0%
15.0%
10.0%
13,000
14,040
15,163
15,921
16,717
17,553
18,431
8.0%
8.0%
5.0%
5.0%
5.0%
5.0%
5.0%
10.0%
15.0%
15.0%
20.0%
20.0%
15.0%
10.0%
25.0%
25.0%
20.0%
15.0%
10.0%
20.0%
35.0%
55.0%
75.0%
90.0%
100.0%
3,500
3,675
3,859
4,052
4,254
4,467
4,690
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
Revenues
Sales (% of est. saleable area)
Average realisation (`/sft)
15,848
YoY chg in realisation (%)

Cash collections (%)
0.0%
0.0%
10.0%
90.0%
Costs
Land cost (% incurred)
Fungible FSI + TDR costs (% incurred)
5.0%

Average construction cost (`/sft)
4,097
YoY chg in construction cost (%)

Project to become cumulative cash flow positive by FY20

Assuming a Phase I launch during FY16, we expect the project to begin generating
positive cash flows from FY18 onwards. Assuming a Phase II launch during FY19, we
expect the project to become cumulative cash flow positive by FY20.
Exhibit 6: Cash flows from the Borivali project
Borivali project cash flows (` mn)
FY14
FY15E
FY16E
FY17E
FY18E
FY19E
FY20E
FY21E
FY22E
240
1,647
4,408
8,440
12,569
16,668
14,568
240
1,647
4,408
8,440
12,569
16,668
14,568
(1,826)
(2,316)
(3,252)
(4,141)
(4,184)
(2,970)
(2,079)
(137)
(275)
(687)
(687)
(549)
(412)
(1,551)
(1,629)
(2,566)
(3,592)
(3,771)
(2,970)
(2,079)
(10,262)
(1,586)
(669)
1,155
4,299
8,386
13,698
12,489
Inflows (A)
Cash collections
Outflows (B)
Land cost incurred
(1,125)
(10,262)
(1,125)
(10,125)
Fungible, TDR
Construction cost incurred
Net cash flow (A-B)
(1,125)
Lease rental discounting (LRD) appears to be the best financing option

We expect the net cash outflow (towards earnest money deposit for land acquisition)
during FY14 to be funded largely from the existing cash on books as of December
2013. We expect the FY15 payouts (remaining 90% towards cost of land and
payments towards development rights and fungible FSI) to be funded partly through
internal accruals and debt of `8bn. Our calculations suggest that Oberoi can raise
debt by discounting the lease rentals from its annuity assets.
Exhibit 7: Financing project debt for the Borivali land parcel - lease rent discounting (LRD) the best option
Cash flows from annuity assets (` mn)
FY15E
FY16E
FY17E
FY18E
FY19E
FY20E
Free cash flows from operating annuity assets (A)
1,875
1,940
2,024
2,089
2,159
2,167
Free cash flows from upcoming annuity assets (B)
335
623
1,433
1,760
2,020
2,176
2,209
2,563
3,457
3,850
4,179
4,343
Free cash flows from all annuity assets (A+B)

Our channel checks suggest that lenders currently offer lease rental discounting at
about 13-13.5%. We believe that Oberoi, on account of its well-capitalised balance
sheet, is likely to raise debt at the lower end of this price band.
As demonstrated in Exhibit 7, assuming Oberoi can only discount lease rentals from
its existing annuity assets (Commerz I, Westin, Oberoi Mall and Oberoi International
April 23, 2014
Page 41
Oberoi Realty
School), Oberoi will need to securitise its receivables for the next six years. On the
other hand, if Oberoi is able to discount lease rentals even from the upcoming
annuity assets (subject to similarly stable tenancy), receivables from FY15-18 are
adequate to finance this debt.
If cash remains fungible (as against a proposal in the Real Estate Regulation Bill that
calls for ring-fencing of 70% of cash flows from a project), we expect Oberoi to repay
the project debt of `8bn by end-FY16, subject to project launches at Worli and
Mulund by 1HFY15.
CARE assigns top rating for ` 8.5bn facility
As per Oberois recent filings, CARE, a rating agency, has assigned the highest rating
for a combination of short-term and long-term facilities for `8.5bn to be availed by
Oberoi. The long-term rating has been assigned to Incline Realty Private Limited, a
wholly-owned subsidiary of Oberoi Realty, recently floated exclusively for developing
the Borivali land parcel.
Exhibit 8: Top ratings secured for facilities worth `8.5bn
Instrument
Commercial paper
Non-convertible debentures
Rating
A1+
Maturity pattern Amount (` mn)

Less than 1 year
1,000
AA+ (SO) Long-term (3-5 years)
7,500
Potential for valuation upgrade to Borivali project

Our estimates for the Borivali project build in the following key assumptions:
Saleable area of ~3.7msf
Phase II launch during FY19
Average per square foot realisation of `15,500 through the project life-cycle
Average per square foot construction cost of `4,100 through the project life-cycle
Cost of debt at 13%
Media reports estimate the saleable area on the Borivali land parcel ranging between
3.6msf and 4msf (the upper end of this range is ~8% higher than our saleable area
assumptions on this project). Faster-than-anticipated execution of the project (say, a
Phase II launch in FY18), higher realisations through the project life-cycle (from better
sales velocity) and lower-than-anticipated cost of debt (on account of superior credit
profile benefiting from better debt servicing) pose an upside risk to our project cash
flow assumptions. Such upside risks would impact our project valuation (excluding
land cost) by ~40% and the overall SOTP valuation by ~10% (`29) net of land cost.
April 23, 2014
Page 42
Oberoi Realty
Project details
Oberoi has an ongoing project slate of 7.1msf under-construction and a planned
project portfolio of 10.4msf, predominantly consisting of residential properties. Whilst
the ongoing project portfolio (see Exhibit 8) is relatively more concentrated, the
portfolio of planned projects (see Exhibit 9) is comparatively better diversified.
Exhibit 9: Under-construction projects (7.1msf)
Exhibit 10: Planned projects (10.4msf)
Hospitality,
4.7%
Social infra,
16.1%
Office
space,
23.4%
Retail, 2.7%
Hospitality,
12.4%
Residential,
65.2%
Office
space, 3.6%
Residential,
71.9%
Residential projects
Excluding the Borivali land that was acquired towards the end of March 2014, Oberoi
has an ongoing residential project portfolio of about 5.1msf.
Exhibit 11: Key residential projects - approval / launch / completion / sale status
Properties under development
Saleable area
Launch
(sft)
Percentage of
Clearances /
completion
approval status
(POC)
OC for floors 31 to
88%
50 pending
Partial CC until the
BTL
30 th floor
BTL
Oberoi Exquisite
1,535,670
October 2009
Oberoi Esquire
1,504,815
February 2011
Oasis Residential
1,783,928
Not yet launched
Mulund project (Exotica)
3,201,380
Not yet launched
BTL
Borivali project
3,693,752
Land acquired
NA
Splendor - Phase III
274,550
Not yet launched
Sangamcity, Pune
773,951
Not yet launched
Time to
completion
(months)
Unsold inventory
(%)
6 months
33%
36 months
35%
48 months
NA
48 months
NA
NOC from trade

union pending
NA
NA
Source: Company, Ambit Capital research; Note: BTL - below threshold level; OC - occupancy certificate; CC - commencement certificate
Although the projects enumerated in Exhibit 10 have relatively greater visibility, other
properties (such as Oberois Khar project and Phase IV of Splendor) have relatively
lower project-level visibility.
Given our assumptions around area sales run rate and cash collections (detailed
separately in the valuation section of this note), we expect the current pipeline of the
ongoing residential projects to be completely sold out by FY23E. We expect cash
collections from residential projects to peak during FY17E-19E.
April 23, 2014
Page 43
Oberoi Realty
Annuity projects
Oberoi currently has four operational annuity assets, which account for 35% of the
companys total operating revenues (during 9MFY14). Although the contribution of
annuity assets appears exaggerated on account of the extremely weak residential
project launches and sales during 9MFY14, the annuity assets have consistently
contributed north of 15% to the companys operating revenues since FY10. Whilst this
is partly on account of the relative maturity of the properties (all of these have been
in existence for over five years), the strong fundamentals of these properties are also
a function of the companys strategy to develop residential townships centred on
commercial properties.
Exhibit 12: Movement in key metrics in Oberois annuity projects - higher occupancy at the cost of easing rentals
Properties
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
79.0%
79.5%
80.7%
80.6%
83.4%
83.4%
85.8%
85.8%
Office space - Commerz I

Occupancy (%)
Realisation (`/sft/month)
128
129
129
130
131
132
128
128
93.7%
95.8%
97.6%
98.2%
96.7%
97.7%
99.2%
99.8%
94.3%
93.5%
94.3%
94.6%
95.1%
99.4%
99.1%
98.0%
125
128
124
129
125
126
137
137
96.0%
96.5%
95.5%
95.9%
94.2%
97.1%
96.0%
94.4%
Occupancy (%)
72.3%
66.8%
65.1%
67.8%
74.6%
72.5%
76.2%
73.1%
RevPAR (`)
5,886
4,637
4,761
5,606
6,085
5,599
5,659
6,185
EBITDA margin (%)
37.7%
24.6%
21.7%
33.8%
34.1%
30.8%
28.4%
28.5%
EBITDA margin (%)

Retail property - Oberoi Mall
Occupancy (%)
Realisation (`/sft/month)
EBITDA margin (%)
Hospitality project - Westin
Currently, Mumbais total office space stock is 101msf, of which 78msf is occupied,
resulting in a vacancy level of 23%. Vacancy levels have been increasing consistently
since 2009 when they were at 12%, due to the massive influx of nearly 38msf of new
supply since 2009.
Against this backdrop, Oberoi, despite its strategy of developing townships around a
central commercial property, is likely to be only marginally less vulnerable to the
effects of a general economic slowdown. Oberoi, has one operational office-use
property (Commerz I, 0.36msf) and is slated to launch another (Phase I Commerz II,
0.7msf) later this year.
Exhibit 13: Office-use projects - key metrics
Commercial properties
Estimated
area (sft)
Launch
Occupancy
(%)
Lease rent
(` /sft/mth)
EBITDA
margin (%)
Commerz I
364,888
85.8%
128
99.86%
Commerz II - Phase 1
725,769
4QFY15
NA
NA
NA
1,661,650
FY16
NA
NA
NA
April 23, 2014
Page 44
Oberoi Realty
Valuation
We use a project-based DCF approach to arrive at a valuation of `290/share (revised
upwards from `277/share), implying a 33% upside. A little over 70% of this valuation
is contributed by residential properties whereas office and retail properties contribute
a further 20% to the sum-of-the-parts valuation.
Exhibit 14: FY15 mix of cash inflows (%)
Hospitality,
7%
Exhibit 15: FY15 sum-of-the-parts valuation (%)
Social infra,
3%
Hospitality,
6%
Social infra,
2%
Retail, 7%
Retail, 16%
Office, 13%
Residential,
65%
Office, 9%
Residential,
71%
We use project-specific assumptions (detailed subsequently) to derive the discounted

project-specific cash flows to arrive at our sum-of-the-parts (SOTP) valuation. We
adjust our SOTP valuation for unallocated overheads that are not apportioned to any
specific project and the net cash (debt) position as at end-FY15. We assume the debt
of `8bn to be completely repaid during FY16, assuming that cash continues to remain
fungible, implying that surplus proceeds from the Mulund and Worli launches will be
used to repay the loan borrowed towards the Borivali land acquisition.
Exhibit 16: Sum-of-the-parts (SOTP) valuation for Oberoi Realty (`/share)
350
300
250
39
21
16
208
200
150
100
50
-5
0
-50
Residential
Office
Retail
Hospitality
Social infra
Other
income less
SG&A
Net cash
Beyond FY15, we expect Oberoi to maintain 15-25% of its balance sheet size in the
form of cash with any surplus deployed towards investments that earn the company
annual returns of 7.5% on an average. We build in a gradually declining contribution
from customer advances, as ongoing projects progress towards completion. We
expect Oberois funding of vendors and sub-contractors (through loans and advances
on the current assets) to progressively increase as the project moves towards
completion.
April 23, 2014
Page 45
Oberoi Realty
Assumptions around valuation parameters

Cost of equity: We have assumed a 15% cost of equity in our calculations. Given
that Oberoi has a larger proportion of residential projects in its slate of ongoing and
planned projects and since residential projects are typically funded by customer
advances, we believe that it is appropriate to use cost of equity to discount cash flows
(as against using the weighted average cost of capital).
Since Oberoi is debt-free (aside from the debt that the company will need to raise for
the recent Borivali land acquisition), we believe that using cost of equity is a
conservative measure to arrive at the net asset value for each individual project.
The two most sensitive project-level variables in our assumptions are: (a) the sales
run rate; and (b) the average blended realisations. To put this in perspective, if each
of Oberois under-construction residential projects is delayed by 12 months (beyond
the delay that we are already building in), our valuation is likely to be dragged by
~15%. More importantly, slower-than-anticipated sales (hence, slower-thananticipated cash inflows) would potentially translate into Oberoi either having to
assume a larger quantum of debt or delaying the construction/launch of some of its
projects, all of which are likely to pull the company further into a vicious cash-burn
cycle.
April 23, 2014
Page 46
Oberoi Realty
Residential properties
Annual run rate of area sales: For under-construction projects that are yet to
be launched, we build in a period of 8-10 years for a project to move from the
launch stage to the stock-out stage. For projects that are likely to be sold out
over 8 years, we assume c.50% of the total saleable area to be sold by Year 3
(from launch) and the remaining 50% to be sold over the next 5 years. For
projects that are likely to be sold out over 10 years, we factor in c.50% of the
total saleable area to be sold by Year 4 (from the time of launch) and the balance
50% to be sold over the next 6 years. For all projects, the completely sold out
stage is triggered at least 1-3 years from the time of project completion.
Exhibit 17: Cumulative sales from the time of launch (% of saleable area)
100%
80%
60%
40%
20%
0%
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Project sold in 10 years
Project sold in 8 years
Our assumptions around the sales run rate are consistent with a typical project
lifecycle in which sales are high during the initial phase (after the project launch) and
gather fresh momentum as the project nears completion (pull factor on account of
customers looking for ready-to-move-in properties). However, the run rate of sales
tapers off in the interim.
Growth in average realisation rates in ongoing projects: For FY15, in the

case of ongoing projects, we have benchmarked average realisation rates based
on price discovery in recent transactions and anonymous channel checks with
Oberois sales team at each project location. In general, we assume c.8% YoY
increase in average realisations between FY15E and FY18E followed by 5% YoY
increase in average realisations thereafter until the project is completely sold out.
Growth in realisation rates in upcoming projects: For upcoming projects, we

have assumed c.8% YoY increase in average realisation for the first two years
after the launch followed by a 5% YoY increase in average realisations thereafter
until the project is completely sold out. Our base realisation (pricing at the time of
launch of such projects) is at a 5-10% discount to the prevailing pricing for
comparable projects in the relevant micro-market.
Outflow pertaining to construction costs: For under-construction projects, we

have assumed that: (a) construction costs are distributed over the construction
period proportionate to the percentage of completion; and (b) the project is
delayed by 1-2 years relative to the managements targeted completion schedule
on account of labour shortage.
We have individually projected the construction costs for each residential project
from FY14E (or the time of launch, whichever is earlier) until project completion,
using the percentage of completion approach. We use an average construction
cost (per sft) of `3,500 for Exquisite and Esquire and `7,500 for Oasis (as it is a
super-premium project).
April 23, 2014
Page 47
Oberoi Realty
Rise in input costs of construction: For all the under-construction projects, we

have assumed an 8% YoY increase in the cost of construction (per sft) during the
first 4 years of a project and 5% thereafter until project completion. Our
assumptions around YoY cost inflation are based on trends around indexed
building construction costs published by the Construction Industry Development
Council (CIDC). Our estimates around a rise in input costs are conservative, given
that the cost of building construction increased ~4% in Mumbai and ~5% each in
Delhi and Bangalore over the past 5 years (between January 2009 and March
2014). Concomitant with our assumptions around growth in blended realisation
rates, we believe that Oberoi will recover its pricing power on select projects only
post FY18E.
Exhibit 18: YoY movement in building construction costs in major real estate markets
Mumbai
Delhi
Apr-14
Jan-14
Jul-13
Oct-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Bangalore
Source: CIDC, Ambit Capital research
Cash collections from upcoming projects: We assume construction-linked cash

collections for each of Oberois upcoming projects (ongoing and planned) subject
to the following clauses:
(a) 20% down payment at the time of booking for new launches; and
(b) final 5-10% of the consideration payable at the time of possession.
Exhibit 19: Cumulative project-wise cash flows (% of value of area sold)

Cumulative project cash flows
FY14E
FY15E
FY16E
Launch
Stock-out
92%
94%
95%
Oct 2009
FY17E
Oberoi Esquire
34%
77%
94%
Feb 2011
FY17E
Oasis Residential
24%
36%
47%
FY15E
FY22E
Mulund project
0%
20%
35%
FY15E
FY23E
Borivali project
0%
0%
40%
FY16E
FY23E
Oberoi Exquisite
April 23, 2014
Page 48
Oberoi Realty
Commercial / retail / hospitality projects
Rental rates for annuity projects: Currently, Mumbais total office space stock
is 101msf, of which 78msf is occupied, resulting in a vacancy level of 23%.
Vacancy levels have been increasing consistently since 2009 when they were at
12%, due to the massive influx of nearly 38msf of new supply since 2009.
Exhibit 20: Movement in lease rentals and absorption levels in Mumbai

3.0
102
100
2.5
98
2.0
96
1.5
94
92
1.0
90
0.5
88
0.0
86
3QCY12
4QCY12
Total area transacted (msf)
1QCY13
2QCY13
3QCY13
Average lease rent (Rs/sft/mth) (RHS)
Source: Knight Frank Office Traction November 2013, Ambit Capital research
Lease rentals in Mumbai have either been steady or declining over the past few
quarters (dotted line in Exhibit 20) although absorption levels have remained healthy
(the red column in Exhibit 20). Although the blended lease rentals in Mumbai are at
sub-`100 levels, Oberois incremental office inventory is being added in Goregaon,
which corresponds to SBD West.
Exhibit 21: Business district-wise lease rent in Mumbai (`/sft/month)
Business district
1QCY12
3QCY12
4QCY12
1QCY13
3QCY13
Average
CBD & Off CBD
250
240
245
240
218
239
ABD
245
275
260
265
265
262
Central Mumbai
128
175
135
139
165
148
SBD West
89
110
90
92
102
97
SBD Central
90
90
92
90
85
89
PBD
44
50
44
42
48
46
Source: Knight Frank Office Traction November 2013, Ambit Capital research; Note: CBD & Off CBD corresponds to Nariman Point, Cuffe Parade, Ballard Estate,
Fort, Mahalaxmi, Worli micro-markets; ABD corresponds to BKC, Bandra (E), Kalanagar and Kalina micro-markets; Central Mumbai consists of Parel, Lower Parel,
Dadar and Prabhadevi micro-markets; SBD West consists of Andheri, Jogeshwari, Goregaon and Malad micro-markets; SBD Central corresponds to Chembur,
Kurla, Ghatkopar, Vikhroli, Kanjurmarg, Powai and Bhandup micro-markets; PBD consists of Thane, Airoli, Vashi and Belapur micro-markets
A typical lease rental agreement on Oberois commercial projects lasts for 5-7 years
embedded with a rent reset clause every three years. However, given the ongoing
sluggishness in the broader economic environment and supply outstripping demand
for commercial properties (reflected in rising vacancies), we assume a 1% YoY decline
in lease rental rates for all of Oberois office projects. Any recovery in the office space
segment, with a potential turnaround in absorption levels, poses an upside risk to our
estimates on lease rent.
We assume a 3% YoY rise in the average rentals for Oberoi Mall (retail property) and
a 5% YoY rise in RevPAR (revenue per available room), the key operating metric for
the companys hospitality projects (Westin and Oasis).
Occupancy rates for retail/commercial/hospitality projects: Given the

continued weakness in the broader economic environment, we expect the
demand for commercial office space to remain sluggish over the near term.
Therefore, for upcoming office-use projects, we assume occupancy levels at 25%
during Year 1, 50% during Year 2, 75% during Year 3 and gradually plateauing
at a steady-state 85% over the next 10 years. Although the overall vacancy levels
April 23, 2014
Page 49
Oberoi Realty
in Mumbai are at an all-time high of over 20%, our analysis suggests that SBD
West, the micro-market corresponding with Oberois upcoming office space
projects, consistently absorbs about one-third of the inventory every quarter (see
Exhibit 22).
Exhibit 22: Business district-wise absorption in Mumbai (%)
Business district
1QCY12
3QCY12
4QCY12
1QCY13
2QCY13
3QCY13
CBD & Off CBD
1%
2%
4%
0%
3%
1%
ABD
6%
14%
3%
3%
6%
16%
17%
43%
29%
4%
34%
7%
SBD West
30%
13%
47%
47%
31%
32%
SBD Central
28%
18%
2%
15%
4%
14%
PBD
18%
10%
15%
31%
22%
30%
Central Mumbai
Source: Knight Frank Office Traction November 2013, Ambit Capital research; Note: CBD & Off CBD corresponds to Nariman Point, Cuffe Parade, Ballard Estate,
Fort, Mahalaxmi, Worli micro-markets; ABD corresponds to BKC, Bandra (E), Kalanagar and Kalina micro-markets; Central Mumbai consists of Parel, Lower Parel,
Dadar and Prabhadevi micro-markets; SBD West consists of Andheri, Jogeshwari, Goregaon and Malad micro-markets; SBD Central corresponds to Chembur,
Kurla, Ghatkopar, Vikhroli, Kanjurmarg, Powai and Bhandup micro-markets; PBD consists of Thane, Airoli, Vashi and Belapur micro-markets
We assume occupancy rates for retail projects (Oberoi Mall) to continue at 99%. For
hospitality projects, we assume an average occupancy rate of 75% for the Westin
project (FY15E-19E) and 25-50% for the Worli project, due to the higher supply of
five-star hotels in Worli as compared to a scarcity premium for such hotels in
Goregaon.
Exhibit 23: Assumptions around occupancy levels (%) in Oberois non-residential projects
Occupancy levels (%)
FY14E
FY15E FY16E FY17E FY18E FY19E
FY20E FY21E FY22E FY23E FY24E FY25E
FY26E
Office space
Commerz I
85%
85%
85%
88%
88%
88%
90%
90%
90%
93%
93%
93%
95%
25%
50%
75%
80%
85%
85%
85%
85%
85%
85%
85%
85%
Commerz II - Phase II
0%
0%
25%
35%
45%
50%
55%
60%
65%
70%
75%
80%
99%
99%
99%
99%
99%
99%
99%
99%
99%
99%
99%
99%
99%
75%
75%
75%
75%
75%
75%
80%
80%
80%
80%
80%
80%
80%
25%
35%
45%
55%
65%
70%
75%
75%
75%
75%
75%
75%
FY20E FY21E FY22E FY23E FY24E FY25E
FY26E
Retail property
Oberoi Mall
Hospitality projects
Westin
Oasis Hospitality
EBITDA margin in non-residential projects: Given that a typical office space

lease agreement mandates the lessee to incur most of the maintenance
expenses, we build in higher EBITDA margins in the office space segment.
Exhibit 24: EBITDA margin (%) assumptions for Oberois non-residential projects
EBITDA margin (%)
FY14E
FY15E FY16E FY17E FY18E FY19E
Office space
Commerz I
99%
99%
99%
99%
99%
99%
99%
99%
99%
99%
99%
99%
99%
90%
90%
90%
90%
90%
90%
90%
90%
90%
90%
90%
90%
90%
90%
90%
90%
90%
90%
90%
90%
90%
90%
Commerz II - Phase II
Retail property
Oberoi Mall
95%
95%
95%
95%
95%
95%
95%
95%
95%
95%
95%
95%
95%
29%
30%
30%
30%
30%
30%
25%
25%
25%
25%
25%
25%
25%
10%
15%
20%
25%
25%
25%
25%
25%
25%
25%
25%
25%
Hospitality project
Westin
Oasis Hospitality
April 23, 2014
Page 50
Oberoi Realty
For the hospitality projects, we assume a maintenance cost of 10% (of operating
revenues) on the Westin project and 15% (of operating revenues) on the Worli project
(in line with the branded residency theme), undertaken in the form of construction
expenditure. Taken alongside our EBITDA margin assumptions, this would imply that
10% of the operating revenues from the Westin project and 15% of the operating
revenues from the Worli project are being re-invested in the respective projects every
year.
Ancillary revenues from hospitality projects: We factor in a meaningful

contribution of ancillary revenues to the overall revenues from both of Oberois
hospitality projects. We have assumed that the Worli (Oasis) hospitality project,
on account of its competitive positioning, will take about 10 years to match the
ancillary revenue contribution of the Westin project.
Exhibit 25: Ancillary revenue (% of total revenue) assumptions for Oberois hospitality projects
Ancillary revenues (%)
FY14E
FY15E
FY16E
FY17E
FY18E
FY19E
FY20E
FY21E
FY22E
FY23E
FY24E
FY25E
FY26E
50%
50%
50%
50%
50%
50%
50%
50%
50%
50%
50%
50%
50%
40%
40%
40%
40%
40%
40%
45%
45%
45%
45%
45%
50%
Hospitality project
Westin
Oasis Hospitality
April 23, 2014
Page 51
Oberoi Realty
Catalysts for our BUY stance

Launch of Worli project by 1QFY15: We expect Oberoi to launch Oasis, its mixeduse Worli project, by 1QFY15. Oasis, proposed as a branded residency, consists of
1.8msf (million square feet) of residential and ~0.3msf of hospitality area.
Completion of Borivali land acquisition: For the Borivali 25-acre land acquisition
transaction to go through, Oberoi Realty needs to obtain two major approvals by
June 2014. Oberoi needs to obtain the collectors permission for the sale of the
Sanad land that forms a part of the total property and an NOC (no objection
certificate) from the labour authority. If these approvals do not come through within
three months, the MOU (Memorandum of Understanding) for the sale of land will
stand annulled. Any potential annulment of this MoU, on any grounds, will be a
significant negative for the visibility on Oberois growth prospects.
Launch of Mulund project by 1HFY15: As highlighted in this note, timely launches
are critical to reviving Oberois sales run rate and consequently, its cash generation.
The company secured the Supreme Courts permission to begin construction, and
thus, we expect the first phase of the Mulund project (1.6msf) to be launched by
2QFY15.
Risks to our BUY stance and our estimates

Delayed launches: We have assumed project launches during each of the first two
quarters of FY15. A delay of one quarter in launching the residential projects at Worli
and Mulund will significantly drag the companys cash flows on account of a larger
portfolio of assets continuing to guzzle cash and an inadequate portfolio of annuity
assets generating cash.
Borivali land acquisition falling through: Oberois bid for the Borivali land has
not only enhanced Oberois growth prospects but has also acted as a powerful signal
of Oberois intent to deploy its cash meaningfully in accumulating inventory. Whilst
timely launches are crucial to revive the companys operating cash flows, these cash
flows are meaningless without a pipeline of inventory. In fact, timely launches without
any new land acquisition would further compound Oberois problems by generating
surplus cash without any avenue for re-deployment.
Forensic accounting flags

Exhibit 26: Explanation for our forensic accounting flags on the front page
Segment
Score
Comment
Accounting
GREEN
Despite a sluggish 9MFY14 (in terms of fresh sales and cash flows), Oberoi boasts of a superior cash
conversion ratio relative to its peers as well as a very strong balance sheet (zero leverage).
Predictability
AMBER
Although Oberois two key projects (Worli and Mulund) have been subject to exogenous factors (litigation
and regulatory bottlenecks), resulting in inordinate delays in the launch of both properties. The company
has been unable to guide investors realistically and it has made inadequate documented disclosures
around the status of approvals and clearances.
Earnings momentum
GREEN
Oberoi recently emerged as the highest bidder for the Borivali land (put on the block by Tata Steel); the
stock has witnessed sharp upgrades to its earnings contingent on the land acquisition transaction going
through.
April 23, 2014
Page 52
Oberoi Realty
Revision in estimates
Exhibit 27: Revision in FY14E/FY15E/FY16E estimates
FY14E
Changes in estimates
Operating income
FY15E
FY16E
Old
New
% change
Old
New
% change
Old
New
% change
10,221
8,599
-15.9%
11,800
11,742
-0.5%
15,074
14,370
-4.7%
EBITDA (` mn)
5,699
4,218
-26.0%
6,846
6,832
-0.2%
8,844
8,347
-5.6%
Net profit (` mn)
4,231
3,184
-24.7%
5,526
4,733
-14.3%
7,404
6,371
-14.0%
12.9
9.7
-24.8%
16.8
14.4
-14.2%
22.6
19.4
-14.1%
129.2
126.9
-1.7%
142.5
139.2
-2.3%
161.5
155.6
-3.6%
EPS (`)
BVPS (`)
Changes to FY14E estimates

Our estimates for FY14E have undergone a sharp downward revision on account of a
combination of limited inventory available for the sale in ongoing projects and lack of
new project launches. The limited availability of inventory was driven by:
Delay in obtaining regulatory approvals to resume construction in Oberoi Esquire;
Availability limited to high-ticket-sized inventory in Oberoi Exquisite; and
Inventory exhaustion in completed projects - Splendor and Splendor Grande
Given Oberois high operating leverage and zero leverage, the downward revision in
our revenue estimates translates directly to a relatively sharper downgrade to our
FY14E earnings estimates.
Changes to FY15E / FY16E estimates

Our revenue estimates for FY15E/FY16E have been revised downwards (though not
pulled down as sharply as our FY14E forecasts) as a result of our relatively
conservative assumptions around project sales run rate and lower growth in
realisation rates for the upcoming projects. The spill-over of project launches from
FY14 into FY15E partially offsets this downward revision. However, our FY15E/ FY16E
earnings estimates are more sharply impacted due to the interest burden from the
debt that Oberoi would need to raise to fund the Borivali land acquisition.
April 23, 2014
Page 53
Oberoi Realty
SWOT analysis
Exhibit 28: Oberoi Realty - SWOT analysis
Strengths
Weaknesses
Strong brand with a reputation for reliable execution in Mumbai
High project concentration risk with 90% of projects exposed to Mumbai
Net cash of `5bn as of December 2013 as against the average

gearing of 0.6x-0.7x for its closest peers (Sobha and Prestige)
Inability to adhere to launch timelines on account of regulatory delays (at

least three projects stuck in litigation)
Strong pipeline of ongoing (7.1msf) and planned projects (10.4msf)

across formats (excluding the recent land acquisition at Borivali)
Best-in-class construction / architectural tie-ups with Samsung C&T,
L&T and KPF
Stable stream of cash flows from annuity assets (commercial and
hospitality segments), contributing north of 25% to operating income
Opportunities
Threats
Deployment of surplus cash towards opportunistic land acquisition

such as the recent Borivali land acquisition
Further delay in launches that drain surplus cash from the balance sheet
Strategic flexibility to bid for land parcels on the back of negligible

leverage
Desperation to generate returns may force the company towards

acquiring land at unviable prices
April 23, 2014
Page 54
Oberoi Realty
Balance Sheet
FY12
FY13
FY14E
FY15E
FY16E
34,688
38,968
41,685
45,763
51,308
8,000
8,000
9,850
10,714
10,423
10,626
12,297
4,000
Cash
12,934
10,725
9,886
6,418
280
Working capital
11,904
17,528
25,375
36,719
38,730
105.7
118.7
127.0
139.4
156.3
FY12
FY13
FY14E
FY15E
FY16E
5,768
7,813
5,469
7,110
9,243
Shareholders funds
Loan funds
Net Fixed assets
Investments

Income statement
Revenue from residential projects
Hospitality services
Rentals and related income
Property and project management income
897
956
1,146
2,336
2,453
1,289
1,398
1,504
1,798
2,096
229
250
330
391
485
63
58
150
107
92
8,247
10,476
8,599
11,742
14,370
(2,958)
(3,715)
(3,698)
(4,110)
(5,029)
(452)
(640)
(684)
(800)
(994)
(3,411)
(4,355)
(4,381)
(4,910)
(6,023)
EBITDA
4,836
6,121
4,218
6,832
8,347
PBT
6,060
6,830
4,644
6,972
9,478
PAT
4,630
5,048
3,205
4,810
6,540
14.1
15.4
9.8
14.7
19.9
Total operating Income

Operating costs
Total SG&A
Total operating expenditure
EPS (`)
Cash Flow statement

FY14E
FY15E
FY16E
Total pre-tax CF
2,546
13,049
14,181
Tax
(840)
(4,306)
(4,680)
CFO
1,706
8,743
9,501
FCFE
2,443
10,220
10,961
Changes in WC
7,847
11,344
2,011
Source: Company, Ambit Capital research, Note: All financials pertain to IFRS consolidated accounts
Ratio Analysis
FY12
FY13
FY14E
FY15E
FY16E
P/E (x)
16.0
14.6
23.0
15.4
11.3
2.1
1.9
1.8
1.6
1.4
P/FCF
43.4
8.5
7.8
P/FCFE
30.3
7.2
6.8
P/BV (x)
ROE %
Net Debt/equity
13.6
13.7
7.9
11.0
13.5
-0.37
-0.28
-0.14
0.03
-0.01
EBITDA margin (%)
58.6
58.4
49.1
58.2
58.1
Net margin %
47.5
44.0
34.3
36.4
41.3
1.0
1.0
0.7
1.0
1.3
Dividend yield %
April 23, 2014
Page 55
Oberoi Realty
This page has been intentionally left blank
April 23, 2014
Page 56
Sobha Developers
BUY
COMPANY INSIGHT
SOBHA IN EQUITY
April 23, 2014
Position of relative strength
Real Estate
With a growing diversified presence across key southern geographies,

especially in NRI-rich cities, Sobha has gradually positioned itself in a
sweet spot. The company is focused on further penetrating the southern
markets beyond Bangalore (its primary market). In addition, it has a
tight collection system. Thus, we expect a quarterly launch run rate of
2msf to translate into a strong pre-sales run rate in excess of 4msf in
FY15E/FY16E. We are BUYers with a sum-of-the-parts valuation of ` 490,
implying 9.6x FY15E P/FCFE.
Competitive position: STRONG
Recommendation
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
`37/US$0.6
`83/US$1.4
`376
`490
30
Flags
Accounting:
Predictability:
Earnings Momentum:
Changes to this position: POSITIVE
AMBER
AMBER
GREEN
FY14 guidance disappointment transitory; well poised for FY15

During FY14, Sobha disappointed on its guidance with volume sales at 3.6msf
(vs guidance of 4.2msf) and value sales at `23.4bn (vs guidance of `26bn)
primarily due to delayed launches. However, with a 20% QoQ increase in presales during 4QFY14, unrecognised revenues from sold units at `23bn (100% of
its December 2013 net worth) and three large projects launched towards endMarch 2014, we expect Sobha to regain its sales momentum in FY15.
Cash inflows (net of interest payout) strong; FY15 refinancing crucial
Catalyst
OMR (Chennai) project launch in 1HFY15
Gurgaon project launch during 1HFY15
Launch of APMC project in Bangalore
Performance (%)
Backward integration and strong launch pipeline imply sweet spot

Sobhas backward-integrated business model has consistently helped achieve
timely execution of projects (annual development run rate of over 6msf since
FY08) whilst maintaining the highest quality standards for contracted projects as
well as its own projects. Concomitant with its backward-integrated business
model, a visible pick-up in sales momentum, steady cash conversion and a
strong launch pipeline, Sobha is in a sweet spot.
140
120
100
80
60
40
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Sobha generated a steady stream of cash inflows from its real estate segment
(quarterly run rate of `4.5bn) and its contracted projects (quarterly run rate of
`1.7bn) during 9MFY14. During 9MFY14, Sobha averaged `0.7bn-0.8bn of
quarterly net cash from operations (CFO), net of interest payouts. With net debt
to equity at 0.6x, Sobha is exposed to a manageable refinancing risk with over
`8.5bn (0.3x net worth) due for repayment during FY15.
Sensex
SOBHA IN
Valuation at ` 490/share; remain BUYers

We use a project-based DCF approach to arrive at a valuation of `490/share,
implying a 30% upside, valuing the company at 9.6x FY15E FCFE. As Sobha
predominantly operates through joint development agreements (JDAs), a
capital-light business model, P/FCFE is an ideal measure for valuing a stabledebt Sobha. A higher-than-expected interest rate environment and lower-thananticipated cash inflows are key risks to our BUY stance.
Key financials
Year to March
Net Revenues (` mn)
FY12
FY13
FY14E
FY15E
FY16E
14,079
18,645
20,931
24,500
29,765
Operating Profits (` mn)
4,666
5,483
5,905
7,300
8,995
Net Profits (` mn)
2,060
2,172
2,245
2,845
3,675
Diluted EPS (`)
21.0
22.1
22.9
29.0
37.5
RoE (%)
10.7
10.5
10.5
12.7
14.7
P/E (x)
17.8
16.8
16.3
12.9
9.9
P/B (x)
1.8
1.7
1.6
1.5
1.3
Analyst Details
Krishnan ASV
+91 22 3043 3205

Sobha Developers
Snapshot of Company Financials

Profit and Loss
Company Background
Year to March
Revenues from property
development
Revenues from sale of land &
TDR
Revenue from sale of
manufactured products
Revenues from contractual
projects
Total income
FY13
FY14E
FY15E
FY16E
13,092
15,762
17,984
21,754
1,020
1,477
1,725
2,187
2,766
3,013
3,390
4,261
5,160
43
54
67
84
18,645
20,931
24,500
29,765
Operating costs
Total SG&A (incl. employee
costs)
EBITDA
(9,103)
(10,252)
(12,356)
(14,957)
(4,060)
(4,101)
(4,942)
(5,983)
5,483
5,905
7,300
8,995
PBT
3,239
3,257
4,312
5,376
PAT
2,172
2,245
2,845
3,675
22.1
22.9
29.0
37.5
EPS (`)
Balance Sheet
Sobha Developers (Sobha), one of Indias foremost real

estate developers, is focused on residential formats (c.40%)
and contractual projects (c.60%) with a sizeable exposure
(90% of 61msf in completed projects) to the relatively stable
south Indian market. Sobha has an ongoing real estate
project slate of 18.9msf under construction (55% in
Bangalore) and a contract portfolio of 9.5msf (60%
contracted by Infosys). Whilst the portfolio of ongoing real
estate projects is relatively more concentrated in Bangalore
(56%), the portfolio of contracts is comparatively betterdiversified (32% exposure to Bangalore). With its backwardintegrated business model and an under-construction area
of ~36msf likely to act as feedstock for a steady stream of
launches, we expect a quarterly launch run rate of 2msf to
translate into a strong pre-sales run rate in excess of 4msf
in FY15E/FY16E.
Cash flow
FY13
FY14E
FY15E
Shareholders fund
21,234
22,819
24,948
Debt
13,787
14,787
15,787
Minority interest
102
102
102
102
Net Fixed Assets
3,169
2,634
2,127
1,644
670
4,086
7,631
12,920
31,283
30,986
31,078
30,115
216.5
231.4
252.8
279.7
7,710
10,582
Tax
(1,141)
(1,496)
(1,906)
CFO
5,417
6,214
8,677
FCFE
3,203
3,773
5,875
297
(92)
963
Changes in WC
Cost of debt benefiting from rating upgrades
8,000
540
14.5%
7,000
520
6,000
500
5,000
480 13.5%
4,000
460
3,000
440
2,000
420
14.0%
14.1%
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
13.0%
12.7% 12.5%
3Q14
2Q14
1Q14
4Q13
12.0%
0
1Q12
13.5%
13.6%
12.9%
1Q12
1,000
13.7%
3Q13
Pre-sales (` mn) - 4QFY14 witnessing an uptick
6,558
2Q13
FY16E
1Q13
Working capital
FY15E
4Q12
Cash & bank balance
FY14E
3Q12
Investments
FY16E Year to March

27,793
Total pre-tax CF
16,787
2Q12
Year to March
Finance cost (Rs mn)

Blended cost of debt (annualized) (%) (RHS)
April 23, 2014
Page 58
Sobha Developers
FY14 - guidance miss but exit on a high

4QFY14 signals meaningful sequential turnaround
Sobha delivered FY14 volume sales at 3.6msf (guidance: 4.2msf) and value
sales at ` 23.4bn (guidance: ` 26bn). However, with a 20% QoQ increase in
pre-sales during 4QFY14, unrecognised revenues from sold units at ` 23bn
(100% of its December 2013 net worth) and strong demand for large projects
launched towards the end of March 2014, we expect Sobha to regain its sales
momentum during FY15.
Despite falling short of its FY14 volume and value sales guidance, Sobha saw a
visible turnaround in sales momentum by end-FY14, as reflected in a 20% sequential
pick-up in pre-sales during 4QFY14 (at `6bn) as compared to a sub-par 3QFY14 (at
`5bn). The recovery comes on the back of 3.6msf of launches in south India during
the March quarter that garnered strong demand after a sluggish 3QFY14 (when sales
volumes dipped to a ten-quarter low of 0.74msf).
Exhibit 1: Pre-sales (` mn) - turnaround during 4QFY14
8,000
Volume recovery during 4QFY14

on the back of launches in south
India and more affordable units
in Bangalore
Exhibit 2: Area sold (sft) - 4QFY14 witnessing an uptick

1,200,000
7,000
1,000,000
6,000
800,000
5,000
4,000
600,000
3,000
400,000
2,000
200,000
1,000
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
0
1Q12
We attribute the sales momentum to Sobhas strategy of focusing on lower ticket sizes
in the `7.5mn-15mn price bracket that continues to see stable demand. Given the
strong reception to its recent project launches, we believe that Sobha will be able to
deliver volume sales north of 4msf in FY15/FY16E on the back of a relatively strong
pipeline of launches in south India.
Reducing concentration risk; benefiting from diversified presence
At the end of March 2014, Sobha has a real estate presence in 9 cities (up from 4 as
of March 2011). Sobhas primary market remains Bangalore (accounting for c.68% of
volumes and 73% of value sales on an average), which ranks extremely high on the
employment creation and affordability metrics. By FY16, we expect the contribution of
Bangalore to Sobhas volume sales to decline to c.60%.
Exhibit 3: Contribution of newly added locations to overall volumes (% of total sft)
Location
Launch debut
Mysore
1QFY12
Average contribution
to area sold (%)
1.9%
NCR
2QFY12
9.6%
Chennai
4QFY12
8.2%
Kozhikode
2QFY14
4.9%
Cochin
4QFY14
1.8%
April 23, 2014
Page 59
Sobha Developers
Our discussion with the management team suggests that the company is looking to
nearly double its new sales volume from ~3.6msf (as of FY14) to ~7msf over the next
five years (FY19), with the contribution of Bangalore likely to drift lower to 50%. Even
within Bangalore, Sobha is focused on gradually moving towards smaller-sized units
(from 3BHK formats of 1,800sft-2,000sft to 2BHK formats of 1,350sft) to reduce the
unitary ticket size and enhance its offerings in the affordable segment.
Exhibit 4: Location-wise breakdown of volume sales (sft) - growing contribution from NRI-rich locations
Bangalore
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
520,080
590,438
591,216
682,629
603,055
674,622
503,708
630,947
Thrissur
44,096
118,306
88,407
93,034
149,194
103,270
49,064
58,458
Coimbatore
26,005
10,631
19,574
7,160
15,871
17,124
40,171
Pune
30,639
38,621
23,124
45,324
22,912
12,716
24,433
23,395
NCR
135,721
137,600
103,098
132,732
36,255
30,892
23,522
38,114
Chennai
72,083
42,323
67,350
106,377
99,963
86,869
53,523
62,195
Mysore
6,975
8,209
9,881
4,015
9,300
22,128
26,538
19,547
Cochin
NP
NP
NP
NP
NP
NP
NP
16,252
Kozhikode
Total
NP
NP
NP
NP
NP
56,661
42,293
32,193
835,599
946,128
902,650
1,071,271
920,679
1,003,029
740,205
921,272
Source: Company, Ambit Capital research; Note: NP indicates no projects on offer in the city during that quarter
Sobhas volume sales, although a function of the exogenous economic environment,

are also a function of increasing penetration into newer cities as well as a stronger
launch pipeline in its traditional markets.
Exhibit 5: New geographies - contribution from Bangalore likely to decline further
10
74.0%
72.0%
70.0%
68.0%
66.0%
64.0%
5
62.0%
60.0%
4
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14
Number of cities (RHS)
Area sold in Bangalore (% of total sft)
Our discussions with the management team and independent consultants suggest
that Sobha is actively scouting for land parcels in the southern city of Hyderabad
(either outright acquisition or through the joint development agreement route) to add
to its slate of 9 locations.
April 23, 2014
Page 60
Sobha Developers
Strong cash conversion to be tested

Cash inflows (net of interest payouts) to pick up pace
Net of interest payouts, Sobha has averaged ` 0.7bn-0.8bn of quarterly net
cash from operations (CFO) during 9MFY14, aided by a steady stream of cash
inflows from its real estate operations (quarterly run rate of ` 4.5bn) as well
as its contracted projects (quarterly run rate of ` 1.7bn). Net debt-to-equity is
comfortable at 0.6x, with the average cost of debt at 12.7%, gaining from an
improving credit profile (on the back of timely repayments and steady cash
flows). However, Sobha is exposed to high refinancing risk with over ` 8.5bn
(0.3x December 2013 net worth) due for repayment during FY15.
Although Sobhas net debt-to-equity has been stable at 0.6x over the past eight
quarters, the cost of debt has been trending lower during the corresponding period
(in an increasing interest rate environment), primarily on the back of upgrades from
rating agencies (ICRA and Brickworks) during FY14.
Exhibit 7: Cost of debt benefiting from rating upgrades
13.5
0.64
540
13.0
0.62
520
Net debt (Rs bn)
440
13.0%
12.7% 12.7%
12.5%
3Q14
2Q14
1Q14
4Q13
3Q13
12.0%
2Q13
420
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
0.52
3Q12
10.0
2Q12
0.54
1Q12
10.5
13.5%
12.9%
1Q13
0.56
11.0
460
4Q12
0.58
11.5
480
14.0%
14.1%
13.9%
13.9%
13.7%
13.6%
13.5%
13.6%
13.5%
3Q12
0.6
12.0
500
1Q12
12.5
14.5%
2Q12
Exhibit 6: Net debt-to-equity stable at 0.6x
Cost of debt down by ~80bps in

the past eight quarters, benefiting
from rating upgrades by ICRA
and Brickworks during FY14
Finance cost (Rs mn)
Net debt-to-equity (x) (RHS)
Blended cost of debt (annualized) (%) (RHS)
Our discussion with rating agencies suggests that the upgrades were primarily driven
by steady cash flows on the back of healthy sales velocity in its ongoing projects and
periodic repayments of its existing debt, with the 3QFY14 volume print an exception
to the trend. Sobhas improving credit profile has been driven by a healthy mix of
recurring cash flows from its contractual projects (~26% of total cash inflows from
operations as of 9MFY14).
Exhibit 8: Segmental cash collections - stable, recurring cash flows from contracts
7,000
6,000
1,037
5,000
4,000
1,788
2,111
5,293
4,923
4,552
4,445
4Q13
1Q14
2Q14
3Q14
1,495
764
798
3,000
2,000
1,230
Rising contribution of operating

cash inflows from recurring cash
flows (contract projects)
3,249
3,687
3,883
1Q13
2Q13
3Q13
1,000
0
Real estate
Contracts
Monetization of land
April 23, 2014
Page 61
Sobha Developers
Over ` 8.5bn (over 50% of outstanding debt) up for repayment during FY15
Our discussion with rating agencies suggests that debt of `8.5bn (of the overall net
debt of `13bn) is up for repayment during FY15. Although Sobha has matching
undrawn sanctioned limits for its ongoing and planned projects, the disbursement of
incremental debt is contingent upon the timely launch and progress of these projects.
Also, one of Sobhas proposed launches over the next four quarters is the
development of a commercial project awarded by APMC (Agricultural Produce Market
Committee), which is likely to result in increased funding requirements.
Debt of ` 8.5bn (of the overall net

debt of ` 13bn) is up for
repayment during FY15; Sobha is
exposed to high but manageable
refinancing risk in a high interest
rate environment
High but manageable refinancing risk during FY15

Hence, Sobha is exposed to high refinancing risk in a high interest rate environment
(our Macro team expects a further 25-50bps hike in repo rate during 1HFY15). The
refinancing risk (potentially higher cost of debt) is further exacerbated by the fact that
the debt repayment is to be made out of customer collections, which depends on the
timing and success of its recent as well as upcoming launches.
As a result, we expect Sobha to expedite the pace of launches and front-load some of
its proposed launches (residential) during the early part of FY15 to stimulate its cash
inflows and manage the refinancing risk better.
Exhibit 9: Format-wise proposed launches during April-December 2014
Format
Sobha's share of saleable area (sft)
Residential
3,323,893
Bangalore
682,143
Gurgaon (NCR)
102,420
Chennai
1,984,850
Coimbatore
206,000
Thrissur
348,480
Commercial
2,063,252
Bangalore
2,063,252
TOTAL
5,387,145
We expect Sobha to launch its commercial project during 2HFY15 to manage its cash
flows better (operating cash inflows are likely to be relatively slower from the
commercial project vis--vis the residential properties). During the early part of FY15,
we believe Sobha will be more aggressive on its residential launches, especially in
Gurgaon (offers higher realisations) and Chennai (offers relatively higher volume).
We expect the commercial project

launch to be back-ended during
FY15 for Sobha to better manage
its cash flows
Going forward, the quantum of undrawn sanctioned limits that Sobha needs to draw
upon as well as the cost of incremental debt will be influenced by:
Sales velocity in recently-launched and upcoming residential projects;
Ability to maintain collection efficiency;
Pace of execution of new launches; and
Recurring cash flows from contracts (cash inflows).
April 23, 2014
Page 62
Sobha Developers
Project details
Sobha has an ongoing real estate project slate of 18.9msf under construction (55% in
Bangalore) and a contract portfolio of 9.5msf (60% contracted by Infosys). Whilst the
portfolio of ongoing real estate projects (see Exhibit 10) is relatively more
concentrated in Bangalore, the portfolio of contracts (see Exhibit 11) is comparatively
better-diversified.
Exhibit 10: Location mix of ongoing projects (18.9msf)
Exhibit 11: City mix of ongoing contract projects (9.5msf)
Others
6%
Kozhikode
3%
Others
13%
Jaipur
6%
Chennai
5%
Bangalore
32%
Pune
7%
Thrissur
8%
Bangalore
56%
Mangalore
10%
Gurgaon
22%
Hyderabad
17%
Trivandrum
15%
Real estate projects

Aside from its under-construction projects, Sobha has an undeveloped land bank of
over 2,500 acres (translating into saleable area of 227msf), with a majority of its land
bank in IT/ITeS-centric cities. Sobhas land bank is well diversified in IT/ITeS-driven
locations that contribute 80% to the companys land bank and 81% to its discounted
cash flow (DCF) (see Exhibit 12).
Exhibit 12: City-wise land bank - demand and valuation drivers
Location
% of land bank
% contribution to DCF
Key buyer segments
Bangalore
38.2%
41.0%
IT/ITeS
Chennai
17.0%
19.0%
IT/ITeS
Coimbatore
2.7%
2.1%
IT/ITeS
Gurgaon
0.0%
3.0%
BPO/KPO/IT/ITeS
Hosur
15.4%
11.0%
IT/ITeS
Kochi
21.3%
14.0%
NRI
Kozhikode
0.2%
0.2%
NRI
Mysore
0.3%
0.3%
IT/ITeS
Pune
2.3%
7.0%
IT/ITeS
Thrissur
2.5%
2.4%
NRI
April 23, 2014
Page 63
Sobha Developers
Valuation
We use a sum-of-the-parts (SOTP) approach and arrive at a valuation of `490/share
(marginal upward revision from our earlier valuation of `486/share), implying a 30%
upside. We value the real estate business at `441/share (using a DCF approach) and
the contracts business at `49/share.
Exhibit 13: Sum-of-the-parts valuation (`/share)
Real estate projects valuation (` mn)
Real estate projects (`/shr)
Contracts business valuation (` mn)
Contracts business (`/shr)
Total valuation (` mn)
SOTP Valuation (`/shr)
Exhibit 14: Valuation of real estate business (`/share)

43,413
442
4,800
49
48,213
491
Real estate projects (` mn)

Less: Unpaid land bank (` mn)
59,317
1,250
Less: Net debt (March 2015) (` mn)
14,654
Net valuation (` mn)
43,413
No. of shares (mn)
98.2
Net valuation (`/shr)
442
Assumptions around valuation parameters
Target leverage: We assume long-term target gearing at 0.7x - this compares

to 0.6x net debt-to-equity that the company has been maintaining over the past 8
quarters.
Weighted average cost of capital: Assuming cost of equity at 18%, we arrive

at a weighted average cost of capital of 14.3%. Cost of equity at 18% is higher
than the 15% that we assume for Oberoi Realty. On the other hand, we assume
cost of debt at 14%, ~125bps higher than Sobhas current cost of debt (12.7% as
of December 2013).
Real estate projects

Given Sobhas discontinued disclosures around project-wise sales and project-level
progress, we cumulate the city-wise pre-sales based on management guidance and
inputs from independent consultants.
Annual run rate of sales: For under-construction projects that are yet to be
launched, we build in about 50% of the total sales to be achieved by Year 1 after
launch and 80% of cumulative sales by Year 3. For all projects, we assume the
stock out stage is triggered about 12-18 months after project completion. For all
the upcoming projects, we build in a delay of 12-18 months in project
completion. Although Sobha claims to complete its residential projects over a
period of 2.5 years to 3.5 years, our assumptions around delays are conservative,
given the usual issues around labour shortage.
Our assumptions around sales run rate are consistent with a typical project life-cycle
in which sales are high during the initial phase (after the project launch) and gather
fresh momentum as the project nears completion (pull factor on account of customers
looking for ready-to-move-in properties). However, the run rate of sales tapers off
during the interim.
Growth in average realisation rates in ongoing projects: For FY15, in the

case of ongoing projects, we have benchmarked average realisation rates based
on our discussion with independent consultants. In general, we assume c.8% YoY
increase in average realisations between FY15E and FY18E followed by 5% YoY
increase in average realisations thereafter until the project is completely sold out.
Growth in realisation rates in upcoming projects: For the upcoming projects,

we have assumed c.8% YoY increase in average realisation for the first two years
after launch followed by 5% YoY increase in average realisations thereafter until
the project is completely sold out. Our base realisation (pricing at the time of
launch of such projects) is at a 5-10% discount to the prevailing pricing for
comparable projects in the relevant micro-market.
April 23, 2014
Page 64
Sobha Developers
Outflow pertaining to construction costs: For projects under construction, we

have assumed that: (a) construction costs are distributed over the construction
period proportionate to the percentage of completion; and (b) project is delayed
by 1-2 years relative to the managements targeted completion schedule on
account of labour shortage.
We have individually projected the construction costs for each residential project
from FY14E (or the time of launch, whichever is earlier) until project completion,
using the percentage of completion approach. We use an average construction
cost (per sft) of `3,000-3,600 for premium projects and `1,500-2,000 for Sobhas
lower price band projects and projects in the smaller cities.
Rise in input costs of construction: For all projects under construction, we have
assumed 8% YoY increase in cost of construction (per sft) during the first four
years of a project and 5% thereafter until project completion. Our assumptions
around YoY cost inflation are based on trends around indexed building
construction costs published by the Construction Industry Development Council
(CIDC). Our estimates around rise in input costs are conservative given the fact
that the cost of building construction increased ~4% in Mumbai and ~5% each in
Delhi and Bangalore over the past five years (between January 2009 and March
2014). Concomitant with our assumptions around growth in blended realisation
rates, we believe that Sobhas pricing power is only restored on select projects
post FY18E.
Exhibit 15: YoY movement in building construction costs in major real estate markets
Mumbai
Delhi
Apr-14
Jan-14
Jul-13
Oct-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Bangalore
Source: CIDC, Ambit Capital research
Exhibit 16: Key assumptions

FY14E
FY15E
FY16E
Remarks
Residential
3.59
3.91
4.37
Contractual sales
3.41
3.98
4.53
Residential
6,534
6,926
7,342
We build in 6% YoY blended rise in realisation rates during FY15E and FY16E
Contracts
1,500
1,620
1,750
We build in 8% YoY rise in blended realisations during FY15E and FY16E
23,457
27,081
32,085
5,115
6,448
7,926
Construction cost (`/sft)
1,900
2,050
2,200
Average cost of debt (%)
12.75%
14%
14%
Volumes (msf)
We expect residential sales to record a 9% YoY growth during FY15E and a
12% YoY growth during FY16E
Given the contractual nature of projects (with relatively higher visibility), we
build in a 17% YoY growth in contract volumes during FY15E and 14% YoY
growth during FY16E
Realization rates (`/sft)
Pre-sales value (` mn)

Residential sales
Contracts
The pre-sales value is driven by 9-12% rise in volumes and a 6% rise in

realisation rates
We assume rise in input costs at around 8% for FY15E and 7% for FY16E
We assume a 125bps increase in cost of debt during FY15E and FY16E
April 23, 2014
Page 65
Sobha Developers
Catalysts for our BUY stance

Launch of residential project in Chennai: We expect Sobhas residential project
launch in Chennai during 1HFY15 to improve the companys net cash reserves prior
to the principal repayment cycle.
Launch of residential project in Gurgaon: Whilst the Chennai projects are likely
to drive volume sales, the residential project launch in Gurgaon is likely to contribute
towards better realisations (higher unitary ticket size).
Launch of commercial project during 2HFY15: We expect Sobha to launch its
commercial project at Bangalore during 2HFY15 to better manage its cash flows and
principal repayment during the year.
Risks to our BUY stance and our estimates

Delayed launches: We have assumed project launches during each of the first two
quarters of FY15 and a front-loading of residential projects in Chennai and Gurgaon.
A delay of one quarter in launching the residential projects at Chennai and Gurgaon
will significantly drag Sobhas cash inflows and raise its net debt-to-equity position.
Weak sales velocity in recently launched projects: As highlighted earlier, a weak
sales velocity in its recent and upcoming launches coupled with a fall in pricing power
(for Sobha) will further accentuate the need for refinancing.
Premature launch of commercial project at Bangalore: We have assumed that
Sobha would launch its commercial project at Bangalore during 2HFY15. An earlier
launch of the commercial project would imply greater strain on the expected pace of
cash inflows, which might have to be offset by higher debt at the wrong end of the
interest rate cycle.
Risk of refinancing: We have assumed that Sobha can refinance its debt maturing
during FY15 at 14% (higher than Sobhas current cost of debt by ~120bps). A higherthan-anticipated interest rate environment and lower-than-anticipated cash inflows
(resulting in tighter liquidity) are risks to our BUY stance.
Forensic accounting flags

Exhibit 17: Explanation for our forensic accounting flags on the front page
Segment
Score
Comment
Accounting
AMBER
Despite an improving cash conversion over the past three years (FY11-13), Sobha
ranks behind its other A-grade peers such as Oberoi Realty; relatively low cash yield;
elevated contingent liabilities as a proportion of net worth; extremely low audit fees
(as proportion of auditor remuneration).
Predictability
AMBER
Instances of missed guidance despite exercising relatively better control over the
supply chain.
Earnings momentum
GREEN
The company launched four new projects (Bangalore, Kozhikode and Cochin) during
4QFY14, and thus, the stock has seen upgrades to its FY15E earnings.
April 23, 2014
Page 66
Sobha Developers
Revision in estimates
Exhibit 18: Revision in FY14E/FY15E/FY16E estimates
FY14E
Changes in estimates
Operating income
Old
New
FY15E
FY16E
% change
Old
New
% change
Old
New
% change
20,559
20,931
1.8%
24,779
24,500
-1.1%
29,998
29,765
-0.8%
EBITDA (` mn)
6,205
5,905
-4.8%
7,481
7,300
-2.4%
9,058
8,995
-0.7%
Net profit (` mn)
2,318
2,245
-3.1%
3,038
2,845
-6.4%
3,870
3,675
-5.0%
23.6
22.9
-3.0%
31.0
29.0
-6.4%
39.5
37.5
-5.2%
232.7
231.4
-0.6%
254.4
252.8
-0.6%
283.4
279.7
-1.3%
EPS (`)
BVPS (`)
Changes to FY14E estimates

Our earnings estimates for FY14E have undergone a marginal downward revision
due to lower-than-anticipated pre-sales volume and lower EBITDA margin during
FY14 on account of:
One-time write-off of `63mn on account of one-time settlement on a contract;
Weak demand fundamentals in the Gurgaon and Pune markets; and
Delayed launches in the southern Indian markets.
Changes to FY15E / FY16E estimates

Our revenue estimates for FY15E/FY16E have been revised marginally downwards as
a result of relatively conservative assumptions around project sales run rate and
lower growth in realisation rates in ongoing projects. However, our FY15E/ FY16E
earnings estimates are more sharply impacted on account of the higher cost of debt
that we have assumed for Sobha during FY15.
April 23, 2014
Page 67
Sobha Developers
SWOT Analysis
Exhibit 19: Sobha Developers - SWOT analysis
Strengths
Weaknesses
Well-located land bank in IT/ITeS-dominated cities such as Bangalore,

its primary market, Gurgaon, Chennai and Pune, accounting for over
80% of the companys saleable area
High concentration risk in the contracts business with 60% of orders from
Infosys
Sizeable presence in Kerala markets with relatively high proportion of

NRI diaspora
High refinancing risk with about `8.5bn up for principal repayment

during FY15
Diversified presence in 9 cities (real estate projects) with contribution

from Bangalore, its primary market, gradually reducing from over 75%
to about 65%
Infosys partner of choice for civil contracts (own buildings)
Backward-integrated business model with subsidiaries engaged in
metalwork manufacturing (0.3msf), woodwork manufacturing (0.8msf),
giving Sobha better control on the supply chain
Opportunities
Threats
Expansion into formats other than residential such as commercial

(office and retail)
Fixed-margin contract business with high client concentration
Expansion into newer geographies to reduce dependence on

Bangalore, its primary market
Rise in net debt-to-equity in case of lower sales velocity from recently

launched projects or delayed launches
April 23, 2014
Page 68
Sobha Developers
Balance Sheet
Year to March
FY12
FY13
FY14E
FY15E
FY16E
Shareholders fund
19,956
21,234
22,819
24,948
27,793
Debt
12,440
13,787
14,787
15,787
16,787
Minority interest
355
102
102
102
102
Net Fixed Assets
2,810
3,169
2,634
2,127
1,644
Investments
588
670
4,086
7,631
12,920
29,352
31,283
30,986
31,078
30,115
203.5
216.5
231.4
252.8
279.7
FY12
FY13
FY14E
FY15E
FY16E
Revenues from property development
8,948
13,092
15,762
17,984
21,754
Revenues from sale of land & TDR

Revenue from sale of manufactured
products
Revenues from contractual projects
1,365
1,020
1,393
1,477
1,725
2,187
2,766
2,348
3,013
3,390
4,261
5,160
25
43
54
67
84
14,079
18,645
20,931
24,500
29,765
Operating costs
(4,447)
(9,103)
(10,252)
(12,356)
(14,957)
Total SG&A (incl. employee costs)
(4,967)
(4,060)
(4,101)
(4,942)
(5,983)
EBITDA
4,666
5,483
5,905
7,300
8,995
PBT
3,177
3,239
3,257
4,312
5,376
PAT
2,060
2,172
2,245
2,845
3,675
21.0
22.1
22.9
29.0
37.5
Cash & bank balance

Working capital
Income statement
Year to March

Total income
EPS (`)
Cash Flow statement

Year to March
FY14E
FY15E
FY16E
Total pre-tax CF
6,558
7,710
10,582
Tax
(1,141)
(1,496)
(1,906)
CFO
5,417
6,214
8,677
FCFE
3,203
3,773
5,875
297
(92)
963
Changes in WC
Source: Company, Ambit Capital research, Note: All financials pertain to IFRS consolidated accounts
Ratio Analysis
Year to March
FY12
FY13
FY14E
FY15E
FY16E
P/E (x)
17.8
16.8
16.3
12.9
9.9
1.8
1.7
1.6
1.5
1.3
5.5
4.8
3.5
P/BV (x)
P/FCF
P/FCFE
9.4
8.0
5.1
10.5
12.7
14.7
0.65
0.65
0.63
0.60
29.4
30.2
30.2
30.2
14.6
11.6
11.2
12.1
12.7
1.6
2.3
2.4
3.0
3.4
ROE %
10.7
10.5
Debt/equity
0.62
EBITDA margin %
33.1
Net margin %
Dividend yield %
April 23, 2014
Page 69
Sobha Developers
Institutional Equities Team

Saurabh Mukherjea, CFA
CEO, Institutional Equities
(022) 30433174
saurabhmukherjea@ambitcapital.com
Research
Analysts
Industry Sectors
Desk-Phone
E-mail
Aadesh Mehta
Banking & Financial Services
(022) 30433239
aadeshmehta@ambitcapital.com
Achint Bhagat
Cement / Infrastructure
(022) 30433178
achintbhagat@ambitcapital.com
Aditya Khemka
Healthcare
(022) 30433272
adityakhemka@ambitcapital.com
Akshay Wadhwa
(022) 30433005
akshaywadhwa@ambitcapital.com
Ankur Rudra, CFA
Technology / Telecom / Media
(022) 30433211
ankurrudra@ambitcapital.com
Ashvin Shetty, CFA
Automobile
(022) 30433285
ashvinshetty@ambitcapital.com
Bhargav Buddhadev
Power / Capital Goods
(022) 30433252
bhargavbuddhadev@ambitcapital.com
Dayanand Mittal, CFA
Oil & Gas / Metals & Mining
(022) 30433202
dayanandmittal@ambitcapital.com
Deepesh Agarwal
Power / Capital Goods
(022) 30433275
deepeshagarwal@ambitcapital.com
Gaurav Mehta, CFA
Strategy / Derivatives Research
(022) 30433255
gauravmehta@ambitcapital.com
Karan Khanna
Strategy
(022) 30433251
karankhanna@ambitcapital.com
Krishnan ASV
Real Estate
(022) 30433205
Nitin Bhasin
E&C / Infrastructure / Cement
(022) 30433241
nitinbhasin@ambitcapital.com
Nitin Jain
Technology
(022) 30433291
nitinjain@ambitcapital.com
Pankaj Agarwal, CFA
(022) 30433206
pankajagarwal@ambitcapital.com
Pratik Singhania
Real Estate / Retail
(022) 30433264
pratiksinghania@ambitcapital.com
Parita Ashar
Metals & Mining / Oil & Gas
(022) 30433223
paritaashar@ambitcapital.com
Rakshit Ranjan, CFA
Consumer / Real Estate / Retail
(022) 30433201
rakshitranjan@ambitcapital.com
Ravi Singh
(022) 30433181
ravisingh@ambitcapital.com
Ritika Mankar Mukherjee, CFA
Economy / Strategy
(022) 30433175
ritikamankar@ambitcapital.com
Ritu Modi
Automobile
(022) 30433292
ritumodi@ambitcapital.com
Tanuj Mukhija, CFA
E&C / Infrastructure
(022) 30433203
tanujmukhija@ambitcapital.com
Sales
Name
Regions
Desk-Phone
Deepak Sawhney
India / Asia
(022) 30433295
deepaksawhney@ambitcapital.com
Dharmen Shah
India / Asia
(022) 30433289
dharmenshah@ambitcapital.com
Dipti Mehta
India / USA
(022) 30433053
diptimehta@ambitcapital.com
Nityam Shah, CFA
USA / Europe
(022) 30433259
nityamshah@ambitcapital.com
Parees Purohit, CFA
UK / USA
(022) 30433169
pareespurohit@ambitcapital.com
Praveena Pattabiraman
India / Asia
(022) 30433268
praveenapattabiraman@ambitcapital.com
Sarojini Ramachandran
UK
+44 (0) 20 7614 8374
E-mail
sarojini@panmure.com
Production
Sajid Merchant
Production
(022) 30433247
sajidmerchant@ambitcapital.com
Sharoz G Hussain
Production
(022) 30433183
sharozghussain@ambitcapital.com
Joel Pereira
Editor
(022) 30433284
joelpereira@ambitcapital.com
Nikhil Pillai
Database
(022) 30433265
nikhilpillai@ambitcapital.com
E&C = Engineering & Construction
April 23, 2014
Page 70
Sobha Developers
Explanation of Investment Rating

Investment Rating
Expected return
(over 12-month period from date of initial rating)
Buy
>5%
Sell
<5%
Disclaimer
This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically, and,
in some cases, in printed form.
Additional information on recommended securities is available on request.

Disclaimer
1. AMBIT Capital Private Limited (AMBIT Capital) and its affiliates are a full service, integrated investment banking, investment advisory and brokerage group. AMBIT Capital is a Stock
Broker, Portfolio Manager and Depository Participant registered with Securities and Exchange Board of India Limited (SEBI) and is regulated by SEBI
2. The recommendations, opinions and views contained in this Research Report reflect the views of the research analyst named on the Research Report and are based upon publicly
available information and rates of taxation at the time of publication, which are subject to change from time to time without any prior notice.
3. AMBIT Capital makes best endeavours to ensure that the research analyst(s) use current, reliable, comprehensive information and obtain such information from sources which the
analyst(s) believes to be reliable. However, such information has not been independently verified by AMBIT Capital and/or the analyst(s) and no representation or warranty, express or
implied, is made as to the accuracy or completeness of any information obtained from third parties. The information or opinions are provided as at the date of this Research Report and
are subject to change without notice.
4. If you are dissatisfied with the contents of this complimentary Research Report or with the terms of this Disclaimer, your sole and exclusive remedy is to stop using this Research Report
and AMBIT Capital shall not be responsible and/ or liable in any manner.
5. If this Research Report is received by any client of AMBIT Capital or its affiliate, the relationship of AMBIT Capital/its affiliate with such client will continue to be governed by the terms
and conditions in place between AMBIT Capital/ such affiliate and the client.
6. This Research Report is issued for information only and should not be construed as an investment advice to any recipient to acquire, subscribe, purchase, sell, dispose of, retain any
securities. Recipients should consider this Research Report as only a single factor in making any investment decisions. This Research Report is not an offer to sell or the solicitation of an
offer to purchase or subscribe for any investment or as an official endorsement of any investment.
7. If 'Buy', 'Sell', or 'Hold' recommendation is made in this Research Report such recommendation or view or opinion expressed on investments in this Research Report is not intended to
constitute investment advice and should not be intended or treated as a substitute for necessary review or validation or any professional advice. The views expressed in this Research
Report are those of the research analyst which are subject to change and do not represent to be an authority on the subject. AMBIT Capital may or may not subscribe to any and/ or all
the views expressed herein.
8. AMBIT Capital makes no guarantee, representation or warranty, express or implied; and accepts no responsibility or liability as to the accuracy or completeness or currentess of the
information in this Research Report. AMBIT Capital or its affiliates do not accept any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from
any use of this Research Report.
9. Past performance is not necessarily a guide to evaluate future performance.
10. AMBIT Capital and/or its affiliates (as principal or on behalf of its/their clients) and their respective officers directors and employees may hold positions in any securities mentioned in this
Research Report (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). Such positions in securities may be contrary to or
inconsistent with this Research Report.
11. This Research Report should be read and relied upon at the sole discretion and risk of the recipient.
12. The value of any investment made at your discretion based on this Research Report or income therefrom may be affected by changes in economic, financial and/ or political factors and
may go down as well as up and you may not get back the full or the expected amount invested. Some securities and/ or investments involve substantial risk and are not suitable for all
investors.
13. This Research Report is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published,
copied in whole or in part, for any purpose. Neither this Research Report nor any copy of it may be taken or transmitted or distributed, directly or indirectly within India or into any other
country including United States (to US Persons), Canada or Japan or to any resident thereof. The distribution of this Research Report in other jurisdictions may be strictly restricted and/ or
prohibited by law or contract, and persons into whose possession this Research Report comes should inform themselves about such restriction and/ or prohibition, and observe any such
restrictions and/ or prohibition.
14. Neither AMBIT Capital nor its affiliates or their respective directors, employees, agents or representatives, shall be responsible or liable in any manner, directly or indirectly, for views or
opinions expressed in this Report or the contents or any errors or discrepancies herein or for any decisions or actions taken in reliance on the Report or inability to use or access our
service or this Research Report or for any loss or damages whether direct or indirect, incidental, special or consequential including without limitation loss of revenue or profits that may
arise from or in connection with the use of or reliance on this Research Report or inability to use or access our service or this Research Report.
Conflict of Interests
15. In the normal course of AMBIT Capitals business circumstances may arise that could result in the interests of AMBIT Capital conflicting with the interests of clients or one clients interests
conflicting with the interest of another client. AMBIT Capital makes best efforts to ensure that conflicts are identified and managed and that clients interests are protected. AMBIT Capital
has policies and procedures in place to control the flow and use of non-public, price sensitive information and employees personal account trading. Where appropriate and reasonably
achievable, AMBIT Capital segregates the activities of staff working in areas where conflicts of interest may arise. However, clients/potential clients of AMBIT Capital should be aware of
these possible conflicts of interests and should make informed decisions in relation to AMBIT Capitals services.
16. AMBIT Capital and/or its affiliates may from time to time have investment banking, investment advisory and other business relationships with companies covered in this Research Report
and may receive compensation for the same. Research analysts provide important inputs into AMBIT Capitals investment banking and other business selection processes.
17. AMBIT Capital and/or its affiliates may seek investment banking or other businesses from the companies covered in this Research Report and research analysts involved in preparing this
Research Report may participate in the solicitation of such business.
18. In addition to the foregoing, the companies covered in this Research Report may be clients of AMBIT Capital where AMBIT Capital may be required, inter alia, to prepare and publish
research reports covering such companies and AMBIT Capital may receive compensation from such companies in relation to such services. However, the views reflected in this Research
Report are objective views, independent of AMBIT Capitals relationship with such company.
19. In addition, AMBIT Capital may also act as a market maker or risk arbitrator or liquidity provider or may have assumed an underwriting commitment in the securities of companies
covered in this Research Report (or in related investments) and may also be represented in the supervisory board or on any other committee of those companies.
Additional Disclaimer for U.S. Persons
20.
21.
22.
23.
24.
The research report is solely a product of AMBIT Capital

AMBIT Capital is the employer of the research analyst(s) who has prepared the research report
Any subsequent transactions in securities discussed in the research reports should be effected through J.P.P. Euro-Securities, Inc. (JPP).
JPP does not accept or receive any compensation of any kind for the dissemination of the AMBIT Capital research reports.
The research analyst(s) preparing the research report is resident outside the United States and is/are not associated persons of any U.S. regulated broker-dealer and that therefore the
analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with
U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.
Copyright 2014 AMBIT Capital Private Limited. All rights reserved.
April 23, 2014

Ambit House, 3rd Floor
449, Senapati Bapat Marg, Lower
Parel, Mumbai 400 013, India.
Phone: +91-22-3043 3000
Fax: +91-22-3043 3100
Page 71
CIN: U74140MH1997PTC107598
www.ambitcapital.com

Ambit RealEstate Thematic Accounting 23apr14 PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ambit RealEstate Thematic Accounting 23apr14 PDF

Uploaded by

Copyright:

Available Formats

REAL ESTATE

Accounting - at the crossroad

April 23, 2014

Ambit Capital Pvt. Ltd.

Accounting - at the crossroad

April 23, 2014

Contingent Liabilities and P/B

In the absence of sector-specific accounting standards, accounting practices in

Prestige Estate Projects

Revenue recognition harmonised yet not watertight

Limited investible universe; Oberoi, Prestige - most transparent

Using accounting checks across four categories (P&L misstatement checks,

Related party transactions (RPTs) - modes of disguised lending

The road ahead - what can investors look forward to?

Kolte Patil Developers

Source: Bloomberg, Ambit Capital research; CL denotes

P&L misstatement checks

Large companies - mcap > US$500mn

April 23, 2014

Ambit Capital Pvt. Ltd.

Cash conversion cycle

Less than 10% of NW

April 23, 2014

Ambit Capital Pvt. Ltd.

Cash conversion cycle (in number

We identify HDIL and Sunteck

Accounting in real estate - A black box

Real estate companies exercise

Real estate transactions - what drives subjectivity in revenue recognition?

Subjectivity lies in identifying the

Significant divergence in revenue recognition practices

Earlier, the GN prescribed the

Exhibit 5: Revenue recognition policies under the erstwhile GN - wide disparity

Minimum project sale

Land cost in POC

Source: Companies, Ambit Capital research

April 23, 2014

Ambit Capital Pvt. Ltd.

Accounting for land - further latitude

Although developers are not

Held for sale

Held for lease

Fixed assets Fixed assets Capital Work-in- Capital Work-inProgress (+ve)

Fixed assets Fixed assets Capital Work-in- Capital Work-inProgress (+ve)

P&L statement entries

Held for lease

Cost of Sales Construction

Cost of Sales Construction costs

Inventory Construction Workin-Progress (+ve)

Sale is completed (risks and

Fixed assets gross block

Capital Work-in- Cash (+ve) /

Fixed assets gross block

Inventory Construction Workin-Progress (-ve)

Cost of Sales Construction

Cost of Sales Construction costs

Inventory Construction Workin-Progress (-ve)

Source: Ambit Capital research

April 23, 2014

Ambit Capital Pvt. Ltd.

Too much ambiguity exists in the

Exhibit 7: Accounting for land as inventory - the myriad alternatives in practice

Ashiana Housing Ltd.