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India Property
Gurgaon: Volume’s up, but investor interest unnerving
Recent data highlights a sharp demand revival in Gurgaon
residential market (71% y-o-y during Jan-Feb 2011)
Our channel checks suggest increased investor participation.
We maintain our view that weak end user demand due to low
affordability will curtail medium-term demand growth
We remain cautious on the residential segment, while
positive on commercial. HDIL is our preferred sector pick
Recent data suggests Gurgaon has witnessed robust sales during Jan-Feb 2011 (+71% y-o-y).
However, at the same time, other National Capital Region (NCR) like Noida (-5% y-o-y) and
Greater Noida (y-o-y not comparable; sharp deceleration q-o-q,) continue to witness sluggish
demand. Property prices during Q4 FY11 have increased by 5-7% q-o-q and 15-20% y-o-y.
DLF and Unitech should benefit from this trend during Q4 FY11. DLF launched c1.4m sq ft in
the NCR during Q4 FY11, while Unitech launched c1m sq ft. Our channel checks suggest that more
than 60-70% of projects for both companies have been sold. We expect DLF to report c5.6m sq ft of
sales during Q4 FY11 (including NCR) and Unitech to report c3.7m sq ft.
However, channel checks reveal increased investor participation. Taking note of the improved
demand in Gurgaon, we spoke to 10 large property brokers (potential annual turnover of cINR1-
2bn). Our discussions with these brokers suggest a) Investor demand has seen a sudden spike from
c25-30% to c60-70% in new launches during the last few months, b) End user customers have been
hard to come through, c) 2 brokers highlighted that they have re-sold few properties more than twice
in the past 4 months, d) 7 out of the 10 brokers related this frenzy equivalent to 2007, and e) Land
plot (preferred by investors) sales by few large players have also been appreciated by investors.
Affordability still remains low. Remain cautious on demand over near-medium term. Lack of
sufficient inventory in the system (currently at 7-10 months as against 20-30 months during the last
industry cycle bottom in December 2009) has been the major reason for investor interest and
resultant sharp property price growth. However, we believe affordability continues to remain low.
Such a scenario is unlikely to sustain demand momentum over the near-medium term.
Remain cautious on residential and positive on commercial. HDIL is our top sector pick. We
expect high property prices to keep residential volume growth muted for our coverage universe.
However, we remain positive on commercial office space demand and expect large players to
benefit disproportionately. HDIL is our preferred sector pick as we believe the company will be a
key beneficiary of the demand revival in Mumbai in the early phase through TDR sales and later
phase through new project launches, given we expect HDIL to launch projects at competitive rates.
HDIL (OW(V), TP INR205)
Investment summary
Competitive product pricing strategy will suit current market conditions. HDIL’s primary business model
of slum rehabilitation/ redevelopment allows the company to keep land cost low. This allows it to launch
products at a competitive price and generate demand. HDIL’s willingness (the majority of recent launches have
been at 10-15% discount to market rates) to do so makes it even more efficient as Mumbai developers continue
to keep product prices high, thereby curtailing volumes. HDIL’s recent launch of a mid-income housing project
in the Vasai-Virar region has received a strong response, with the company selling c30% of the volumes (1.2m
sq ft) in the first 3 days of launch.
Reduced dependence on TDR sales has improved business model. We attribute the majority of HDIL’s
share price underperformance during the last cyclical downturn to its overdependence on TDR sales. However,
the strategy to increase its focus on a build and sell model has helped reduce dependence on TDR sales
significantly. We expect the share of TDR sales in the revenue mix to fall from c60% in FY11 to c30% in
FY12, before increasing to 39% in FY13.
A good proxy to play the Mumbai property market. We like the locations of HDIL’s land bank (195m sq
ft), given the strong focus on the city of Mumbai (36%, including TDR and FSI sales) and the Mumbai
Metropolitan Region (43%). Mumbai contributes c90% to HDIL’s NAV, more than any other large listed real
estate company operating in India’s two most important cities, Mumbai and Delhi.
Valuation and risks
We value HDIL on a net asset value (NAV) approach using the discounted cash flows of its real estate projects
(cost of Equity 15.5%, risk free rate 7.5%, market risk premium 5.5% and WACC 13.6%). Our target price of
INR205 is pegged at a 55% discount to its NAV and terminal value of INR33. Our high target NAV discount
of 55% factors in: 1) looming concern about an FSI hike, which could lower demand and pricing for TDR in
the Mumbai suburbs to 1.33x from 1x, 2) a weak MMR property market outlook. Our target NAV discount of
55% is a reflection of HDIL’s market positioning and higher risk-reward ratio in the slum rehab business.
Key risks: The key risks to our valuation are: 1) Slum rehabilitation projects have a longer gestation period and
are prone to delays. Any longer-than-anticipated delay would negatively impact our revenue forecasts. 2)
Lower than estimated TDR volumes and prices would be a key downside risk. 3) Delay in the airport slum
rehabilitation project execution would be a key negative.
HSBC India property coverage
DLF (DLFU IN, N(V), TP INR263, CMP INR251.25), Unitech (UT IN, OW(V), TP INR50, CMP INR45.35),
HDIL (HDIL IN, OW(V), TP INR205, CMP INR186.85), Indiabulls Real Estate (IBREL IN, N(V), TP
INR140, CMP INR147.45), Anant Raj Industries (ARCP IN, UW(V), TP INR95, CMP INR92.30)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Property
Gurgaon: Volume’s up, but investor interest unnerving
Recent data highlights a sharp demand revival in Gurgaon
residential market (71% y-o-y during Jan-Feb 2011)
Our channel checks suggest increased investor participation.
We maintain our view that weak end user demand due to low
affordability will curtail medium-term demand growth
We remain cautious on the residential segment, while
positive on commercial. HDIL is our preferred sector pick
Recent data suggests Gurgaon has witnessed robust sales during Jan-Feb 2011 (+71% y-o-y).
However, at the same time, other National Capital Region (NCR) like Noida (-5% y-o-y) and
Greater Noida (y-o-y not comparable; sharp deceleration q-o-q,) continue to witness sluggish
demand. Property prices during Q4 FY11 have increased by 5-7% q-o-q and 15-20% y-o-y.
DLF and Unitech should benefit from this trend during Q4 FY11. DLF launched c1.4m sq ft in
the NCR during Q4 FY11, while Unitech launched c1m sq ft. Our channel checks suggest that more
than 60-70% of projects for both companies have been sold. We expect DLF to report c5.6m sq ft of
sales during Q4 FY11 (including NCR) and Unitech to report c3.7m sq ft.
However, channel checks reveal increased investor participation. Taking note of the improved
demand in Gurgaon, we spoke to 10 large property brokers (potential annual turnover of cINR1-
2bn). Our discussions with these brokers suggest a) Investor demand has seen a sudden spike from
c25-30% to c60-70% in new launches during the last few months, b) End user customers have been
hard to come through, c) 2 brokers highlighted that they have re-sold few properties more than twice
in the past 4 months, d) 7 out of the 10 brokers related this frenzy equivalent to 2007, and e) Land
plot (preferred by investors) sales by few large players have also been appreciated by investors.
Affordability still remains low. Remain cautious on demand over near-medium term. Lack of
sufficient inventory in the system (currently at 7-10 months as against 20-30 months during the last
industry cycle bottom in December 2009) has been the major reason for investor interest and
resultant sharp property price growth. However, we believe affordability continues to remain low.
Such a scenario is unlikely to sustain demand momentum over the near-medium term.
Remain cautious on residential and positive on commercial. HDIL is our top sector pick. We
expect high property prices to keep residential volume growth muted for our coverage universe.
However, we remain positive on commercial office space demand and expect large players to
benefit disproportionately. HDIL is our preferred sector pick as we believe the company will be a
key beneficiary of the demand revival in Mumbai in the early phase through TDR sales and later
phase through new project launches, given we expect HDIL to launch projects at competitive rates.
HDIL (OW(V), TP INR205)
Investment summary
Competitive product pricing strategy will suit current market conditions. HDIL’s primary business model
of slum rehabilitation/ redevelopment allows the company to keep land cost low. This allows it to launch
products at a competitive price and generate demand. HDIL’s willingness (the majority of recent launches have
been at 10-15% discount to market rates) to do so makes it even more efficient as Mumbai developers continue
to keep product prices high, thereby curtailing volumes. HDIL’s recent launch of a mid-income housing project
in the Vasai-Virar region has received a strong response, with the company selling c30% of the volumes (1.2m
sq ft) in the first 3 days of launch.
Reduced dependence on TDR sales has improved business model. We attribute the majority of HDIL’s
share price underperformance during the last cyclical downturn to its overdependence on TDR sales. However,
the strategy to increase its focus on a build and sell model has helped reduce dependence on TDR sales
significantly. We expect the share of TDR sales in the revenue mix to fall from c60% in FY11 to c30% in
FY12, before increasing to 39% in FY13.
A good proxy to play the Mumbai property market. We like the locations of HDIL’s land bank (195m sq
ft), given the strong focus on the city of Mumbai (36%, including TDR and FSI sales) and the Mumbai
Metropolitan Region (43%). Mumbai contributes c90% to HDIL’s NAV, more than any other large listed real
estate company operating in India’s two most important cities, Mumbai and Delhi.
Valuation and risks
We value HDIL on a net asset value (NAV) approach using the discounted cash flows of its real estate projects
(cost of Equity 15.5%, risk free rate 7.5%, market risk premium 5.5% and WACC 13.6%). Our target price of
INR205 is pegged at a 55% discount to its NAV and terminal value of INR33. Our high target NAV discount
of 55% factors in: 1) looming concern about an FSI hike, which could lower demand and pricing for TDR in
the Mumbai suburbs to 1.33x from 1x, 2) a weak MMR property market outlook. Our target NAV discount of
55% is a reflection of HDIL’s market positioning and higher risk-reward ratio in the slum rehab business.
Key risks: The key risks to our valuation are: 1) Slum rehabilitation projects have a longer gestation period and
are prone to delays. Any longer-than-anticipated delay would negatively impact our revenue forecasts. 2)
Lower than estimated TDR volumes and prices would be a key downside risk. 3) Delay in the airport slum
rehabilitation project execution would be a key negative.
HSBC India property coverage
DLF (DLFU IN, N(V), TP INR263, CMP INR251.25), Unitech (UT IN, OW(V), TP INR50, CMP INR45.35),
HDIL (HDIL IN, OW(V), TP INR205, CMP INR186.85), Indiabulls Real Estate (IBREL IN, N(V), TP
INR140, CMP INR147.45), Anant Raj Industries (ARCP IN, UW(V), TP INR95, CMP INR92.30)
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