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UBS Investment Research
India Real Estate
In the ‘value zone’
We think the worst has been priced in at a 50% discount to est. NAV
The property sector has underperformed the Sensex index by 31% over the past
three months due to negative news/events. We believe the market has overreacted
as core fundamentals remain intact. With the sector trading at: 1) around a 50%
discount to our base NAV (close to peak discounts of 60%); 2) a 15% discount to
our bear case NAVs; and 3) 1.7x FY11E P/BV, we believe the worst has been
priced in the share prices and that there is value in the Indian property sector.
How negative sentiment on the property sector can change
We believe sentiments can change if: 1) concerns over rising interest rates and
tight liquidity eases with central bank measures; 2) healthy GDP growth drives
land/asset prices; 3) residential presale/mortgage growth recovers over the next six
months, 4) there is no major fallout from the ongoing fraud investigations; and
5) progress in execution/presales/leasing improves cash flow visibility.
We lower our price targets, but attractive risk-reward potential remains
We lower our price targets as we ascribe a higher discount of 20%-40% to NAVs
(15%-30% previously), factoring in higher risks of slowdown amid weak
sentiment, while our NAV estimates remain intact. Despite this, we think there are
attractive risk-reward opportunities and potential 30% returns.
Sector is attractive; valuations outweigh the risks
Though expectations of a muted Q3 may be a near-term overhang, we believe
attractive valuations outweigh the risks and see value here. In the current
environment, we believe there will be a preference for liquidity and quality stocks,
with these being consensus names. We like DLF among the large caps and Phoenix
Mills among the mid-caps. However, we think high risk-reward stocks are
contrarian names, and like Indiabulls Real Estate and DB Realty in this group.
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