We have compared volume trends in the Mumbai and Bengaluru markets to the BSE Realty index performance. The BSE Realty index has moved in tandem with the volume trend in these two markets for seven out of the last nine quarters (see Exhibits 1 & 2), implying volume is a key indicator for the sector. Based on the affordability metrics, price correction is the most effective variable (interest rates and wages are other variables which take time to change) for volumes to recover. We forecast real estate prices will correct about 20% across India over the next three-to-six months, based on our affordability calculation (refer to the section ‘Assessing the extent of price correction -- - expect a 20% decline in prices’ on page 7). If prices correct 20% and volumes increase only 20% (historically the quantum of increase has been much more), the net impact on gross profit across price segments could range from 14% to 23%. If we incorporate a similar scenario to our target prices, our calculations suggest about 6% downside potential from current levels.
Office sector: Bengaluru remains better placed, vacancies in Mumbai to increase due to upcoming supply The office sector contributes about 45% to the total gross asset value (GAV) of the major listed developers. DLF, Prestige (PEPL) and Anant Raj (ARCP) are the most geared to the office sector, as it represents more than 50% of their GAV. In 2011, we expect total absorption of around 35m sqft across the top seven cities (Mumbai, NCR, Chennai, Bengaluru, Hyderabad, Kolkata and Pune) in India, which is close to the last five years’ average of 34m sqft. We estimate supply in the seven key cities will increase 24% in 2011. A majority of the upcoming supply is concentrated in the Mumbai region, thus we expect vacancies to continue to increase in Mumbai. Bengaluru remains relatively better placed due to limited upcoming supply and stable demand. Asset sales to continue, dilution and refinancing are other options to meet funding shortfall We assess the funding situation of the developers under our coverage based on their debt service coverage ratios (DSCR) including capex, which effectively = (EBITDA -- - minimum alternative tax) divided by (interest + debt repayment + capex) and net funding shortfall (debt repayment + interest obligation + capex on office or retail assets -- - cash flow from operations). DSCR is used to evaluate a company’s ability to meet its debt repayment and servicing obligations. Our analysis shows that DLF, Unitech, PEPL and Sobha are likely to face funding shortfall in the near term. Asset sales, dilution and refinancing are the potential options to offset this eventually. We believe developers with huge debt burden (DLF) will likely to continue with asset sales and possibly dilute equity. Sobha and PEPL can meet their funding shortfall through refinancing since their gearing ratios are still within the acceptable range (0.5-0.7x). Unitech is likely to see a mix of asset sales and refinancing. Prefer a valuation methodology which factors in both efficiency and asset base of the developer For the last four years investors have been debating about the appropriate way of valuing Indian developers. Some old-school investors believe a P/BV multiple (captures efficiency) is the best way to value developers, which effectively implies using the formula: ((long-term sustainable ROE -- - long-term growth rate)/(long-term cost of equity)) -- - long-term growth rate. Some investors believe a DCF-based NAV (captures asset base) approach captures the actual value of the large land banks. We believe the true value lies somewhere in between which captures both efficiency and the asset base of a firm, so we use the average of these two valuations to derive target prices for our property coverage universe. *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.** * ** * * ** ** -- For Anything related with Stock market be Online at http://www.niftyviews.com/ Get free updates on your mobile phone. Sms "Join TSR " and send to 09223492234 FOR TRIAL STOCK/NIFTY/OPTION CALLS You received this message because you are subscribed to Google Group "STOCKRESEARCHER" group. To post to this group, send an email to [email protected] To unsubscribe email [email protected] for more info visit http://groups.google.com/group/STOCKRESEARCHER?hl=en-GB . This is Not a Spam Mail. Disclaimer :- "The opinions expressed by the members on this board are based on their individual experience and perceptions and to share information with other members with the best of intentions to help fellow members in investment decisions as equity investment is a risky venture."
