Asia India
Property Property
10 February 2009
India Property
Darkest hour is just before
dawn; retain UW
Abhay Shanbhag
Research Analyst
(91) 22 6658 4035
abhay.shanbhag@db.com
Prakash Agarwal
Research Associate
(91) 22 6658 4031
prakash.agarwal@db.com
We expect upcycle on slashed property prices after stock/financial collapse
Just as seen in their stock prices in early 2008, the 3Q financials of developers
were in freefall due to a collapse in demand. Interest rates and apartment sizes are
now falling. With significant payables and no other sources of funding, we expect
developers to slash prices. Despite the stock price collapse, the global slowdown
which led to poor demand forces us to retain UW. We cut our estimates, DCF and
TP. Improving macro environment (the only missing driver) should lead to the next
upcycle and offer sizeable upsides to survivors (such as IBREL and DLF).
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CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
Industry Update
Top picks
Indiabulls Real Estate (INRL.BO),INR98.80 Buy
DLF (DLF.BO),INR139.85 Hold
Puravankara Projects (PPRO.BO),INR41.90 Hold
Unitech (UNTE.BO),INR29.10 Hold
Sobha Developers (SOBH.BO),INR85.40 Sell
Companies featured
Indiabulls Real Estate (INRL.BO),INR98.80 Buy
2008A 2009E 2010E
P/E(x) 34.7 37.8 26.1
EV/EBITDA(x) 34.0 37.3 15.6
Price/book(x) 2.6 0.5 0.5
DLF (DLF.BO),INR139.85 Hold
2008A 2009E 2010E
P/E(x) 17.5 4.6 7.5
EV/EBITDA(x) 14.3 4.3 6.3
Price/book(x) 5.6 1.0 0.9
Puravankara Projects (PPRO.BO),INR41.90 Hold
2008A 2009E 2010E
P/E(x) 34.4 5.7 10.1
EV/EBITDA(x) 41.5 10.5 19.8
Price/book(x) 4.2 0.6 0.6
Unitech (UNTE.BO),INR29.10 Hold
2008A 2009E 2010E
P/E(x) 31.1 4.3 6.5
EV/EBITDA(x) 26.1 6.8 9.9
Price/book(x) 12.5 1.0 0.9
Sobha Developers (SOBH.BO),INR85.40 Sell
2008A 2009E 2010E
P/E(x) 26.8 4.9 9.4
EV/EBITDA(x) 21.9 8.6 11.9
Price/book(x) 4.4 0.6 0.5
Valuations & Ratings
Company featured NAV TP/ CMP Rating
IBREL 214 155/ 99 Buy
DLF 275 140/ 140 Hold
Puravankara 97 36/ 42 Hold
Unitech 115 26.3/ 29 Hold
Sobha 438 50/ 85 Sell
Change in TP
Company featured Old TP New TP % Chg
IBREL 200 155 -23%
DLF 200 140 -30%
Puravankara 42 36 -14%
Unitech 30 26.3 -12%
Sobha 37 50 +35%
Related recent research Date
India Property - Recipe for the perfect storm; maintain
Underweight - Abhay Shanbhag/ Prakash Agarwal
2 Sept 2008
India Property - Fundamentally worse off, but value
emerging - Abhay Shanbhag/ Prakash Agarwal
24 Nov 2008
Global Markets Research Company
As feared, the higher and faster one climbs, the more painful the “freefall”
The India Property sector – a long cycle industry which recorded aggressive
growth in property prices, financials and stock prices – has now seen a massive
unwinding. While stock prices have fallen 86% in the last 12 months despite using
all possible strategies, even large companies reported a sharp drop in financials in
the 3Q (revenues collapsed 40%+ on a yoy and qoq basis). Sub-prime was the last
straw, leading to a collapse in demand and funding from October 2008.
With drivers falling in place, survivors could win big as demand improves
Despite the sharp fall in mortgage rates and size of properties being constructed,
a poor economic outlook and weak consumer sentiment has killed demand from
Oct’08. Given the significant asset-liability mismatch and difficulty in raising funds,
developers seem to be accepting the inevitable – large price cuts. Unlike China,
which saw volume-driven growth last decade, prices were the major sector driver
in India during its 5-year upcycle. This indicates significant unmet demand, in our
view. Furthermore, as seen in mobile telephony (where India followed the Chinese
model of aggressive growth led by aggressive price cuts), we believe property
demand could follow similar lines once prices are slashed and the macro
environment improves. We believe IBREL (a net cash company) and DLF (an
industry leader with a relatively strong balance sheet), which continue to focus on
execution, will be survivors and should gain significantly in the medium-long term.
With no demand visibility, we maintain sector Underweight; risks
With poor global macro environment constraining demand, we cut estimates and
TP and maintain sector UW. India’s property has significantly underperformed the
market with stocks trading at a major discount to their book value. Given their high
Beta, we expect the sector to rebound on any significant improvement in the
macro environment. Hence, we believe this risk-reward scenario provides an entry
opportunity for long-term investors. We maintain Buy on IBREL, Hold on DLF,
Puravankara and Unitech and Sell on Sobha. Risks: macro environment and
financial liquidity outlook, as well as the amount of price cuts by developers. While
the risk of bankruptcy for Unitech and Sobha remains, this is partly reflected in the
market ascribing negligible value to their real estate businesses.

Table of Contents
Intensifying downcycle may hasten next upcycle.......................... 3
Freefall in stock prices…...........................................................................................................3
…with significant lag, financials of developers now collapse ...................................................4
Intensifying sub-prime in Oct’08 – the last straw......................................................................5
While most drivers to restart next cycle are in place….............................................................6
…liquidity and global outlook must also sharply improve .........................................................7
Considering unmet demand, India may follow robust growth of mobiles in China – once
developers slash prices.............................................................................................................7
While stock markets take a 9-12 month view…........................................................................9
…the sector should see significant negative newsflow in near term .......................................9
While we rate UW, long-term investors may look to bottom fish...........................................10
Cut estimates and TPs; ratings and risks ...................................... 11
Sharp cut in estimates, with marginal cut in DCF ...................................................................11
Ratings...................................................................................................................................12
Risks on UW rating .................................................................................................................12
Company Section ............................................................................ 13
Indiabulls Real Estate...................................................................... 14
DLF.................................................................................................... 22
Puravankara Projects....................................................................... 30
Unitech ............................................................................................. 36
Sobha Developers............................................................................ 44