Commercial and non-core assets' monetisation plan positive for IBREL

Debt after asset sale could come down by half

Indiabulls Real Estate (IBREL) is making progress on its plans to monetise its commercial and non-core assets with two deals it announced on Monday and Friday involving its Mumbai commercial and Chennai properties. The company is divesting its entire stake in certain subsidiaries and thereby indirectly divesting 50 per cent stake in Indiabulls Properties (IPPL) and Indiabulls Real Estate Company (IRECPL) at an aggregate enterprise value of around $1.4615 billion or Rs 9,500 crore. The stake sale in entities that include One Indiabulls and Indiabulls Finance Centre will fetch the company Rs 4,750 crore. The company is also selling residential and commercial assets at Chennai which it calls its non-core market, for Rs 2.86 billion. 

The properties sold are its completed commercial projects with a total area of 5.2 million sq ft and is more than half of its projects both completed and under construction by area. The other commercial projects, with an area of 3.9 million sq ft, are under construction and located in Gurugram and Worli/Parel in Mumbai. For the nine months ended FY18, the company’s rental portfolio generated about Rs 5.17 billion and at an annualised level it is expected to hit Rs 7.20 billion. The company has a target of achieving rental revenues of Rs 8 billion for its completed office properties and Rs 7 billion for its under-construction commercial properties by FY21. 

While the sale of the rental assets means that the rental income is expected to come down, the proceeds from the sale will help bring down the company’s net debt of Rs 95 billion. About Rs 42 billion of this is attributable to its rental operations while the rest is accounted for by its developmental or residential portfolio. Analysts believe that the asset monetisation is a near-term catalyst for the stock given that total debt will come down by half if the Mumbai asset sales are entirely used to retire debt. Analysts at JP Morgan in an earlier report indicated that if the company is able to execute even a minority stake sale, residential balance sheet (Rs 45 billion net debt) will move towards a net cash position, especially given it has almost Rs 20 billion in pending collections from its pre-sold assets such as BLU, which is 99 per cent sold. 

The focus now is expected to shift to the execution of it residential portfolio of 33.91 million sq ft, the largest of which is its Panvel project. Of the 15 projects, the company has started handing over the units in five and expects to start the handover process in another four in the next four-five quarters. While lower debt should help, delays in execution of the existing projects could lead to cost overruns.