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The latest PropEquity data suggests sales volumes remain weak after property prices
reached an all-time high in April. While sector headwinds persist, corrective measures (plot
sales, asset sales) by developers are encouraging. We expect a gradual recovery and
remain cautious on the sector.
Initial recovery signs seen in Feb 2011 short lived
We had misgivings about the sharp recovery in February 2011 sales volume (according to
PropEquity data) across key cities and attributed it to speculative demand (see False
optimism: remain cautious, dated 11 April 2011). Therefore, we are not surprised at the weak
April sales volume data – Mumbai’s sales volume declined 22% yoy and 21% qoq;
Gurgaon’s grew 3% yoy and fell 21% qoq, while Bangalore’s grew 15% yoy and fell 6% qoq
(Table 2). Property prices across these cities are at all-time highs (Table 4) and this, coupled
with rising mortgage rates, is the key reason for the subdued showing, in our view. The
absorption percentage (total units sold/total units available) in Gurgaon (DLF and Unitech’s
main area) declined from 16% in February to 10% in April (Table 3). Inventories declined 11-
37% in June 2010 vs March 2008, but are now up 5-29% in April 2011 vs June 2010.
After a weak FY11, developers taking corrective steps; we expect a gradual recovery
Despite a weak FY10, FY11 was muted with DLF/Unitech’s EBITDA margins contracting
806/541bp and PAT declining 5/16%. Besides the sector headwinds (declining affordability
due to high property prices, inflation and interest rates, cost escalation, access to funds),
DLF also faces a high debt burden, while Unitech’s receivables level looks stretched to us.
To increase cashflows and reduce debt, developers are looking at two factors: 1) focus on
plots to minimise inflation and execution risks; and 2) non-core asset monetisation. We have
also started to see developers cutting prices in certain markets to lift sales volumes. While
we believe these are steps in the right direction, we can see only a gradual recovery as the
sector headwinds remain strong and the appetite for non-core assets (hotels, land parcels,
etc) remains weak.
Sector headwinds persist – we remain cautious; Sell DLF and Unitech
While we are encouraged by developers’ steps to improve sales, we remain cautious on the
sector as we foresee only a gradual recovery. We maintain our Sell ratings on DLF (high debt,
cashflows from operations just about adequate to service debt) and Unitech (potential collateral
damage due to the telecom issue overhang, weakening balance sheet and execution concerns).
We prefer HDIL (positive newsflow on Mumbai International Airport Ltd [MIAL], focus on nonMIAL as well, play on redevelopments in Mumbai) and IBREL – Indiabulls Real Estate –
(attractive valuations and low leverage) where we have Buy ratings
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The latest PropEquity data suggests sales volumes remain weak after property prices
reached an all-time high in April. While sector headwinds persist, corrective measures (plot
sales, asset sales) by developers are encouraging. We expect a gradual recovery and
remain cautious on the sector.
Initial recovery signs seen in Feb 2011 short lived
We had misgivings about the sharp recovery in February 2011 sales volume (according to
PropEquity data) across key cities and attributed it to speculative demand (see False
optimism: remain cautious, dated 11 April 2011). Therefore, we are not surprised at the weak
April sales volume data – Mumbai’s sales volume declined 22% yoy and 21% qoq;
Gurgaon’s grew 3% yoy and fell 21% qoq, while Bangalore’s grew 15% yoy and fell 6% qoq
(Table 2). Property prices across these cities are at all-time highs (Table 4) and this, coupled
with rising mortgage rates, is the key reason for the subdued showing, in our view. The
absorption percentage (total units sold/total units available) in Gurgaon (DLF and Unitech’s
main area) declined from 16% in February to 10% in April (Table 3). Inventories declined 11-
37% in June 2010 vs March 2008, but are now up 5-29% in April 2011 vs June 2010.
After a weak FY11, developers taking corrective steps; we expect a gradual recovery
Despite a weak FY10, FY11 was muted with DLF/Unitech’s EBITDA margins contracting
806/541bp and PAT declining 5/16%. Besides the sector headwinds (declining affordability
due to high property prices, inflation and interest rates, cost escalation, access to funds),
DLF also faces a high debt burden, while Unitech’s receivables level looks stretched to us.
To increase cashflows and reduce debt, developers are looking at two factors: 1) focus on
plots to minimise inflation and execution risks; and 2) non-core asset monetisation. We have
also started to see developers cutting prices in certain markets to lift sales volumes. While
we believe these are steps in the right direction, we can see only a gradual recovery as the
sector headwinds remain strong and the appetite for non-core assets (hotels, land parcels,
etc) remains weak.
Sector headwinds persist – we remain cautious; Sell DLF and Unitech
While we are encouraged by developers’ steps to improve sales, we remain cautious on the
sector as we foresee only a gradual recovery. We maintain our Sell ratings on DLF (high debt,
cashflows from operations just about adequate to service debt) and Unitech (potential collateral
damage due to the telecom issue overhang, weakening balance sheet and execution concerns).
We prefer HDIL (positive newsflow on Mumbai International Airport Ltd [MIAL], focus on nonMIAL as well, play on redevelopments in Mumbai) and IBREL – Indiabulls Real Estate –
(attractive valuations and low leverage) where we have Buy ratings
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