Indiabulls Retail (64% owned by IBREL) shut four Megastores and 20 Megamarts in the previous quarter that brought stores under operation to four Megastores and 20 Megamarts, respectively.

Results for Q2FY09 for retail operations were consequently muted with revenue increasing only 2.3% sequentially to Rs421 million.

EBITDA margins continued to decline and were lower by approximately 600bps sequentially as the company focused on clearing existing inventory.

We have maintained that acquisition of Piramyd Retail, which had one of the highest operating cost structures in the industry, was ambitious. We view the steps taken to cut retail losses positively impacting the outlook for IBREL shareholders.

The company continues to remain optimistic about retail growth in India and plans to infuse approximately Rs10 billion over next two years.

With real estate prices anticipated to come down, we expect the cost structure to be more favorable for retail expansion. However, we still do not expect the company to achieve EBITDA breakeven before FY11.

Valuation

While the company does not consolidate its retail operations, our consolidated estimates for IBREL factor the retail business contribution.

We are revising our estimates to reflect slower top-line growth in retail. The retail operations currently contribute approximately 25% and 28% to our FY10 and FY11 revenue, respectively.

However, our consolidated bottom-line figures marginally improve due to lower losses in the retail business.

We reiterate our BUY rating and target price of Rs175 implying 41% upside from current levels.

We have valued only the net realizable value for the business including net cash (Rs89/share), Elphinstone / Jupiter mills property (Rs63/share), and land bank at cost (Rs82/share) while netting liabilities (Rs59/share).

Our current asset valuations for Elphinstone/Jupiter property factors in nearly 70% property price correction, while historical land bank factors 40% price correction.