Mahindra Lifespace Developers
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,096
Current market price: Rs799
Pioneering the SEZ revolution
Key points
- Leveraging on SEZ expertise: Mahindra Lifespace Developers (MLD) is the only private sector player to have an operational SEZ, the Chennai SEZ, in the country. Leveraging on this rich expertise, the company is planning to develop one more SEZ in Jaipur. For this it has already acquired 2,100 acre of land. It expects to acquire the balance land for the project by FY2008 end.
- More upside possible from Karla and Chennai SEZ extensions: MLD also has plans to develop another 3,000-acre multi-product SEZ in Karla and to extend its Chennai SEZ by 1,980 acre. However, it has acquired only 100 acre of land for the Chennai project so far. Hence, we have not considered these two projects in our valuation. Any development on these projects would lead to an upward revision in our valuation.
- Margins to improve: Given the higher revenue contribution from the Chennai SEZ's non-processing area and better realisation for the Jaipur SEZ's processing area, we expect MLD's EBITDA margin to improve to 55.2% by FY2010 from 14.3% in FY2007. Consequently, we expect MLD's earnings to grow at a CAGR of 179.2% over FY2007-10.
- Other initiatives: MLD also plans to develop space aggregating 2.7 mn sq ft over the next few years. These projects contribute Rs83 per share to our valuation. MLD is also implementing the Tirupur Water Supply and Sewerage project through its subsidiary Mahindra Infrastructure Developers. It is a 30-year BOOT project and is expected to generate an annual income of Rs6-8 crore.
- Attractive valuation: We value the stock using the SOTP method. Given MLD's operational expertise in SEZ and premium brand in the other verticals, we value the Chennai and Jaipur SEZs and the other planned developments at 1.0x NAV of Rs1,038 per share. We value the balance land for which its has no development plans in the short to medium term at Rs58 per share, ie at a discount to the current market price. We initiate Buy recommendation on MLD with a price target of Rs1,096.