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Opportunity amidst adversity
Liquidity the all-important factor; Prefer stocks with stronger fundamentals or near-term triggers
Headwinds are buffeting the real estate industry:
We have downgraded earnings estimates and target prices of key Real Estate stocks under our coverage.
This reflects our multiple concerns on the sector: (1) tighter bank funding norms, (2) delay in new launches,
(3) slower broad based recovery in commercial vertical, and (4) company-level overhangs.
Liquidity position will decide whether companies focus on growth or on de-leveraging. Expect healthier
players to add value-accretive assets, and others to go for faster monetization of existing assets.
Prefer stocks with prudent balance sheets and strong business models such as Oberoi Realty, Prestige,
Phoenix and Mahindra Lifespaces, or stocks with near-term triggers like DLF, which offers play on deleveraging
theme with valuation comfort.
Challenging backdrop: Funding is getting tighter,
costlier and selective
Major banks have adopted a stricter and more vigilant
approach towards the real estate sector for new loan
disbursement or refinancing. Our channel checks suggest
that banks are selectively biased towards (a) projects with
lower uncertainty and/or lease income support, and (b)
developers with long-term relation and goodwill. Costlier home
loan rate coupled with plummeting customer sentiment is
affecting residential sales volume, another major source of
fund to developers. Even alternative funding sources are both
cautious and costly e.g. NBFCs at 16-20%, private equity at
25-30%, and private lenders at 25-35%. Cost of capital of
key developers has become dearer by 2-4% in the past 18
months
Growth v/s De-leveraging: Liquidity position to
determine companies' near-term focus
The liquidity outlook for real estate companies is dented due
to multiple factors: (1) tighter bank funding norms, (2) rising
interest rates, (3) slowdown in sales and new launches, and
(4) debt servicing outflow accounting for higher share of the
cash-pie. Thus, we believe, companies' near-term focus will
be driven by their respective liquidity position. Expect
healthier players to exploit this opportunity and add valueaccretive
assets. Others will need to focus on de-leveraging
by faster monetization of existing assets e.g. plot sales
(DLF), FSI sales (HDIL), and exit from non-core assets.
Cutting earnings estimates and target prices to
factor in concerns
We are downgrading target prices for many companies
under our coverage by 2-29% and FY12/13 estimates by 2-
18%. This is on the back of (1) moderating sales assumption
of next 5 years, along with increase in construction cost by
10-15%, and (2) assigning higher discount factor to NAV.
Both these revision factor in multiple concerns for real estate
companies besides liquidity: (a) delay in new launches due
to regulatory hurdles, (b) escalating commodity prices
dampening margins, (c) sluggish demand across markets,
(d) slower broadbased revival of commercial vertical, and (e)
several company-level issues such as CCI probe, 2G
spectrum issue, farmers' protest on land acquisition, etc.
Prefer Oberoi, Prestige, Phoenix, Mahindra; DLF
offers de-leveraging play
To objectively assess individual stocks' risk-reward position,
we have ranked them on six key success factors in the
prevailing situation: (1) Funding gap, (2) Certainty of key
catalysts, (3) Sales outlook, (4) Leverage on commercial
recovery, (5) Company-specific headwinds, and (6) Attractive
valuation, measured in terms of expected upside from current
levels. As corroborated by the weighted score, we prefer
Oberoi Realty (huge surplus cash, value-accretive acquisition
triggers), Prestige (stable operations, huge valuation
discount), Mahindra Lifespaces (comfortable liquidity, positive
outlook on operations) and Phoenix Mills (strong scale-up
in rental income). Besides, DLF offers good play on the deleveraging
theme with valuation comfort
Challenging backdrop: Funding is getting tighter, costlier
and selective
Major banks have adopted stricter and more vigilant approach towards real
estate sector for new loan disbursement or re-financing.
Lenders are showing higher preference towards projects with low uncertainty
or lease rental support and developers with long term relation and goodwill.
Alternative funding sources are both cautious and costlier. The cost of capital
of key developers increased by 2-4% in past 18 months
Liquidity concerns afflict the real estate sector
RBI's anti-inflationary measures including 12 rounds of rate hikes have hit the growth of
high beta rate-sensitive sectors like real estate. Banks are more cautious about lending to
the sector and are putting priority on stringent verification processes such as (a) crossverification
of documents with local authorities, (b) authenticating chartered accountants'
certificates, (c) checking property valuation and lines of credit etc. Consequently loan
sanctions have been delayed and re-financing tougher, aggravating execution uncertainty.
Additionally, spiraling interest cost is eating-up bigger share of operating cash flow, which
is also under stress, given slowdown in sales volume. Conventional support from the equity
market has also dried up with declining investor interest, which has made promoters reluctant
to offer stake at current prices.
Developers with a good track record have an edge
Our interaction with key banks suggests managements adopt a cautious, selective
approach while lending to the realty sector.
Liquidity to the sector has not dried up completely. However, lenders prefer low risk
projects with meaningful cash-flow visibility or lease rental discounting models.
Lenders also prefer financially healthy developers with asset backing and a reputed
track record.
Stricter bank finance invites costlier sources - which are also cautious
Selective bank lending prompted several developers to tap alternative sources of funds,
which are more expensive in nature. Private Equity or bridge finance from private lenders,
and public deposits etc are gaining higher share in developers' loan-mix. Most of the nonbanking
sources typically come at a much higher cost such as NBFCs (16-20%), Private
Equities (25-30%), and private lenders (25-35%) as against 12-14% for bank loan in
healthier period. While replacing low cost bank debt with high cost funding renders shortterm
respite; it could aggravate the cash flow pressure further, going forward, especially
if liquidity from the primary sources doesn't improve in due course.
However our industry interaction indicates that factors like tight availability of funds with
PE players and delays in project execution prompted such funds to adopt a cautious
approach as well toward the sector. Private equity investment in India's real estate sector
declined by around 20.2% to USD831m (about INR37.4b) in the first five months FY12.
Recent key Private Equity participation in realty projects
Date Fund name Developer Project type INR m Location
Sep-10 Kotak Realty 3C Company Residential 850 Noida
Sep-10 Kotak Realty Emar MFG Residential 2,500 Gurgaon
Sep-10 Kotak Realty IVRCL Assets and Holding Residential 2,700 Chennai
Sep-10 Milestone Capital Advisors Pelican Group Residential 200 Hyderabad
Jun-11 Milestone Capital Advisors Ackruti City Residential 1,000 Mumbai
Sep-10 Ask Realty Fund ATS Group Residential 500 Noida
Dec-10 Ask Realty Fund Amit Enterprise Housing Residential 2,550 Pune
Dec-10 Ask Realty Fund Darde Jog Realities Residential 2,700 Pune
Apr-11 Warburg Pincus Nhava Seva Corporation Residential 4,500 Chennai
Apr-11 Warburg Pincus Oceanus Real Estate Entity 14,000 Gurgaon
Oct-10 Red Fort Capital Parsvnath Commercial 1,200 Delhi
Feb-11 Red Fort Capital Ansal Properties Residential 2,000 Gurgaon
Mar-11 Balckstone Embassy Property Residential 1,350 Bangalore
Jun-11 TPG Capital Shriram properties Entity 4,480 Bangalore
Aug-11 India REIT Omkar Developers Resident 2,000 Mumbai
Source: Industry/MOSL
Growth v/s De-leveraging: Liquidity position to determine
companies' near-term focus
The liquidity outlook for real estate companies is dented due to multiple factors:
(1) tighter bank funding norms, (2) rising interest rates, (3) slowdown in sales
and new launches, and (4) debt servicing outflow accounting for higher share
of the cash-pie.
Deeper credit analysis suggests barring a few, most companies are unlikely to
witness major funding gap in FY12, however pressure could arise in FY13 if
slowdown persists.
Companies' near-term focus will be driven by their respective liquidity position.
Expect healthier players to exploit this opportunity and add value-accretive
assets. Others need to focus on de-leveraging by faster monetization of existing
assets e.g. plot sales (DLF), FSI sales (HDIL), and exit from non-core assets
A closer analysis of companies' liquidity profile suggests the following:
a) Companies better placed than in 2008: The leverage profile of companies in our
coverage seems healthier than they were during the crisis of 2008, with several
developers having lower net DER (x). The median net DER (x) improved to ~0.5x
against >1x over FY08-09. Re-capitalization and re-financing exercises by several
developers after the downturn improved the quality of debt as well, with (1) a higher
proportion of secured loans and (2) longer re-payment schedules.
b) Higher cost of debt augments interest outgo: Over the past 2-3 years the absolute
debt of some developers rose significantly along with some cash rich developers making
themselves levered. This, coupled with a significant jump in (a) cost of debt, (b) imminent
repayment schedules and (c) a liquidity crunch, resulted in a steady increase in capital
commitment towards interest payment and debt servicing.
c) Reduced support from operating cash flows: Launch delays due to approvals and
regulatory issues and a sales slowdown have withdrawn conventional support of
operating cash flow in the backdrop of rising debt-servicing commitment.
De-leveraging or low cost acquisition - key liquidity-driven triggers
Our base case cash flow analysis suggests most companies (except DLF, Godrej Properties
and Prestige) are unlikely to face any major funding gap in FY12. Despite bank loans to
the sector drying up, a recent loan sanctioning of ~INR5.5b for Unitech under LRD (lease
rental discounting) for Unitech Corporate Park and ~INR2.5b for Anantraj, bodes positive
for companies with tighter situation. However, if adverse impact of physical market persists
for long and the apathy among lenders extends beyond FY12, we expect the funding gap
to stretch and liquidity pressure to aggravate for several companies, given higher repayment
need in FY13 such as DLF (INR40b), Unitech (INR10b), HDIL (~INR11b) etc.
Companies are evaluating means to bridge the funding gap through asset sales, refinancing
or alternative funding sources, while players with surplus cash and limited land banks are
assessing opportunities for value accretive acquisitions in the backdrop of a sluggish demand
and peers under stress.
We believe the liquidity position will determine companies' near-term focus. DLF's riskreward
profile will gain a strong catalyst from a successful de-leveraging. Its recent traction
in stated divestment gives greater visibility to its debt reduction plan. Similarly, HDIL plans
to cut debt by 15-20% over FY12, largely driven by plans to sell FSI of 15-20msf in Virar-
Vasai area over next 12-15 months. Meaningful strategic acquisitions would act as primary
triggers for companies with stronger financial health and a limited land bank such as
Oberoi and Mahindra Lifespaces, even at the cost of moderate increase in gearing.
Headwinds dent outlook
Although the valuations are attractive, they are accompanied by headwinds. Besides liquidity
concerns, sustained under-performance and valuation discount could be attributable to:
(a) Delay in launches due to approvals, regulatory hurdles: With the perception
that several business models offer developers access to super-normal profit, government
organizations have imposed higher surveillance on project approvals. Mumbai has
been worst affected with very few new launches over the past 6-9 months as the new
government revisits pending proposals. While regulatory changes, such as change in
public parking norms, proposal of 100% premium on certain free of FSI component
etc. are steps towards better industry practices, they have created an uncertain
regulatory environment resulting in severe delay in launches and execution.
(b) Rising commodity prices hurt margins: An upswing in prices of crucial commodities
such as steel, cement and sand have impacted developers' margins, even wiping out
most of the profit in several low-priced projects in the mid-income segment.
(c) Sluggish demand: As a confluence of high property prices, high borrowing cost and
expectation of price moderation, absorption rates deteriorated across cities despite
lower launches. While Mumbai sales declined severely, NCR volume has been mixed
bag (Gurgaon: moderate on the back of good response in plotted sales and investors
demand and Noida: sluggish due to oversupply concern and issues related to farmers
protest on land acquisition). However Bangalore and Chennai markets remained steady
with higher end-users demand.
(d) Hurdles for commercial revival: Although revival in commercial
vertical in major CBDs has been promising with certain sign of rental
strengthening, broad-based recovery is yet to happen due to high
vacancy rates and recent concern over IT/ITES growth outlook, which
may delay leasing decisions.
(e) Company-specific issues: Real estate companies are up against
several headwinds including a CCI-probe of DLF (which can be
broadened to other players as it challenges the existing business
practice), 2G telecom headwinds (Unitech and DB Realty) and court
verdict in favor of farmers on land acquisition in Greater Noida.
Prefer stocks with stronger fundamentals or near-term
triggers
Despite adversity, we find opportunities in a) stocks with lower liquidity risk,
strong fundamental and robust business model or b) higher certainty of nearterm
catalyst along with favorable risk-rewards position.
To objectively assess the risk-reward position, we have evaluated the companies
under six key aspects and our hypothesis has been corroborated by the weighted
scores attached to these aspects.
Prefer stocks with prudent balance sheet and strong business model such as
Oberoi Realty, Prestige, Phoenix and Mahindra Lifespaces, or stocks with nearterm
triggers like DLF, which offers play on de-leveraging theme with valuation
comfort.
Evaluating companies based on six key success factors
While steep valuation discount offers attractive entry points, the headwinds call for a
selective investment approach. We evaluate stocks based on six key success factors to
screen companies in attractive shape. The factors are as follows:
(a) Funding gap (Scale of 0-5): We have evaluated this based on our analysis of a
company's debt profile and cash-flow status (Refer previous section).
(b) Certainty of key catalysts (Scale of 0-5): We have assessed the nature of the
catalysts for a company and certainty of their near-term occurrence. While we draw
higher confidence from catalyst linked with operational performance, triggers of
regulatory in nature remain a cause of concern.
(c) Sales outlook (Scale of 0-5): We have assessed two qualitative aspects
1. Market outlook. We considered the dynamics of the primary markets, the company
is operating into. We expect a steadier sales momentum for Bangalore players,
while sluggish market momentum could impact the Mumbai based developers.
2. Product positioning. We considered a company's emphasis on (i) the right product
pricing strategy, (ii) strong brand recall, (iii) strong execution track-record and (iv)
hassle-free land parcels in attractive locations, which would gain customer
preference and faster monetization. We expect such qualitative factors to play a
(d) Leverage on commercial recovery (Scale of 0-5): While macro headwinds related
to IT sector and oversupply are key overhang on commercial vertical, lower vacancy
levels at key city centric locations augurs well for stronger leasing and possibility of
rental uptick. we believe companies with a) large base of operational assets in city
centric locations, b) near-completion pipeline and c) strong client base, would continue
to be key beneficiaries.
(e) Company-specific headwinds (Scale of 0-5): We considered prevalent regulatory
or legal hassles attached to a company, their magnitudes and likelihoods of near-term
mitigation.
(f) Current Valuation (Scale of 0-10): This factor evaluates a company's risk-reward
position base on current valuation.
Prefer Oberoi, Prestige, Phoenix, Mahindra; DLF offers de-leveraging play
Given recent underperformances by all major stocks, which render strong upside potential,
we have assigned higher weightage to valuation. Our weighted scorecard bolsters our
hypothesis of higher inclination towards a) stocks with lower liquidity risk, strong
fundamentals and robust business models or b) higher certainty of near-term catalyst
along with favorable risk-rewards position.
We prefer:
(1) Oberoi Realty (strong liquidity, huge surplus cash and trigger from value-accretive
acquisitions),
(2) Prestige (steady operation, lower headwinds and strong valuation discount),
(3) Phoenix Mills (near-term triggers with strong scale-up in rental income),
(4) Mahindra Lifespaces (comfortable liquidity, better operational performance outlook),
(5) DLF (Geater certainty in divestment and debt reduction).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Opportunity amidst adversity
Liquidity the all-important factor; Prefer stocks with stronger fundamentals or near-term triggers
Headwinds are buffeting the real estate industry:
We have downgraded earnings estimates and target prices of key Real Estate stocks under our coverage.
This reflects our multiple concerns on the sector: (1) tighter bank funding norms, (2) delay in new launches,
(3) slower broad based recovery in commercial vertical, and (4) company-level overhangs.
Liquidity position will decide whether companies focus on growth or on de-leveraging. Expect healthier
players to add value-accretive assets, and others to go for faster monetization of existing assets.
Prefer stocks with prudent balance sheets and strong business models such as Oberoi Realty, Prestige,
Phoenix and Mahindra Lifespaces, or stocks with near-term triggers like DLF, which offers play on deleveraging
theme with valuation comfort.
Challenging backdrop: Funding is getting tighter,
costlier and selective
Major banks have adopted a stricter and more vigilant
approach towards the real estate sector for new loan
disbursement or refinancing. Our channel checks suggest
that banks are selectively biased towards (a) projects with
lower uncertainty and/or lease income support, and (b)
developers with long-term relation and goodwill. Costlier home
loan rate coupled with plummeting customer sentiment is
affecting residential sales volume, another major source of
fund to developers. Even alternative funding sources are both
cautious and costly e.g. NBFCs at 16-20%, private equity at
25-30%, and private lenders at 25-35%. Cost of capital of
key developers has become dearer by 2-4% in the past 18
months
Growth v/s De-leveraging: Liquidity position to
determine companies' near-term focus
The liquidity outlook for real estate companies is dented due
to multiple factors: (1) tighter bank funding norms, (2) rising
interest rates, (3) slowdown in sales and new launches, and
(4) debt servicing outflow accounting for higher share of the
cash-pie. Thus, we believe, companies' near-term focus will
be driven by their respective liquidity position. Expect
healthier players to exploit this opportunity and add valueaccretive
assets. Others will need to focus on de-leveraging
by faster monetization of existing assets e.g. plot sales
(DLF), FSI sales (HDIL), and exit from non-core assets.
Cutting earnings estimates and target prices to
factor in concerns
We are downgrading target prices for many companies
under our coverage by 2-29% and FY12/13 estimates by 2-
18%. This is on the back of (1) moderating sales assumption
of next 5 years, along with increase in construction cost by
10-15%, and (2) assigning higher discount factor to NAV.
Both these revision factor in multiple concerns for real estate
companies besides liquidity: (a) delay in new launches due
to regulatory hurdles, (b) escalating commodity prices
dampening margins, (c) sluggish demand across markets,
(d) slower broadbased revival of commercial vertical, and (e)
several company-level issues such as CCI probe, 2G
spectrum issue, farmers' protest on land acquisition, etc.
Prefer Oberoi, Prestige, Phoenix, Mahindra; DLF
offers de-leveraging play
To objectively assess individual stocks' risk-reward position,
we have ranked them on six key success factors in the
prevailing situation: (1) Funding gap, (2) Certainty of key
catalysts, (3) Sales outlook, (4) Leverage on commercial
recovery, (5) Company-specific headwinds, and (6) Attractive
valuation, measured in terms of expected upside from current
levels. As corroborated by the weighted score, we prefer
Oberoi Realty (huge surplus cash, value-accretive acquisition
triggers), Prestige (stable operations, huge valuation
discount), Mahindra Lifespaces (comfortable liquidity, positive
outlook on operations) and Phoenix Mills (strong scale-up
in rental income). Besides, DLF offers good play on the deleveraging
theme with valuation comfort
Challenging backdrop: Funding is getting tighter, costlier
and selective
Major banks have adopted stricter and more vigilant approach towards real
estate sector for new loan disbursement or re-financing.
Lenders are showing higher preference towards projects with low uncertainty
or lease rental support and developers with long term relation and goodwill.
Alternative funding sources are both cautious and costlier. The cost of capital
of key developers increased by 2-4% in past 18 months
Liquidity concerns afflict the real estate sector
RBI's anti-inflationary measures including 12 rounds of rate hikes have hit the growth of
high beta rate-sensitive sectors like real estate. Banks are more cautious about lending to
the sector and are putting priority on stringent verification processes such as (a) crossverification
of documents with local authorities, (b) authenticating chartered accountants'
certificates, (c) checking property valuation and lines of credit etc. Consequently loan
sanctions have been delayed and re-financing tougher, aggravating execution uncertainty.
Additionally, spiraling interest cost is eating-up bigger share of operating cash flow, which
is also under stress, given slowdown in sales volume. Conventional support from the equity
market has also dried up with declining investor interest, which has made promoters reluctant
to offer stake at current prices.
Developers with a good track record have an edge
Our interaction with key banks suggests managements adopt a cautious, selective
approach while lending to the realty sector.
Liquidity to the sector has not dried up completely. However, lenders prefer low risk
projects with meaningful cash-flow visibility or lease rental discounting models.
Lenders also prefer financially healthy developers with asset backing and a reputed
track record.
Stricter bank finance invites costlier sources - which are also cautious
Selective bank lending prompted several developers to tap alternative sources of funds,
which are more expensive in nature. Private Equity or bridge finance from private lenders,
and public deposits etc are gaining higher share in developers' loan-mix. Most of the nonbanking
sources typically come at a much higher cost such as NBFCs (16-20%), Private
Equities (25-30%), and private lenders (25-35%) as against 12-14% for bank loan in
healthier period. While replacing low cost bank debt with high cost funding renders shortterm
respite; it could aggravate the cash flow pressure further, going forward, especially
if liquidity from the primary sources doesn't improve in due course.
However our industry interaction indicates that factors like tight availability of funds with
PE players and delays in project execution prompted such funds to adopt a cautious
approach as well toward the sector. Private equity investment in India's real estate sector
declined by around 20.2% to USD831m (about INR37.4b) in the first five months FY12.
Recent key Private Equity participation in realty projects
Date Fund name Developer Project type INR m Location
Sep-10 Kotak Realty 3C Company Residential 850 Noida
Sep-10 Kotak Realty Emar MFG Residential 2,500 Gurgaon
Sep-10 Kotak Realty IVRCL Assets and Holding Residential 2,700 Chennai
Sep-10 Milestone Capital Advisors Pelican Group Residential 200 Hyderabad
Jun-11 Milestone Capital Advisors Ackruti City Residential 1,000 Mumbai
Sep-10 Ask Realty Fund ATS Group Residential 500 Noida
Dec-10 Ask Realty Fund Amit Enterprise Housing Residential 2,550 Pune
Dec-10 Ask Realty Fund Darde Jog Realities Residential 2,700 Pune
Apr-11 Warburg Pincus Nhava Seva Corporation Residential 4,500 Chennai
Apr-11 Warburg Pincus Oceanus Real Estate Entity 14,000 Gurgaon
Oct-10 Red Fort Capital Parsvnath Commercial 1,200 Delhi
Feb-11 Red Fort Capital Ansal Properties Residential 2,000 Gurgaon
Mar-11 Balckstone Embassy Property Residential 1,350 Bangalore
Jun-11 TPG Capital Shriram properties Entity 4,480 Bangalore
Aug-11 India REIT Omkar Developers Resident 2,000 Mumbai
Source: Industry/MOSL
Growth v/s De-leveraging: Liquidity position to determine
companies' near-term focus
The liquidity outlook for real estate companies is dented due to multiple factors:
(1) tighter bank funding norms, (2) rising interest rates, (3) slowdown in sales
and new launches, and (4) debt servicing outflow accounting for higher share
of the cash-pie.
Deeper credit analysis suggests barring a few, most companies are unlikely to
witness major funding gap in FY12, however pressure could arise in FY13 if
slowdown persists.
Companies' near-term focus will be driven by their respective liquidity position.
Expect healthier players to exploit this opportunity and add value-accretive
assets. Others need to focus on de-leveraging by faster monetization of existing
assets e.g. plot sales (DLF), FSI sales (HDIL), and exit from non-core assets
A closer analysis of companies' liquidity profile suggests the following:
a) Companies better placed than in 2008: The leverage profile of companies in our
coverage seems healthier than they were during the crisis of 2008, with several
developers having lower net DER (x). The median net DER (x) improved to ~0.5x
against >1x over FY08-09. Re-capitalization and re-financing exercises by several
developers after the downturn improved the quality of debt as well, with (1) a higher
proportion of secured loans and (2) longer re-payment schedules.
b) Higher cost of debt augments interest outgo: Over the past 2-3 years the absolute
debt of some developers rose significantly along with some cash rich developers making
themselves levered. This, coupled with a significant jump in (a) cost of debt, (b) imminent
repayment schedules and (c) a liquidity crunch, resulted in a steady increase in capital
commitment towards interest payment and debt servicing.
c) Reduced support from operating cash flows: Launch delays due to approvals and
regulatory issues and a sales slowdown have withdrawn conventional support of
operating cash flow in the backdrop of rising debt-servicing commitment.
De-leveraging or low cost acquisition - key liquidity-driven triggers
Our base case cash flow analysis suggests most companies (except DLF, Godrej Properties
and Prestige) are unlikely to face any major funding gap in FY12. Despite bank loans to
the sector drying up, a recent loan sanctioning of ~INR5.5b for Unitech under LRD (lease
rental discounting) for Unitech Corporate Park and ~INR2.5b for Anantraj, bodes positive
for companies with tighter situation. However, if adverse impact of physical market persists
for long and the apathy among lenders extends beyond FY12, we expect the funding gap
to stretch and liquidity pressure to aggravate for several companies, given higher repayment
need in FY13 such as DLF (INR40b), Unitech (INR10b), HDIL (~INR11b) etc.
Companies are evaluating means to bridge the funding gap through asset sales, refinancing
or alternative funding sources, while players with surplus cash and limited land banks are
assessing opportunities for value accretive acquisitions in the backdrop of a sluggish demand
and peers under stress.
We believe the liquidity position will determine companies' near-term focus. DLF's riskreward
profile will gain a strong catalyst from a successful de-leveraging. Its recent traction
in stated divestment gives greater visibility to its debt reduction plan. Similarly, HDIL plans
to cut debt by 15-20% over FY12, largely driven by plans to sell FSI of 15-20msf in Virar-
Vasai area over next 12-15 months. Meaningful strategic acquisitions would act as primary
triggers for companies with stronger financial health and a limited land bank such as
Oberoi and Mahindra Lifespaces, even at the cost of moderate increase in gearing.
Headwinds dent outlook
Although the valuations are attractive, they are accompanied by headwinds. Besides liquidity
concerns, sustained under-performance and valuation discount could be attributable to:
(a) Delay in launches due to approvals, regulatory hurdles: With the perception
that several business models offer developers access to super-normal profit, government
organizations have imposed higher surveillance on project approvals. Mumbai has
been worst affected with very few new launches over the past 6-9 months as the new
government revisits pending proposals. While regulatory changes, such as change in
public parking norms, proposal of 100% premium on certain free of FSI component
etc. are steps towards better industry practices, they have created an uncertain
regulatory environment resulting in severe delay in launches and execution.
(b) Rising commodity prices hurt margins: An upswing in prices of crucial commodities
such as steel, cement and sand have impacted developers' margins, even wiping out
most of the profit in several low-priced projects in the mid-income segment.
(c) Sluggish demand: As a confluence of high property prices, high borrowing cost and
expectation of price moderation, absorption rates deteriorated across cities despite
lower launches. While Mumbai sales declined severely, NCR volume has been mixed
bag (Gurgaon: moderate on the back of good response in plotted sales and investors
demand and Noida: sluggish due to oversupply concern and issues related to farmers
protest on land acquisition). However Bangalore and Chennai markets remained steady
with higher end-users demand.
(d) Hurdles for commercial revival: Although revival in commercial
vertical in major CBDs has been promising with certain sign of rental
strengthening, broad-based recovery is yet to happen due to high
vacancy rates and recent concern over IT/ITES growth outlook, which
may delay leasing decisions.
(e) Company-specific issues: Real estate companies are up against
several headwinds including a CCI-probe of DLF (which can be
broadened to other players as it challenges the existing business
practice), 2G telecom headwinds (Unitech and DB Realty) and court
verdict in favor of farmers on land acquisition in Greater Noida.
Prefer stocks with stronger fundamentals or near-term
triggers
Despite adversity, we find opportunities in a) stocks with lower liquidity risk,
strong fundamental and robust business model or b) higher certainty of nearterm
catalyst along with favorable risk-rewards position.
To objectively assess the risk-reward position, we have evaluated the companies
under six key aspects and our hypothesis has been corroborated by the weighted
scores attached to these aspects.
Prefer stocks with prudent balance sheet and strong business model such as
Oberoi Realty, Prestige, Phoenix and Mahindra Lifespaces, or stocks with nearterm
triggers like DLF, which offers play on de-leveraging theme with valuation
comfort.
Evaluating companies based on six key success factors
While steep valuation discount offers attractive entry points, the headwinds call for a
selective investment approach. We evaluate stocks based on six key success factors to
screen companies in attractive shape. The factors are as follows:
(a) Funding gap (Scale of 0-5): We have evaluated this based on our analysis of a
company's debt profile and cash-flow status (Refer previous section).
(b) Certainty of key catalysts (Scale of 0-5): We have assessed the nature of the
catalysts for a company and certainty of their near-term occurrence. While we draw
higher confidence from catalyst linked with operational performance, triggers of
regulatory in nature remain a cause of concern.
(c) Sales outlook (Scale of 0-5): We have assessed two qualitative aspects
1. Market outlook. We considered the dynamics of the primary markets, the company
is operating into. We expect a steadier sales momentum for Bangalore players,
while sluggish market momentum could impact the Mumbai based developers.
2. Product positioning. We considered a company's emphasis on (i) the right product
pricing strategy, (ii) strong brand recall, (iii) strong execution track-record and (iv)
hassle-free land parcels in attractive locations, which would gain customer
preference and faster monetization. We expect such qualitative factors to play a
(d) Leverage on commercial recovery (Scale of 0-5): While macro headwinds related
to IT sector and oversupply are key overhang on commercial vertical, lower vacancy
levels at key city centric locations augurs well for stronger leasing and possibility of
rental uptick. we believe companies with a) large base of operational assets in city
centric locations, b) near-completion pipeline and c) strong client base, would continue
to be key beneficiaries.
(e) Company-specific headwinds (Scale of 0-5): We considered prevalent regulatory
or legal hassles attached to a company, their magnitudes and likelihoods of near-term
mitigation.
(f) Current Valuation (Scale of 0-10): This factor evaluates a company's risk-reward
position base on current valuation.
Prefer Oberoi, Prestige, Phoenix, Mahindra; DLF offers de-leveraging play
Given recent underperformances by all major stocks, which render strong upside potential,
we have assigned higher weightage to valuation. Our weighted scorecard bolsters our
hypothesis of higher inclination towards a) stocks with lower liquidity risk, strong
fundamentals and robust business models or b) higher certainty of near-term catalyst
along with favorable risk-rewards position.
We prefer:
(1) Oberoi Realty (strong liquidity, huge surplus cash and trigger from value-accretive
acquisitions),
(2) Prestige (steady operation, lower headwinds and strong valuation discount),
(3) Phoenix Mills (near-term triggers with strong scale-up in rental income),
(4) Mahindra Lifespaces (comfortable liquidity, better operational performance outlook),
(5) DLF (Geater certainty in divestment and debt reduction).
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