| Summary of Contents
| STOCK UPDATE Orbit Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs70
Current market price: Rs55 Timely clearances of projects hold the key Key points -
Sales booking in Q4FY2012 likely to be better than Q3: Orbit Corporation (Orbit)'s management is expecting presales for Q4FY2012 to be better than in Q3FY2012. In Q3FY2012 the sales booking stood at Rs71.1 crore (32,921 sq ft) which was better than Q2FY2012's presales of a measly Rs2.41 crore (9,034 sq ft). The company in the third quarter resorted to fire sale (ie bulk selling) in Orbit Laburnum at Gamdevi, Mumbai and Orbit Residency at Andheri-Saki Naka, Mumbai which drove the sales volume. Similarly in Q4FY2012, the company is looking at bulk sales in two of its properties viz Orbit Residency at Andheri, Mumbai and Orbit Terraces at Lower Parel, Mumbai which are at an advanced stage. It has also achieved sales in some of its other projects which would result in sales booking to be better sequentially. -
New launches to kick in from Q1FY2013: With the amended Development Control Regulation (DCR) now in place, the company expects the approval process to be streamlined. Though the approvals have still not picked up, but the same are expected to gain momentum in a month's time. As a result the company has started applying for approvals for its existing under-construction projects, so that the execution can be ramped up. It will also soon start applying for newer projects so that they can be launched by end of Q1FY2013. Any further delay in getting clearances will impact the company's financials and thus our estimates. The company plans to launch a slum rehabilitation project (SRA) in Santa Cruz (phase 1 of ~100,000 sq ft), a new project at Napean Sea Road (60,000 sq ft) and another new project at Kemps Corner (~100,000 sq ft) by H1FY2013. All of these planned projects are in Mumbai. -
Looking out for partner in Santa Cruz SRA project: Orbit is in talks with a few property firms from Singapore for partnering in its planned Santa Cruz SRA project in Mumbai, the Orbit Grandeur. It might bring in a partner for project designing expertise or for investment in the project. However the discussions are at a very nascent stage and the deal will take time to materialise. If the discussions fall out as per plan then Orbit would be able to execute the project without any further debt raising. -
Mandwa project to take 6-9 months to get approvals and clearances: The pending approvals and clearances for Mandwa will take approximately six to nine months, after which the company will launch the project and will be able to start construction work. Recently the project had come under the scanner of the Bombay Environmental Action Group (BEAG), which had complained to the Union Ministry of Environment and Forests (MoEF) about large-scale destruction of mangroves. However as per the environment secretary, an inspection of the area was carried out and there was no case of mangroves having been destroyed. The company had applied to the local collector's office for a recreational and tourism zone permit for 200 acres as the land was reserved for that purpose in the regional plan. However, the land is still recorded as agricultural land. It's now over a year since the application has been made, but the company has not received any permission so far. No construction work is being carried out at the site currently. The MoEF has carried out a survey and Orbit is awaiting the final decision from the union environment ministry. The project will not get impacted by BEAG's allegations. -
Maintain Buy: Poor sales across projects over the last one year due to regulatory uncertainties and absence of new launches due to pending approvals and clearances took a toll on the company. However there have been amendments in the DCR which now create a level playing field for developers and provide regulatory clarity. This will result in pending projects now getting approved, resulting in a pick-up in execution of projects along with launches of new projects. We expect the clearances to start coming in by the end of Q1FY2013. The next couple of quarters need to be keenly watched in terms of the cut in interest rate cycle and the progress on the approvals front for the company. Given the healthy land bank of the company, any quick revival on the clearances front will be a positive for the stock. Further any success in roping private equity in few of its projects will help the company improve its balance sheet. We maintain our Buy rating on the stock with a target price of Rs70. At the current market price, the stock trades at 7.8x its FY2013E earnings and 0.4x its FY2013E price to book value (P/BV).
VIEWPOINT Tech Mahindra Tech Mahindra and Mahindra Satyam merger finalised
The much awaited merger of Tech Mahindra and Mahindra Satyam has got finalised with the boards of the two entities having approved the proposal. The swap ratio for the merger is worked out to be 2 shares of Tech Mahindra (face value Rs10) for every 17 shares of Mahindra Satyam (face value of Rs2). As per the managements' indication, the merger process will take another six to nine months to complete and the record date of the merger would be announced in due course. Key synergies from the merger The combined entity would be the fifth largest domestic IT company: The merged entity's revenues are at around $2.4 billion for the last 12 months (ended December 2011), making it the fifth largest domestic IT company, next to HCL Technologies among the listed space. The entity would be the sixth largest when taking Cognizant Technologies into consideration. In terms of market capitalisation, the merged entity will be at around Rs17,000 crore. Diversified revenue stream with strong domain expertise in focused areas: The merged entity's revenue stream will be much diversified as compared to the current single industry (telecom) exposure of Tech Mahindra. The new entity's revenue mix will comprise of sectors like banking, financial services and insurance (BFSI), manufacturing and telecom among others. On the other hand, the merged entity would derive synergies from strong capabilities of Tech Mahindra in mobility and system integration whereas the legacy strength of Satyam in the area of enterprise solutions would be the key differentiator for the merged entity. Among geographies, the revenue exposure will be more balanced with 42% accounted by the US, 35% by Europe and 23% by
emerging markets. Top client's concentration will reduce; clients portfolio looks more diversified: Currently, British Telecom (BT) contributes close to 35% of the total revenues of Tech Mahindra, which is likely to reduce substantially to 16.5% in the new merged entity. Further, with around 217 Satyam clients adding to the joint entity, the joint entity will have over 350 clients. Cost benefits to accrue from operational synergies: The joint "Go to market" strategy of the merged entit has already started bearing fruits, with both Tech Mahindra and Satyam working closely in the last one year as a joint entity for the market penetration. In the last one year, the merged entity has won more than 10 deals through this initiative. On the other hand, the joint entity would also have the scale and bandwidth to accrue benefits from the general and administrative (G&A) side of the expenses. Going forward, the management has indicated at an EBITDA margins of 16% from the combined entity. Valuation: We view the merger of Mahindra Satyam with Tech Mahindra as a positive catalyst for creating a value accretive entity for the future. However, legal hurdles pending with Mahindra Satyam and slowdown in the telecom vertical (main industry exposure for Tech Mahindra) would stand to be a roadblock in the medium term. On a longer-term, the new entity will have a more diversified and scalable revenue stream and operational synergies will create value for the investors. At the current market price, both Tech Mahindra and Mahindra Satyam trade at 10x and 9x their FY2013E and FY2014E consensus earnings respectively. We continue to remain positively biased on Mahindra Satyam. Currently, we do not have any active rating on Tech Mahindra and Mahindra Satyam.
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