>India Property (GLOBAL MARKET RESEARCH)

INDIA PROPERTY

Darkest hour is just before dawn; retain UW

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).


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.

To see full report: India_Property