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Indiabulls Real Estate's Merger with the Embassy Group: All You Need to Know

Jul 30, 2021 10:43 AM 4 min read

The proposed merger of Indiabulls Real Estate Ltd. (IBREL) and a certain set of residential and commercial assets of the Embassy Group (EG) is likely to be completed by the end of this year.

It has already received the assent of the CCI, NSE, BSE and SEBI. What remains is the NCLT's nod, following which one of the country's largest listed property development platforms - to be named Embassy Developments Ltd. (EDL) - will be created.

In August 2020, IBREL and EG confirmed plans for a merger that had already been approved by their respective boards. The selling points to shareholders included the combined entity’s massive market share, financial heft and pan-India presence.

Brushing Up On the Basics

IBREL's parent, Indiabulls Group, is a Gurugram-headquartered conglomerate with interests in housing finance, consumer finance, real estate, securities, wealth management etc. The IBREL-EG merger would in a way mark its exit from the real estate business (which currently accounts for about 15% of the Group's revenue) with its interest in the post-merger entity falling to under 10%.

IBREL is this conglomerate's listed real estate wing, which was created in 2006 and has a presence mainly in the residential real estate sector (95% share of assets) across major metros. All in all: Total launched and planned area of 24.6 million sq ft. As part of debt management and a larger desire to extract out of the real estate business, IBREL has been reducing stakes for a while now. This includes a 14% stake sale to EG earlier for ₹950cr ($127.9m) and then a subsequent sale of its commercial real estate portfolio to Blackstone Group for ₹12,250cr ($1.65bn), among other transactions.

As for EG, it is a Bengaluru-based real estate developer with operations across many Indian cities as well as in Serbia and Malaysia. It is involved in residential, commercial and industrial projects. In 2012, it entered into a JV with the Blackstone Group to form Embassy Office Parks (India's first REIT) to develop office spaces. All in All: Total launched and planned area of 56.2 million sq ft.

Ergo, EDL’s development potential would be 24.6 + 56.2 = 80.8 million sq ft. This includes ongoing, completed but unsold, and planned projects.


Birth of a Conflation

Let's begin with the broad strokes. The merged entity would be big. Here's some context regarding scale vis-a-vis other players:

Currently, both IBREL’s and EG’s assets are heavily reliant on certain parts of the country (NCR and MMR regions for IBREL; Bengaluru and Chennai for EG). Embassy Developments would suffer from less geographic risk concentration, with sizable presence across metros.

The nature of assets would also shift. IBREL, as previously noted, is heavily skewed in favour of residential assets, with only 5% of its assets in the commercial segment. Given EG's more diversified portfolio, EDL would have a healthy 53-47 ratio between commercial and residential assets respectively.

IBREL’s shareholding would no doubt change with the merger. EG is already a minority shareholder in the former; EDL would see reduced presence of IBREL promoters and the entry of Blackstone in the mix:

Now let’s talk money. Both IBREL and EG recorded strong quarterly sales figures in the past quarter. Both are dominant property players in their market bastions (MMR and Bengaluru respectively). And with an additional post-merger spend of ₹201cr, the company can execute projects worth ₹10,868cr ($1.46bn) in inventory value. Moreover, the two merging entities have a fairly high level of completed or near-completed projects - of about ₹5,658cr ($761.57m) (or 52%) with sold receivables covering 2x pending costs for the near-complete projects. As such, this bodes well for near-term liquidity and also somewhat reduces development risk.

Net residential surplus for the combined entity (defined as pending collections from area sold + value of unsold inventory - pending construction cost) for launched and upcoming projects stands at ₹18,592cr ($2.5bn) with sold receivables of ₹4,220cr ($568m).


Getting Real About Real Estate

Investor attitude towards EDL will inadvertently be influenced by whether or not the market is bullish about the prospects of India’s real estate sector. But at a micro level, at an estimated equity value of the merged entity at ₹9,400cr ($1.26bn) and pro forma debt at ₹4,000cr ($538.4m), the implied EV is about ₹13,400cr ($1.8bn). If EDL can generate even ₹1,000cr ($134.6m) in annual EBITDA from existing inventory (with a realistic upside on EBITDA estimates), the EV/EBITDA multiple would land at 13.4x, which seems fairly reasonable on a risk-adjusted basis given a double-digit EBITDA growth profile. 

However, COVID-19 affected this sector in a unique way. On one hand, sales inadvertently plunged YoY - for housing projects, this number was 75%! But on the other hand, it may have given a fillip to the desire to own a house rather than rent one. Not only due to social distancing concerns but also due to the work-from-home culture, which has also given rise to new opportunities for “offbeat” properties in tier-2 and even tier-3 cities and towns.

With the country reopened, consumer demand is expected to climb up again. But the economic mayhem that sparked a recession and continues to plague sectors - and the threat of new waves and renewed lockdown restrictions - remain potent threats to near-term growth. These are all factors that add uncertainty to the risk profile of the entire sector.

Provided the NCLT approval is finalised smoothly, Embassy Developments Ltd. Will come into being “by the third quarter of FY22”. The merger seems to be a win-win for both IBREL and EG. The resulting entity will command a strong presence in the property market. Whether it can escape pandemic-related headwinds and inflationary trends remains to be seen.


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