>INDIAN REAL ESTATE (CITI)

Run-up Leaves No Room for Error; Equity Dilution an Overhang

■ What’s changed? More the market... — A significant increase in risk appetite, capital flows and preference for high-beta names have largely driven the 55% outperformance of property stocks over the past 3 months. While ~$1.7bn raised last month (more on the anvil) has eased liquidity, we believe it’s coming at the cost of sizeable dilution, which would take time to digest and act as an overhang.

■ ... than the business — Fundamentals are still weak. Some pick-up is seen in volumes with new launches and B/S concerns addressed, but there are no signs of a meaningful recovery yet. Risk of cancellations/bad debts is high, and there is a marked slowdown in leasing and mortgage growth to 8% in 4Q (vs. 10% in 3Q) despite the recent price/rate cuts. We await sustainability of sales, improved execution and cash flows to get positive.

■ Raising NAVs and TPs, lower risk ratings; but rally raises risks — We factor in: 1) lower cost of capital of 13-14% (vs. 17-18%), 2) reduced debt, 3) roll-forward to Mar 10E, 4) lower NAV disc. of 15-35% (vs. 35-50%). Trading at an avg. 13% disc. to NAV, the market seems to be pricing in strong recovery that has yet to materialize. Execution risks seem to be ignored. We see risk of disappointment.

■ India’s narrowing NAV disc. similar to China — This is unwarranted given China’s strong and more sustained recovery in volumes. Trends in China suggest property stocks offer maximum upside when trading around 40% or more NAV disc. But downside risks are high at <20%>

■ DLF our Top Pick — DLF is our best play. Its proactive measures to address recv worries (without dilution), boost pre-sales and ensure liquidity have differentiated itself. Maintain Sells on Unitech, HDIL, IBREL. With most stocks trading at NAV premiums and equity dilution a likely overhang, we view risk/reward as unfavorable.

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