Key Takeaways

Existing projects of Ashok Towers (Parel), Ashok Gardens (Sewree), Peninsula Technopak (Kurla) and Peninsula Business Park (Dawn Mills, Lower Parel) are on schedule.

Future projects include its 3 SEZ projects in Goa, 2 projects in Pune and 2 in Nashik, all expected to break ground by June 2008. Peninsula also plans to enter cities like Chennai, Coimbatore, Bangalore, Mysore, Hyderabad and Ahmedabad.

Peninsula shall continue to focus on an asset light business model, as is evident from its real estate fund plans. Peninsula shall co-invest (25%) along with the fund in all future projects, once the fund is closed (expected by March 2008).

Possible Dilution:

As per our calculations, Peninsula will need to raise approx Rs 5-7billion to co-invest with the fund, as well as for executing its larger SEZ and township projects.

Outlook

We believe the company is a high quality real estate player in Mumbai with a strong focus on the commercial segment. At CMP of Rs 587, the stock trades at a discount of approx 8% to our NAV of Rs 637*. We maintain a sector Outperformer rating and our sum-of-parts price target at Rs 719.

Real estate fund Fund size:

Domestic: Rs 3.5-4.0billion; Offshore: USD 325-350million

Investment strategy:

West & South India–projects with an IRR >25%

Alignment of interests with Peninsula:

Peninsula Land will not buy land independent of the fund. It will coinvest with the fund up to 25% Co-investment at the same time and at same terms and conditions No existing project of Peninsula to be transferred to the fund

Revenue streams for Peninsula

Fund to have a 2-20% (fee-carry) structure, with Peninsula having a 76% stake in the investment management company. Peninsula to provide project and facility management @approx 5-7% of revenue

Valuations Sum of parts approach:

We believe a sum-of-parts approach is most appropriate to valuing real estate in India currently. This approach gives due weightage to the execution ability of a company, a key factor in gauging the performance of developers. The key components of our methodology are:

1) Land bank value: Current market value on a post tax basis, after conversion to commercial use

2) Conversion margin: Margin enjoyed from undertaking the core activity of construction, development and selling (does not include land gains),

3) Leased income: Valued on a 9% rent capitalization basis.