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Indian property developer stock prices have de-rated almost 60% from the
Oct-10 levels given a confluence of tightening credit, deteriorating macro
and rising regulatory/political risks. The sector in general has now traded
back to Lehman levels in terms of valuations. This even as Balance sheets
and physical market volumes are in general in a much better shape vs.
GFC levels. Given this back drop we try and screen stocks which offer
high absolute upside with lower concomitant risks. On this framework
Phoenix is our top pick followed by DLF. Amongst others, we would play a
high beta via IBREL which is the cheapest (0.2x adj. RE book) stock in our
coverage and is a potential multi bagger hereon.
Our screening strategy- We rate the stocks on four parameters viz.
Valuations (current & relative to GFC), Exposure to regulatory/
political risks, ability to withstand a credit crunch (given the
experience of 2008, past track record and current cash flows) and
visible share price catalysts. Our risk reward framework here places an
equal emphasis on risks (regulation / credit) relative to reward
(valuations / catalysts). We use a combination of both quantitative and
qualitative factors to rate each company on the relevant metric
What are the markets telling us? Most companies in the sector have
been able to de-lever and physical fundamentals though weakening in
the face of current macro are still in a far better shape vs. 2008 levels
(volumes are 2-2.5x above 08 levels). However valuations are now
back to GFC levels (and in some cases even below). Clearly market is
telling us that things will get worse before it gets any better. Valuations
in some cases are pricing in worst case risks and a binary outcome for
many companies.
What to expect hereon- Property stocks bottomed out around 0.5x
book in 2008 but had significant bear market rallies around that.
However a comprehensive re-rating happened only when monetary
stimulus was introduced which tied in with anecdotal evidence flowing
through of volume recovery in main markets. Taking history as a
guide, from a macro perspective we would need to see a peaking out of
rate cycle along with price cut induced volume recovery. Visibility on
both however is low as of now. Our econ team is calling for another
75bps rate hike hereon given inflation concerns and significant price
cuts haven’t come through as yet in respective micro markets.
Conclusion
Indian property developer stock prices have de-rated almost 60% from the Oct-10
levels given a confluence of high interest rates and deteriorating macro feeding into
lower sales and tighter funding environment. Regulatory environment is also getting
tighter and this along with elevated concerns on corporate governance issues have
meant that the sector in general has now traded back to Lehman levels in terms of
valuations (and in some cases even absolute stock prices).
Stock prices seem to be pricing in distress across the board despite a relatively better
B/S and a physical market which though has slowed down, is in a far better shape
than Oct-08 levels. However we note that risks are NOT evenly spread across the
stocks and the recent de-rating seems to suggest that “babies have been thrown out
with the bathwater” altogether.
Given the above, we try and rank each of the stocks in our coverage on four primary
metrics to gauge the risk reward profile. On our analysis
1. DLF and Phoenix stand out as companies which offer the best risk
reward balance with near term share price catalysts, prime on book assets,
high annuity streams and where we do not see any stress on credit profile.
Managements in both the cases too seem to be making the right noises in
terms of near term business strategy.
2. IBREL is a high risk but potentially a multi bagger idea as the recent de
rating means that it has now traded down to the asset value of lower parel
with all other concomitant business (Power , Worli parcels, other land etc)
almost free. Demerger of power business, leasing progress in Lower Parel
and launch of Worli project are the key near term (2-3Qs) catalysts.
3. JPIN/ HDIL /UT suffer from high regulatory risks and even though they
are at compelling valuations, investors may shun these as these still don’t
make the cut on our risk reward framework. We will prefer to play quality
via 1 and beta via 2 mentioned above.
Four primary metrics that we have used are -
1) Ability to withstand credit tightening … which is a function of various
parameters such as current cash flows, past track record with lenders and annuity
revenue streams in the business. Apart from the low gearing profile companies
(Oberoi/ Phoenix) , DLF despite its high debt comes out well given a strong
annuity stream , historical track record and recent traction on asset /plot sales.
2) Regulatory / Political risks – Stocks exposed to political / regulation / litigation
risks have justifiably de rated in the current environment which is "sensitive" to
such issues. Things are in a state of flux in the sector right from – FSI/approval
issues in Mumbai to farmer agitations in Noida. Recent ruling of CCI against
DLF can potentially open up a hornet's nest. Our relative preference here then is
for perceived cleaner businesses such as Phoenix mills / Godrej Properties.
Mumbai developers in general suffer from policy paralysis (airport project/FSI
issues) whereas JPIN/UT have an overhang from farmer agitations / telecom
business which are unlikely to get resolved anytime soon.
3) Trough P/B valuations – Earnings based valuations are at risk given the
constant stream of downgrades seen for almost all the companies in the sector.
Hence even though most companies are trading at mid to high single digit PEs
and look cheap, risk of disappointment remains high. P/B and benchmark to
Lehman crisis levels approach can then help identify “stress” being implied into
share prices despite an improvement in B/S / Physical market. These stocks can
then be the "Beta" plays in case the market improves. IBREL clearly stands out
here as a potential “multi bagger” given it is trading at less than the asset value
of one single project (Lower parel) with all other parts (Worli and other land
parcels along with power business) almost entirely free.
4) Near term catalysts… which are important to make the stocks move out of the
current downtrend. Apart from DLF, where we see net debt reduction over the
next 2 Qs and Phoenix mills, where key large assets are nearing completion , we
see limited catalysts for other companies HDIL even though is pricing in zero
value for it airport project, the same may not get unlocked till govt policy gets
more amenable towards rehabilitation . UT’s business continues to be stable (in
terms of bookings) but some positive news flow on the ongoing 2G trial will be
required before the market takes note of the heavy disconnect between
company's land value (Rs 57) and stock price.
Stock screener
#1 - Ability to withstand credit stress
Tight funding environment coupled with slowing residential sales have led to
apprehensions on developer’s ability to service their outflow commitments. This is
despite their respective balance sheets and cash flow situation (physical
fundamentals) being in much better shape vs. 2008.
Refinancing at the moment however is getting tighter and credit is increasingly
getting constrained to a top few players with the long tail getting increasingly starved
for funds.
In our analysis, apart from conventional credit ratios like Net D/E , EBITDA/Debt ,
we also focus on historical track record (especially experience on credit restructuring
in 2008/09), annuity streams on book (which typically are levered but don’t
necessarily mean a credit stress) and cash flows against repayment commitments.
The top 3 players are relatively easy to screen Oberoi / Phoenix given low debt
profile. JPIN ranks third and though has debt on book, most of it is long term
amortizing loan. DLF surprisingly comes out as relatively better despite carrying one
of the heaviest debt burden thanks to its annuity stream, prime assets on book and
strong track record which is evident in a 300-400bps differential in cost of debt vs.
rest of the industry
# 2 – Low associated regulatory / political “baggage”
Regulatory / political environment in India has been a minefield off late and
correspondingly risks have emanated that were perhaps not conceivable a year ago.
Specifically approval /FSI issues in Mumbai have led to basic assumptions on area
being brought into question. Supreme court verdict on G Noida land acquisition is
virtually a landmark ruling which has increased risks on any govt land acquisition.
The proposed land acquisition bill further will likely make any new acquisition even
more expensive. Apart from this, the ongoing 2G investigations against two RE
companies have also dented the image of the RE sector
In the light of all this, there is a heightened sensitivity on news flow with risk
appetite being very low and perception on “corporate governance” being high
amongst investor’s radar. In the light of this we try and rank companies on the
potential for a “nasty” surprise which can then impact sentiment.
In our view, GPL, Phoenix and Sobha /PEPL have the minimum associated
political/ regulatory risk relative to peers, in our view. On the other extreme there
are high risk companies like JPIN (farmer protests and upcoming UP state
elections), IBREL (given approval issues in lower parel and policy issues in Mumbai
RE), HDIL (with limited visibility on airport rehabilitation project) and Unitech
(given ongoing telecom investigation).
DLF in our view too falls under a medium to high risk category given the recent CCI
penalty and pending income tax claims. But we do note that unlike others most of the
risks specific to the company have been explicitly quantified (Rs 20B) implying
scope for negative surprise on any may be limited.
#3- How cheap is cheap on valuations. Benchmarking to
stressed levels of 2008
Earning based metrics typically lose significance in a stress case scenario given
constant stream of downgrade. Hence while most stocks look cheap on PE, investors
are unlikely to take any comfort in it. As an alternate we try and compare valuations
on a PB basis benchmarking it to Oct 08- Mar-09 lows. As we note below in most
cases valuations are already at those levels and in some cases even stock prices on an
absolute basis are.
However there are cases where we think extreme distress is getting priced in. IBREL
is one such example where valuations are below 2008 levels (and so is stock price)
and the company is trading at the NAV of its Lower Parel asset with virtually all of
its other assets ( Panvel / Worli/ Gurgaon / Power business and other land bank of 90
msf+ ) almost free. While there are near term issues to be resolved (approval for
lower parel and launch of worli), we feel the stock should be on a must watch on the
radar screen.
Other companies which score low on other parameters (regulation risks/ credit stress)
score well here , but we think if investors want to play beta , its best played via
IBREL. On a purely risk reward basis the company offers the best profile
DLF’s stock price too has corrected sharply over the last one month (-24% since mid
Jul) on the back of recent CCI’s penalty which in our view has been a harsh reaction.
At 1.1x FY13 P/B the stock is trading close to its trough valuation seen post Lehman
episode (1x forward book). While investors have questioned the value of DLF’s
book we note that even if one takes a conservative view of things, the mark to market
value of assets on the company’s books are around 2x their holding cost (thanks to
cheap land bank and rental assets)
On the other hand GPL and Oberoi emerge as the most expensive stocks across
universe. While Oberoi’s strong balance sheet (Rs15B net cash) and better RoE
profile explains relative premium to the sector; GPL's valuations at 4x FY13 P/B are
the most stretched relative to both local as well as regional peers.
# 4 – Near term stock price catalysts
To revive the stocks from their current downtrend an important catalyst needs to play
out over the next 2-3Qs. In most of the companies in our coverage while it is just
project launches (which markets may not discount) , stocks may needs need a more
powerful “fundamental” driver to take over from the “technical” downtrend.
We find this in only three companies viz. DLF, Phoenix and IBREL. Specifically for
the three
DLF – Progress on debt reduction remains the single key deliverable. Recent
news flow on sale of IT parks in Pune/Noida (Rs13B), Gurgaon plot sale
(Rs4B), Aman resorts (Rs15-20B) and stake sale in insurance business (Rs4.5B)
points to an increased traction on the same. This coupled with plot sales in NCR
can potentially accelerate cash flows and help in gearing reduction which is the
main concern for investors.
Phoenix – Opening of market cities in Kurla, Bangalore, Chennai and ShangriLa
hotel progressively over FY12 will imply that the co will emerge as one of the
largest retail land lords in the country. This also coincides on a potential positive
policy improvement in norms for FDI in retail (which should aid sentiment).
These assets along with existing rent renegotiations should aid rentals grow
almost 2x over a 2 year period.
Other companies have specific catalysts but they can potentially play out either ways
implying higher risk. Stock specific catalysts for the companies are listed in the table
below. While we note that most of the outcomes (2G/ Noida agitation / Airport
rehab/ Approval issues) can be binary in nature and thus are not necessarily be a
positive stock price driver.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian property developer stock prices have de-rated almost 60% from the
Oct-10 levels given a confluence of tightening credit, deteriorating macro
and rising regulatory/political risks. The sector in general has now traded
back to Lehman levels in terms of valuations. This even as Balance sheets
and physical market volumes are in general in a much better shape vs.
GFC levels. Given this back drop we try and screen stocks which offer
high absolute upside with lower concomitant risks. On this framework
Phoenix is our top pick followed by DLF. Amongst others, we would play a
high beta via IBREL which is the cheapest (0.2x adj. RE book) stock in our
coverage and is a potential multi bagger hereon.
Our screening strategy- We rate the stocks on four parameters viz.
Valuations (current & relative to GFC), Exposure to regulatory/
political risks, ability to withstand a credit crunch (given the
experience of 2008, past track record and current cash flows) and
visible share price catalysts. Our risk reward framework here places an
equal emphasis on risks (regulation / credit) relative to reward
(valuations / catalysts). We use a combination of both quantitative and
qualitative factors to rate each company on the relevant metric
What are the markets telling us? Most companies in the sector have
been able to de-lever and physical fundamentals though weakening in
the face of current macro are still in a far better shape vs. 2008 levels
(volumes are 2-2.5x above 08 levels). However valuations are now
back to GFC levels (and in some cases even below). Clearly market is
telling us that things will get worse before it gets any better. Valuations
in some cases are pricing in worst case risks and a binary outcome for
many companies.
What to expect hereon- Property stocks bottomed out around 0.5x
book in 2008 but had significant bear market rallies around that.
However a comprehensive re-rating happened only when monetary
stimulus was introduced which tied in with anecdotal evidence flowing
through of volume recovery in main markets. Taking history as a
guide, from a macro perspective we would need to see a peaking out of
rate cycle along with price cut induced volume recovery. Visibility on
both however is low as of now. Our econ team is calling for another
75bps rate hike hereon given inflation concerns and significant price
cuts haven’t come through as yet in respective micro markets.
Conclusion
Indian property developer stock prices have de-rated almost 60% from the Oct-10
levels given a confluence of high interest rates and deteriorating macro feeding into
lower sales and tighter funding environment. Regulatory environment is also getting
tighter and this along with elevated concerns on corporate governance issues have
meant that the sector in general has now traded back to Lehman levels in terms of
valuations (and in some cases even absolute stock prices).
Stock prices seem to be pricing in distress across the board despite a relatively better
B/S and a physical market which though has slowed down, is in a far better shape
than Oct-08 levels. However we note that risks are NOT evenly spread across the
stocks and the recent de-rating seems to suggest that “babies have been thrown out
with the bathwater” altogether.
Given the above, we try and rank each of the stocks in our coverage on four primary
metrics to gauge the risk reward profile. On our analysis
1. DLF and Phoenix stand out as companies which offer the best risk
reward balance with near term share price catalysts, prime on book assets,
high annuity streams and where we do not see any stress on credit profile.
Managements in both the cases too seem to be making the right noises in
terms of near term business strategy.
2. IBREL is a high risk but potentially a multi bagger idea as the recent de
rating means that it has now traded down to the asset value of lower parel
with all other concomitant business (Power , Worli parcels, other land etc)
almost free. Demerger of power business, leasing progress in Lower Parel
and launch of Worli project are the key near term (2-3Qs) catalysts.
3. JPIN/ HDIL /UT suffer from high regulatory risks and even though they
are at compelling valuations, investors may shun these as these still don’t
make the cut on our risk reward framework. We will prefer to play quality
via 1 and beta via 2 mentioned above.
Four primary metrics that we have used are -
1) Ability to withstand credit tightening … which is a function of various
parameters such as current cash flows, past track record with lenders and annuity
revenue streams in the business. Apart from the low gearing profile companies
(Oberoi/ Phoenix) , DLF despite its high debt comes out well given a strong
annuity stream , historical track record and recent traction on asset /plot sales.
2) Regulatory / Political risks – Stocks exposed to political / regulation / litigation
risks have justifiably de rated in the current environment which is "sensitive" to
such issues. Things are in a state of flux in the sector right from – FSI/approval
issues in Mumbai to farmer agitations in Noida. Recent ruling of CCI against
DLF can potentially open up a hornet's nest. Our relative preference here then is
for perceived cleaner businesses such as Phoenix mills / Godrej Properties.
Mumbai developers in general suffer from policy paralysis (airport project/FSI
issues) whereas JPIN/UT have an overhang from farmer agitations / telecom
business which are unlikely to get resolved anytime soon.
3) Trough P/B valuations – Earnings based valuations are at risk given the
constant stream of downgrades seen for almost all the companies in the sector.
Hence even though most companies are trading at mid to high single digit PEs
and look cheap, risk of disappointment remains high. P/B and benchmark to
Lehman crisis levels approach can then help identify “stress” being implied into
share prices despite an improvement in B/S / Physical market. These stocks can
then be the "Beta" plays in case the market improves. IBREL clearly stands out
here as a potential “multi bagger” given it is trading at less than the asset value
of one single project (Lower parel) with all other parts (Worli and other land
parcels along with power business) almost entirely free.
4) Near term catalysts… which are important to make the stocks move out of the
current downtrend. Apart from DLF, where we see net debt reduction over the
next 2 Qs and Phoenix mills, where key large assets are nearing completion , we
see limited catalysts for other companies HDIL even though is pricing in zero
value for it airport project, the same may not get unlocked till govt policy gets
more amenable towards rehabilitation . UT’s business continues to be stable (in
terms of bookings) but some positive news flow on the ongoing 2G trial will be
required before the market takes note of the heavy disconnect between
company's land value (Rs 57) and stock price.
Stock screener
#1 - Ability to withstand credit stress
Tight funding environment coupled with slowing residential sales have led to
apprehensions on developer’s ability to service their outflow commitments. This is
despite their respective balance sheets and cash flow situation (physical
fundamentals) being in much better shape vs. 2008.
Refinancing at the moment however is getting tighter and credit is increasingly
getting constrained to a top few players with the long tail getting increasingly starved
for funds.
In our analysis, apart from conventional credit ratios like Net D/E , EBITDA/Debt ,
we also focus on historical track record (especially experience on credit restructuring
in 2008/09), annuity streams on book (which typically are levered but don’t
necessarily mean a credit stress) and cash flows against repayment commitments.
The top 3 players are relatively easy to screen Oberoi / Phoenix given low debt
profile. JPIN ranks third and though has debt on book, most of it is long term
amortizing loan. DLF surprisingly comes out as relatively better despite carrying one
of the heaviest debt burden thanks to its annuity stream, prime assets on book and
strong track record which is evident in a 300-400bps differential in cost of debt vs.
rest of the industry
# 2 – Low associated regulatory / political “baggage”
Regulatory / political environment in India has been a minefield off late and
correspondingly risks have emanated that were perhaps not conceivable a year ago.
Specifically approval /FSI issues in Mumbai have led to basic assumptions on area
being brought into question. Supreme court verdict on G Noida land acquisition is
virtually a landmark ruling which has increased risks on any govt land acquisition.
The proposed land acquisition bill further will likely make any new acquisition even
more expensive. Apart from this, the ongoing 2G investigations against two RE
companies have also dented the image of the RE sector
In the light of all this, there is a heightened sensitivity on news flow with risk
appetite being very low and perception on “corporate governance” being high
amongst investor’s radar. In the light of this we try and rank companies on the
potential for a “nasty” surprise which can then impact sentiment.
In our view, GPL, Phoenix and Sobha /PEPL have the minimum associated
political/ regulatory risk relative to peers, in our view. On the other extreme there
are high risk companies like JPIN (farmer protests and upcoming UP state
elections), IBREL (given approval issues in lower parel and policy issues in Mumbai
RE), HDIL (with limited visibility on airport rehabilitation project) and Unitech
(given ongoing telecom investigation).
DLF in our view too falls under a medium to high risk category given the recent CCI
penalty and pending income tax claims. But we do note that unlike others most of the
risks specific to the company have been explicitly quantified (Rs 20B) implying
scope for negative surprise on any may be limited.
#3- How cheap is cheap on valuations. Benchmarking to
stressed levels of 2008
Earning based metrics typically lose significance in a stress case scenario given
constant stream of downgrade. Hence while most stocks look cheap on PE, investors
are unlikely to take any comfort in it. As an alternate we try and compare valuations
on a PB basis benchmarking it to Oct 08- Mar-09 lows. As we note below in most
cases valuations are already at those levels and in some cases even stock prices on an
absolute basis are.
However there are cases where we think extreme distress is getting priced in. IBREL
is one such example where valuations are below 2008 levels (and so is stock price)
and the company is trading at the NAV of its Lower Parel asset with virtually all of
its other assets ( Panvel / Worli/ Gurgaon / Power business and other land bank of 90
msf+ ) almost free. While there are near term issues to be resolved (approval for
lower parel and launch of worli), we feel the stock should be on a must watch on the
radar screen.
Other companies which score low on other parameters (regulation risks/ credit stress)
score well here , but we think if investors want to play beta , its best played via
IBREL. On a purely risk reward basis the company offers the best profile
DLF’s stock price too has corrected sharply over the last one month (-24% since mid
Jul) on the back of recent CCI’s penalty which in our view has been a harsh reaction.
At 1.1x FY13 P/B the stock is trading close to its trough valuation seen post Lehman
episode (1x forward book). While investors have questioned the value of DLF’s
book we note that even if one takes a conservative view of things, the mark to market
value of assets on the company’s books are around 2x their holding cost (thanks to
cheap land bank and rental assets)
On the other hand GPL and Oberoi emerge as the most expensive stocks across
universe. While Oberoi’s strong balance sheet (Rs15B net cash) and better RoE
profile explains relative premium to the sector; GPL's valuations at 4x FY13 P/B are
the most stretched relative to both local as well as regional peers.
# 4 – Near term stock price catalysts
To revive the stocks from their current downtrend an important catalyst needs to play
out over the next 2-3Qs. In most of the companies in our coverage while it is just
project launches (which markets may not discount) , stocks may needs need a more
powerful “fundamental” driver to take over from the “technical” downtrend.
We find this in only three companies viz. DLF, Phoenix and IBREL. Specifically for
the three
DLF – Progress on debt reduction remains the single key deliverable. Recent
news flow on sale of IT parks in Pune/Noida (Rs13B), Gurgaon plot sale
(Rs4B), Aman resorts (Rs15-20B) and stake sale in insurance business (Rs4.5B)
points to an increased traction on the same. This coupled with plot sales in NCR
can potentially accelerate cash flows and help in gearing reduction which is the
main concern for investors.
Phoenix – Opening of market cities in Kurla, Bangalore, Chennai and ShangriLa
hotel progressively over FY12 will imply that the co will emerge as one of the
largest retail land lords in the country. This also coincides on a potential positive
policy improvement in norms for FDI in retail (which should aid sentiment).
These assets along with existing rent renegotiations should aid rentals grow
almost 2x over a 2 year period.
Other companies have specific catalysts but they can potentially play out either ways
implying higher risk. Stock specific catalysts for the companies are listed in the table
below. While we note that most of the outcomes (2G/ Noida agitation / Airport
rehab/ Approval issues) can be binary in nature and thus are not necessarily be a
positive stock price driver.
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