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India Property
Bangalore update: Prices will correct, but only by late FY12
Our survey of brokers (25) across Bangalore highlights that
healthy growth in residential rentals (+25-30%) is discouraging
sellers in the secondary market to lower capital values
While low inventory in the primary market will help sustain
high prices in the near term, we anticipate a price correction
towards end-FY12 as secondary market deliveries increase
Reiterate our weak residential outlook for FY12. HDIL is our
preferred play in a weak operating environment
What is buoying Bangalore residential property prices? We conducted a survey across
25 large residential property brokers in Bangalore to understand what is discouraging
customers/developers from lowering capital values in a weak demand environment. We
came up with three key reasons: (1) Rental values have increased by 25-30% across most
locations over the past 12 months and customers expect c15-20% appreciation during
FY12; (2) with rent prices sustaining the momentum, sellers are not willing to cut capital
values on outright property sales, expecting them to remain firm; (3) pent-up demand over
the past 18-24 months was strong and has been able to absorb finished inventory over
CY09-10 efficiently.
We expect prices to correct by end-FY12. In our report, India Property: Ears to the
ground, dated 13 June 2011, we highlighted that a low proportion of unsold inventory in
the primary market segment across most cities has been guiding developers to hold prices
firm and will likely continue over the next 6-8 months. Additional data from PE Analytics
(a real estate data-providing firm) on planned deliveries suggest that Bangalore is
expected to witness c50m sq ft of residential segment deliveries during CY11 (c43m sq ft
in CY10; see page 4 for more details). We expect a combination of increased deliveries
and new project launches to start to exert pressure on pricing during H1 FY12, while a
meaningful price correction in primary market sales could come though with a lag of 3-4
months by end-FY12. Meanwhile, in the absence of a price correction, we expect volumes
in FY12 to fall 10-15% y-o-y.
Separately, we like HDIL (with its Mumbai city focus), despite our negative sector
outlook. We like HDIL’s (OW(V), curr price INR157, TP INR205) competitive pricing
strategy to attract business volumes, which, in our view, is well suited to current market
conditions. In our view, HDIL, which is the market leader (with 60-70% market share) in the
Transfer of Development Rights (TDR) segment, will be an early beneficiary of demand
revival as developers launch new projects (consume TDR) to tap increased demand.
HDIL (OW(V), TP INR205)
Investment summary
We like HDIL’s competitive pricing strategy to attract business volumes, which, in our view, is well
suited to current market conditions. In our view, HDIL, which is the market leader (with 60-70% market
share) in the Transfer of Development Rights (TDR) segment, will be an early beneficiary of the demand
revival as developers launch new projects (consume TDR) to tap increased demand. With Mumbai
contributing c90% to HDIL’s NAV, we believe HDIL offers one of the best proxies to one of India’s
most resilient property markets – Mumbai. We expect the company to deliver a robust 26% earnings
CAGR over FY11-13e.
Company background
Housing Development and Infrastructure Ltd (HDIL) is India’s fourth-largest real estate developer by
market capitalization. We like HDIL’s land bank (237m sq ft) locations and strong focus in Mumbai city
(36%, including TDR and FSI sales) and the Mumbai metropolitan region (43%). We like the company’s
high-margin slum rehabilitation business model and strong execution capability witnessed during the past
business down-cycle (2008-2010).
Valuation and risks
Valuation: We value HDIL using a net asset value (NAV) approach, by discounting cash flows from 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 with a terminal value of
INR33. Our 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; and (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 rehabilitation/redevelopment business. An earnings multiple
comparison is not particularly useful for HDIL, in our view, as the company follows a project-completion
method, while other peer coverage companies follow the percentage-of-completion method of accounting.
Under our research model, for stocks with a volatility indicator, the Neutral band is 10 percentage points
above and below the hurdle rate for Indian stocks of 11%. Our target price of INR205 provides a potential
return of 30.6%, above the Neutral band of our model; therefore, we are reiterating our OW(V) rating on
HDIL stock.
Key risks: Slum rehabilitation projects have a long gestation period and are subject to delays. Lower
TDR volumes and pricing could come in lower than we estimate, and an FSI increase in the Mumbai
suburbs could lower demand for TDR and, hence, our valuation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Property
Bangalore update: Prices will correct, but only by late FY12
Our survey of brokers (25) across Bangalore highlights that
healthy growth in residential rentals (+25-30%) is discouraging
sellers in the secondary market to lower capital values
While low inventory in the primary market will help sustain
high prices in the near term, we anticipate a price correction
towards end-FY12 as secondary market deliveries increase
Reiterate our weak residential outlook for FY12. HDIL is our
preferred play in a weak operating environment
What is buoying Bangalore residential property prices? We conducted a survey across
25 large residential property brokers in Bangalore to understand what is discouraging
customers/developers from lowering capital values in a weak demand environment. We
came up with three key reasons: (1) Rental values have increased by 25-30% across most
locations over the past 12 months and customers expect c15-20% appreciation during
FY12; (2) with rent prices sustaining the momentum, sellers are not willing to cut capital
values on outright property sales, expecting them to remain firm; (3) pent-up demand over
the past 18-24 months was strong and has been able to absorb finished inventory over
CY09-10 efficiently.
We expect prices to correct by end-FY12. In our report, India Property: Ears to the
ground, dated 13 June 2011, we highlighted that a low proportion of unsold inventory in
the primary market segment across most cities has been guiding developers to hold prices
firm and will likely continue over the next 6-8 months. Additional data from PE Analytics
(a real estate data-providing firm) on planned deliveries suggest that Bangalore is
expected to witness c50m sq ft of residential segment deliveries during CY11 (c43m sq ft
in CY10; see page 4 for more details). We expect a combination of increased deliveries
and new project launches to start to exert pressure on pricing during H1 FY12, while a
meaningful price correction in primary market sales could come though with a lag of 3-4
months by end-FY12. Meanwhile, in the absence of a price correction, we expect volumes
in FY12 to fall 10-15% y-o-y.
Separately, we like HDIL (with its Mumbai city focus), despite our negative sector
outlook. We like HDIL’s (OW(V), curr price INR157, TP INR205) competitive pricing
strategy to attract business volumes, which, in our view, is well suited to current market
conditions. In our view, HDIL, which is the market leader (with 60-70% market share) in the
Transfer of Development Rights (TDR) segment, will be an early beneficiary of demand
revival as developers launch new projects (consume TDR) to tap increased demand.
HDIL (OW(V), TP INR205)
Investment summary
We like HDIL’s competitive pricing strategy to attract business volumes, which, in our view, is well
suited to current market conditions. In our view, HDIL, which is the market leader (with 60-70% market
share) in the Transfer of Development Rights (TDR) segment, will be an early beneficiary of the demand
revival as developers launch new projects (consume TDR) to tap increased demand. With Mumbai
contributing c90% to HDIL’s NAV, we believe HDIL offers one of the best proxies to one of India’s
most resilient property markets – Mumbai. We expect the company to deliver a robust 26% earnings
CAGR over FY11-13e.
Company background
Housing Development and Infrastructure Ltd (HDIL) is India’s fourth-largest real estate developer by
market capitalization. We like HDIL’s land bank (237m sq ft) locations and strong focus in Mumbai city
(36%, including TDR and FSI sales) and the Mumbai metropolitan region (43%). We like the company’s
high-margin slum rehabilitation business model and strong execution capability witnessed during the past
business down-cycle (2008-2010).
Valuation and risks
Valuation: We value HDIL using a net asset value (NAV) approach, by discounting cash flows from 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 with a terminal value of
INR33. Our 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; and (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 rehabilitation/redevelopment business. An earnings multiple
comparison is not particularly useful for HDIL, in our view, as the company follows a project-completion
method, while other peer coverage companies follow the percentage-of-completion method of accounting.
Under our research model, for stocks with a volatility indicator, the Neutral band is 10 percentage points
above and below the hurdle rate for Indian stocks of 11%. Our target price of INR205 provides a potential
return of 30.6%, above the Neutral band of our model; therefore, we are reiterating our OW(V) rating on
HDIL stock.
Key risks: Slum rehabilitation projects have a long gestation period and are subject to delays. Lower
TDR volumes and pricing could come in lower than we estimate, and an FSI increase in the Mumbai
suburbs could lower demand for TDR and, hence, our valuation.
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