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Property
India
Remain selective. Launches, absorption and inventory levels have remained stable over
the past two months despite funding getting tighter for developers and concerns on
demand. Relatively, Gurgaon has been the strongest and Mumbai the weakest. We
retain our stance of being selective. Our top picks are (1) Sobha (BUY, TP Rs380) –
Bengaluru residential, (2) Oberoi (BUY, TP Rs305) – visible NAV and net cash, and
(3) Phoenix (BUY, TP Rs300) – three mall openings in FY2012E are potential triggers.
Very few visible cracks as yet
Data up to February 2011 indicates that apart from financial market participants none of the other
stakeholders (developers, financiers, customers) are worried about a demand slowdown.
Developer launches have been higher mom, housing loans are up 15% yoy essentially in line with
trend and sales have also been healthier mom.
Fresh residential launches are up 50% mom (total for Mumbai, Gurgaon, Noida and Bengaluru)
and sales are up 24% mom and 46% yoy.
Gurgaon sales volumes are actually up 50% versus January 2011 and 132% yoy.
Mumbai (highest worry market) has seen launches and sales dip marginally (likely due to lack of
approvals) but we do not see any confirmation of a slowdown trend. Oberoi has launched
Exquisite II as planned while HDIL has not launched any projects in 4QFY11.
Pricing change has been in a narrow band with only Mumbai witnessing a 1% average decline.
Anecdotally, we hear of developers keeping prices for new projects either flat or 5% lower than
prevailing prices to enable volume off-take.
Retail loan growth data from RBI also indicates growth remaining stable at around15%.
Stocks have reacted positively as demand has held up and launches have been more than expected
Post a sharp 51% correction in the BSE Realty index over four months, stocks have bounced back
2-36% as (1) launches in the NCR region have been better than expected though still continue
to lag company promises, (2) prices have ’soft-landed‘ against a worry that they could decline
and there has been no indicator of developers willing or forced to undertake a significant price
correction, (3) retail housing loans have continued to grow (15% yoy in February 2011),
(4) demand has sustained (January-February 2011), and (5) there have been no debt restructurings
or signals of big trouble.
Remain selective – BUY Sobha, Oberoi and Phoenix Mills
We continue to recommend a selective approach as (1) funding is still constrained and our
discussion with companies and other sector participants leads us to believe that raising equity at
the entity level remains a near-impossible task while raising debt has also become more difficult
and effective borrowing costs have increased, (2) impact on developers and consequently prices
could be felt with a lag, and (3) company-specific risks continue to remain high. Oberoi, Phoenix
and Sobha are our top picks as we believe they are relatively insulated (Oberoi – net cash, Phoenix
– retail, Sobha – Bengaluru residential) and have potential upside (Oberoi – NAV accretive land
purchases, Phoenix – three mall openings in FY2012E and Sobha – launch of large projects in
Bengaluru and Gurgaon).
Housing loan outstanding is up 15% yoy for February 2011
We do not see any weakness in outstanding retail housing loans. Housing loans are up 15%
yoy in February 2011 which is similar to the growth trend of the previous few quarters and
only 100 bps below the high growth rates achieved in August 2007.
Despite skepticism, absorption and launches have remained healthy
Total launches have increased to 21.5 mn sq. ft in February 2011, up 50% yoy. Mumbai was
the only region where launches declined mom partly due to a slower pace of approvals.
Anecdotally, with DLF, UT and PVKP launching projects in March 2011, it seems unlikely that
data for March 2011 will show any significant downtick.
Total absorption of 20.6 mn sq. ft is the highest since June 2010. This has been led by NCR
(Gurgaon + Noida) while Mumbai has seen a marginal softening.
Prices have also essentially remained stable in CY2011E indicating that volume growth is not
at the expense of prices.
Region-wise analysis – Gurgaon the strongest, Mumbai the weakest
Gurgaon. After a weak January 2011, February 2011 has seen launches pick up back to
October 2010 levels. While a certain proportion among this would be plots (DLF, Unitech
and others), we still see this as an indication that developer confidence remains steady.
Absorption at 7.7 mn sq. ft is the highest since September 2009. Our channel checks
indicate that developers have been pricing projects aggressively with prices flat to 5% lower
than current prevailing prices. Within our coverage universe, DLF has launched 3-4 mn sq. ft
in Gurgaon and Mullanpur (Chandigarh) while Unitech has launched six projects across
Gurgaon, Noida and Mohali.
Mumbai has been the weakest market for launch and absorption with new launches and
absorption declining marginally. However, a part of the weak launches is explained by an
uncertain regulatory environment (car park FSI, extra FSI in suburbs) and slower pace of
approvals. Among our coverage universe, Oberoi has launched Exquisite II (1.3 mn sq. ft in
Goregaon E) while HDIL has not launched any new project in 4QFY11E.
Bengaluru. While launches have picked up and absorption is resilient, we have not seen an
uptick. Sobha and Puravankara, the two Bengaluru-centric stocks in our coverage universe,
had not launched any projects until end-February 2011. Puravankara has launched one small
project (227,000 sq. ft) in March 2011, towards the end of the quarter.
Stock prices have bounced back; we continue to recommend ’quality‘
From its recent peak (October 6, 2010), the BSE Realty index lost 51% in a little more than
four months due to multiple worries—(1) RBI steps on November 2, 2010 to increase cost
and restrict flow of credit for residential real estate mortgages, (2) weaker-than-expected
2Q-3QFY11 results and launches raising concerns on demand in CY2011E, (3) regulatory
overhaul and uncertainty in Mumbai, (4) the 2G telecom license issue impacting Unitech and
DB Realty, and (5) Central Bureau of Investigation’s (CBI) arrests following a probe
into ’illegal gratification‘ and improper loan disbursals that seemed to involve some real
estate developers.
Post that, stocks have bounced back 2-36% as (1) launches in the NCR region have been
better than expected though still continue to lag company promises, (2) prices have ’softlanded‘
versus a worry that they could decline and there has been no indicator of developers
willing or forced to undertake a significant price correction, (3) retail housing loans have
continued to grow (15% yoy in February 2011), (4) demand has sustained (January-February
2011), and (5) there have been no debt restructurings or signals of big trouble.
We continue to recommend a selective approach as (1) funding is still constrained
and our discussion with companies and other sector participants leads us to believe that
raising equity at the entity level remains a near-impossible task while raising debt has also
become more difficult and effective borrowing costs have increased, (2) Impact on
developers and consequently prices could be felt with a lag, and (3) company-specific
risks remains high. Our top three picks are (1) Oberoi (BUY, TP Rs305, +22% potential
upside), (2) Phoenix (BUY, TP Rs300, +47% upside) and Sobha (BUY, TP Rs 380, +18%
upside).
We find Oberoi relatively better-placed in this environment as (1) Oberoi is the only debtfree
developer operating in the lucrative Mumbai region and could actually take
advantage of declining land prices by adding to its land bank, (2) NAV realization is
relatively more front-loaded than peers, and (3) RoE in the mid-20s is again higher than
peers.
Phoenix is one of our top picks as we believe (1) reducing execution risk and revenue
visibility as the three malls (Pune, Kurla, Bengaluru) get operational over FY2012E, and (2)
potential residential launches (Bengaluru and Chennai over FY2012E) of at least 0.5 mn
sq. ft could act as potential triggers. We retain our BUY recommendation with a target
price of Rs300 at par with our March-2012E NAV.
We find three positives for Sobha – (1) a Bengaluru-centric portfolio (which we believe is
relatively the most insulated region), (2) almost 100% residential development portfolio,
and (3) visibility of two critical project launches over 1QFY12E (Sobha City in Bengaluru
and Gurgaon project).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Property
India
Remain selective. Launches, absorption and inventory levels have remained stable over
the past two months despite funding getting tighter for developers and concerns on
demand. Relatively, Gurgaon has been the strongest and Mumbai the weakest. We
retain our stance of being selective. Our top picks are (1) Sobha (BUY, TP Rs380) –
Bengaluru residential, (2) Oberoi (BUY, TP Rs305) – visible NAV and net cash, and
(3) Phoenix (BUY, TP Rs300) – three mall openings in FY2012E are potential triggers.
Very few visible cracks as yet
Data up to February 2011 indicates that apart from financial market participants none of the other
stakeholders (developers, financiers, customers) are worried about a demand slowdown.
Developer launches have been higher mom, housing loans are up 15% yoy essentially in line with
trend and sales have also been healthier mom.
Fresh residential launches are up 50% mom (total for Mumbai, Gurgaon, Noida and Bengaluru)
and sales are up 24% mom and 46% yoy.
Gurgaon sales volumes are actually up 50% versus January 2011 and 132% yoy.
Mumbai (highest worry market) has seen launches and sales dip marginally (likely due to lack of
approvals) but we do not see any confirmation of a slowdown trend. Oberoi has launched
Exquisite II as planned while HDIL has not launched any projects in 4QFY11.
Pricing change has been in a narrow band with only Mumbai witnessing a 1% average decline.
Anecdotally, we hear of developers keeping prices for new projects either flat or 5% lower than
prevailing prices to enable volume off-take.
Retail loan growth data from RBI also indicates growth remaining stable at around15%.
Stocks have reacted positively as demand has held up and launches have been more than expected
Post a sharp 51% correction in the BSE Realty index over four months, stocks have bounced back
2-36% as (1) launches in the NCR region have been better than expected though still continue
to lag company promises, (2) prices have ’soft-landed‘ against a worry that they could decline
and there has been no indicator of developers willing or forced to undertake a significant price
correction, (3) retail housing loans have continued to grow (15% yoy in February 2011),
(4) demand has sustained (January-February 2011), and (5) there have been no debt restructurings
or signals of big trouble.
Remain selective – BUY Sobha, Oberoi and Phoenix Mills
We continue to recommend a selective approach as (1) funding is still constrained and our
discussion with companies and other sector participants leads us to believe that raising equity at
the entity level remains a near-impossible task while raising debt has also become more difficult
and effective borrowing costs have increased, (2) impact on developers and consequently prices
could be felt with a lag, and (3) company-specific risks continue to remain high. Oberoi, Phoenix
and Sobha are our top picks as we believe they are relatively insulated (Oberoi – net cash, Phoenix
– retail, Sobha – Bengaluru residential) and have potential upside (Oberoi – NAV accretive land
purchases, Phoenix – three mall openings in FY2012E and Sobha – launch of large projects in
Bengaluru and Gurgaon).
Housing loan outstanding is up 15% yoy for February 2011
We do not see any weakness in outstanding retail housing loans. Housing loans are up 15%
yoy in February 2011 which is similar to the growth trend of the previous few quarters and
only 100 bps below the high growth rates achieved in August 2007.
Despite skepticism, absorption and launches have remained healthy
Total launches have increased to 21.5 mn sq. ft in February 2011, up 50% yoy. Mumbai was
the only region where launches declined mom partly due to a slower pace of approvals.
Anecdotally, with DLF, UT and PVKP launching projects in March 2011, it seems unlikely that
data for March 2011 will show any significant downtick.
Total absorption of 20.6 mn sq. ft is the highest since June 2010. This has been led by NCR
(Gurgaon + Noida) while Mumbai has seen a marginal softening.
Prices have also essentially remained stable in CY2011E indicating that volume growth is not
at the expense of prices.
Region-wise analysis – Gurgaon the strongest, Mumbai the weakest
Gurgaon. After a weak January 2011, February 2011 has seen launches pick up back to
October 2010 levels. While a certain proportion among this would be plots (DLF, Unitech
and others), we still see this as an indication that developer confidence remains steady.
Absorption at 7.7 mn sq. ft is the highest since September 2009. Our channel checks
indicate that developers have been pricing projects aggressively with prices flat to 5% lower
than current prevailing prices. Within our coverage universe, DLF has launched 3-4 mn sq. ft
in Gurgaon and Mullanpur (Chandigarh) while Unitech has launched six projects across
Gurgaon, Noida and Mohali.
Mumbai has been the weakest market for launch and absorption with new launches and
absorption declining marginally. However, a part of the weak launches is explained by an
uncertain regulatory environment (car park FSI, extra FSI in suburbs) and slower pace of
approvals. Among our coverage universe, Oberoi has launched Exquisite II (1.3 mn sq. ft in
Goregaon E) while HDIL has not launched any new project in 4QFY11E.
Bengaluru. While launches have picked up and absorption is resilient, we have not seen an
uptick. Sobha and Puravankara, the two Bengaluru-centric stocks in our coverage universe,
had not launched any projects until end-February 2011. Puravankara has launched one small
project (227,000 sq. ft) in March 2011, towards the end of the quarter.
Stock prices have bounced back; we continue to recommend ’quality‘
From its recent peak (October 6, 2010), the BSE Realty index lost 51% in a little more than
four months due to multiple worries—(1) RBI steps on November 2, 2010 to increase cost
and restrict flow of credit for residential real estate mortgages, (2) weaker-than-expected
2Q-3QFY11 results and launches raising concerns on demand in CY2011E, (3) regulatory
overhaul and uncertainty in Mumbai, (4) the 2G telecom license issue impacting Unitech and
DB Realty, and (5) Central Bureau of Investigation’s (CBI) arrests following a probe
into ’illegal gratification‘ and improper loan disbursals that seemed to involve some real
estate developers.
Post that, stocks have bounced back 2-36% as (1) launches in the NCR region have been
better than expected though still continue to lag company promises, (2) prices have ’softlanded‘
versus a worry that they could decline and there has been no indicator of developers
willing or forced to undertake a significant price correction, (3) retail housing loans have
continued to grow (15% yoy in February 2011), (4) demand has sustained (January-February
2011), and (5) there have been no debt restructurings or signals of big trouble.
We continue to recommend a selective approach as (1) funding is still constrained
and our discussion with companies and other sector participants leads us to believe that
raising equity at the entity level remains a near-impossible task while raising debt has also
become more difficult and effective borrowing costs have increased, (2) Impact on
developers and consequently prices could be felt with a lag, and (3) company-specific
risks remains high. Our top three picks are (1) Oberoi (BUY, TP Rs305, +22% potential
upside), (2) Phoenix (BUY, TP Rs300, +47% upside) and Sobha (BUY, TP Rs 380, +18%
upside).
We find Oberoi relatively better-placed in this environment as (1) Oberoi is the only debtfree
developer operating in the lucrative Mumbai region and could actually take
advantage of declining land prices by adding to its land bank, (2) NAV realization is
relatively more front-loaded than peers, and (3) RoE in the mid-20s is again higher than
peers.
Phoenix is one of our top picks as we believe (1) reducing execution risk and revenue
visibility as the three malls (Pune, Kurla, Bengaluru) get operational over FY2012E, and (2)
potential residential launches (Bengaluru and Chennai over FY2012E) of at least 0.5 mn
sq. ft could act as potential triggers. We retain our BUY recommendation with a target
price of Rs300 at par with our March-2012E NAV.
We find three positives for Sobha – (1) a Bengaluru-centric portfolio (which we believe is
relatively the most insulated region), (2) almost 100% residential development portfolio,
and (3) visibility of two critical project launches over 1QFY12E (Sobha City in Bengaluru
and Gurgaon project).
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