>INDIA PROPERTY (DEUTSCHE BANK)

Liquidity driven TP upgrade, but where's the demand?

■ Despite upgrading TP driven by liquidity, retain UW on large outperformance
This capital-intensive sector was caught in a pincer of weak operational cashflows and asset-liability mismatch in a tight financial market. Improving liquidity in financial markets is resulting in 55% increase in float (with significant more to go) by financially savvy developers. This reconfirms our view that physical demand is yet to see any significant pickup. Despite the liquidity driven increase in TP by up to 150%, the 147% spike in Realty Index in last 3m leads us to retain UW rating.

■ Liquidity leads us to increase TP, despite retaining all other assumptions
This capital-intensive sector was caught in a pincer – significant mismatch in operational cashflows and assets-liabilities in a tight financial market resulting in a 90% underperformance from its peak in Jan’08 to the bottom in Feb’09. Improving global financial markets as also support by local banks (with significant growth in outstanding debt and restructuring of old debt) has resulted in a significant lowering of the bankruptcy risk for the sector. Hence, while we retain all other major assumptions, driven by improving liquidity, we cut WACC by up to 200 basis points and a sharp (5-30%) cut in discount to GAV (Gross Asset Value) resulting in up to 150% increase in TP.

■ But fundamentals are yet to fall in place as seen by the rush to raise equity
(a) Despite the sharp cut in prices of new launches that are redesigned with smaller apartments and fewer amenities resulting in ~60% fall in unit prices and upto 300bp fall in mortgage rates, demand seems to have picked up only at city centric locations of Mumbai and NCR. (b) Developers admit that while worse seems behind, demand is yet to pickup in residential with other verticals being further behind. (c) Data on outstanding mortgages available till Feb’09 have shown a consistent and sharp fall in growth from Jun’06, while outstanding credit to developers has ramped up from Feb’08. (d) Data available for cement demand till Apr’09 indicates no significant pickup in last few months (e) Almost all the fresh equity raising in India seems to have been by developers. Despite most developers being reasonably aggressive and BSE Real being 71% below its Jan’08 peak currently, the sector has seen 55% increase in free float from mid Apr’09. Infact proposed issuances could result in upto 140% increase in free float from mid Apr’09. This clearly indicates their unwillingness to “wait for better times” for diluting. It also raises the threat of significant flow of paper.

■ Despite the significant increase in TP, retain most company ratings; Risks
Liquidity driven upgrade in TP by up to 150%. However with a 147% spike in BSE Realty Index vis-à-vis 65% for Sensex in last 3m, we retain most ratings (Hold on DLF and Unitech and Sell on Puravankara and Sobha), while downgrading IBREL to Hold as we now do not see the need to “hide” in a good B/S. Risks: Improving macro environment (with higher GDP growth and a better outlook for IT/ITES), aggressive price cuts by developers’ kick-starting demand across regions and across verticals and continuing liquidity in financial markets.

To see full report: INDIA PROPERTY