Property: July demand weak but not distressed ::Kotak Sec,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Property
India
July demand weak but not distressed. Launches down 16% and sales 1% in July
2011 versus average of the past 3 months. Mumbai remained weak while Bengaluru
remained the most stable. With inventory levels below peak and few signs of distress
sales, we believe we are not at the cycle bottom. Our top picks are (1) Sobha (BUY, TP
Rs370) – Bengaluru residential, (2) Oberoi (BUY, TP Rs315) – visible NAV and net cash
and (3) Phoenix (BUY, TP Rs300) – three mall opening in FY2012E are potential triggers.


July – weak as expected and bottom still remains elusive
We continue to see definite signs of weakness (1) launches in July 2011 were 16% lower than
average of previous 3 months, (2) sales declined by 1% and (3) there is anecdotal evidence that
developers are focusing on ‘affordability’ once again through marginal price discounts, easier
payment terms or lower specs (size or quality of amenities). However, we do not find enough
evidence that this is the bottom as (1) inventory levels have not moved up significantly,
(2) developers have not yet stopped launching new projects (without meaningful price reductions)
or evaluating land-buy proposals and (3) loans to the sector are still growing 15% yoy.
Inflation remains sticky above RBI’s comfort zone though RBI could be positioning for a pause
After inflation reached a 13-month high in August, RBI raised policy rates by a further 25 bps on
September 16, 2011. Before this, RBI had raised interest times 11 times but inflation proved to be
sticky in the 9%+ range (inflation has been above 9% for the past 9 months and above 8% for
the past 20 months). However, we now believe that RBI is conditioning the system for a pause - in
this policy statement, the RBI indicates that its future stance will be influenced by ’signs of
downward movement in the inflation trajectory’. Our economist expects the interest rate cycle to
reverse from 1QFY13E though the reversal is likely to be gradual depending on inflation at that
point.
Demand upturn is contingent on interest rate trajectory and price declines
We believe that demand upturn versus the abatement of cost pressures or even debt reduction
(through asset sales) is the real turning point for the sector. Though we expect RBI to pause in
October 2011 unless there is a negative surprise on inflation, we expect interest rates to reverse
gradually from 1QFY13E depending on inflation at that point of time. On pricing declines driving
affordability, we would await evidence of developers willing to do so before turning positive on
the demand trajectory.
Remain selective – Sobha, Oberoi and Phoenix Mills are our top picks
We continue to recommend a selective approach as (1) funding is still constrained and our
discussions with companies and other sector participants lead us to believe that raising equity at
the entity level remains a near-impossible task while raising debt has also become more difficult
and effective borrowing costs have increased, (2) impact on developers and consequently prices
could be felt with a lag (coming festive season in 3QFY12E could be critical) and (3) companyspecific
risks continue to remain high. Oberoi, Phoenix and Sobha are our top picks as we believe
they are relatively insulated (Oberoi – net cash, Phoenix – retail, Sobha – Bengaluru residential) and
have potential upside (Oberoi – NAV accretive land purchases, Phoenix – three mall openings in
FY2012E and Sobha – launch of large projects in Bengaluru and Gurgaon).