MOST
India Real Estate; Dying Stars?
We are downgrading target prices for many companies under our coverage
by 2-29% and FY12/13 estimates by 2-18%, on the back of (1) moderating
sales
assumption of next 5 years, along with certain increase in
construction cost by 10-15%, and (2) assigning higher discount factor
to NAV.
The 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 revival of commercial vertical, and (e) several
company-level issues
such as CCI probe, 2G spectrum issue, farmers' protest on land acquisition, etc.
Liquidity concerns afflict the real estate sector
Banks are more cautious about lending to high beta rate-sensitive
sectors like real estate. RBI's anti-inflationary measures including
12 rounds of rate hikes have hit the growth of the sector and are
putting priority on stringent verification processes such as (a)
cross-verification 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.
Conventional support from the equity is also under stress, given
slowdown in sales volume. Additionally, spiraling interest cost is
eating-up bigger share of operating cash flow, which market has also
dried up with declining investor interest, which has made promoters
reluctant to offer stake at current prices.
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 risk-reward 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.
Safe Harbor Statement:
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.
Nothing in this article is, or should be construed as, investment advice.
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