Hold Peninsula Land, target Rs 672: Ambit Capital

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Ambit Capital has maintained hold rating on Peninsula Land with target price of Rs 672.

 

Ambit Capital research report on Peninsula Land

 

Post the analyst meet and meeting with the management at Peninsula Land Ltd (PLL), we are upgrading our estimates on two key triggers: Doubling of FSI of its Dawn Mills property on account of land use change to IT Park, which increases the saleable area from 0.6million to 1.15million sq ft, sale transaction of one of the two buildings in this property for approx Rs.10.54billion and change in approval status of its SEZ projects from our previous update, from 2 formally approved SEZs to 3 formally approved SEZs and 1 notified SEZ. These predominantly contribute to the increase in our target price. We recommend a hold on the stock with a target price of Rs672, indicating an upside of 14% from current levels. The key risks to valuation being pending permission for its land use change to IT park in Dawn Mills property, execution delays in ongoing projects and delays in launch of its venture funds, which would be required to fuel its future growth.

 

Key Changes since our last update

 

Change in classification of Dawn Mills project:

 

PLL has applied for a change in classification for the project on Dawn Mills (Peninsula Business Park) from a commercial project to an IT Park. Currently the company is awaiting approvals from the municipal authorities. The change if approved would double the developable area, as the FSI for an IT park doubles to 2.67x. This would increase the saleable area from 0.58million sq ft to 1.15 million sq ft. This has contributed to an Rs.102 per share increase in the company's valuations. 

 

Part sale of project on Dawn Mills:

 

The Company has sold 1 out of the 2 buildings of 0.58million sq.ft. to Alok Infrastructure (a subsidiary of Alok Industries) for an amount of Rs.10.54billion (approx Rs.18700/sq ft) . The company would receive the payments in a staggered manner on percentage completion basis, contingent to the project getting necessary approvals. The company has till now not had any cash inflow from this deal. The company expects revenue in the range of approx Rs.25billion from this property over the next 3 years.

 

Change is approval status of its SEZs:

 

The company is developing 4 SEZs: (i) IT SEZ (Pune), (ii) Two Biotech SEZs (Goa) and (iii) Gems and Jewellery SEZ (Goa). The approval status of these SEZs has changed from 2 formally approved SEZs to 3 formally approved SEZs and 1 notified SEZ (Goa, Sancaole). We have incorporated the valuation of the additional formally approved SEZs and greater visibility in terms of the completion schedule of these projects. This has contributed to a considerable upside in our estimates.

 

Risks to valuation

 

Any delay or problems in getting permissions for change of land use for its Dawn Mills property from commercial to an IT park, could be a major risk to valuations. 

 

Project execution delays in its existing and upcoming projects remain a key risk. Execution delays have been witnessed in its existing projects like Ashok Towers on account of delay in clearances from the escrow committee, which has subsequently been resolved. 

 

Delays in notification of its 3 formally approved SEZs could adversely impact cash flows and hence the valuations. The company expects the notifications to be in place in the next few months.

 

Equity Dilution:

 

The Company would be required to dilute its equity to fund its 25% co-investment in its proposed domestic and foreign venture funds, which are of the order of Rs.20billion. The company's contribution would be of the order of Rs.5billion, which at current market prices would dilute equity to the tune of 8.5%. The company has passed a resolution to split its shares of face value Rs.10 to Rs.2 (effective 23-Oct-2007) and approved issue of up to 60billion shares of face value Rs.2. 

 

Delay in launch of its venture funds:

 

The company had planned to launch its two venture funds - Domestic and Foreign in Dec-06 and Jan-07 respectively, which have since been delayed and are expected to close by FY08. Further delays could adversely impact the company's long-term growth. Though successful launch and efficient deployment would have a significant positive impact on its valuations.

 

Delays or stoppage of work on account of BMC or MHADA directives, where their share of mill land in case of redevelopment has not been given could be a risk. Though the company maintains that it's not going to affect any of their work, as they have already complied with all the formalities. In fact they have been behind the BMC and Mhada to take possession of their share at Ashok Garden and Technopark, as already an area is earmarked to them. Hence they expect to face no issues on account of this. Softening of real estate prices/rentals in the areas that it operates in would negatively impact our valuations.