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Property Radar India: October sales data - some respite
The festive season got off to a mixed start, with October sales data showing muted yoy
growth but good mom growth. Mumbai sales volumes remain weak, but Gurgaon and
Bangalore performed better. Despite the sector underperformance, we await positive triggers
and remain Underweight.
Mixed start to the festive season; sustainable up-tick in sales volume remains key
The festive season (Oct-Dec) got off to a mixed start, with October sales volumes across
most cities (Mumbai and Kolkata being the exceptions) showing good 20-70% mom
increases, as per Prop Equity (which collates data via primary and secondary research).
Growth signals were mixed on a yoy basis, which we believe gives a more useful comparison
due to seasonality. While Mumbai remains under pressure (sales volumes declined 46% yoy
in October) due to a spike in property prices, IT/ITES-centric cities like Bangalore have
shown modest growth (10%). Sales volumes in Gurgaon seem stable (3%) as price hikes
have been fairly moderate. Excluding festive season-driven and IT/ITES sector-driven
demand, performances and outlook still do not appear encouraging, as sales volumes across
most cities are still some way below their peak (about 30-50%).
Asset churn remains key in the current challenging environment
There is significant demand for residential real estate across India, albeit affected by
affordability (as property prices peak again) and thus not converted into sales volumes. We
believe that rising mortgage rates are more painful this time around due to the higher loan
values (higher priced properties). We believe the current focus of Indian developers on
EBITDA margin (through price increases) may not be the ideal strategy in the current
challenging environment, where sluggish sales volumes could result in a repeat of the
liquidity crisis. A focus on EBITDA growth, on the other hand, ie aggressive sales volumes
(asset churn) through cutting property prices, could result in higher execution and ROEs.
We await positive triggers and remain Underweight
The property sector has underperformed the Sensex by 16% and 25% over the last one and
three months, respectively, reflecting the headwinds faced by the sector. We remain cautious and
await possible positive triggers such as: (a) a sustainable up-tick in sales volumes (b) significant
asset monetisation (plot sales, non-core asset sales) or equity dilution to reduce debt and save
interest costs; and (c) favourable government policy. We believe DLF (Sell) and Unitech (Sell) will
remain under pressure given their significant debt. On a relative basis, we prefer HDIL (Buy,
redevelopment play) and IBREL (Buy, attractive valuation).
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