India is home to probably the priciest Real Estate in the World and more or less resembles conditions that were evident in the US and Europe, before all hell broke loose three years ago. Now officially in the fifth year of being in the publicly listed domain, Indian Realtors show few signs of skills to execute, adhering to price and time targets. After a multi-year land bank creation fuelled by Banks, Real Estate funds, PE players and some Government investment vehicles it is becoming apparent we are getting into a multi-year bear market for the listed Real Estate space. Physical holders of land and apartments on the individual level may still do well.
However, the real estate sector has been very volatile (beta >1.5) since 2007, and we think companies with better disclosures stand a better chance of gaining investor attention, which could in turn lead to better valuations.
Valuations, Headwinds and the definition of Reasonableness
Investors prefer geographies that provide some affordability cushion as we expect headwinds on affordability to persist on account of rising interest rates and higher construction costs. In our view, Bangalore is well positioned as pricing levels remain reasonable. However,
1) Rapid price hikes will exert pressure on volumes, (2) interest rate risk, (3) volatility in input costs, (4) inability to procure land at reasonable cost. The 10 Indian real estate stocks under coverage currently trade at 1.4X FY12E P/B (at 48% discount to the 3-year average) and below 1-SD on 12-m fwd P/B. Adjusted for equity dilution, some stocks are currently trading close to trough prices seen in early-CY2009. This is where reasonableness and value ends. Just because a stock is at a 3 year low does not mean it is better value and will not go down. Infact, this sector can surprise on the upside just like Sugar producers, but then reveal it's head again for Shorts to pile in.A global research house has initiated coverage on 10 companies in Feb11. Surprise, Surprise-Out of the ten just one stock is a BUY, the remaining 9 are either Neutral or Sell calls. So much for discovering value at a three year for stock prices. An example is IBREL, which has been downgraded
on the back of limited visibility on usage of cash.The revised FY11E-FY13E EPS for existing stocks under coverage has been reduced by 36 per cent and 12-m RNAV-based TPs by -8% to -46%.
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
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