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India real estate sector
Selection via elimination
A selective approach is required to pick stocks
The property sector has underperformed for so long (36 months) that we are
often tempted to finally throw away our bearish hat. We however maintain our
view from our initiation report (Tread carefully... and carry a big stick dated 25
November 2010). We don’t think this is a broad-based buying opportunity. Since
stocks are generally cheap (trading at 40-50% NAV discounts), we believe stock
picking can be done by ‘elimination’ of obvious risks. We would avoid high debtlow
cashflow yield companies and stick to players facing limited ‘news flow’ risk
with operations in ‘sane’ markets (Bangalore/ IT commercial/ retail). We
recommend buying Prestige and Sobha followed by HDIL and Phoenix.
Avoid obvious risks and value traps
Most stocks in the Indian real estate sector are trading at attractive discounts to
NAV. Some of these stocks can however remain in a value trap due to risk of
persistent negative news flow. We therefore think that investors should…
Avoid developers which are likely to experience volatile news flow related to
the 2G telecom and financial services bribery scandals.
Avoid high debt companies. In a rising rate environment, we expect debt
funding for developers to get increasingly tough.
Focus on cashflow – not ‘land banks’. From a valuation perspective
(discussed in detail in this report), we highlight free cashflow yields as a
method for evaluating stocks.
Stick to sane markets. We believe the NCR residential market faces risk of a
fall in run rate of sales volumes. Mumbai residential volumes on the other
hand are down to a trickle even as prices continue to rise sharply. We would
continue to avoid risk of further NAV downgrades as projects get delayed due
to the oligopolistic nature of these markets.
Little left to buy: We pick Prestige, Sobha and HDIL
Importantly, once we have conducted this exercise, we are left with very few
options. Only two companies tick all boxes- Prestige and Sobha. Despite the
rally in Prestige and Sobha (25% and 20% from their respective bottoms in last 6
months), we believe these stocks can perform. This is due to relatively better
visibility on execution and comfort on NAV and cashflow based valuations. HDIL,
Phoenix and DLF (in that order) are next.
Target prices adjusted: We have increased our target discount to NAV for all
stocks under coverage. This reflects the risk of downgrades in the major markets
(Mumbai and NCR residential) and execution delays due to the tight funding
scenario. Since we last ran a comb through our NAV estimates, the Mumbai and
NCR residential markets have become very weak. While our NAV estimates did
reflect bearish trends in these markets, we have still been negatively surprised.
HDIL is the only developer where we have made major changes. We have now
left the airport rehab project out and replaced it with three new projects.
Our top bullish ideas are Prestige, Sobha- followed by HDIL, Phoenix and DLF.
We would avoid investing in Indiabulls Real Estate, Omaxe and Unitech.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India real estate sector
Selection via elimination
A selective approach is required to pick stocks
The property sector has underperformed for so long (36 months) that we are
often tempted to finally throw away our bearish hat. We however maintain our
view from our initiation report (Tread carefully... and carry a big stick dated 25
November 2010). We don’t think this is a broad-based buying opportunity. Since
stocks are generally cheap (trading at 40-50% NAV discounts), we believe stock
picking can be done by ‘elimination’ of obvious risks. We would avoid high debtlow
cashflow yield companies and stick to players facing limited ‘news flow’ risk
with operations in ‘sane’ markets (Bangalore/ IT commercial/ retail). We
recommend buying Prestige and Sobha followed by HDIL and Phoenix.
Avoid obvious risks and value traps
Most stocks in the Indian real estate sector are trading at attractive discounts to
NAV. Some of these stocks can however remain in a value trap due to risk of
persistent negative news flow. We therefore think that investors should…
Avoid developers which are likely to experience volatile news flow related to
the 2G telecom and financial services bribery scandals.
Avoid high debt companies. In a rising rate environment, we expect debt
funding for developers to get increasingly tough.
Focus on cashflow – not ‘land banks’. From a valuation perspective
(discussed in detail in this report), we highlight free cashflow yields as a
method for evaluating stocks.
Stick to sane markets. We believe the NCR residential market faces risk of a
fall in run rate of sales volumes. Mumbai residential volumes on the other
hand are down to a trickle even as prices continue to rise sharply. We would
continue to avoid risk of further NAV downgrades as projects get delayed due
to the oligopolistic nature of these markets.
Little left to buy: We pick Prestige, Sobha and HDIL
Importantly, once we have conducted this exercise, we are left with very few
options. Only two companies tick all boxes- Prestige and Sobha. Despite the
rally in Prestige and Sobha (25% and 20% from their respective bottoms in last 6
months), we believe these stocks can perform. This is due to relatively better
visibility on execution and comfort on NAV and cashflow based valuations. HDIL,
Phoenix and DLF (in that order) are next.
Target prices adjusted: We have increased our target discount to NAV for all
stocks under coverage. This reflects the risk of downgrades in the major markets
(Mumbai and NCR residential) and execution delays due to the tight funding
scenario. Since we last ran a comb through our NAV estimates, the Mumbai and
NCR residential markets have become very weak. While our NAV estimates did
reflect bearish trends in these markets, we have still been negatively surprised.
HDIL is the only developer where we have made major changes. We have now
left the airport rehab project out and replaced it with three new projects.
Our top bullish ideas are Prestige, Sobha- followed by HDIL, Phoenix and DLF.
We would avoid investing in Indiabulls Real Estate, Omaxe and Unitech.
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