Despite over a 100% rise in property stocks this quarter, we remain
positive on the sector, with 20%+ potential upside in our top picks DLF,
Unitech and IBREL.
■ Volatility in property stocks will remain a lasting feature as NAVs are
linked to asset prices. Just as there were real reasons for the 60-70%
NAV declines in 2008, a liquidity improvement and demand revival
could cause NAVs to rise by another 30-120% over the next 12 months.
■ We calculate that average gearing in our coverage could decline from
0.7x to 0.2x, given developers’ fund-raising plans. This would have a
beneficial impact on developers’ new launches and business plans.
■ The outlook has turned positive, with increased investor demand, a
gradual revival of end-user demand and possibly wider participation
through the REITs/REMFs. Demand could pick up faster than expected
and the possibility of a property price increase cannot be ruled out,
although this is not in our estimates currently.
■ All said, substantial risks remain and valuations are no longer as
compelling. Equity issuances are only plans and a demand revival
needs wider participation from end users. Investors are better advised
to focus on secular themes that are expected to do well, such as
(1) affordable housing and city-centric residential; (2) projects in tier I/II
cities; and (3) developers that will be able to aggressively de-leverage.
■ We like DLF for the quality of its land bank and the efforts it is making
to improve its liquidity situation. We like Unitech for its thrust in
affordable housing and IBREL for the net cash on its balance sheet
after its recent QIP issuance.
Table of contents
What justified our peak NAV of Rs800 for DLF? ................................................................. 6
Deconstructing the 60-70% fall in NAVs ......................................................................... 6
Mistakes which are unlikely to be repeated .................................................................... 7
Rs500 NAV for DLF is still possible ................................................................................ 9
Implying a potential for 30-120% upgrade in NAVs ........................................................ 9
Current theme- deleveraging balance sheets.................................................................... 11
Sector lending has eased.............................................................................................. 11
Volatility creating challenges for equity offerings .......................................................... 12
Focus is back on real estate and medium-term opportunities....................................... 13
Coverage gearing could reduce from 0.7x to 0.2x ........................................................ 15
Rewards for deleveraging to be disproportionate ......................................................... 15
Future theme- Affordable housing in tier I/II cities ............................................................. 16
There is a definite buzz in the residential market.......................................................... 16
Recovery is still shallow and needs time to become broad based................................ 21
Our preferred themes for the next 12-18 months.......................................................... 22
Staying focused on preferred plays ................................................................................... 27
Property stocks are no longer cheap ............................................................................ 27
DLF, Unitech and IBREL are our top picks ................................................................... 27
Regional valuation comparison ..................................................................................... 30
Risks................................................................................................................................. 31
DLF Ltd ............................................................................................................................ 33
Unitech Ltd ....................................................................................................................... 38
Indiabulls Real Estate Limited ........................................................................................... 43
Sobha Developers Ltd ..................................................................................................... 48
Parsvnath Developers Ltd ............................................................................................... 52
Appendix I: Citywise market trends ................................................................................... 56