Property India- One more straw: Kotak Sec

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Property
India
One more straw. We do not find any material mention of the real estate companies
we cover in the CBI’s charges of “illegal gratification” to lenders (newsflow November
24). While Oberoi Realty had appeared in media reports, the company clarifies it is a
zero debt company and has not taken any loans from the lenders under investigation.
The new developments could result in more stringent norms and/or a temporary freeze
on debt funding to the real estate sector




Spate of bad news leads to 19% decline in BSE Realty index in November
Indian real estate stocks have declined by 4-40% with BSE Realty index down 19% since 1st
November led by (1) RBI steps on 2nd November 2010 to increase cost and restrict flow of credit for
residential real estate mortgages, (2) weaker-than-expected 2QFY11 results raising concerns on
demand in 2HFY11, (3) 2G telecom license issue impacting two companies in the sector, (4) recent
press reports indicating that SEBI has asked Indian mutual funds to avoid investing in debt of real
estate developers in certain schemes and (5) yesterday’s Central Bureau of Investigation’s (CBI)
arrests following a probe into “illegal gratification” and improper loan disbursals in what is called
the “housing loan bribery case” and seems to involve some real estate developers.

For now, we do not find any material mention of real estate companies under our coverage
While investigation and newsflow is ongoing, within our coverage universe, except for Oberoi
Realty (Rs262, BUY), none of the other stocks have been mentioned in any of the media reports.
While these reports did mention Oberoi Realty, the company reiterates that it is a zero debt
company and has not taken any loans from the lenders under investigation.

Collateral impact: Temporary lending freeze or more stringent norms
Apart from negative news headwinds, we see the real concern as a potential temporary freezing /
higher scrutiny / less rollovers of debt to the real estate sector as either lending institutions avoid
the sector or tighten norms or wait for the central bank (RBI) to clarify its stance. This could have a
follow-on impact of a decline in real estate prices if developers are forced to liquidate inventory /
sell more to fund ongoing projects. Screening for low D/E (given risk of a more adverse
environment for raising debt), lower regulatory involvement (discretionary FSI, government land
acquisition or redevelopment) and lower residential exposure among our coverage universe, PHNX
and MLIFE are the two stocks that stand out. OBER derives over 50% of its NAV from the
residential segment but has zero debt and relatively lower regulatory risk.

􀁠 We find 38% upside to our target price for PHNX (Rs219, BUY) with a large part of their NAV
derived from retail operations with key market city launches (Pune, Kurla – Mumbai and Bangalore)
being the key milestones over the next six months.

􀁠 We find 32% upside to our target price for MLIFE (Rs414, ADD) where SEZs (Chennai and
Jaipur) and FY2010 cash and investments make up for 70% of its current market price.