Embassy REIT – BUY

Initiating coverage

27 January 2020

Total return play – Inorganic growth in focus Company update

CMP Rs424 Price performance (%)
Embassy Office Parks REIT (Embassy) is a play on the strong
office space demand and high visibility on cash distribution. Its 12-mth TP (Rs) 447 (5%) 1M 3M 1Y
completed portfolio of 24.8m sqft is ~95% occupied and ~8m Absolute (Rs) 0.8 4.5 0.0
Market cap (US$m) 4,594
sqft of brownfield development will accrue over 5-7years. We Absolute (US$) 0.8 5.6 0.0
see Ebitda Cagr of 16% over FY20-22ii, with further room for Enterprise value(US$m) 4,967
Rel. to Sensex 0.4 (2.1) 0.0
growth via earnings-accretive acquisitions. The REIT trades at a Bloomberg EMBASSY IN
premium to NAV; although, with distribution yield at ~6.2% and Cagr (%) 3 yrs 5 yrs
normalised DPU growth of ~7% p.a., the REIT continues to offer Sector Real Estate EPS 57.7
double-digit total returns. We initiate on Embassy REIT with a
Shareholding pattern (%) Stock performance
BUY recommendation.
Sponsors 70.3 Vol('000, LHS) Price (Rs., RHS)
Strong visibility on earnings growth, distribution: The Embassy Pledged (as a % of promoter share) 74.3 8,000 500
portfolio consists of city-centric offices/IT SEZs, hotels and a solar FII 16.4 400
6,000
asset, spread across Bangalore, Pune, NCR and Mumbai. Over FY20- DII 0.5 300
22ii, the REIT is expected to register Ebitda Cagr of 16%, largely driven 4,000
200
52Wk High/Low (Rs) 462/300
by contracted escalations, renewals/re-leases and completion of under- 2,000 100
construction (U/C) assets. The REIT has achieved robust operational Shares o/s (m) 772
0 0
performance for 1HFY20 and its high distribution (~100% of NDCF) is Daily volume (US$ m) 3.0

Mar-19

Nov-19
Jul-19

Sep-19
May-19
further aided by tax benefits and deferred payment structures. Dividend yield FY21ii (%) 6.2
Free float (%) 29.7
DPU value-accretive acquisitions to drive next leg of growth:
Financial summary (Rs m)
Embassy REIT has received a ROFO (Right of First Offer) request from a
Y/e 31 Mar, Consolidated FY18A FY19A FY20ii FY21ii FY22ii
sponsor (the Embassy Group), for a 6.2m sqft completed asset in
Bangalore (Embassy Tech Village); media reports suggest the REIT is Revenues (Rs m) 16,118 18,771 21,077 24,549 28,978
looking to raise equity & debt to fund this. Our initial workings indicate Ebitda (Rs m) 12,059 13,597 17,162 19,416 23,153
that an equity:debt mix of 60:40 would be DPU-accretive. Embassy Ebitda margins (%) 74.8 72.4 81.4 79.1 79.9
REIT has also executed its first acquisition of 0.6m sqft of sponsor’s U/C Pre-exceptional PAT (Rs m) 3,764 3,653 9,009 10,590 13,064
asset (in Manyata) for Rs7.4bn, which will be funded via debt. Reported PAT (Rs m) 2,569 3,653 9,009 10,590 13,064
EPU (Rs) 11.7 13.7 16.9
Total return play – Initiate with BUY: Strong operational Growth (%) 17.5 23.4
performance, continued weakness in interest rates, razor-sharp focus on
distribution and low leverage has in our view driven Embassy’s strong
NDCF (Rs m) 18,710 20,316 21,712
outperformance since listing (up 40% YTD, at a premium to NAV). We
DPU (Rs) 24.2 26.3 28.1
believe these factors would help sustain the valuation premium; further,
the double-digit total returns (distribution yield and DPU growth) remain DPU growth (%) 8.6% 6.9%
attractive. Key risks include higher interest rates, slowdown in the DPU Yield (%) 5.7% 6.2% 6.6%
commercial cycle and sell-down by the Blackstone sponsor. Net debt/equity (x) 0.2 0.2 0.3
Source: Company, IIFL Research. Priced as on 24 January 2020

Mohit Agrawal | [email protected] | |

91 22 4646 4675
 Embassy REIT – BUY

Strong earnings growth and visibility Figure 2: REIT assets and distribution - Summary
Particulars Total area Completed Occupancy NDCF (Rs m)
(m sqft) area (%) FY20 FY21 FY22
We see an Ebitda Cagr of >16% over FY20-22ii, largely
(m sqft)
bolstered by contracted escalations and completion of U/C
assets. The REIT has 8m sqft of on-campus development, of Bangalore 17.2 14.0 97.1% 55% 56% 53%
which 2.5m sqft will start contributing from FY22ii. The REIT has Embassy Manyata 14.2 11.0 99.3% 7,771 8,561 8,913
delivered an Ebitda growth of 17% YoY (adjusted) for 1HFY20 Embassy One 0.3 0.3 4.8% 340 690 848
and has achieved distribution broadly in line with projections. Embassy Golf Links 2.7 2.7 96.7% 1,920 1,801 1,319
Apart from a robust operational performance, we see high a DPU Hilton @ Embassy 1,096
(distribution per unit) being aided by tax benefits arising from Golf Links keys
477 keys
265 306 320
optimising the structuring of cash flows through tax benefits
Mumbai 2.1 2.1 90.5% 15% 15% 16%
and deferred payment structures.
Express Towers 0.5 0.5 91.5% 1,213 1,215 1,271
Embassy REIT – India’s first real estate investment trust: Embassy 247 1.2 1.2 94.0% 1,078 1,117 1,215
Embassy REIT owns seven office parks and four city-centre office FIFC 0.4 0.4 77.8% 567 658 990
buildings, totalling 32.6m sqft (potential on completion) of leasable Pune 8.9 5.6 92.1% 15% 14% 16%
area, of which 24.8m sqft is completed and ~95% occupied, making it Embassy TechZone 5.5 2.2 87.3% 1,004 1,069 1,470
the largest REIT (by volume) among comparable Asian peers. The
Embassy Quadron 1.9 1.9 91.4% 1,071 1,120 1,279
portfolio is located in India’s four key office markets, of Bengaluru,
Pune, Mumbai and Noida – these markets, by and large, are witnessing Embassy Qubix 1.5 1.5 100.0% 651 678 784
historically high volumes in absorption of commercial space. (For more NCR 4.7 3.3 91.3% 8% 9% 11%
details on REIT and assets, refer Page 19 onwards.) Embassy Oxygen 3.3 1.9 85.3% 936 1,200 1,631
Embassy Galaxy 1.4 1.4 99.9% 561 583 670
Figure 1: Snapshot of REIT structure – a pass through for rental cash flows
Others 7% 7% 7%
Embassy Energy 100MW 100MW 1,336 1,372 1,588
Asset Level 18,714 20,371 22,299
Adjustments: (4) (55) (588)
REIT level 32.7 24.8 94.7% 18,710 20,316 21,712
YoY 8.6% 6.9%
Yield at CMP 5.7% 6.2% 6.6%
Source: Company, IIFL Research

Expect 16% Ebitda/7% NDCF Cagr over FY20-22ii: Embassy

REIT’s earnings are highly stabilised owing to the long-term nature of
the leases (~5-9 years), protecting the REIT from significant volatility in
earnings at the overall portfolio level. The organic earnings growth is
Source: Company, IIFL Research driven by: 1) contracted escalation in revenue on existing leases, 2)

moh i t. ag ra wal @i i fl cap. c om 2

 Embassy REIT – BUY

vacant space lease-up, 3) re-leasing potential on lease expiries, and 4) Figure 4: Rents have clocked 4% Cagr over CY14-1HCY19
the delivery of planned ‘on-campus’ developments. Based on these
drivers, the Ebitda growth is estimated to grow 16% p.a. over FY20-
22ii, whereas the NDCF (net distributable cash flow) is expected to grow
7.5% p.a. over the same period.

Figure 3: Ebitda growth expected at ~16% over FY20-22ii

(Rs bn)
30
cagr of 16%
25

20

15 Source: Mindspace REIT DoD, IIFL Research

10
Completion of ‘on campus’ expansion projects: Currently, ~3.3m
5 sqft of office space is under construction, along with two hotels of
619keys in total, both of which are expected to be completed and
0 delivered over the next three years. Additionally, 4.6m sqft of
FY19 FY20ii FY21ii FY22ii developable area is proposed to be developed, which will be executed
Source: Company, IIFL Research
over the next 3-5 years. As of 1HFY20, execution of ~1.8m sqft in
‘Manyata’ and 0.6m sqft in ‘Oxygen’ assets are on track, as per
management. In fact, management is now guiding for earlier-than-
Contractual escalations: These form the largest component of Rental
expected completion of some of the projects (NXT block and T-2
growth. Typically, office space lease contract with a tenant has a long-
Oxygen). Further, management has front-ended the construction of a
term tenure, of 9-15 years, with built-in contractual rent escalations of
part of the remaining 4.6m sqft (has commenced work on Embassy
10-15% every 3-5 years. In our estimates, we assume an annual
TechZone – 0.9m sqft across the ‘Hudson’ and ‘Ganges’ blocks).
normalised rental escalation of 4-5% across assets.

moh i t. ag ra wal @i i fl cap. c om 3

 Embassy REIT – BUY

Figure 5: Most capex projects are on track or ahead of schedule Figure 7: Manyata Expansion – NXT office and Hilton Hotels under progress
Year Area (m sqft) Key details of completion
Oxygen - Tower 2
FY20 0.6
(Targeting FY20 completion vs FY21 earlier)
Manyata - Front Parcel (NXT Block)
FY21 0.8
(Management is targeting an end-FY20 completion)
TechZone (Hudson and Ganges blocks) + 619-key hotels
FY22 0.9
(Construction underway – on track)
1m Manyata (M3) + 0.7m (Oxygen)
FY23 1.7
(In the Design stage)
Later 3.9 Manyata and TechZone
Source: Company, IIFL Research

Figure 6: Near-term expansion programmes running ahead of schedule

Embassy Manyata Embassy Oxygen Embassy Techzone
5.0 Source: Company, IIFL Research

4.0 Lease-up of existing vacancy: The portfolio has an overall occupancy

of ~95%, as of 1HFY20; this has been stable over the last 9 months.
3.0 Over the next 3 years, we see occupancy increasing by ~60bps, driven
2 quarters ahead 2.4 by improvement in transitional factors such as on-going repositioning
of schedule and strategic upgrades (like façade work, etc), which on completion will
2.0
be leased in due course. We expect the office assets to have a stabilised
0.7 occupancy of 95-97%, whereas for the hotel assets, we expect the
1.0
1.5 occupancy to be ~40%.
0.8 0.9 1.0
0.5 0.6
0.0
FY2019 FY2020 FY2021 FY2022 FY2023 Post FY2023
Source: Company, IIFL Research

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 Embassy REIT – BUY

Figure 8: Occupancy levels to improve by 60bps over FY20-22ii Figure 9: Achieved >40% average re-leasing spreads during FY16-19
(%) Occupancy
120%

100%

80%

60%

40%

20%

0%
FY19 1QFY20 2QFY20 FY20ii FY21ii FY22ii
Source: Company, IIFL Research
Source: Company, IIFL Research
Re-leasing of existing tenants at market rents: With market rental
growth outpacing contractual escalations (of ~5%), given strong Figure 10: Around 20% of leases expiring during FY20-23
absorption trends and low vacancy, older legacy contracts tend to be
lower than market rentals, over time. In the past 4 years, ~2m sqft of
space has been re-leased in the portfolio, at rents that were, on an
average, 42.2% higher than in-place rents at expiry. For the portfolio
today, the Embassy REIT projects market rents to be 30% above in-
place rents. Upcoming lease expiries give the REIT the opportunity to
re-lease an additional 5.2m sqft across the portfolio, at market levels,
over the next 3-4 years.

Source: Company, IIFL Research

moh i t. ag ra wal @i i fl cap. c om 5

 Embassy REIT – BUY

Distribution optimisation to keep returns healthy: The REIT has Figure 11: Capex for U/C projects will be funded through non-amortising debt
achieved high distribution (~100% of NDCF vs 90% mandated) in
(Rs mn) Capex
1HFY20. Unlike the residential real-estate segment, Commercial entails
8000
a high cash-conversion ratio, although we see high distribution being
aided by: 1) interest capitalisation through Rs36bn, zero-coupon bonds
and capex debt; 2) optimising distribution between interest and 6000
amortisation of debt; and 3) low-cash taxes. We expect some of these
benefits to dilute over time, although focus on optimising distribution to
4000
maximise yield should endure.

Zero-coupon bonds for enhancing near-term payout: Of the total 2000

Rs83bn asset level, REIT raised Rs47.5bn as equity capital, whereas
Rs36.5bn was replaced with ZCBs (over 2 tranches). In the next 3-year
0
period (tenure of the bond), the NDCF will be partly boosted by a FY20 FY21 FY22
structure that avoids both interest and debt repayment related cash
outgo. Management believes that a zero-coupon bond is essentially Source: Company, IIFL Research
replicating the U/C portfolio value (Rs36.9bn, as of end-Sep 2019), with
the bond of Rs36.5bn protecting yields from negative impact. The zero- Maximising interest payment for tax inefficiency: With Dividend
coupon bonds of Rs36.5bn in total have been issued in two tranches, of resulting in some tax leakage (in the form of DDT) till the two-tier
Rs30bn and Rs6.5bn, with redemption premium of ~9.4% and 9% structure is collapsed, especially in Manyata, management is distributing
respectively. No coupon payment is scheduled for the tenure of the cash in the form of interest and amortisation of the SPV debt.
bond of 3years, helping the upfront yield to be higher due to deferral of Management has said that at least for the next one or two years, the
coupon payment. Interest expenses in the P&L for 1HFY20 include part distribution will largely be in interest and principal repayment, and low
of redemption premium on the zero-coupon bonds. preference to dividend. Management continues to work on collapsing
the 2-tier structure at Manyata; we assume this will come to pass by
Capex to be met through non-amortising debt: The on-going FY22ii.
expansion of on-campus development and other construction and
upgrade costs are financed by additional external debt, which the asset Figure 12: Embassy to optimise distribution to lower taxation levels
SPVs are obtaining as non-amortising debt during the construction Type Comments Tax treatment Preference
period; hence, interest will be capitalised. Post completion of Interest on Tax shelter available 5% for NRIs, exempt for Most efficient at the
construction and stabilisation of the asset, the finance costs will be Shareholder Domestic, taxed fully to portfolio level
expensed to the P&L. debt HNIs/Individuals

Amortisation No tax shelter Exempt for Investor Next to Interest

of SPV debt available

Dividend DDT applicable for Exempt for Investor Not efficient till the two-
distribution Manyata, Energy tier structure collapses
Source: Company, IIFL Research

moh i t. ag ra wal @i i fl cap. c om 6

 Embassy REIT – BUY

Overall taxation levels to be low; tax cuts to benefit in FY21: Figure 13: Operational highlights for 1HFY20
Cash taxes for 1HFY20 are in the 15-18% range due to: 1) higher SEZ Highlights 1QFY19 2QFY19 1QFY20 2QFY20
benefits leading to payment of MAT, and eventual utilisation of MAT Completed Area (m sqft) 24.8 24.8 24.8 24.8
credit, keeping actual pay-out low; 2) higher share of interest on Occupancy (%) 93.1% 93.7% 94.3% 94.7%
shareholder debt, which provides tax shelter. With the introduction of
Average rental (Rs/sqft per month) 60 61 65 66
the new corporate tax rate, Embassy REIT has decided to adopt the new
tax regime and expects the tax rate to be lower by 4-5%, though full- Hotels - Completed Keys (no.) 247 247 477 477
year impact will only be visible in FY21. Source: Company, IIFL Research

Investments in Golf Links through NCDs: Debt at Embassy Golf Figure 14: Revenue bridge – 17% YoY growth in revenue
Links is refinanced out of the proceeds of the Issue, through the REIT 1HFY19 8,986
subscribing to the NCDs. To that effect, Embassy REIT has subscribed to Contracted revenue 576 6% Contracted esc on 5.5m + Others
2,500 secured redeemable NCDs of Golf Links Software Parks Private, Lease Up and MTM 539 6% Lease up 1.8m + MTM 1m
with debt outstanding of Rs1.6bn, as on 30-September. Redemption of Development 49 1% 0.5m Tower 3 - Oxygen
these debentures shall be at 8.5% coupon, redeemed in 16 monthly
Income from Hotel and Others 408 5%
instalments (principal and interest) of Rs160m each and a 17th
instalment of Rs99m. 1HFY20 10,557 17%
Source: Company, IIFL Research
1HFY20 - overall performance broadly in-line: For 1HFY20,
Embassy REIT reported a revenue growth of 17% YoY, driven by a Figure 15: Embassy has distributed ~100% of the NDCF
combination of: 1) contracted escalations, 2) uptick from higher 1QFY19 2QFY19 1QFY20 2QFY20
occupancy and renewals, and 3) ramp up in solar asset. Adjusted Ebitda Revenue from Operations (Rs m) 4,494 4,524 5,351 5,206
was up 17% YoY, although reported Ebitda as per REIT (including other NOI (Rs m) 3,817 3,767 4,529 4,384
income) is up only 11% YoY, due to a one-off in 1QFY19 other income. NOI margin 84.9% 83.3% 84.6% 84.2%
Operationally, the REIT maintained its overall occupancy level of ~95%
Reported EBITDA (Rs m) 3,938 3,939 4,378 4,378
over 1HFY20, across the entire portfolio. Further, it achieved 67% re-
leasing spreads on 0.9m sqft. The Four Seasons Hotel started Adjusted EBITDA (ex Other Income) 3,472 3,586 4,236 4,078
operations at Embassy One in Bangalore. Management reported that it EBITDA margin 77.3% 79.3% 79.2% 78.3%
achieved 12-15% contractual escalation on ~0.9m sqft, spread over 10 NDCF at SPV level (Rs m) 4,151 3,901
tenants. Over FY20-23, 20% of the portfolio leases are expiring, giving Distribution from SPVs to REIT (Rs m) 3,749 4,249
ample opportunity to the REIT to achieve higher rentals. % of SPV NDCF 90.3% 108.9%
NDCF at REIT level (Rs m) 4,180 4,668
Distribution (Rs m) 4,167 4,630
% of NDCF 99.7% 99.2%
No of units (m) 772 772
Distribution per unit (Rs) 5.4 6.0
Source: Company, IIFL Research

moh i t. ag ra wal @i i fl cap. c om 7

 Embassy REIT – BUY

Figure 16: Distribution has largely been in the form of interest and amortisation Figure 18: 1HFY20 NDCF is ~46% of projected NDCF for FY20ii by REIT managers
In Rs/Unit In % NDCF (Rs m) Projected 1H Actual Comments
Distribution Per Unit (DPU, Rs) 11.4 Embassy Manyata 7,604 3,671
Interest 5.0 43.9% Embassy One Assets 457 0 Weak; leasing expected to pick up
Amortisation of SPV level debt 6.3 54.9% Express Towers 1,006 415
Dividend 0.2 1.2% Embassy 247 915 339
Source: Company, IIFL Research FIFC 943 418
Embassy TechZone 1,179 1,256 One time payoff drives beat
For 1HFY20, total distribution (Net Distributable Cash flow) was Embassy Quadron 1,137 471
Rs8.8bn; on an annualised basis, the yield was ~5.5% pre-tax.
Embassy Qubix 651 327
Distribution was in the form of interest and amortisation of SPV debt, in
the 44:55 ratio and only 1.2% dividend was paid out (to achieve tax Embassy Oxygen 850 436
efficiency). Embassy Galaxy 492 326
Hilton at Embassy Golf Links 263 150
Figure 17: High distribution achieved in 1HFY20 Embassy Energy 1,562 244 Weak; leasing expected to pick up
(Rs bn) Ebitda NDCF % of Ebitda (RHS) (%) Distributions from Embassy
25 120% 2,003 960
Golf Links
20 100% Others 41 -165
80% Embassy Office Parks Group* 19,103 8,848
15 Source: Company, IIFL Research
60%
10
40% Commercial – Strong and steady in the near term
5 20%
Commercial markets are expected to remain steady in the near
0 0%
1QFY20 FY20 FY21 term, driven by demand for office space, especially by IT-SEZs.
The all-time high CY19 demand was driven by low, single-digit
Source: Company, IIFL Research
vacancy levels across Bengaluru, Hyderabad and Pune; this is
likely to stabilise over CY20. Supply is expected to catch up
1HFY20 in line with FY20 projections? Embassy REIT had shared its
significantly over the next 2-3 years, although funding issues
FY19-21 projections in the IPO filing. Based on leasing and rental trends
continue to pose headwinds, especially for tier-2 developers.
in 1HFY20, Embassy One, Bangalore and Embassy Energy have been
Valuations for the commercial segment will be supported by
key laggards, whereas TechZone NDCF has fared better than expected.
steady cap rates, on account of a favourable demand-supply
Management has maintained its FY20 projections for now and remains
outlook and weak interest rates.
hopeful about attaining cash flows from leasing FIFC (~60% occupancy)
and Embassy One (2% occupancy) over the next 2-3 quarters.
Commercial supply-demand balance healthy in the near term:
India’s office market (with >500m sqft of Grade A stock) has, over the
last 5-7 years, seen ~30m sqft of net absorption p.a., leading to

moh i t. ag ra wal @i i fl cap. c om 8

 Embassy REIT – BUY

vacancy levels driving down to ~12% for CY19 as against >16% in Figure 20: Top developers have leased out 90-95% of their office space
2014. As per C&W data, leasing activity for CY19 was up 36% YoY, Area Leased Occupancy Rentals U/C assets
entailing >40m sqft, the highest ever. Bengaluru, followed by Office (Listed) (m sqft) (m sqft) (%) (Rs/sqft/mth) (m sqft)
Hyderabad, NCR and Mumbai, accounted for about 80% of the leasing DLF 28.2 26.6 94.3% 77 6.7
over the same period. Tech corporates have driven up office space take-
up in the country over the last few years, accounting for 35-40% of the EMBASSY 24.8 23.5 94.7% 66 7.9
leasing. Engg & Manufacturing, research, consulting & analytics PEPL 10.3 9.8 ~95.0% 64 5.7
companies and flexible space operators comprise the remaining. About OBER 1.1 1.0 94.7% 136 3.6
50m sqft of new office supply was added in 2019; such additions were BRGD 3.3 2.5 77.2% 79 7.5
mainly in Hyderabad, followed by Bengaluru, NCR and Mumbai. Rental
PHNX 1.4 1.1 79.7% 1.0
growth is expected to continue averaging at 4-5% p.a. pan India, with
Bengaluru, Hyderabad and Pune witnessing stronger growths. Total 69.1 64.5 93.4% 32.3
Mindspace REIT 19.8 19.2 97.2 9.7
Over the next 2-3 years, nearly 125m sqft of supply is expected to hit Source: Company, IIFL Research
the market across the top-6 cities, as against an annual net absorption
of 30m sqft (on an average of 3 years). We expect the large & listed Figure 21: Strong absorption in the last 2-3 years driving down Vacancy rates
developers to outperform and deliver due to strong funding avenues like
Supply, Net Absorption & Vaccancy - Top Six Indian Markets
access to equity, private equity and REITs listing, apart from debt
financing. Supply (msf) (LHS) Net Absorption (msf) (LHS) Vaccancy (%) (RHS)
50 20.0%
16.4%
Figure 19: India has ~500m sqft Grade A Commercial land stock, with ~125m sqft land 14.7%
stock expected in 2-3 years 40 13.4% 13.1% 12.7% 15.0%
11.9%
Stock Current Vacancy CY19e 2-3Yr Supply
30
(m sqft) (%) Absorption (m sqft) 10.0%
Bangalore 143 5.5% 10.7 24.7 20
Hyderabad 57 5.7% 9.6 29.7 5.0%
10

29.3
29.6

32.4
33.5

31.9
32.4

26.5
24.2

31.8
29.7

41.6
40.6
NCR 109 23.6% 7.8 24.9
MMR 94 19.6% 5.6 15.8 0 0.0%
Chennai 50 8.7% 2.6 11.1 2014 2015 2016 2017 2018 2019F
Pune 51 4.3% 4.3 19.4 Source: C&W, Mindspace REIT DOD
Total 504 11.9% 40.6 125.6
Source: C&W, IIFL Research. Data till 3Q19

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 Embassy REIT – BUY

Figure 22: Sectoral absorption 2014-1H2019 analysis – Top-6 cities Tech/IT demand key driver, aided by strong SEZ demand
The IT sector accounts for ~35-40% of annual absorption on a pan
India basis. Most of this demand is driven by IT-SEZs, often from
corporates based outside India. These companies currently enjoy the
Others, 21.0%
advantage of availing both, direct and indirect tax benefits, operating
Technology, out of SEZs. We note that direct tax benefits are available if the
E-Commerce,
37.6% company commences its operations before April 2020 in an SEZ and,
2.2% unless this clause is extended, such benefits will not be available April
Healthcare and onwards. Also, in CY19, hiring activity for IT companies has been high,
Pharma, 3.8% further aiding the Commercial absorption activity.
Media & Engg &
In Union Budget-FY17, the government amended Section 10AA of the
Telecom, 5.7% Manufacturing,
Income Tax Act, extending income tax (IT) benefits to SEZ companies
12.7%
Professional Financial till 31-March-2020, for commencement of manufacturing or services
Services, 7.4% Services, 9.6% activity by any unit located in an SEZ. Industry experts believe that
even after the sunset clause, advantages for an SEZ will more or less
Source: C&W, Mindspace REIT DOD
withstand, especially as indirect tax benefits remain intact. Such
benefits include exemptions from Goods & Services Tax (GST), custom
Figure 23: Rentals in the top-6 cities have gone up, at 4% Cagr
duty and several other state-level incentives such as subsidised,
(Indexed Rates) uninterrupted power supply, etc.
125
Figure 24: Bangalore, Pune, Hyderabad and Chennai drive SEZ demand
120
115 NCR
15%
110
Bangalore
105 Mumbai 31%
7%
100
95
Chennai
90 15%
2014 2015 2016 2017 2018 2019

Source: C&W, Mindspace REIT DOD Pune

Hyderabad 14%
18%
Source: CBRE, IIFL Research

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 Embassy REIT – BUY

Figure 25: IT hiring picked up sharply in CY19, favouring leasing demand Figure 26: 10-year yield as of ~6.5-6.6% is near the lowest in 10 years, supporting
Headcount (LHS) % growth Commercial valuations – outlook soft
(nos mn) (% YoY)
1,400 12% % 10 year Sov Yield
1,200 10% 9.5
1,000 8% 9.0
800 8.5
6% 8.0
600
4% 7.5
400
7.0
200 2%
6.5
0 0% 6.0
3QFY17

4QFY19
2QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

1QFY20

2QFY20
5.5

Dec-11

Nov-14

Dec-18
May-11

Apr-14

May-18
Oct-10
Mar-10

Feb-13
Sep-13

Jun-15

Oct-17
Jan-16
Aug-16
Mar-17
Jul-12

Jul-19
Feb-20
Sep-20
Source: Company, IIFL Research
Source: Bloomberg, IIFL Research. Estimates from Bloomberg.
Interest rates hold the key to Valuations: Interest rates and cap
rates are linked; cap rates are typically at premium to the real interest
rates. In India, interest rates have edged down through CY19. The
Monetary Policy Committee (MPC) has cut policy rates by 135bps since
February 2019; however, the Committee, worried over rising inflation,
may not be able to cut rates over 1HCY20. This could keep cap rates
steady during CY20, unless there is a sharp rebound in interest rates,
which looks unlikely, at the moment.

moh i t. ag ra wal @i i fl cap. c om 11

 Embassy REIT – BUY

DPU-accretive acquisitions to drive next leg of Excerpts from Press Release

growth “Took note of the invitation to offer dated November 11, 2019
received by the Embassy REIT from Embassy Property Developments
Embassy REIT has received a ROFO request from the sponsor Private Limited (the “Embassy Sponsor”), Embassy Office Ventures
(Embassy Group), for a 6.2m sqft completed asset in Bangalore Private Limited (“EOVPL”) (a subsidiary of the Embassy Sponsor),
(Embassy Tech Village); media reports suggest that the REIT is Pune Dynasty Projects Private Limited (a subsidiary of the Embassy
looking to raise equity & debt to fund this. Our initial workings Sponsor) and Vikas Telecom Private Limited (“VTPL”) and its other
suggest that an equity:debt mix of 60:40 would be DPU- shareholders pursuant to the Deed of Right of First Offer dated
accretive. Embassy REIT has also executed its first acquisition of September 20, 2018 ("ROFO Deed”) with respect to the proposed sale
0.6m sqft of the sponsor’s under-construction asset (in of 100% of the equity share capital of VTPL (which is undertaking the
Manyata) for Rs7.4bn, which will be funded via debt. development of the Embassy TechVillage, an integrated office park
located in Bengaluru) and EOVPL, its holding company.
Embassy REIT looking at acquiring new assets, raising funds:
The REIT announced during its 2QFY20 earnings that it has received a The invitation to offer relates to approximately 6.2 msf of completed
ROFO invitation from Embassy Property Development (promoter group) office premises and approximately 2.5 msf of under-construction
for potential sale of ~8.7m sqft of completed and under-construction mixed use development. The invitation to offer states that it does not
office space in Embassy Tech Village, Bengaluru. This would include include approximately 19.76 acres of land which is under
6.2m sqft of completed office space and 2.5m sqft of under-construction development.
area. Media reports suggest that the REIT has picked investment banks
to help raise a combination of debt & equity, although details are not The Manager will evaluate the opportunity pursuant to the
yet clear. terms of the ROFO Deed and applicable law and subject to
receipt of any approvals and consents as may be required.
Figure 27: ETV acquisition could be valued at Rs64bn EV There can be no assurance that the Manager, on behalf of
ETV (Rs m) Embassy REIT, will enter into any definitive agreements for
Completed (m sqft) 6.2 this acquisition.”
U/C (m sqft) 2.5 Note: msf = million square feet (m sqft)
Total (m sqft) 8.7

NOI (estimated) 4,284 Embassy Group planning to infuse more funds into office park
EV of completed area (est) 51,922 REIT - “Our REIT is performing pretty well and we are putting in
EV Of U/C area (est.) 12,500 some more assets into it,” said Aditya Virwani, chief operating officer
at Embassy.
Total EV (estimated) 64,422
Source: Company, IIFL Research
Business Standard – Dec 20, 2019

moh i t. ag ra wal @i i fl cap. c om 12

 Embassy REIT – BUY

Embassy REIT has also executed its first acquisition of 0.6m sqft of the The Embassy REIT has a ROFO on certain assets owned by the Embassy
sponsor asset (part of the M3 parcel in Embassy Manyata) for Rs7.4bn, sponsor located in Bengaluru and Chennai. The eligibility criteria for this
funded by debt. are:
1) Controlling interest should be divested
Details, as released by Embassy to Exchanges:
2) At least 50% area has been developed and not more than 30% area
 Acquisition of M3 Block B from the sponsor group helps further
to be sold by way of strata sale
consolidation of the M3 land parcel, which also comprises 1m sqft of
M3 (Block A). 3) Market value (assessed) is not less than Rs7.5bn
 Estimated acquisition cost of Rs7.4bn to be funded through
additional debt and shall be paid in tranches linked to milestones. Figure 29: REIT has received its first ROFO from the Embassy Promoter, in Nov-2019
The final acquisition cost will be determined, upon building Assets Location Area (m sqft) Comments
completion and lease-up space, based on actual achieved rents. Embassy Tech Village Bengaluru >12.2 8.7 ROFO received to REIT
 At 9.25% yield, the debt-funded acquisition is expected to be DPU- Embassy Knowledge Park Bengaluru >17.7
accretive on stabilisation and compares favourably with the Embassy
Embassy Concord Bengaluru >7.9
Manyata cap rate of 8%, as per the 1HFY2020 independent
appraisal. Embassy Splendid TechZone Chennai >5
Total 42.8
Figure 28: We estimate the transaction will assume a 7-8% p.a. rental growth Source: Company, IIFL Research
Particulars Comments
EV (Rs m) 7,360 Embassy REIT is expected to incur a capex of Rs20bn during FY20-23,
Cap Rate (%) 9.25% towards completion of under-construction office projects and hotels as
well as modernisation and upgrade of facilities. The REIT will ensure
Implied NOI (FY24ii) 681
that 90% of the cash surplus is distributed and any shortfall will be met
through external borrowings.
Area (m sqft) 0.60
Leased (m sqft) 0.57 Occupancy (assumed 95%)

Revenue (Rs m) 756 NOI 90% margin

Expected Rentals - FY24ii (Rs/sqft) 111
Current M2M Rentals (Rs/sqft) 85
Source: Company, IIFL Research

The total indebtedness, as of end-September 2019, is Rs34bn, which is

~11% of the market value (as revised in 1HFY20), and which compares
favourably with key similar office REITs in Asia and the 49% regulatory
limit. This will allow the REIT to drive growth by undertaking value-
accretive future acquisitions through both, new transactions and
acquisition of ROFO assets from the Embassy sponsor.

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 Embassy REIT – BUY

Figure 30: Net debt to increase, driven by capex, although it remains low levered Valuations are at premium to NAV..: Since listing, the Embassy
stock has gone up >40% YTD, trading at 6-7% premium to its NAV (as
(Rs bn) Net debt Capex (Rs bn) of end-Sep-2019). At CMP, Embassy REIT trades at 6% yield, at close
70 14 to the 10-year treasury. Globally, we see that REITs trade at 200bps
60 12 premium to the respective country G-Secs; however, the distribution
growth is lower and hence, looking at the total returns (DPU growth
50 10
together with distribution yield), relevant.
40 8
30 6 …total returns stay attractive: We expect DPU growth to be ~7%
p.a. over a normalised period; this places total returns at >13%. We
20 4 believe premium valuations will sustain, given Embassy REIT’s
10 2 operational performance, distribution focus, etc, a healthy balance sheet
that can support organic development, and acquisitions. Globally, we
0 0 see REITs trading at a dividend yield of 4.5%, with average DPU growth
FY19 FY20ii FY21ii FY22ii
at 3%, thereby placing total returns lower than Indian REITs, which
Source: Company, IIFL Research have displayed higher growth.

Figure 31: EV assessed by the CBRE valuer

Total return play – Valuations at a premium
(Rs bn)
to NAV 350
300
Strong operational performance, continued weakness in interest
rates, razor-sharp focus on distribution and low leverage have 250
driven Embassy’s strong outperformance since its listing (up
200
40% YTD, at a premium to NAV). We believe these factors would
help sustain the valuation premium; also, the double-digit total 150
returns (distribution yield and DPU growth) remain attractive. 100
Key risks include higher interest rates, slowdown in commercial
cycle and sell down by the Blackstone sponsor. 50
0
Asset valuation stable over the last 9 months: The enterprise value Dec-18 Mar-19 Sep-19
(EV), as assessed by the CBRE (valuer), has been flattish over the last 9
Source: Company, IIFL Research
months. The EV is based on assumption of cap rates ranging between
7.5% and 8.25% across assets, and WACC of 12.3% for operational
assets and of 13.6-14.2% for under-construction assets. Our valuation
and target price are based on a cap rate of 8%, and WACC of 12%,
assuming rentals growth at ~5-8% p.a. over the next 10 years.

moh i t. ag ra wal @i i fl cap. c om 14

 Embassy REIT – BUY

Figure 32: NDCF is expected to clock ~7% Cagr over the next 5 years Figure 34: Embassy REIT is - sensitivity to cap rate and cost of equity
Cap rates
(Rs bn)
6.0% 7.0% 8.0% 9.0% 10.0%
30
11.0% 596 528 477 437 405
25 11.5% 577 511 462 423 392
Cost of equity (%) 12.0% 559 495 447 410 380
20 12.5% 541 479 433 397 368
15 13.0% 524 464 419 384 356
Source: Company, IIFL Research
10

0
FY20ii FY21ii FY22ii FY23 FY24 FY25
Source: Company, IIFL Research

Figure 33: Our price target implies ~5% upside from CMP
As on Mar - 21 Rs mn
Disounted FCFF (FY22-FY30) 145,169
PV of Terminal Value 259,257
Enterprise Value (Rs mn) 404,426
Less: Net debt (FY21) 48,953
Less: Security deposits 10,619
Equity Value (Rs mn) 344,855
Value per unit (Rs) 447
Source: Company, IIFL Research

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 Embassy REIT – BUY

Figure 35:Comparison between Embassy, Mindspace (Unlisted) Risks to Valuation

Embassy Mindspace Comments
Operating (m sqft) 24.8 19.8 Increase in interest rates: In the last 9 months, since the listing of
Occupancy (%) 94.7% 97.2% Committed Occupancy for M-REIT Embassy REIT, G-Sec yields have fallen, aiding REITs outperformance to
Under Construction (m sqft) 2.4 6.1 broader markets. Globally, REITs trade at a >200bps premium to LT
Future Development (m sqft) 5.5 3.6 bond yields, while Embassy trades close to G-Secs. While the outlook on
interest rate overall broadly remains benign, any hike in interest rates
Total (m sqft) 32.7 29.5
over the medium term will have a negative impact on the REIT price.
ROFO (m sqft) 42.8 8.6
Dilution by Blackstone: Blackstone currently holds 55% in the REIT,
EV Valuation (Rs bn) 321 228 and may look to reduce its shareholding post the lock-in of one year,
Completed 284 185 which ends in April 2020, leading to a potential downward pressure on
M-REIT has higher share of U/C the stock price, if such an event unfolds. The Embassy sponsor views
U/C 37 43
assets the REIT as a permanent capital vehicle and has provided the REIT with
Bangalore 61% ROFO rights over all its current and future eligible office assets.
Hyderabad 37%
Mumbai 16% 42%
Pune 14% 17%
NCR 9%
Chennai 2%
Others 0% 2%

FY21 estimates
M-REIT financials from Draft Offer
Revenue (Rs bn) 26.6 20.0
Document
NOI (Rs bn) 22.0 16.1
Ebitda (Rs bn) 21.0 14.8
% margin 78.7% 74.2%
NDCF (Rs bn) 20.3 12.0

M-Cap/Post Money Value 316.9 180.0 Post Money estimated for M-REIT
FY21 DPU (%) 6.2% 6.6%
FY22/21 DPU Growth (%) 6.9% 9.1%
Source: Company, IIFL Research

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 Embassy REIT – BUY

Figure 36: REIT − Valuation comparable

Country Last M Cap Total debt Leverage Avg Daily Trading Distribution Cagr 2 yr Distribution Yield 10 Year Bond Yield
Company Name Code Px/NAV (UA$ bn) (US$ bn) (%) (US$ m) (%) FY21(%) (%)
Embassy REIT IN 424.1 4.6 1.0 18% 3.0 5.6% 6.2% 6.6%

Ascendas India REIT SG 3.2 8.4 3.0 26% 28.8 3.4% 5.3% 1.7%
Capitaland
Commercial SG 2.1 6.1 1.9 24% 15.7 6.0% 4.3% 1.7%
Keppel REIT SG 1.3 3.2 1.6 33% 5.4 3.4% 4.7% 1.7%
Manulife US SG 1.0 1.6 0.6 26% 3.9 4.1% 6.1% 1.7%
Suntec SG 1.9 3.9 2.6 40% 11.8 0.0% 5.3% 1.7%
Mapletree Commercial SG 2.4 5.9 1.7 23% 28.3 2.1% 4.1% 1.7%

The Link REIT HK 81.6 21.8 3.1 12% 64.2 7.1% 3.8% 1.6%
Champion REIT HK 4.9 3.7 1.9 34% 3.4 2.2% 5.6% 1.6%
Fortune REIT HK 9.2 2.3 1.1 33% 3.0 3.0% 5.9% 1.6%

Boston Properties US 142.0 22.0 11.0 33% 77.0 3.5% 2.9% 1.8%
Vornado Realty Trust US 67.3 12.8 9.8 43% 68.1 -1.4% 5.3% 1.8%
Kilroy Realty US 82.4 8.7 2.9 25% 46.8 3.1% 2.5% 1.8%
Douglas Emmett US 42.4 7.4 4.1 36% 38.2 6.1% 2.6% 1.8%
SL Green Realty US 93.4 7.6 5.6 42% 70.2 1.0% 4.0% 1.8%
Average 120.1 52.0 30% 31.2 3.3% 4.6% 2.1%
Source: Company, IIFL Research

moh i t. ag ra wal @i i fl cap. c om 17

 Embassy REIT – BUY

About the REIT and its structure Figure 37: Asset holding structure of the REIT

The Embassy Office Parks REIT (Embassy REIT) owns seven office parks
and four city-centre office buildings, spread over 32.6m sqft (on
completion of U/C assets), including one operational and three U/C
hotels totalling 1,096keys. The portfolio is held by the Embassy REIT
through asset SPVs. Most of these SPVs are directly held by the REIT,
as 100% subsidiaries, except Manyata and Embassy Energy, where
REIT holds 100% through step-down subsidiaries. Further, Embassy
Golf Links is an investment entity and will be held through the Holdco.

The REIT has invested in India’s top office markets of Bengaluru, Pune,
Mumbai and Noida, which account for 72.5% of the total Grade A office
stock in India and 76.9% of the total absorption in the last 5 years (as
per the REIT Offer Document). The portfolio is highly stabilised, at
~95% occupancy (with weighted average lease length of 7.2years), and
is positioned to achieve further organic growth through a combination of
contracted revenue, re-leasing at market rents, lease-up of vacant
space and new construction.

The investment objective of the Embassy REIT is to own, operate and Source: Company, IIFL Research
invest in rent-generating office real estate. Embassy and Blackstone are
sponsors of Embassy REIT. The REIT is externally managed and, for Figure 38: Snapshot of the REIT structure
that, Embassy Office Parks Management Services Pvt (EOPMSPL; owned
by the sponsor group) has been appointed as the Manager. The Trustee
and Manager have executed the Investment Management Agreement,
under which the Manager is empowered to take all decisions in relation
to management and administration of Embassy REIT’s assets and the
company’s investments.

Source: Company, IIFL Research

moh i t. ag ra wal @i i fl cap. c om 18

 Embassy REIT – BUY

Figure 39:CBRE valuation has been stable over the last 9 months Figure 40: Embassy REIT the largest among Asia in size
Annual Value CBRE - DOD (Dec 2018) Mar-19 Sep-19 Change Asian REITs Comparison - Area in msf
Embassy Manyata 133 133 136 2.4% Office UC/Potential
Embassy Golf Links 26 26 26 1.0% 35 32.7
29.5
Embassy One 6 6 6 -6.1% 30
25 19.7
Express Towers 19 19 19 -1.4% 20 11.7
Embassy 247 17 17 17 -0.4% 15 9.2
FIFC 15 15 15 -0.3% 10 2.9 2.9 3.1 3.7 4.8
5 0.8 1.3
Embassy TechZone 21 21 21 3.6% 0
Embassy Quadron 15 15 15 0.0%

KDO REIT
Capitaland REIT

Keppel REIT

AIT
Sunlight REIT

NBF REIT

Mindspace REIT
Champion REIT

Suntech REIT

JRE REIT
Prosperity REIT

Embassy REIT
Embassy Qubix 10 10 10 -2.8%
Embassy Oxygen 20 20 21 3.6%
Embassy Galaxy 8 8 9 5.1%
Hilton at Embassy Golf Links 5 5 5 4.6%
Four Seasons 8 8 8 3.3%
Source: C&W report, Mindspace REIT DoD
Embassy Energy 11 11 11 -2.4%
Hilton at Embassy Manyata 2 3 3 19.3% Embassy REIT assets have outperformed their markets with 940bps
Total 315 316 321 1.6% higher committed occupancy, as of end-FY18, and 270bps higher rent
Source: Company, IIFL Research Cagr over the last 5years & 3months. Due to scarcity of available land
for development and land aggregation complexities, it may now be
High quality, well-located annuity assets: The Embassy REIT is the challenging to replicate the present scale of Embassy REIT’s portfolio.
largest REIT among comparable Asian peers (by volume of assets held). For example, in North Bengaluru, most under-development office
The assets have 94.7% Occupancy (higher than the overall India office projects have less than ~0.8m sqft of leasable area vs Embassy
market), with a weighted average lease length of 7.2years. The portfolio Manyata, which has 14.2m sqft of leasable area, giving it an advantage.
is located in India’s four key office markets of Bengaluru, Pune, Mumbai
and Noida. The absorption in these markets, between CY2013 and Strong relationships with tenant base: Embassy REIT’s
CY2019, exceeds the total absorption for 11 global cities, including New managers/team members maintain regular communication with
York, San Francisco, Central London, Shanghai and Tokyo, over the corporate real-estate heads of existing tenants, through a dedicated
same period. Also, these markets are among the top-performing in customer relationship management (CRM) programme, leading to
India and account for 72.5% of total Grade A office stock and 76.9% of strong tenant relationships. Of the 5.3m sqft of new leasing in the last
total absorption over the last five years and three months. three years, 3.4m sqft (62.7%) has come from existing tenant
expansions and led to high & stable occupancy levels of ~93.4%.

As of 31-March-2018, Embassy REIT assets have 160 tenants

comprising a mix of blue-chip multinational and Indian corporates, with
approximately 81.4% of gross rentals contracted with leading MNCs.
Gross Rentals of up to 49.4% are derived from the technology sector,
while the remainder is well diversified across various industries,

moh i t. ag ra wal @i i fl cap. c om 19

 Embassy REIT – BUY

including financial services, healthcare and telecommunications. The top  The properties are required to be held for at least three years, from
10 tenants contribute approximately 43% of gross rentals. Over the last the date of completion or purchase.
few years, the REIT’s assets have enjoyed >85% tenant retention rate.  There are restrictions on certain investments: 1) vacant land, 2)
agricultural land or mortgages other than mortgage backed
Further, leases in India are typically on a warm-shell basis, resulting in securities, and 3) assets located outside India.
landlords incurring TI (tenant improvement) capex of only 2-5% of the
rental revenue, whereas tenants incur significant cost, often equivalent Distribution of Cash Flows: The Manager shall declare and distribute
of 4-7 years of rents. This results in tenant ‘stickiness’ across the at least 90% of the net distributable cash flows as distributions, at least
portfolio, as occupiers would have to incur significant capital costs for on a quarterly basis. Distributions shall be within 15 days from the date
relocation to new premises. of such declarations. 100% of the cash flows received by the Holdco
from the underlying SPVs are required to be distributed to the REIT, and
Figure 41: Top-10 tenants account for 43% of gross rentals not less than 90% of the net distributable cash flows generated by the
Top-10 tenants Gross rentals - % of Total Sector Holdco on its own shall be distributed to the REIT. The net distributable
IBM 13% Technology cash flows receivable by the Embassy REIT may be in the form of
Cognizant 10% Technology dividends, interest income, principal repayment or capital reduction or
buyback.
NTT Data 5% Technology
Cerner 3% Healthcare Tax implications: The REIT holds assets through SPVs; hence cash
Google India 3% Technology flow is in the form of dividends, interest income and principal
PWC 2% Research, Consulting and Analytics repayment. On interest, the tax liability on ‘residents’ as per the IT Act
NOKIA 2% Telecom is the maximum marginal rate and for ‘non-residents’ it is 5%. Embassy
JP Morgan 2% Technology REIT will distribute ~50% of the cashflows through interest. At the REIT
level, interest would be subject to a withholding tax of 10% for
Lowe’s 2% Retail
residents and 5% for non-residents. The dividend paid out is exempt
Total Top 10 Tenants 43% from DDT, if a REIT holds 100% equity of the HoldCo/SPV (which is the
Source: Company, IIFL Research case for Embassy REIT for all SPVs except Manyata, Embassy Energy
and the Golf Links asset (investment entity). Dividends or interest
Snapshot of REIT regulations income from SPVs with controlling interest is exempt, in the hands of
Under REIT Regulations of the SEBI, Embassy REIT is, on a half yearly the REIT.
basis, required to ensure the following:
 At least 80% of the value of assets to be completed in rent- Expenses at the REIT and SPV level: Expenses to be directly
generating properties; charged to the Embassy REIT would include: 1) REIT management fee
 Not more than 20% value of assets can be invested in: 1) U/C (1% of REIT distributions) and 2) property management fee paid by
properties, 2) completed, but not rent-generating, and 3) listed or asset SPVs to the Manager. Further fees include Trustee fee (initial
unlisted debt of real estate sector companies, which derive at least acceptance fee of Rs1m as well as annual fee of Rs2.5m), Trademark
75% of their operating income from realty; licencing fee (monthly: Rs0.1m), Auditor fee and Valuer fee.
 At least 51% of the revenues (ex-asset sale) of the REIT and SPVs
must arise from rental income;

moh i t. ag ra wal @i i fl cap. c om 20

 Embassy REIT – BUY

Board of Directors of the Manager Figure 42: The manager team is highly experienced in leasing space
Name Position Description
Sponsor group: The Embassy REIT is jointly sponsored by Embassy Michael CEO Founder and former country head of JLL India; ex-CEO of
and Blackstone, both of which have a large real-estate presence in Holland Assetz Property Group
India. Embassy is a leading Indian real-estate company, which has Vikaash Deputy CA and CFA, associated with Blackstone since 2011
completed over 45m sqft of office & residential development. Blackstone Khdloya CEO
is one of the world’s leading investment, real-estate and alternative
Rajesh Kaimal CFO >23 years of experience across the Manipal Group and others
asset management firms, with US$119billion of investor capital under
management, as of June 30, 2018. The Sponsor group shall hold at Sachin Shah CIO >17 years of experience across the Starwood Capital Group,
least 25% of units on a post-Issue basis, locked in for a period of three Blackstone; MBA from Harvard University
years from the date of listing. Unit holding exceeding 25% shall be Bhhavesh Head of > 26 years of experience, previously with L&T. MBA from SP
locked in for at least one year. The sponsor group shall hold at least Kamdar Leasing Jain, Mumbai
15% at all times; however, Blackstone may divest its unit holding below Ritwik Head IR Previously with Nomura and UBS; MBA from Tuck School,
5%, after the expiry of the three-year lock-in period. Bhattacharjee Dartmouth College
Source: Company, IIFL Research
REIT Manager and the Board: The REIT Manager − led by Michael
Holland, Vikaash Khdloya, and their team − has an average experience Figure 43: The Board comprises 4 independent directors, 2 each from Embassy and
of 20 years in the leasing space. The Manager and the Asset SPVs Blackstone
together have over sixty employees. In the last 3-4 years, the team has Director Designation Profile
leased >5m sqft of office space, grown the portfolio by >2.5m sqft
Anuj Puri Independent Chairman, ANAROCK; ex-Chairman and Country
through strategic acquisitions and building of office parks, undertaken
Director Head, JLL India
extensive renovation and repositioning programmes as well as major
asset upgrades. The Board is comprised of 8 directors, of which 50% Dr Punita Kumar Independent Founder, Pacific Paradigm Advisors; ex Blackstone
are independent. The non-independent directors comprise 2 board Sinha Director Senior MD
seats, one each for Embassy and Blackstone. There is one woman Dr Ranjan Pai Independent Board member on various Manipal Group
independent director on the Board. Director companies
Vivek Mehra Independent ex PWC, Board member of DLF, HT Media, Jubilant
Director Life and others
Aditya Virwani Non-Executive COO, Embassy Group
Director
Jitendra Virwani Non-Executive CMD, Embassy Group
Director
Christopher Non-Executive Chairman, A-PAC Real Estate - Blackstone
Heady Director
Tuhin Parikh Non-Executive Senior MD, India Real Estate - Blackstone
Director
Source: Company, IIFL Research

moh i t. ag ra wal @i i fl cap. c om 21

 Embassy REIT – BUY

Figure 44: Framework for making key decisions

Strategic decisions Key requirements Unit holder approval requirements
Acquisition (non- Independent valuation If purchase price over 110% of
Related Party required independent valuation
Transaction)
If value equal to or greater than 25% of
the REIT assets
Acquisition (Related Two independent If total value of all the RPTs over 10% of
Party Transaction) valuation reports the value of the REIT
Purchase price cannot be higher than 110% of the average of the
two independent valuations
Divestment (non- Independent valuation If sale price less than 90% of the
Related Party required independent valuation
Transaction)
If the value is more than 10% of the
REIT assets
Divestment (Related Two independent If total value of all the RPTs is more than
Party Transaction) valuation reports 10% of the value of the REIT
Sale price cannot be lower than 90% of the average of the two
independent valuations
Debt raise Borrowings not allowed to Aggregate consol net debt exceeds 25%
exceed 49% of value of of value of REIT assets
REIT assets
If value of funds borrowed from RPs in a
year is more than 10% of total consol
borrowings
Leasing (Related Fairness opinion from If related party leases (by area, value, or
Party Transaction) independent valuer rentals) more than 20% of total REIT
required, if RP leases (by assets
area, value or rentals)
exceed 20% of REIT assets
Development If 80/20 conditions, w.r.t An additional 6-month extension
U/C assets, are breached requires unit holders approval
on sale/expiry, 6 months
rectification period
Source: Company, IIFL Research

moh i t. ag ra wal @i i fl cap. c om 22

 Embassy REIT – BUY

Annexures

moh i t. ag ra wal @i i fl cap. c om 23

 Embassy REIT – BUY

Embassy Manyata - Bengaluru Figure 47: Rental growth higher than competition
INR psf / mth Historical Rent Growth (CY2013-Q1 2018)
Embassy Manyata is a Grade A, freehold office park in North Bengaluru, Embassy Manyata Competing assets in submarket
spread across 121.76 acres – being the largest office park in the city and 80
the second-largest in India. The park has office space and two hotels
9.0%
with 619 keys, currently under construction, as well as 1.4m sqft of 70 8.2%
proposed development.
60 CAGR
Figure 45: Key statistics – Embassy Manyata 2013 – Q1 2018
Submarket Northern Bengaluru
50
Site area (acre) 121.76
Leasable area (m sqft) 14.2
40
Completed area (m sqft) 11
2013 2014 2015 2016 2017 Q1 2018
Under-Construction area (m sqft) 1.8
Source: CBRE Report, Offer Document
Proposed Development area (m sqft) 1.4
Occupancy (%) 99.5% Figure 48: Tenant Mix − Technology at >50%
Number of tenants 64 Manyata Technology
Source: Offer Document
Research, Consulting & Analytics
Figure 46: Location Map – Embassy Manyata
49.4% Healthcare
Retail
100.0% 4.4% Telecom
10.1%
11.5% Financial Services
11.3%
6.6%
5.0%
1.7% Engg & Manufacturing
Others
Total
Source: Offer Document

Source: Offer Document

moh i t. ag ra wal @i i fl cap. c om 24

 Embassy REIT – BUY

Express Towers - Mumbai

Figure 51: Rental growth higher than competition
Express Towers is an office building situated at Nariman Point, within
Mumbai’s Central Business District. This property is one of the very few INR psf / mth Historical Rent Growth (CY2013-Q1 2018)
Grade A office buildings in this submarket, which is institutionally held. Express Towers Competing assets in submarket
The property recently underwent a major repositioning programme, 300
which included façade replacement for the entire building exterior, lobby 1.5%
refurbishment, and enhanced security controls. 260

Figure 49: Key Stats − Express Towers, Mumbai 220

-0.9%
Submarket CBD (Nariman Point), Mumbai 180 CAGR
Site area (acres) 1.46
2013 – Q1 2018
Remaining lease life (# of years) 43 years 140
Leasable area (m sqft) 0.5
100
Completed area (m sqft) 0.5 2013 2014 2015 2016 2017 Q1 2018
Occupancy (%) 92.5%
Source: CBRE Report, Offer Document
Number of tenants 28
Source: Offer Document Figure 52: Tenant Mix – Financial Services & Consulting at ~75%
Figure 50: Location Map – Express Towers Express Towers
Technology

42.3% Research, Consulting & Analytics

Healthcare
100.0%
32.3%
Retail
2.6%
5.8%
17.0%
Telecom

Financial Services

Source: Offer Document

Source: Offer Document

moh i t. ag ra wal @i i fl cap. c om 25

 Embassy REIT – BUY

Embassy 247 - Mumbai

Figure 55: Rental growth lower than competition
Embassy 247 is a freehold, Grade A city-centre office building located in
the Peripheral Business District East submarket of Mumbai. The Historical Rent Growth (CY2013 - Q1 2018)
property comprises three high-quality office blocks, totalling 1.1 m sqft INR psf/mth Embassy 247 Park
of leasable area. A comprehensive upgrade programme over the last Competing assets in submarket
two years, coupled with the addition of Wework India Management 130
Private as a major occupier, has led to the asset being repositioned.
0.4%
Figure 53:Key Statistics – Embassy 247
Submarket PBD East, Mumbai 115 0.3%
Site area (acres) 7.27 CAGR
Freehold/ Leasehold Freehold (2013 - Q1 2018)
Leasable area (m sqft) 1.2
100
Completed area (m sqft) 1.2 2013 2014 2015 2016 2017 Q1 2018
Occupancy (%) 73.8%
Source: CBRE Report, Offer Document
Number of tenants 28
Source: Offer Document
Figure 56: Tenant Mix –Technology & Retail key
Figure 54: Location Map – Embassy 247
Embassy 247
Technology

10.9% Research, Consulting & Analytics

33.5%
Healthcare

100.0% 15.9% Retail

6.0%
17.2% Telecom
16.5%
Financial Services

Source: Offer Document Engg & Manufacturing

Source: Offer Document

moh i t. ag ra wal @i i fl cap. c om 26

 Embassy REIT – BUY

FIFC - Mumbai Figure 59: Rental growth higher than competition

INR psf / mth Historical Rent Growth (CY2013-Q1 2018)
First International Finance Centre (FIFC) is a Grade A city centre office FIFC Competing assets in submarket
building located in Bandra Kurla Complex (BKC) in Mumbai’s Alternate 290
Business District. Of the 0.7m sqft, Embassy REIT owns 0.4m sqft; the 280 1.3%
remaining is owned by MNC Bank. 270
260
Figure 57: Key Statistics – FIFC 250
-0.9%
Submarket Alternate Business District, Mumbai 240
Site area (acres) 1.99 230 CAGR
Freehold/ Leasehold Leasehold 220 2013 – Q1 2018
Remaining lease life (# of years) 69 years 210
Leasable area (m sqft) 0.4 200
Completed area (m sqft) 0.4 2013 2014 2015 2016 2017 Q1 2018
Occupancy (%) 55.4% Source: CBRE Report, Offer Document
Number of tenants 10
Source: Offer Document Figure 60: Tenant Mix – Technology and Retail at >90%
FIFC Technology
Figure 58: Location Map – FIFC
Research, Consulting & Analytics

Healthcare
72.1%
Retail
100.0%
Telecom
2.9%
8.5% Financial Services
16.5%
Engg & Manufacturing

Others
Source: Offer Document

Source: Offer Document

moh i t. ag ra wal @i i fl cap. c om 27

 Embassy REIT – BUY

Embassy TechZone - Pune Figure 63: Rental growth higher than competition
INR psf / mth Historical Rent Growth (CY2013-Q1 2018)
Embassy TechZone is a Grade A, campus office park, located close to the Embassy Techzone West Pune (SEZ only)
60
Mumbai-Pune Expressway in West Pune. The park is spread over
67.45acres, with 5.5m sqft of leasable area and comprises 6 operational 55
towers (2.2m sqft) and a further 3.3m sqft of Proposed Development 50 7.9%
Area. Of the 67.45acres, 42.3 are currently designated as SEZ and an 45
additional 18.03 are under application for conversion into an SEZ. 40 8.8%
35 CAGR
Figure 61: Key Statistics – Embassy TechZone 30 2013 – Q1 2018
Submarket West Pune 25
Site Area (acres) 67.45 20
Freehold/ Leasehold Leasehold 2013 2014 2015 2016 2017 Q1 2018
Remaining lease life (# of years) 81 years Source: Company, IIFL Research
Leasable area (m sqft) 5.5
Completed area (m sqft) 2.2 Figure 64: Tenant Mix – Technology at >75%
Proposed Development area (m sqft) 3.3 Techzone
Technology
Occupancy (%) 81.5%
Number of tenants 23 Research, Consulting & Analytics
Source: Offer Document
73.6% Healthcare
Figure 62: Location Map – Embassy TechZone
100.0% Retail

4.1% Telecom
3.5%
0.3%
18.3%
0.2%
Financial Services

Engg & Manufacturing

Source: Offer Document

Source: Offer Document

moh i t. ag ra wal @i i fl cap. c om 28

 Embassy REIT – BUY

Embassy Quadron - Pune Figure 67: Rental growth higher than competition
INR psf / mth Historical Rent Growth (CY2013-Q1 2018)
Embassy Quadron is a high-quality, Grade A office park located in the Embassy Quadron West Pune (SEZ only)
West Pune submarket. The property is spread over 25.52acres and 60
comprises four buildings with 1.9m sqft of leasable area. It has high 55 9.0%
quality specifications, infrastructure and tenant amenities, including a 50
+2,000-seat food court, indoor sports zone, etc. 45 7.9%
40 CAGR
Figure 65: Key Statistics – Embassy Quadron 35 2013 – Q1 2018
Submarket West Pune 30
Site area (acres) 25.52 25
Freehold/ Leasehold Leasehold 20
Remaining lease life (# of years) 81 years 2013 2014 2015 2016 2017 Q1 2018
Leasable area (m sqft) 1.9
Source: CBRE Report, Offer Document
Completed area (m sqft) 1.9
Occupancy (%) 91.4%
Number of tenants 24
Figure 68: Tenant Mix – Technology at >50%
Source: Offer Document
Quadron
Technology
Figure 66:Location Map – Embassy Quadron

65.3% Research, Consulting & Analytics

100.0%
Healthcare
12.3%
1.8%
20.5%
Retail

-100.0% Telecom

Financial Services

Source: Offer Document

Source: Offer Document

moh i t. ag ra wal @i i fl cap. c om 29

 Embassy REIT – BUY

Embassy Qubix - Pune Figure 71: Rental growth similar to competition

INR psf / mth Historical Rent Growth (CY2013-Q1 2018)
Embassy Qubix is a Grade A office park, strategically located close to Embassy Qubix West Pune (SEZ only)
the Mumbai-Pune Expressway in the submarket of West Pune. The office 60
park is spread over 25.16acres and has six office buildings totalling 55 8.0%
1.5m sqft of leasable area. It provides occupiers with a full suite of 50
amenities, including a recently fully-renovated food court, refurbished 45 7.9%
lobbies, etc. 40
CAGR
Figure 69: Key Statistics – Embassy Qubix 35 2013 – Q1 2018
Submarket West Pune 30
Site area (acres) 25.16 25
Freehold/ Leasehold Freehold 20
Leasable area (m sqft) 1.5 2013 2014 2015 2016 2017 Q1 2018
Completed area (m sqft) 1.5 Source: CBRE Report, Offer Document
Occupancy (%) 99.2%
Number of tenants 47 Figure 72: Tenant Mix – Technology at >88%
Source: Offer Document Qubix
Technology
Figure 70: Location Map – Embassy Qubix
Research, Consulting & Analytics

87.2% Healthcare
100.0%
Retail

8.7%
1.5%
2.6%
0.0% Telecom

Financial Services

Source: Offer Document

Source: Offer Document

moh i t. ag ra wal @i i fl cap. c om 30

 Embassy REIT – BUY

Embassy Oxygen - Noida Figure 75: Rental growth lower than competition
Historical Rent Growth (CY2013 - Q1 2018)
INR psf/mth
Embassy Oxygen is one of the few institutionally-owned, Grade A office Embassy Oxygen Competing assets in submarket
parks in Noida, situated in the Noida Expressway submarket. It is 55
among the largest office parks in the city and one of only two SEZ 10.5%
50
developments in its submarket. It is spread over 24.83acres, with 3.3m
sqft of leasable area. 45 7.7%
40
CAGR
Figure 73: Key Statistics – Embassy Oxygen 35 (2013 - Q1 2018)
Submarket Noida Expressway 30
Site area (acres) 24.83 25
Remaining lease life (# of years) 79 years 20
Leasable area (m sqft) 3.3 2013 2014 2015 2016 2017 Q1 2018
Completed area (m sqft) 1.5 Source: CBRE Report, Offer Document
Under Construction area (m sqft) 1.1
Proposed Development Area (m sqft) 0.7 Figure 76: Tenant Mix – Technology >58%
Occupancy (%) 89.2% Oxygen Technology
Number of tenants 22
Source: Offer Document Research, Consulting & Analytics
59.0%
Healthcare
Figure 74: Location Map – Embassy Oxygen 100.0%
24.0% Retail

16.3% Telecom
0.5%
Financial Services
-100.0%
Engg & Manufacturing

Others
Source: Offer Document

Source: Offer Document

moh i t. ag ra wal @i i fl cap. c om 31

 Embassy REIT – BUY

Embassy Galaxy - Noida Figure 79: Rental growth higher than competition
Historical Rent Growth (CY2013 - Q1 2018)
Embassy Galaxy is a Grade A office park located in Peripheral Noida, INR psf/mth Embassy Qubex West Pune (SEZ only)
with a leasable area of 1.4m sqft. Spread across 9.88acres, the property 45
is an open-campus style development, with a range of amenities
including a recently refurbished state-of-the-art food court, cafes and 40
5.7%
numerous retail options.
35
8.0%
Figure 77: Key Statistics – Embassy Galaxy 30
Submarket Peripheral Noida CAGR
25 (2013 - Q1 2018)
Site area (acres) 9.88
Freehold/ Leasehold Leasehold 20
Remaining lease life (No of years) 77 years 2013 2014 2015 2016 2017 Q1 2018
Leasable area (m sqft) 1.4 Source: CBRE Report, Offer Document
Completed area (m sqft) 1.4
Occupancy (%) 100.00% Figure 80: Tenant Mix – Technology at >80%
Number of tenants 31 Galaxy Technology
Source: Offer Document
Research, Consulting & Analytics
Figure 78: Location Map – Embassy Galaxy
81.6% Healthcare
100.0%
Retail
0.3%
3.2%
0.4%
14.1% Telecom

Financial Services
-100.0%
Engg & Manufacturing

Others
Source: Offer Document

Source: Offer Document

moh i t. ag ra wal @i i fl cap. c om 32

 Embassy REIT – BUY

Embassy Golf Links - Bengaluru Figure 83: Rental growth higher than competition
INR psf/mth Embassy Golflinks Submarkets
Embassy Golf Links is located in the heart of Bengaluru, next to the 140
10.0%
Karnataka Golf Association (KGA) Golf Course and close to the Central 130
Business District (CBD). The park offers a fully-integrated office 120
ecosystem in a dense in-fill location in the EBD submarket, with 4.5m 110
100 10.3%
sqft of completed office space, of which GLSP owns 2.7m sqft.
90 CAGR
80 (2013 - Q1 2018)
Figure 81: Key Statistics – Embassy Golf Links
70
Entity Golf Links Software Park Pvt. 60
Interest owned by REIT (%) L0% 50
Submarket EBD, Bengaluru 40
2013 2014 2015 2016 2017 Q1 2018
Occupancy (%) 94.2%
Committed Occupancy (%) 100%
Source: CBRE Report, Offer Document
Number of tenants 20
Source: Offer Document Figure 84: Tenant mix – Technology & Financials Services mainly
Golflinks
Figure 82: Location Map – Embassy Golf Links Technology

Research, Consulting & Analytics

48.2%

Healthcare
100.0%
14.3%
1.0% Retail
30.0%
6.5% Telecom

Financial Services

Source: Offer Document

Source: Offer Document

moh i t. ag ra wal @i i fl cap. c om 33

 Embassy REIT – BUY

Embassy One - Bengaluru Hilton at Embassy Golf Links - Bengaluru

Embassy One is a mixed-use development in Bengaluru comprising 0.3 Hilton at Embassy Golf Links is a 247-key hotel, set within the Embassy
msf of leasable office and retail area, a 230 key proposed Four Seasons Golf Links business park in Bengaluru. Hilton at Embassy Golf Links
Hotel. The project is located on the main arterial Bellary Road between offers among the largest rooms in the city with studios and suites fully
Kempegowda International Airport and the Central Business District equipped with kitchenettes, dining, living and work areas and are ideal
(CBD). Project includes office space (195k sqft) and 55k sqft of retail for a business trip or relaxing vacation. The hotel also features two
space. indoor dining venues, an al fresco restaurant by the poolside, a bar, six
meeting rooms with natural light, 24-hour fitness centre, outdoor
Figure 85: Key Statistics – Embassy One temperature-controlled swimming pool and spa.
Asset Type City Centre Office & 5 Star Hotel
Submarket Bellary Road, Bengaluru Figure 87: Key Statistics – Embassy Golf Links
Site area (acres) 3.19 Asset Type 5-star business hotel
Freehold/ Leasehold Freehold Submarket EBD, Bengaluru
Leasable area (3) (m sqft) 0.3 Site area (acres) 3.58
Completed area (m sqft) 0.3 Number of hotel keys 247
Hotel brand Four Seasons Average room rate (INR) (9MFY19) 9,013
Number of hotel keys 230 Revenue per available room (INR) (9MFY19) 6,102
Source: Offer Document Occupancy (%) (9MFY19) 67.7%
Source: Offer Document
Figure 86: Location Map – Embassy One
Figure 88: Location Map – Embassy Golf Links

Source: Offer Document

Source: Offer Document

moh i t. ag ra wal @i i fl cap. c om 34

 Embassy REIT – BUY

Embassy Energy - Karnataka Figure 90: Other details − Embassy Energy

Particulars Unit Details
Development Timelines
The REIT owns a 100MW solar park as an ancillary asset, supplying
green energy to Bengaluru assets. It was commissioned in February COD Date 28-February-2018
2018 and is located in the Bellary district in Karnataka, and has over Revenue assumptions (as on Mar 31, 2018)
460acres of land. The plant has a capacity to generate 215m units p.a. BESCOM tariff – Commercial INR per kWH 8.8
A Power Purchase Agreement (PPA) has been entered into between BESCOM tariff – Industrial INR per kWH 7.2
Embassy Energy and the assets located in Bengaluru, for secured Blended tariff INR per kWH 8.16
offtake of its entire generation. These include Embassy Manyata,
Other financial assumptions
Embassy Golf Links, Hilton at Embassy Golf Links and Embassy Tech
Village, for a period of 25 years. Embassy Energy indirectly provides Useful life Years 25 years
power to tenants in the park and its tariff is linked to the BESCOM tariff. Cost of Equity % 13.5%

Figure 89: Key Statistics − Embassy Energy

Entity Embassy Energy Pvt
Interest owned by REIT (%) 100%
Year of Commencement of Operations 2018
Asset Type Solar Park
Location Bellary District, North Karnataka
Site area (acres) over 460
Freehold/ Leasehold Freehold
Capacity (MW) 100 (AC)
Annual Generation (m units—KWh) 215
Commercial: 8.8
Existing Tariff (INR per KWh unit)
Industrial: 7.2
Embassy Manyata
Embassy Golf Links
Key Customers
Hilton at Embassy Golf Links
Embassy TechVillage
PPA terms 25 Years
Source: Offer Document

moh i t. ag ra wal @i i fl cap. c om 35

 Company snapshot Embassy REIT – BUY

Background: Embassy REIT owns seven office parks and four city-center office buildings totalling 32.6m sqft (on completion), of which 24.8m sqft is
completed and ~95% occupied, making it the largest REIT (by volume) among comparable Asian office REITs. The Portfolio is located in India’s four
key office markets of Bengaluru, Pune, Mumbai and Noida – most of these markets are witnessing historical high volumes in absorption of commercial
space.

Management
% of assets Located Revenue Margins
Name Designation (Rs b) (%)
Jitendra Virwani Non-Executive Director NCR,
20 18.0%
14.0 18
Michael Holland CEO 16.0%
Bangalor 16 14.0%
e, 53.0 14
Vikaash Khdloya Deputy CEO 12.0%
12
Source: Company 10.0%
10
Pune, 8.0%
8
27.0 6 6.0%
4 4.0%
2 2.0%
0 0.0%

FY16A

FY17A

FY18A

FY19A
Mumbai,
6.0

Assumptions P/E EV/Ebitda

Y/e 31 Mar, Consolidated FY18A FY19A FY20ii FY21ii FY22ii 12m fwd EV/EBITDA Avg +/- 1SD
12m fwd PE Avg +/- 1SD
Leaseable area (mnsqft) 22.9 23.3 23.3 26.0 27.1
Blended Lease Rental 36.0 24.0
0.0 79.3 86.8 90.2 100.8 (x) 23.0 (x)
(Rs/sqft)
34.0 22.0
Ebitda Margins (%) 0.0 0.8 0.8 0.8 0.8
Source: IIFL Research 32.0 21.0
20.0
30.0 19.0
28.0 18.0
17.0
26.0 16.0
24.0 15.0
Apr-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Apr-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20

moh i t. ag ra wal @i i fl cap. c om 36

 Embassy REIT – BUY

Financial summary
Income statement summary (Rs m) Balance sheet summary (Rs m)
Y/e 31 Mar, Consolidated FY18A FY19A FY20ii FY21ii FY22ii Y/e 31 Mar, Consolidated FY18A FY19A FY20ii FY21ii FY22ii
Revenues 16,118 18,771 21,077 24,549 28,978 Cash & cash equivalents 4,698 52,524 7,621 7,281 8,617
Ebitda 12,059 13,597 17,162 19,416 23,153 Inventories 0 10,188 10,452 12,173 14,370
Depreciation and amortisation (3,228) (3,563) (5,640) (5,651) (5,888) Receivables 26,899 7,592 2,108 2,455 2,898
Ebit 8,831 10,034 11,522 13,765 17,265 Other current assets 0 0 0 0 0
Non-operating income 1,545 1,539 576 573 586 Creditors 12,303 8,614 3,818 4,447 5,249
Financial expense (6,312) (7,060) (3,168) (3,772) (4,652) Other current liabilities 0 8,854 9,117 10,619 12,534
PBT 4,063 4,514 8,930 10,566 13,199 Net current assets 19,294 52,836 7,246 6,844 8,101
Exceptionals (1,195) 0 0 0 0 Fixed assets 89,491 220,881 220,874 222,618 224,125
Reported PBT 2,868 4,514 8,930 10,566 13,199 Intangibles 0 0 0 0 0
Tax expense (1,259) (2,012) (893) (1,057) (1,320) Investments 5,948 24,064 26,014 26,014 26,014
PAT 1,609 2,502 8,037 9,509 11,879 Other long-term assets 8,119 51,699 51,699 51,699 51,699
Minorities, Associates, etc 960 1,152 972 1,080 1,186 Total net assets 122,853 349,480 305,833 307,175 309,939
Attributable PAT 2,569 3,653 9,009 10,590 13,064 Borrowings 85,544 79,111 45,165 56,233 67,645
Other long-term liabilities 2,520 41,424 41,424 41,424 41,424
Ratio analysis Shareholders’ equity 34,789 228,945 219,244 209,517 200,870
Y/e 31 Mar, Consolidated FY18A FY19A FY20ii FY21ii FY22ii Total liabilities 122,853 349,480 305,833 307,175 309,939
Per share data (Rs)
Pre-exceptional EPS 4.9 4.7 11.7 13.7 16.9 Cash flow summary (Rs m)
DPS 0.0 0.0 24.2 26.3 28.1 Y/e 31 Mar, Consolidated FY18A FY19A FY20ii FY21ii FY22ii
BVPS 45.1 296.7 284.1 271.5 260.3 Ebit 8,831 10,034 11,522 13,765 17,265
Growth ratios (%) Tax paid (1,314) (1,863) (893) (1,057) (1,320)
Revenues 8.5 16.5 12.3 16.5 18.0 Depreciation and amortisation 3,228 3,563 5,640 5,651 5,888
Ebitda 11.7 12.8 26.2 13.1 19.2 Net working capital change (212) 155 687 62 79
EPS 112.6 (3.0) 146.6 17.5 23.4 Other operating items 1,974 505 (3,126) (3,673) (4,017)
Profitability ratios (%) Operating cash flow before interest 12,508 12,395 13,830 14,748 17,895
Ebitda margin 74.8 72.4 81.4 79.1 79.9 Financial expense (5,515) (7,177) (42) (99) (635)
Ebit margin 54.8 53.5 54.7 56.1 59.6 Non-operating income 1,133 1,597 576 573 586
Tax rate 43.9 44.6 10.0 10.0 10.0 Operating cash flow after interest 8,125 6,815 14,364 15,222 17,846
Net profit margin 10.0 13.3 38.1 38.7 41.0 Capital expenditure (19,584) (12,010) (5,633) (7,395) (7,395)
Return ratios (%) Long-term investments (6,912) 11,470 (5,476) 1,080 1,186
RoE 11.0 2.8 4.0 4.9 6.4 Others (1,344) (349) 4,498 0 0
RoCE 9.3 4.9 3.7 4.7 5.8 Free cash flow (19,715) 5,926 7,752 8,907 11,637
Solvency ratios (x) Equity raising 0 47,500 0 0 0
Net debt-to-equity 2.3 0.1 0.2 0.2 0.3 Borrowings 19,335 (5,599) (33,946) 11,068 11,412
Net debt-to-Ebitda 6.7 2.0 2.2 2.5 2.5 Dividend 0 0 (18,710) (20,316) (21,712)
Interest coverage 1.4 1.4 3.6 3.6 3.7 Net chg in cash and equivalents (379) 47,827 (44,903) (341) 1,337
Source: Company, IIFL Research Source: Company, IIFL Research

moh i t. ag ra wal @i i fl cap. c om 37

 Embassy REIT – BUY

Disclosure: Published in 2020, © IIFL Securities Limited (Formerly ‘India Infoline Limited’) 2020
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L) IIFLCAP accepts responsibility for the contents of this research report, subject to the terms set out below, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor. The
analyst whose name appears in this research report is not registered or qualified as a research analyst with the Financial In dustry Regulatory Authority (“FINRA”) and may not be an associated person of IIFLCAP
and, therefore, may not be subject to applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account.
We submit that no material disciplinary action has been taken on IIL by any regulatory authority impacting Equity Research Analysis.

moh i t. ag ra wal @i i fl cap. c om 38

 Embassy REIT – BUY

A graph of daily closing prices of securities is available at http://www.nseindia.com/ChartApp/install/charts/mainpage.jsp, www.bseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes.
(Choose a company from the list on the browser and select the “three years” period in the price chart).

Name, Qualification and Certification of Research Analyst: Mohit Agrawal (Chartered Accountant)

IIFL Securities Limited (Formerly ‘India Infoline Limited’), CIN No.: L99999MH1996PLC132983, Corporate Office – IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel, Mumbai – 400013 Tel: (91-
22) 4249 9000 .Fax: (91-22) 40609049, Regd. Office – IIFL House, Sun Infotech Park, Road No. 16V, Plot No. B-23, MIDC, Thane Industrial Area, Wagle Estate, Thane – 400604 Tel: (91-22) 25806650. Fax: (91-22)
25806654 E-mail: [email protected] Website: www.indiainfoline.com, Refer www.indiainfoline.com for detail of Associates.
Stock Broker SEBI Regn.: INZ000164132, PMS SEBI Regn. No. INP000002213, IA SEBI Regn. No. INA000000623, SEBI RA Regn.:- INH000000248

Key to our recommendation structure

BUY - Stock expected to give a return 10%+ more than average return on a debt instrument over a 1-year horizon.

SELL - Stock expected to give a return 10%+ below the average return on a debt instrument over a 1-year horizon.

Add - Stock expected to give a return 0-10% over the average return on a debt instrument over a 1-year horizon.

Reduce - Stock expected to give a return 0-10% below the average return on a debt instrument over a 1-year horizon.

Distribution of Ratings: Out of 227 stocks rated in the IIFL coverage universe, 101 have BUY ratings, 8 have SELL ratings, 85 have ADD ratings and 32 have REDUCE ratings

Price Target: Unless otherwise stated in the text of this report, target prices in this report are based on either a discounted cash flow valuation or comparison of valuation ratios with companies seen by the analyst as
comparable or a combination of the two methods. The result of this fundamental valuation is adjusted to reflect the analy st’s views on the likely course of investor sentiment. Whichever valuation method is used there
is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company’s products. Such
demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, in fashion. Valuations may also be affected by changes in taxation, in exchange rates and, in
certain industries, in regulations. Investment in overseas markets and instruments such as ADRs can result in increased risk from factors such as exchange rates, exchange controls, taxation, and political and social
conditions. This discussion of valuation methods and risk factors is not comprehensive – further information is available upon request.

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