Three reasons why Indiabulls Real Estate jumped over 40% on Monday

While Sensex and Nifty were busy sliding down on Monday, Indiabulls Real Estate (IBREL) was one scrip that found tremendous favour and touched a seven-year high.

Shares of Indiabulls Real Estate touched Rs 151 per share -- last seen on November 18, 2010.

The stock closed at Rs 148.20 per piece on NSE, surging by a whopping Rs 42.35 or 40.01% on Monday.

The company said that it has decided to segregate its commercial and leasing business into Indiabulls Commercial Asset Limited (ICAL).

In a BSE filing, Indiabulls Real Estate said, “The board has considered the possibility of streamlining the existing 'residential', 'commercial' and 'leasing' business of Indiabulls Real Estate by segregating the commercial and leasing business segment carried on by itself through its SPV and vesting the same into ICAL.”
The company said, "Business of IBCAL will be carried either by restructuring the business by way of placing IBCAL as a separate holding under Indiabulls Real Estate or by re-organizing the existing business through demerger of commercial and leasing business."

Post the restructuring, IBCAL's newly added business' primary focus would be only on annuity business through income of existing portfolio, under-development projects and future projects, while residential business of IBREL will be only focuses on earning profits and return on equity from the business of selling properties that are developed, under developed and the from future projects.

Presently, IBREL holds net worth of Rs 2,380 crore with net debt of Rs 4,395 crore as of March 2017, While  IBCAL has a net worth of Rs 2,311 crore with net debt of Rs 3,950 crore.

Once it starts operating only on commercial and leasing business, it expects annuity revenue to reach at Rs 692 crore in FY18 and Rs 1,357 crore by FY21. Annuity Revenue from completed properties based on existing leased area. The completed properties of 5.2 million sq ft have 91% occupancy.

Such deal is expected to reduce net debt of IBCAL over medium to long term from the annuity revenues.  IBREL said, "We believe this model will provide cheaper cost of capital to fund the expansion of business after FY 2020-21."

While IBREL is expected to benefit from its Blu project in Worli (Mumbai) which is scheduled for completion in the current fiscal. 

So far, pending construction costs in Blu project stands at Rs 612 crore. Collections that are pending  and value of unsold area in Blu is projected to be Rs 3,341 crore. Thus, net surplus arising from Blu is expected to around  Rs 2,729 crore which will reduce the net debt of IBREL (post restructuring) to less than Rs 2,000 crore in next 12-18 months. 

This will result in IBREL maintaining a net debt position of not exceeding Rs 2,000 crore thereafter. 

Abhishek Lodhiya Sr. Equity Research Analyst - Infrastructure, Capital goods and Real Estate, Angel Broking said, "The eventual plan is to create a separate entity for the commercial and leasing business and target listing the stock at a later date. Indiabulls will also be looking at getting a foreign investor / PE Fund to participate in the equity of ICAL."

He added, "Most large global investors have preferred to participate in the commercial / leasing market in India as the retail space has been going through a very sluggish phase with tepid demand. Markets are expecting value discovery for Indiabulls Real Estate through this move as was evident from the stock rallying by over 30% during the day.”

In the recent past, there have been some marquee deals in this space. Government Investment Corporation (GIC) of Singapore recently took a stake in the commercial real estate business of DLF while Blackstone had bought into K Raheja Corp.