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Indian Real Estate
Time to Add Some Exposure; Initiate Coverage of Prestige at Buy
Negatives priced in; Initiate Prestige at Buy/Medium Risk — Asset prices
are at highs; stock prices are at cyclical lows – we believe likely price cuts are
largely factored in, presenting an opportunity to start adding exposure. We
initiate Prestige at Buy/Medium risk – a play on Bangalore (our preferred micro
market with modest price increases, IT Services recovery helping commercial
demand/purchasing power), with a proven track record of execution. We
continue to be selective: we prefer DLF (quality land bank, good rental annuity
support), Prestige & Phoenix Mills. IBREL remains a high-risk pick in the sector.
Multiple headwinds have resulted in a sharp correction ... — a) Interest
rates have gone up; likely to go up further; b) Increased scrutiny post “bribe-forloans”
scam – tight liquidity as well; c) equity funding tough given soft markets;
d) pricing-related volume impact in some locations; e) 3Q below expectations.
... Cyclical concerns (and not structural) — Funding, pricing pressures could
all continue for a while. However, the challenges are more cyclical and appear
largely priced in. Easing liquidity, volume pick-up post a price correction should
be catalysts in the medium term – valuations look attractive post the sharp fall.
Is it similar to last time? — Much less so. a) D/E for the sector is at relatively
better levels; b) global slowdown had impacted buyer sentiment – lower pricing
should bring back buyers now; c) leasing momentum is strong today. Net-net,
operationally, the sector seems better placed than the last slowdown.
When did stocks bottom out last time? — Almost here. DLF, in the last
downturn, bottomed at ~1x 1-yr fwd P/B. DLF (using it as sector proxy) trades
at ~1.3x FY12E P/B (range of ~1x - 5x since April 2008). We believe that things
are better than the last downturn, and it is time to start adding exposure.
Adjusting NAVs — NAVs now factor a) higher cost of capital (~15-17% from
13-14% earlier); b) further execution delays; c) roll forward NAVs. We believe
likelihood of price corrections of ~15% remains high. We take two scenarios –
a) normal pricing trends and b) a 15% price decline. We use a weighted
average of a) and b) – weights based on exposures to various markets, etc -
target prices are at a discount to the blended NAV.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian Real Estate
Time to Add Some Exposure; Initiate Coverage of Prestige at Buy
Negatives priced in; Initiate Prestige at Buy/Medium Risk — Asset prices
are at highs; stock prices are at cyclical lows – we believe likely price cuts are
largely factored in, presenting an opportunity to start adding exposure. We
initiate Prestige at Buy/Medium risk – a play on Bangalore (our preferred micro
market with modest price increases, IT Services recovery helping commercial
demand/purchasing power), with a proven track record of execution. We
continue to be selective: we prefer DLF (quality land bank, good rental annuity
support), Prestige & Phoenix Mills. IBREL remains a high-risk pick in the sector.
Multiple headwinds have resulted in a sharp correction ... — a) Interest
rates have gone up; likely to go up further; b) Increased scrutiny post “bribe-forloans”
scam – tight liquidity as well; c) equity funding tough given soft markets;
d) pricing-related volume impact in some locations; e) 3Q below expectations.
... Cyclical concerns (and not structural) — Funding, pricing pressures could
all continue for a while. However, the challenges are more cyclical and appear
largely priced in. Easing liquidity, volume pick-up post a price correction should
be catalysts in the medium term – valuations look attractive post the sharp fall.
Is it similar to last time? — Much less so. a) D/E for the sector is at relatively
better levels; b) global slowdown had impacted buyer sentiment – lower pricing
should bring back buyers now; c) leasing momentum is strong today. Net-net,
operationally, the sector seems better placed than the last slowdown.
When did stocks bottom out last time? — Almost here. DLF, in the last
downturn, bottomed at ~1x 1-yr fwd P/B. DLF (using it as sector proxy) trades
at ~1.3x FY12E P/B (range of ~1x - 5x since April 2008). We believe that things
are better than the last downturn, and it is time to start adding exposure.
Adjusting NAVs — NAVs now factor a) higher cost of capital (~15-17% from
13-14% earlier); b) further execution delays; c) roll forward NAVs. We believe
likelihood of price corrections of ~15% remains high. We take two scenarios –
a) normal pricing trends and b) a 15% price decline. We use a weighted
average of a) and b) – weights based on exposures to various markets, etc -
target prices are at a discount to the blended NAV.
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