INSTITUTIONAL SECURITIES

INDIA RESEARCH

REAL ESTATE

SECTOR UPDATE

BSE SENSEX: 16937

20 OCTOBER 2011

Real Estate
On shaky ground!
Post a short-lived recovery in 2009-10, volumes have again dried up for the Indian real estate sector in the wake of sharp price escalations as also an adverse regulatory environment (high interest rates, approval delays). Though solvency concerns similar to 2008 are unlikely given the relatively strong balance sheets this time, cashflow/ profitability pressures are visible for most players. These pressures will likely force developers to blink and undertake price cuts (10-25%) in the near term. Further, with an expected reversal of interest cycle by early-FY13 and given the robust underlying demand for residential property, we anticipate an uptick in sales volumes/ cashflows for developers in the next 6-12 months. This, in turn, could lead to a cyclical rebound in stocks. However, we believe persistent structural issues poor corporate governance, patchy execution, inconsistent accounting policies, etc will continue to cap any broad-based re-rating across the sector. We see the sector increasingly becoming a stock-specific play with the possibility of significant value creation in select stocks. Oberoi Realty (ORL), Sobha Developers and Jaypee Infratech (JIL) are our top picks in the space. Developers in a tight spot, yet again: RBIs tightening regime, coupled with banks reluctance to lend to the sector, has magnified the pain emanating from a sharp slowdown in absorptions. Sluggish new product launches due to increasingly ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF. stringent approval processes and a sharp rise in input costs (steel, cement, sand and labor) have added to the woes. BSE Realty index has underperformed the broader index by 36% in the past 12 months and ~63% since March 2009. Expect cyclical rebound in the near term; structural re-rating unlikely: We see a 10-25% drop in property prices over the next 6-12 months as developers seek to regenerate the sales momentum. Along with the likely reversal of the interest rate cycle by early-FY13, this could spur a sharp bounce-back in stock prices, though a further slowdown in the economy and hardening of interest rates are key risks to this thesis. However, this likely recovery will not address the structural issues that have led to investor disenchantment with the broader space and the consequent de-rating. Increasingly a stock-specific play; only a few winners likely: Given the diversity in business models and governance standards as also an increasingly tough macro environment, we expect divergent stock performances with only a few clear winners. We prefer ORL, Sobha and JIL which possess most of the winning traits: Balance sheet strength, strong cashflows, proven execution capabilities, land bank focused on tier I/II cities and high corporate governance. Comparative valuations (FY13E)
Price Company
DLF Jaypee Infratech Oberoi Realty Godrej Properties HDIL Sobha Developers Sunteck Realty

Mkt Cap Rating (Rs m)

391,589 83,614 76,872 46,153 39,344 22,555 22,152 N OP OP N N OP OP OP

Target
222 84 328 694 99 314 431 66

Upside
(4) 39 40 5 6 36 23 83 247 105 298 631 142 392 539 94

NAV
(7) (42) (21) 5 (34) (41) (35) (62)

EPS CAGR
11 (36) 17 17 2 10 1,311 25

P/E (x)
20.7 12.4 12.4 25.7 4.7 10.3 4.1 3.3

P/B (x)
1.3 1.2 1.7 3.9 0.4 1.0 1.8 0.2

RoE (%)
6.5 10.0 15.0 16.2 8.3 10.2 54.9 7.1

Gearing FY12E (x)

0.8 1.2 (0.4) 1.2 0.3 0.6 0.6 0.6

(Rs)
231 60 234 661 94 230 352

price (Rs) potential (%) FY13E Prem/ (Disc) FY11-13E (%)

APIL 36 5,674 Source: Bloomberg, IDFC Securities Research Nitin Agarwal nitin.agarwal@idfc.com 91-22-6622 2568 Vineet Chandak

vineet.chandak@idfc.com 91-22-6622 2579

For Private Circulation only. Important disclosures appear at the back of this report

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Content
Investment Argument ..............................................................................................................3 Indian Real Estate: back in the woods! ...................................................................................9 The going has become toughAGAIN! ............................................................................... 9 Multiple headwinds buffeting the sector ............................................................................. 12 Regional diversities: Market no longer homogenous ......................................................... 18 Commercial outlook healthy; only a few listed players ....................................................... 22 The good news: A business revival may be nigh ..................................................................24 Long-term demand drivers intact........................................................................................ 24 Healthier solvency will prevent another 2008...................................................................... 25 Price and interest rate decline would boost absorption ..................................................... 28 Cyclical rebound to drive a spike in stock prices................................................................ 31 Key risks to near-term recovery .......................................................................................... 32 The bad news: Valuations will continue to lag .......................................................................34 Structural issues continue to plague the sector.................................................................. 34 ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF. Market fragmentation adds to the challenges................................................................. 37 Valuations will not attain even 2HFY10 levels ..................................................................... 39 How to play the sector ..........................................................................................................42 Multiplicty of business models/ geographical focus ....................................................... 42 impels a bottom-up approach......................................................................................... 43 Identifying the winners......................................................................................................... 47 Companies ...........................................................................................................................49 Ansal Properties ................................................................................................................... 51 DLF ....................................................................................................................................... 53 Godrej Properties ................................................................................................................. 55 HDIL...................................................................................................................................... 57 Jaypee Infratech ................................................................................................................... 59 Oberoi Realty........................................................................................................................ 61 Sobha Developers ................................................................................................................ 63 Sunteck Realty...................................................................................................................... 65

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INVESTMENT ARGUMENT
Challenges besetting the Indian real estate space reflected in the underperformance of stocks over the past few quarters While there are no solvency issues like in 2008, significant operational cashflow pressures have emerged again due to slump in sales Unless global macro issues and sharp economic slowdown play spoilsport, we anticipate a near-term revival in the sector catalyzed by price cuts However, we expect stock performances to increasingly diverge going forward and not move in a herd as seen in the past Quality of business models will differentiate the men from the boys; we see only a few winners

The going has become toughAGAIN!

The Indian real estate sector, yet to fully recover from the 2008 meltdown, has hit another rough patch in the past few quarters. Sales volumes have slowed considerably, led by historically high residential prices and stringent approval processes delaying new launches. Operational margins are stretched due to sharp inflation in input costs, with higher interest cost denting profitability. Debt levels, though off the peaks of 2008, are still high for most developers. Given a tough lending environment, operational cashflows will increasingly be insufficient to meet repayment obligations.
Weak sales, tougher regulations and sharp rise in input costs buffeting the sector

Exhibit 1: Current state of real estate ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF.
Real estate not in a good shape
Falling sales volumes Historically high prices impacting affordability Purchase decisions delayed in anticipation of price correction Declining margins/profitability Sharp inflation in input costs Higher interest rates increasing interest burden Inadequate operational cashflows Slower new launches limiting cashflow generation Operational cashflows insufficient to meet debt repayment requirements Regulatory logjam Increasing diligence in approval processes Delays due to policy inactions

Fa

i li ng ab ni ofit i cl pr De ns/ i g ar

ty

Dep r val essed u at ion s

llin g vo sal lum es es

ce ur so ed ng p di ap un c

In ad

eq

ua ca te o sh pe flo ra ws tio na l

Regulatory logjam Funding sources capped Debt becoming more expensive and selective PE funding increasingly difficult

The BIG Question

Will developers blink?

Depressed valuations Real estate stocks trading at historical lows Discounts to NAV widening

Source: Company, IDFC Securities Research

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 clearly reflected in the BSE Realty performance (down 54% since Oct-10)
Index has plunged by 54% in the past year, underperforming the Sensex by 36%

Since the bribery-for-loan scam broke out in October 2010, BSE Realty has significantly underperformed the broader indices. The index is down 54% in the past one year and has underperformed the Sensex by a wide margin (36%). Exhibit 2: BSE Realty index has significantly underperformed Sensex since Oct-10
120 100 80 60 40 20 Sensex BSE Realty
BSE Realty down 54% vs. ~18% for Sensex

Apr-11

Aug-11

Mar-11

May-11

Oct-10

Sep-11

Nov-10

Dec-10

Source: Bloomberg

Broad-based solvency concerns of the 2008 kind unlikley

Positive operational The macro drivers of real estate demand a young population, rising urbanization, cashflows, lower gearing ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF. still in place. higher disposable household incomes and growing nuclear families are and limited investment in Also, developers are far better placed compared to 2008 as positive operational cash land to prevent another flows, manageable gearing levels and limited investment in land in the past two years 2008

mitigate solvency concerns this time. Further, unlike the fairly homegenous trends witnessed in the real estate industry across different regions around 2008, there is increasing diversity across various markets in terms of pricing trends and absorptions.

Probable business recovery from the lows in the near term...

Supply-side dynamics to improve after a likely correction in the next 6-12 months

Huge unmet demand for housing and continued strong growth in the economy are the key demand drivers of residential real estate. We expect improvement in supply-side dynamics in the form of a 10-25% price correction in the next 6-12 months in most markets (especially Mumbai and Gurgaon). A reversal of the interest rate cycle (expected by early-FY13) would provide another positive trigger. Emergence of these two positive factors, supported by a high savings rate (23%) and largely unleveraged balance sheets of Indian households, will drive a near-term turnaround in the sector and thereby a cyclical rebound in stock prices..

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Oct-11

Feb-11

Jan-11

Jun-11

Jul-11

Exhibit 3: A repeat of the 2009 post-downturn rebound likely 10-30% correction in property prices boosted volumes
14,000
Mumbai Thane Gurgaon

further aided by rate cuts by the RBI

Repo rate (%)
10.0

10,500

8.5

Repo rate cut by 425bps over 6-month period

7,000

7.0

3,500

5.5

4.0

Oct-08

Oct-08

Oct-08

Nov-08

Nov-08

Apr-09

Apr-09

Dec-08

Dec-08

Mar-09

Nov-07

Nov-08

Nov-09

Mar-08

Mar-09

May-08

May-09

Mar-10

Sep-07

Sep-08

Sep-09

Jul-08

Jul-09

leading to a cyclical rebound in real estate stocks

400 Sensex BSE Realty

300

BSE Realty outperformed Sensex by 121% in MarMay 2009

ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF.

100

200

Jan-08

Jan-09

Jan-10

Mar-09

Feb-09

Feb-09

Jan-09

Jan-09

8-Oct-09

2-Apr-09

15-Mar-09

24-Mar-09

15-Aug-09

17-May-09

26-May-09

24-Aug-09

11-Sep-09

20-Sep-09

Source: Bloomberg

but structural issues will continue to plague sector valuations

While macroeconomic concerns (high interest rates, inflation, etc) may start to ease by early-FY13, we believe structural issues that plague the sector/ listed stocks will persist. We reckon that a lot remains to be achieved in terms of transparency and disclosures, consistency of accounting policies, timely execution, land bank visibility, and discipline in maintaining conservative balance sheets. We do not see these issues dissipating, until the sector gets a regulator and a comprehensive regulation act. Until then, a rerating of the sector is unlikely.
Concerns on balance sheet health, accounting methodologies and governance persist

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29-Sep-09

13-Jun-09

22-Jun-09

17-Oct-09

11-Apr-09

20-Apr-09

29-Apr-09

6-Mar-09

8-May-09

6-Aug-09

10-Jul-09

19-Jul-09

28-Jul-09

2-Sep-09

4-Jun-09

1-Jul-09

Apr-09

Exhibit 4: Too many issues to grapple with before arriving at a fair valuation
Current state
No operational details provided till 2008 Post downturn, many companies have started sharing information on quarterly basis; extent of information still remains limited Information missing in most cases Segmental and geographical break-up of sales Detailed land bank and cashflow information Extent of revenue/cost recognized from projects Execution status of projects Oberoi Realty Sobha Developers Prestige Estates Godrej Properties

Companies that stand out

Limited operational disclosures

Inconsistent accounting policies

Multiple methods of revenue recognition makes it difficult to compare companies financials IFRS accounting also modified to include percentage completion methodology

Companies following IFRS standards of accounting: HDIL Sunteck Realty

Most information required to make reasonable valuation assumptions for land bank remain absent

Oberoi Realty Prestige Estates Sobha Developers Godrej Properties

Land bank remains a black box

Limited information on total area and key land parcels available while contribution to Gross NAV remains quite significant Details required include geographic and segmental breakup, companys stake, acquisition cost, amount paid and payable, land status (agri, residential, industrial etc)

Most companies have failed to scale-up on 2011-10-22 07:54:19 EDT. DownloadPDF. ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 execution post a

Patchy execution

bumper sales in FY10 resulting in delays across projects

Oberoi Realty

Limited project management bandwidth and high input cost inflation have added to the woes Sector currently lacks a regulatory body to oversee operation and ensure accountability Real estate regulation act remains in draft mode; final bill still 12-24 months away

Sobha Developers

Lack of regulatory body

Source: IDFC Securities Research

and prevent stocks from attaining valuation levels of H2FY10

Growth and profitability profiles of most players have been dented in the past 12-18 months

We believe the sector will remain unattractive to long-term investors until the structural issues are significantly resolved. Most investors had burnt their fingers after the 2006-07 boom and again in FY10 (QIPs, stake sale, IPOs), resulting in total lack of confidence in real estate valuations. Also, with developers failing to sustain FY10 sales volumes and sharp inflation in input costs (especially labour) as well as rising interest cost eroding operational margins, we believe growth as well as profitability profile of most developers have significantly contracted in the last 12-18 months. We also do not see structural issues being addressed at least in the next 2-3 years. We, therefore, do not expect valuations to return even to H2FY10 levels, which were also too expensive to provide any meaningful returns. We believe while investors might look for trading gains in the sector, any short-term bounce would be used as an exit opportunity.

Indian real estate a highly fragmented market, with regional dynamics

Sector dynamics dominated by the large number of unlisted players

Real estate is one of the most fragmented sectors in India, with listed players accounting for only a minority of the overall market. The sector is also highly unorganized with a large number of small/ medium players and just a handful of large names. As a result, the broader real estate market, in most cases, is governed more by

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the actions of unlisted players than of listed ones. Also, high dependence on the project location (different micro-markets display divergent trends) and business models (owned land, joint development agreement, re-development, slum rehabilitation, etc), we believe, make companies difficult to compare. Exhibit 5: Projects of listed players accounted for 5% of the total in FY11
Ongoing projects in FY11 Cities
Bengaluru Chennai Greater Noida Gurgaon Hyderabad Mumbai Navi Mumbai New Delhi Noida Pune Thane All India Source: PropEquity

By listed players
58 14 17 34 3 55 4 7 26 26 9 330

PropE coverage
623 460 138 176 444 956 692 15 141 675 422 6,547

% by listed players
9 3 12 19 1 6 1 47 18 4 2 5

We prefer a bottom-up approach to invest in the sector

We look for a favorable Given high dependence on location and business model, we believe the sector is blend ISIEmergingMarketsPDF on individual companies. As a result, we do not expect all stocks to DownloadPDF.of regional increasingly a play in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. presence, asset class, move in a pack even when optimism returns to the sector. We believe the next 1-2 years business model could see significantly divergent trends in terms of stock performance. The key challenge, therefore, is to tap the right business model with presence in right markets and asset classes, and wait for a recovery. We expect select stocks, depending on the and visibility of macro (regional presence, asset class and corporate governance) and micro factors cashflows in the near (diversified business model, low leverage, higher cashflows in the near term, quality term, besides quality land land bank, and execution scalability) to do well in the next 1-2 years, while others may bank and execution continue to trade at discounted valuations.

Exhibit 6: Key parameters to identify winners

Low gearing Visibility on near-term cashflows

Key to success

Execution capabilities and track record Quality and quantity of land bank Levels of corporate disclosures

Oberoi Realty, Sobha Developers and Jaypee Infratech satisfy most of the winning criteria

Source: IDFC Securities Research

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Oberoi Realty, Sobha Developers and Jaypee Infratech stand out on most parameters and, therefore, are our top picks in the sector. We maintain Outperformer on Ansal Properties and Sunteck Realty given the sharp correction in stock prices and attractive valuations at current levels. We maintain Neutral on Godrej Properties and HDIL, and downgrade DLF to Neutral as current valuations offer limited upside. Exhibit 7: Ranking coverage companies on key to success parameters
APIL Low Gearing Visibility on nearterm cashflows Quantity/Quality of land bank Execution track record Transparency / disclosures Valuation upside discount to NAV DLF GPL HDIL JIL ORL Sobha SRL Best placed ORL ORL, SRL JIL, Sobha, DLF ORL, Sobha, JIL ORL, Sobha, GPL APIL, Sobha, JIL

Source: IDFC Securities Research

Exhibit 8: Comparative in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF. ISIEmergingMarketsPDF valuations (FY13E)
Target Company DLF Oberoi Realty Jaypee Infratech Godrej Properties HDIL Sobha Developers Sunteck Realty APIL Price 231 234 60 661 94 230 352 36 Mkt Cap 391,589 76,872 83,614 46,153 39,344 22,555 22,152 5,674 Rating N OP OP N N OP OP OP price 222 328 84 694 99 314 431 66 Upside potential (4) 40 39 5 6 36 23 83 FY13E 247 298 105 631 142 392 539 94 NAV Prem./(Disc) (7) (21) (42) 5 (34) (41) (35) (62) EPS CAGR FY11-13E 11 17 (36) 17 2 10 1311 25 P/E (x) 20.7 12.4 12.4 25.6 4.7 10.3 4.1 3.3 P/B (x) 1.3 1.8 1.2 3.9 0.4 1.0 1.8 0.2 RoE (%) 6.5 15.0 10.0 16.2 8.3 10.2 54.9 7.1 Gearing FY12E (x) 0.8 (0.4) 1.2 1.2 0.3 0.6 0.6 0.6

Source: Bloomberg, IDFC Securities Research

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INDIAN REAL ESTATE: BACK IN THE WOODS!

Post a short-lived recovery, the Indian real estate sector is again beset with problems Sales volumes have nosedived due to steep price escalation, while inflationary cost pressures have mounted squeezing cashflows An unfavorable macro-environment in the form of delays in approvals and a high interest rate regime have added to the woes Widely varying dynamics across regional markets; e.g. Bangalore has been stable due to reasonable price hikes, Mumbai reels under sharp price escalation

The going has become toughAGAIN!

The Indian real estate sector, yet to fully recover from the impact of the 2008 meltdown, has hit another rough patch in the past few quarters. Sales volumes have slowed with prices of residential apartments at historical highs, profitability is under stress because of a sharp inflation in input costs, and operational margins have been hit by higher interest cost. Debt levels, though off the peaks of 2008, are still stretched. Given the tough lending environment, operational cashflows, though positive, are insufficient to meet repayment obligations.
Margins and debt levels of developers are under stress, but not as gloomy as in 2008

Slowdown in volumes
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Sales volumes of most listed players have stagnated or have started declining over the past few quarters. While historically high prices and a slowdown in approvals have hit sales in Mumbai, the NCR market (especially Noida and Greater Noida) is under pressure due to increasing concerns over land acquisition. Bangalore players, though, have been reporting strong sales. Exhibit 9: Quarterly sales of most listed developers have declined over the past 3-5 quarters

High prices and slow approvals have hit sales in most markets; Bangalore is an exception

(msf) 4.0

DLF

(msf) 5.0 4.0 3.0

Unitech

(msf) 6.0

Jaypee Infratech

3.0

4.5

2.0

3.0
2.0

1.0

1.0
0.0
Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12

1.5

0.0
Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12

0.0
Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12

Source: Company, IDFC Securities Research

Profitability under pressure

Despite improving realizations in the past few quarters, margins of most developers have stagnated. While EBITDA margins have declined on higher construction cost and rising SG&A expenses, PAT margins have fallen due to the higher cost of debt and lower other income. To curb margin erosion, players like DLF have shown a marked shift in strategy to launching plotted developments.
High cost of debt, lower other income and steep construction costs have shaved off margins

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Exhibit 10: Margins of real estate companies on a decline

Margins falling consistently
(%) 68 51 34
20

Quarterly EBITDA margins

(%) 80 60 40

and PAT margins witness gradual decline

(%) 60 45 30 15 0

Coverage EBITDA margin ex-JIL Coverage PAT margin ex-JIL

DLF Sobha Developers

Unitech HDIL

DLF Sobha Developers

Unitech HDIL

17
Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11
Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11

0 FY07 FY08 FY09 FY10 FY11

Source: Company, IDFC Securities Research

Operating cashflows remain stagnant

Cashflows of most developers have been strained, with operating cashflows (before working capital changes) having grown only modestly in the past 3-5 quarters. We see the following reasons for the same:
Steep construction cost and high debt have squeezed liquidity

Customer inflows are declining, led by slowdown in new launches and sales. Increased construction cost of ongoing projects and higher interest burden have squeezed liquidity. Substantial debt repayment obligations and the difficult funding/ refinancing environment have forced developers to look for alternative funding options (PE investment, land sale, non-core asset sale, etc).

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Exhibit 11: Operational cashflows yet to witness any significant improvement

Operational cashflows stagnant in last few Qs
Operational cashflows before WC changes (Rs m) 14,000 DLF HDIL

FY11 operational cashflows fail to show any substantial growth despite strong FY10 sales
Unitech Ansal API HDIL Sobha Developers
100,000 DLF

24,000

10,500

Q1FY12

18,000

75,000

7,000

12,000
3,500

50,000

6,000
-

25,000

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

FY08 FY09 FY10 FY11

FY08 FY09 FY10 FY11

Source: Company, IDFC Securities Research

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Q1FY12

Debt levels high despite capital-raising and limited land acquisition

Gearing levels have declined from the highs of 2008, but gross debt of real estate companies has not seen any significant reduction despite capital-raising by most companies during FY10-11 and limited investment into land acquisitions. While DLFs debt escalated due to consolidation of DLF Assets (DAL) in Q4FY10, gross debt of most other companies has failed to come down substantially. Exhibit 12: Gross debt levels have not fallen in the past year
Coverage Gross Debt ex-JIL (Rs m) 400,000 1.93 300,000 1.80 Coverage gearing ex-JIL (Rs m) 2.40

Gearing levels have fallen, but the gross debt profile has been stubborn

260,000

DLF
84,000 Unitech HDIL Sobha Developers

220,000

63,000

180,000
200,000 0.88 100,000 0.87 0.65 0.68 0.60 1.20

42,000

140,000

21,000

100,000

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

FY07 FY08 FY09 FY10 FY11

Source: Company, IDFC Securities Research

BSE Realty crumbling under the pressure

The impact of the aforementioned headwinds is clearly reflected in the BSE Realty index, which has tumbled by 54% in the past 12 months, underperforming the broader market by ~36%. Exhibit 13: BSE Realty index significantly underperformed the Sensex since Oct-10
120 100 80 60 40 20 Sensex BSE Realty
BSE Realty down 54% vs. ~18% for Sensex

The realty index has fallen by 54% in the past 12 months

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Apr-11

Aug-11

Mar-11

May-11

Oct-10

Sep-11

Nov-10

Dec-10

Source: Bloomberg

11 | OCTOBER 2011

Oct-11

Feb-11

Jan-11

Jun-11

Jul-11

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Q1FY12

Multiple headwinds buffeting the sector

High commodity prices and labour shortage have dented profitability

The sharp rise in property prices, a series of monetary tightening measures by the RBI, and developers insistence on keeping prices high have led to significant slowdown in volumes across markets in the country. Also, availability of debt has become extremely difficult for the sector after the bribery-for-loan scam was exposed in November 2010. Approval processes have become more stringent due to the irregularities in Adarsh Housing Society (Mumbai). To add to these woes, higher commodity prices and acute labor shortage have dented profitability and led to slower execution. Exhibit 14: Current state of real estate
Banks Reduced lending to Real Estate Developers Investors Not investing at current levels as returns are no longer attractive

Real Estate
Developers Hold on to their prices in the midst of Genuine Buyer credit crunch and demand slowdown. Adopt wait and watch strategy in Rising interest burden and reduced anticipation of price correction ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. of finance impacts cash flows of availability DownloadPDF. projects
Source: IDFC Securities Research

High prices keep both genuine buyers and investors away

While sales volumes have taken a hit with both genuine buyers and investors sitting on the sidelines in anticipation of a significant price correction, banks have significantly tightened lending norms for real estate developers. The problems have been aggravated by developers keeping property prices elevated driven by the expectation of a quick turnaround in fortunes. Sharp escalation in prices across key cities
The rise in prices has been the sharpest in Mumbai, Gurgaon and Thane

Prices have risen sharply almost across the country from the lows of 2009 when developers had to significantly cut prices to spur demand. The pace of escalation was unexpected, especially given the depressed dynamics not too long in the past. While prices have trended up in most markets, the pace has been higher in Mumbai (up 37% in two years), Gurgaon (34%) and Thane (45%). Prices have already surpassed previous highs in some of these markets.

12 | OCOTBER 2011

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Exhibit 15: Sharp rise in prices in the past two years

MMR
South Mumbai 170 Thane west Central Suburb Navi Mumbai - Airoli
280

NCR
Western Suburb
Gurgaon - Sohna Road Noida - Sec 92-96 Greater Noida - sector Omnicom Gurgaon - new sectors Noida - Expressway

145

225

120

170

95

115

70
Oct-07 Oct-08 Oct-09 Oct-10 Apr-08 Apr-09 Apr-10 Apr-11 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jan-08 Jan-09 Jan-10 Jan-11

60

Nov-07

Nov-08

Nov-09

Nov-10

Mar-08

Mar-09

Mar-10

Mar-11

May-08

May-09

May-10

May-11

Sep-07

Sep-08

Sep-09

Sep-10

Jul-07

Jul-08

Jul-09

Jul-10

Bangalore
130 Tumkur road Hosur road Mysore road
160

Jan-08

Jan-09

Chennai
Chennai - north west Hyderabad - south west Chennai - south east

115
135

100

110

85

85

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Oct-07 Oct-08 Oct-09 Oct-10 Apr-08 Apr-09 Apr-10
Oct-07 Oct-08 Oct-09 Oct-10 Apr-08 Apr-09 Apr-10 Apr-11

Apr-11

70
Jul-07 Jul-08 Jul-09 Jul-10 Jan-08 Jan-09 Jan-10 Jan-11 Jul-11

60

Jul-07

Jul-08

Jul-09

Jan-10

Jul-10

Jan-11

Jan-08

Jan-09

Jan-10

Source: IDFC Securities Research

and falling affordability The sharp rise in property prices as also developers preference for high-margin luxury residential projects have increased the average ticket size (apartment value) by 30-45% across most markets in the past two years. With income growth not commensurate to the rise in prices, affordability - and thereby absorptions - have seen a gradual decline.
The average ticket size of flats has risen 30-45% in the past two years

13 | OCTOBER 2011

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Jan-11

Jul-11

Jul-11

Exhibit 16: Average ticket size up by 30-45% across markets in the past two years
(Rs m)
Avg. ticket size of apts sold in FY09 (Rs m) Change from FY09 to FY10 % increase in prices % increase in avg. unit size Cumulative impact (%) Avg. ticket size of apts sold in FY10 (Rs m) Change from FY10 to FY11 % increase in prices % increase in avg. unit size Cumulative impact (%) Ticket size as of Mar-11 Increase in ticket size from FY09-11 (%) Source: PropEquity, IDFC Securities Research 0 20 20 56.2 35 17 12 29 14.8 43 33 (2) 31 4.9 31 37 11 49 7.7 34 26 (19) 7 5.0 (53) (1) 9 8 3.7 (46) 20 (1) 19 6.2 20 (10) 25 15 46.9 2 12 15 11.5 15 (15) 0 3.9 2 (16) (14) 5.2 (34) (25) (59) 4.7 (20) (34) (54) 3.5 7 (5) 2 5.2

South Mumbai
41.8

Mumbai western suburbs

10.0

Thane
3.9

Gurgaon
6.1

Noida
9.6

Greater Noida
6.5

Bangalore
5.2

have impacted absorptions The sharp rise in property prices in certain pockets (NCR, MMR), combined with developers unwillingness to cut prices, have squeezed volumes in these regions. While end-user demand has been impacted by falling affordability and expectations of a price reduction, investor interest has also fallen as prices are unlikely to appreciate considerably from current levels. As a result, absorptions in these markets have ISIEmergingMarketsPDF in-iimlsingh fromby 40-55% yoy in the past 3 quarters. However,DownloadPDF.in South Indian declined 59.165.151.7 on 2011-10-22 07:54:19 EDT. absorptions markets (Bangalore and Chennai) have remained stable and not witnessed any downward trend.
Absorptions have plunged 40-55% in the past three quarters

Exhibit 17: NCR and MMR absorptions decline 40-55% yoy; South Indian markets buck the trend
NCR and MMR have witnessed maximum decline in absorptions
500 NCR MMR
300

Bangalore and Chennai absorptions have remained stable

Bangalore Chennai

375

225

250

150

125

75

Nov-09

Nov-10

Mar-09

Mar-10

Mar-11

Jan-09

Nov-09 Nov-10

May-09

May-10

May-11

Sep-09

Sep-10

Mar-09

Mar-10

May-09

May-10

Mar-11

Jul-09

Jul-10

Jul-11

May-11

Jan-10

Jan-11

Sep-09

Sep-10

Jul-09

Jul-10

Jan-09

Jan-10

Source: PropEquity

The volume squeeze is most evident in Mumbai, where monthly property registrations have been constantly declining for the past few quarters. Average registrations have fallen below 5,000/month from the Nov-Dec 2009 peak of 7,500/month.

14 | OCOTBER 2011

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Jan-11

Jul-11

Exhibit 18: Monthly sale registrations in Mumbai indicate a clear downward trend
8,000 7,000 6,000 5,000 4,000 3,000 Mumbai sale registrations (3-mth avg)
New sale registrations down 34% from the peak of Dec-09

Nov-09

Nov-10

Mar-09

Mar-10

May-09

May-10

Mar-11

May-11

Sep-09

Sep-10

Jul-09

Jul-10

Jan-10

Source: PropEquity, IDFC Securities Research

Unfavourable macro environment rising inflation and interest costs

The Indian economy is currently characterized by inflationary trends - similar to that of 2008, though the increase in interest rates has been gradual this time. In the past 15 months, RBI has raised interest rates by 325bp, leading to an increase in funding costs for both developers and consumers. For instance, SBI PLR has crossed its 2008 peak reached levels not seen since 2005. Exhibit 19: Macro-economic environment 2008 vs. 2011
WPI (% chg yoy)
12.0 9.0

Jan-11

Jul-11

RBIs monetary tightening has increased funding costs for both buyers and developers

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(%) 16.0

Repo rate

SBI PLR

13.0
6.0

10.0
3.0 (3.0)
Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11

7.0

4.0
Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Oct-11

Source: RBI

Banks averse to lending to developers

Banks, especially PSU banks, have become averse to lending to the sector after the bribery-for-loan scam broke out in November 2010. So, not only have fresh loans become hard to come by, refinancing of existing debt has also become difficult. This has put pressure on companies to generate sufficient cashflows for repayment and to avoid a debt trap. Interest rates have risen by 200-300bp in the past six months, putting further pressure on profitability and stunting expansion plans.
Refinancing and fresh loans have become difficult after the bribery-for-loan scam

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Slowdown in approval process

Irregularities in the approval and construction of Adarsh Housing Society (Mumbai) and involvement of various approval authorities in the imbroglio led to serious doubts on the authenticity of approvals, virtually holding up all new project approvals in Mumbai in 2HFY11. It has also had a cascading effect, with the diligence process becoming more stringent in other cities too. Land acquisition troubles in the northern India have affected significant number of real estate projects (especially in Noida and Greater Noida). Policy inaction (lack of clarity on new CRZ policy, parking FSI, new development regulations etc) has further added to the woes. As a result, multiple projects across cities have been stuck awaiting approvals.

Land acquisition issues have hit a large number of projects in North India

Exhibit 20: Many projects delayed/ stuck pending approvals

Company
DLF DLF Sobha Sobha Sunteck Realty Sunteck Realty Oberoi Realty Oberoi Realty DB Realty IBREL

Projects
Indore, Gurgaon, Panchkula NTC Mills, Mumbai Gurgaon Villas Chennai launch Goregaon Mulund Mulund Worli Orchid Crown Sky residential projects

Comments
Planned launches in FY11 postponed to FY12 due to approval delays Awaiting approvals since 2009; lack of clarity on parking FSI policy Approvals received after more than a year wait Approvals delayed due to change in government Launch delayed by 6 months due to delay in NOC Awaiting environmental clearance since last 1 year Awaiting environmental clearance since last 1 year Approvals recently received after more than 6 months delay Stop work order since Jan-11 for lack of environmental clearance Stop work order since Jun-11 for lack of environmental clearance

HDIL Mumbai Airport Rehabilitation Awaiting clarity on rehabilitation eligibility criteria ISIEmergingMarketsPDF in-iimlsinghprojects 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF. Ackruti City Worli, Bandra from Awaiting clarity on CRZ policy Source: Company, Newspaper reports, IDFC Securities Research

Also visible from the trend in new launches (especially in MMR and NCR), which clearly shows a constant month on month decline since Oct-10. Exhibit 21: New launches (msf) witnessing a decline in the past year
14.0 Mumbai Thane Gurgaon Noida

10.5

7.0

3.5

Oct-10

Nov-10

Dec-10

Aug-10

Mar-11

Apr-11

May-11

Sep-10

Feb-11

Jul-10

Jun-10

Source: PropEquity, IDFC Securities Research

16 | OCOTBER 2011

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Jun-11

Jan-11

Jul-11

Input cost inflation profitability under stress

Raw materials, including steel, cement, sand, bricks, etc, have seen significant price escalation (20-50%) over the past few quarters. The sharp inflation in input costs has severely impacted profitability across projects, with developers specializing in low/ midincome projects bearing the brunt. The price of steel has appreciated by >25% in the past year, with iron ore prices having risen globally. Cement prices have increased from ~Rs200/bag to Rs270280/bag (+30-40%) in the same period due to declining cement production. The price of sand has more than doubled in the last one year owing to supply constraints due to ban on sand mining in several states. Brick prices have also increased from Rs12,500 to Rs24,000 /3000 units (31% hike). Labor has become a huge constraint. Rural laborers are increasingly opting for the Mahatma Gandhi National Rural Employment Guarantee (NREGA) scheme, which guarantees 100 days of wage employment a year to a rural household whose adult members volunteer for unskilled manual work. While skilled labor is already in short supply, NREGA has led to shortage of unskilled labor too, causing a sharp rise in labor cost (up from Rs250/day to Rs325/day for unskilled labor).
The NREGA scheme has reduced availability of laborers for construction Developers of low-income projects have been the worst hit by the rise in input costs

Steel and cement prices have risen by >25% and 30-40% in the past year

Exhibit 22: Input costs have risen sharply in the past year
While cement prices have risen due to declining production higher raw material prices have led to rise in steel prices ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF.
135 NCR Mumbai Chennai Bangalore

140

Rebars domestic price (Rs/ton)

120

125

105

110
90

95
75

Mar-08

Mar-09

Mar-10

Mar-11

May-08

May-09

May-10

May-11

Sep-08

Sep-09

Sep-10

Nov-09

Nov-10

Mar-09

Mar-10

May-09

May-10

Sep-09

Sep-10

Source: IDFC Securities Research

New land acquisition bill to increase cost of land as well

The Cabinet has approved the Draft Land Acquisition Bill & the Relief and Rehabilitation Bill (R&R) and the bill is likely to be tabled in Parliament in the winter session. The bill, once passed, will increase the cost of acquisition significantly. This, in turn, would also increase the overall prices of land across the country. While companies with large land bank acquired and under possession will stand to benefit, we believe the new bill will reaffirm developer confidence in buying and holding large land parcels and might entice developers to increase investments in buying land parcels.
The Bill expected to be tabled in Parliament in the winter session

17 | OCTOBER 2011

Mar-11

Jan-09

Jan-10

Jan-11

IDFC SECURITIES

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Sep-11

Jul-08

Jul-09

Jul-10

Jan-08

Jan-09

Jan-10

Jan-11

Jul-09

Jul-10

Jul-11

60

Nov-08

Nov-09

Nov-10

80

Regional diversities: Market no longer homogenous

Most listed players have a regional focus and are not pushing for wider base

Indias leading real estate markets include Mumbai Metropolitan Region (Mumbai, Thane and Navi Mumbai), National Capital Region (New Delhi, Gurgaon, Noida, Greater Noida and others) and South India (Bangalore, Chennai and Hyderabad). All these markets have evolved over the last 6-8 years into much larger markets and are, now, governed by their own set of dynamics which vary significantly across markets. Land laws, being regulated by the respective states, are also diverse across regions. As a result, analysing regional markets has become far more pertinent than evaluating panIndia trends. Also, given the tedious approval process and dependence on local authorities, developers have chosen to focus on regional markets than aiming for a panIndia presence. Most listed players, save a few like DLF and Godrej Properties, have presence in regional markets and have not shown an inclination to expand to other regions.

MMR: Witnessed highest price increase; dull near-term outlook

MMR enjoys the highest prices in the country

Mumbai Metropolitan Region (MMR) contributes >20% to Indias GDP and has the highest per capita income (3x the countrys average). It enjoys the highest property prices in India (~3x compared to other tier-I cities) as it remains sea-locked, with high population density driving demand. Key trends

Volumes and registrations 34% respectively in the past two years

have fallen by 30% in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF. ISIEmergingMarketsPDF and ~30% drop in sales volumes (3-mth average) in the past 12 months. Mumbai

Property prices have risen to historical highs in the past two years. This has led to sales registrations have also fallen 34% from Dec-10 highs.

Absorptions are shifting to the suburbs due to better affordability and supply

Approval processes have slowed significantly in the past 2-3 quarters as a result of the Adarsh scam and the Brihanmumbai Municipal Corporation (BMC) proposing drastic amendments in approval guidelines to block loopholes (see our report titled New building approval guidelines for Mumbai; negative for city players, 25 July 2011). Absorptions are shifting towards extended Mumbai (Thane and Navi Mumbai), led by lower affordability levels in the city and growing supply in the former areas.

Outlook We believe a near-term price correction (10-25%) is likely in Mumbai city given the ~30% drop in volumes and increasing liquidity pressure on developers holding on to inventory. We believe a price correction will unlock the strong latent demand and drive absorptions. However, if the deadlock over new construction guidelines continues, new launches will be delayed and limit any significant price correction.

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Exhibit 23: Prices continue to rise in MMR; absorptions show clear shift to Thane and Navi Mumbai
(msf) 40 Total absorptions (LHS) Availability (RHS) 120

(Absorptions/qtr - msf) 40

Mumbai

Thane + Navi Mumbai

MMR

30

90

30

20

60

20

10

30

10

0
Oct-07 Oct-08 Oct-09 Oct-10 Apr-08 Apr-09 Apr-10 Apr-11 Jul-07 Jul-08 Jul-09 Jul-10 Jan-08 Jan-09 Jan-10 Jan-11 Jul-11

Dec-07 Dec-08 Dec-09 Dec-10 Mar-08 Mar-09 Mar-10 Sep-07 Sep-08 Sep-09 Sep-10 Mar-11 Jun-08 Jun-09 Jun-10 Jun-11

(units absorbed - % mix) 100 15 75

Mumbai

Thane

Navi Mumbai

(msf absorbed - % mix) 100

Mumbai

Thane

Navi Mumbai

20

23

17
26

19

22

25

24 23 34 35

75

22

22 30 30

50

50

25

61

57 43 38

61 25

59 48 45

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0 FY08* FY09 FY10 FY11

0 FY08* FY09 FY10 FY11

(Rs psf)
27,400 South Mumbai Central Suburb Mumbai Harbour Western Suburb Thane Navi Mumbai

22,400

17,400

12,400

7,400

2,400

Nov-07

Nov-08

Nov-09

Nov-10

Mar-08

Mar-09

Mar-10

May-08

May-09

May-10

Mar-11

May-11

Sep-07

Sep-08

Sep-09

Sep-10

Jul-07

Jul-08

Jul-09

Jul-10

Jan-08

Jan-09

Jan-10

Source: PropEquity, IDFC Securities Research

19 | OCTOBER 2011

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Jan-11

Jul-11

NCR: Investor-driven market; stable medium-term outlook

NCR has grown to be the largest real estate market

Over the past few years, the NCR has grown to become the largest real estate market in India. With almost negligible new supply in New Delhi, extended suburbs like Gurgaon, Noida, Greater Noida, Faridabad and Ghaziabad have become large micro-markets, with Gurgaon being the most preferred suburb. NCR is an investor-driven market, with almost half the new supply being absorbed by investors. Also, supply is not a constraint given significant land available in these suburbs. Key trends and outlook

with a large number of satellite micro-markets like Gurgaon and Faridabad

Gurgaon has seen sharpest price increase in the NCR (up 34% in past two years). However, the market is showing initial signs of a slowdown, with investor interest waning due to the high prices. We expect prices to correct by 10-20% in FY12. Prices in Noida and Greater Noida have not risen much due to significant new supply in the past two years. Also, given the current farmer agitation over low compensation for land, demand in the region has witnessed a sharp decline in the past 1-2 quarters. We expect prices in Noida and Greater Noida to remain under some pressure in the near term and be stable in the medium term.

Exhibit 24: Key trends in the NCR market

(msf) 40 Total absorptions (LHS) Availability (RHS) 200

(msf) 300

New launches (LHS)

Absorptions (LHS) 168

Availability (RHS) 169

(msf) 180

137 30 ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7150 2011-10-22 07:54:19 EDT. DownloadPDF. on 225 139
20 100

135

117 150 90

10

50

75
0 0

45

Oct-07

Oct-08

Oct-09

Oct-10

Apr-08

Apr-09

Apr-10

Apr-11

Jul-07

Jul-08

Jul-09

Jul-10

Jan-08

Jan-09

Jan-10

Jan-11

Jul-11

0 FY08 FY09 FY10 FY11 4MFY12

Gurgaon and Noida markets have seen the sharpest price rise in last one year (Rs psf)
5,500 4,800 4,100 3,400 2,700 2,000 Gurgaon Noida G.Noida Faridabad Ghaziabad

Nov-07

Nov-08

Nov-09

Nov-10

Mar-08

Mar-09

Mar-10

May-08

May-09

May-10

Mar-11

May-11

Sep-07

Sep-08

Sep-09

Sep-10

Jul-07

Jul-08

Jul-09

Jul-10

Jan-08

Jan-09

Jan-10

Source: IDFC Securities Research

20 | OCOTBER 2011

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Jan-11

Jul-11

Bangalore: The most sane market; steady growth outlook

In the past two years, Bangalore has remained the most sane markets in India. Being the Information Technology (IT) hub of the country, real estate demand in Bangalore in largely driven by the IT/ITeS sector which has seen strong growth post the economic downturn. Key trends and outlook Residential absorptions grew strongly by 36% in FY11 to 47msf. Price appreciation was also steady (average of 7% yoy), keeping pace with increase in income levels. Property values have, therefore, remained affordable. Easy availability of land has kept supply flowing, limiting price appreciation Demand has been led by strong traction in the IT/ ITeS sector after the end of the last economic downturn. Most IT/ ITeS companies have strong hiring plans, with Bangalore remaining the preferred destination. While we expect prices and absorption to remain steady, any significant slowdown in the IT/ ITeS sector (led by global slowdown and thereby cut in IT spending) will negatively impact demand.
We expect both prices and absorptions to remain steady in Bangalore Demand largely driven by the IT bounceback after the last downturn

Exhibit 25: Key trends in the Bangalore market

(msf) 8 Total absorptions (LHS) Availability (RHS) 88
68 70 New launches (msf) Absorptions (msf) Availability (msf) 74 62 51 52 60 80

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6 66

44
34 40

22
17 20

Oct-07

Oct-08

Oct-09

Oct-10

Apr-08

Apr-09

Apr-10

Apr-11

Jul-07

Jul-08

Jul-09

Jul-10

Jan-08

Jan-09

Jan-10

Jan-11

Jul-11

FY08 FY09 FY10 FY11 4MFY12

(Rs psf)
4,000

NorthEast Region

NorthWest Region

SouthEast Region

SouthWest Region

3,600

3,200

2,800

Nov-07

Nov-08

Nov-09

Nov-10

2,400

Mar-08

Mar-09

Mar-10

May-08

May-09

May-10

Mar-11

May-11

Sep-07

Sep-08

Sep-09

Sep-10

Jul-07

Jul-08

Jul-09

Jul-10

Jan-08

Jan-09

Jan-10

Source: IDFC Securities Research

21 | OCTOBER 2011

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Jan-11

Jul-11

Commercial outlook healthy; only a few listed players

Huge investments limit number of players
Need for huge upfront investments have kept most players away from this segment

Given the substantial investment required upfront, only a few listed players (DLF, Phoenix Mills, Anant Raj, Indiabulls Real Estate, Oberoi Realty, Prestige Estates) have ventured into the leasing space. Most other companies still continue to focus on the residential space. Exhibit 26: Very few listed players have relevant share of revenues from lease income
Lease rentals - % of FY11 revenues Phoenix Mills Anant Raj Oberoi Realty DLF Prestige Peninsula Land 0 9 30 60 90 (%) 11 13 18 18 80

Source: Company

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Experts believe leasing momentum will sustain

Office space absorption to grow by 14.6% CAGR over CY10-13

Most property experts (JLL, Cusman & Wakefield, Colliers) believe that commercial demand will remain healthy, led by a growing economy and stable environment for the IT/ITeS sector (~50% of the total office demand). According to JLL estimates (December 2010), office space absorption is expected to grow at a CAGR of 14.6% from CY10-13 (from 30.5msf in CY10 to 45.9m in CY13).

Exhibit 27: Absoprtions* to pick up both in office and retail segments

Office space absorptions to grow at ~16% CAGR over 2010-13 with most markets moving into rent rising quadrant

JLL expects rentals to rise in Mumbai, Bangalore & DelhiNCR

Source: JLL as of Jul-11; * across top 7 cities of India

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Rentals, though, expected to remain stable as vacancy remains high

Rentals have not appreciated in CY10 in most markets, but are expected to improve as excess supply gradually gets absorbed. In the past nine months, rentals for Grade A office space in Gurgaon have been stable at ~Rs60psf pm. Rentals in Chennai and Hyderabad were also largely stable in FY11. JLL expects rents to increase in the Mumbai, Bangalore and NCR markets while remaining stable in other tier-1 cities. Exhibit 28: Rental outlook for Mumbai and Bangalore stable in CY11E
Mumbai Bangalore

Rentals are expected to rise in Mumbai, Bangalore and NCR and remain stable in other tier-1 cities

Source: JLL as of Jul-11

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THE GOOD NEWS: A BUSINESS REVIVAL MAY BE NIGH

Long-term demand drivers are intact despite recent upheavals Unlike in 2008, developers are not fighting solvency battles and are much better placed to find solutions A 10-25% cut in real estate prices, along with a rate cycle reversal, will be the magic potion to nurse the sector back to health We believe a 10-25% cut in prices is inevitable and very likely in the near term Any recovery in business sentiment would drive a cyclical rebound in real estate stocks; but we remain wary of the sustainability of this bounce

Long-term demand drivers intact

Increase in working population and growing nuclearisation bode well for demand

While multiple issues beset the sector, long-term macro demand drivers strong GDP growth expectations and favorable demographics still favor developers promising strong and sustained demand. An increasingly young population, rising urbanization, higher disposable household incomes due to the rise in working population, and a growing number of nuclear families have been increasing the number of those able to afford a house.

Exhibit 29: Positive change in demographics to drive demand for housing

Largest growth in working age population (1564 years) by 2020 Approx. 50% of Indias population under 25 years of age ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF.
60 (years) 2010 2015 2020 49

600 495
47

Change in working age population by 2020 (m)

45 34 30 25 27 28 36 37 37 37 38 40 38 39

45

450 294 300 159 150 0 -8 -10 -25 -150 130 34 30 16 14 11

15

India China USA Russia Japan

World

Asia

Africa

India

South North Brazil America America

China USA

Japan

Russia Europe

One of the lowest urbanized developing economies

Urban population (% of total) 81 65 48 44 27 22 29
4.6

and increasing nuclearisation of Indian families

5.8 Average household size 5.7 5.5 5.4 5.5 5.3

88

66

66

69

40

5.0 4.8

0 Vietnam India China Indonesia Malaysia Japan US Korea

4.2 1971 1981 1991 2001 2006

Source: CRISIL Research, McKinsey Research (2005), United Nations World Urbanization Prospects 2009

24 | OCOTBER 2011

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Healthier solvency will prevent another 2008

Volumes have suffered due to high property prices, cashflows stressed due to sharp rise in interest burden, raw material and manpower costs, and the lending environment tough; but we do not see the risk of another 2008-like collapse. We believe the economy is stable (cautious but positive global outlook, GDP growth forecast of >7%, and a stable job environment) and developers are in much better shape (positive operational cashflows, lower gearing levels compared to 2008 slowdown, and limited investment in land in the past two years), which could buffer any demand erosion and thereby prevent solvency concerns.
High GDP growth rates and healthier balance sheets should buffer impact of demand erosion

Global economic conditions uncertain, but not as bad as in 2008

Disappointing economic data from the US (0.9% GDP growth in H1CY11, vs. 3.1% in CY10) and a sovereign crisis in Europe in the past few quarters have raised concerns over another recession in these markets and a slowdown in global GDP growth. However, with a stronger financial system, improved balance sheets of banks, corporates as well as households, we believe a freeze of the entire financial system as seen in 2008 is unlikely. Exhibit 30: GDP growth in developed markets USA
(%) 6

Stricter regulation, strong balance sheets of banks, corporates and households will prevent another 2008

UK, Euro zone and Japan

(%) 4 2 0
UK Euro zone Japan

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-2

-2
-6

-4 -6 1QCY04 1QCY05 1QCY06 1QCY07 1QCY08 1QCY09 1QCY10 1QCY11

-10 1QCY04 1QCY05 1QCY06 1QCY07 1QCY08 1QCY09 1QCY10 1QCY11

Source: Bloomberg, US Bureau of Economic Analysis, UK Office for National Statistics, Government of Japan

Indian economy much better placed

While we are staring at slower GDP growth in FY12 (7.6%, vs. earlier estimate of 8.5%), we see no threat of a financial meltdown or mass layoffs and salary cuts. The domestic consumption story is intact, led by strong growth in the rural economy. Also, the job environment is fairly optimistic, with relatively stable hiring plans across sectors, including IT/ ITeS, financials and manufacturing.
Indian consumption story is intact, helped by strong growth in rural economy and robust hiring across sectors

25 | OCTOBER 2011

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Exhibit 31: Improving employment outlook and stable hiring plans of Top 4 IT companies
90,000 TCS Infosys Wipro HCL Tech

67,500

45,000

22,500

FY11 FY12E FY13E

Source: Manpower Research, IDFC Securities Research

GDP growth, despite some slowdown, remains strong The ongoing monetary tightening to control inflation could result in some growth slowdown, but we believe the impact will not be as significant to dampen the strong macro outlook of the country. In 2008, while GDP growth had plummeted to ~6% for three consecutive quarters, the current forecast is still a healthy 7.6% (revised downwards from 8% earlier). Exhibit 32: GDP growth has not fallen below 6% like in H2FY09
GDP growth had plummeted to ~6% for three quarters in FY09 ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on GDP growth still healthy at >7%; only the pace has tempered 2011-10-22 07:54:19 EDT. DownloadPDF.
GDP (yoy %) 8.0 7.8
8.5 10.0 GDP (yoy %) 9.4 9.3 8.9 8.3 7.8 7.4

8.4

7.3 6.4 6.2 5.6 5.1 6.3

7.0

5.5

4.0 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10

4.0 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12

Source: IDFC Securities Research

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Exhibit 33: We expect GDP growth to remain above 7% in FY12

16.0 Construction GDP growth (%) Overall GDP growth (%)
FY12 GDP growth expected at 7.6%

12.0

8.0

4.0

0.0

Q1FY06

Q3FY06

Q1FY07

Q3FY07

Q1FY08

Q3FY08

Q1FY09

Q3FY09

Q1FY10

Q3FY10

Q1FY11

Q3FY11

Source: IDFC Securities Research

Developers not as leveraged or distressed as in 2008

An asset-liability mismatch led to serious solvency concerns for real estate players in Most developers have been prudent buyers of land since 2008, when land costs were funded through short-term liabilities. In the past two years, the last downturn however, there has been no large-scale diversion of project inflows to land payments. Also, most companies have raised fresh equity (QIP, warrants, etc) and used the proceeds to bring down debt to reasonable levels from the peaks of 2008. Therefore, we believe the developers ability to survive and compete for projects is not in question ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF. in the current environment. Exhibit 34: Gearing levels have fallen sharply
Gearing - FY11 Oberoi GPL Sunteck APIL Sobha HDIL Unitech DLF 0.50 0.46 0.50 0.66 0.89 1.00 1.50 2.00 2.50 0.68 0.94 1.73 0.60 0.01 0.84 0.86 1.01 0.93 1.74 2.09 Gearing - FY09

Source: IDFC Securities Research

Investments in land bank have been limited Most developers, in the past two years, have been selling part of their land parcels (mostly non-core; with limited development visibility) and using the cash to retire debt. Total land area of most players (including DLF, Unitech, Sobha) have come down substantially from 2007 highs through either partial sale or complete exit from various projects. Also, new investments have been restricted to a) consolidation of existing under-development parcels or b) acquisition of land with near-term development visibility.
and have limited investments to land with near-term development visibility

27 | OCTOBER 2011

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 with focus shifting to expanding regional presence

Domicile markets still contribute the largest share of sales of most developers

During the economic boom of 2004-06, most developers aimed for a pan-India presence to expand their operations and minimize concentration risk. This led to rampant land acquisition (and higher debt) by players across the board - led by DLF and Unitech. However, with land regulations subject to state laws and approval processes driven by political influence, most developers either failed to launch projects outside their domicile or were stuck for various approvals. However, after the economic downturn, most developers have been trying to exit or rationalize their land banks and have increasingly focused on their home turfs for expansion. Among the listed real estate players, only a few have a pan-India presence (DLF, Unitech and Godrej Properties); but even for these developers, the domicile markets continue to account for a substantial share of their total sales volume. and reducing debt through higher realizations from non-core asset sale

High interest costs have forced builders to exit assets with long gestation and limited development visibility

With internal accruals failing to bring down gearing levels, developers including DLF, Unitech, HDIL, Ansal Properties etc are actively looking to monetize non-core land parcels/ built assets and utilize the proceeds to reduce overall debt levels. With high interest cost hurting cashflows as well as profitability, developers are increasing evaluating opportunities to exit investments with either long gestation period or limited development visibility. While asset sales during the economic downturn found few takers due to developer reluctance on cutting valuations, they are more flexible this time and are willing to negotiate and close the deal rather than adopting a wait and watch strategy. Exhibit 35: Non-core asset sale plans of key real estate players
Companies
DLF

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Assets on the block

Mumbai NTC Mill Land Land parcels in Gurgaon, Chennai Pune SEZ Noida IT Park Aman Resorts chain Life Insurance business Land parcel in Thiruvanathapuram SEZs and IT Park Sold FSI in Andheri East, Goregaon (Mumbai) for >Rs10bn To sell FSI in Vasai-Virar region

Unitech HDIL

Ansal Properties To exit from two projects worth Rs3-4bn Source: News reports, Company, IDFC Securities Research

Price and interest rate decline would boost absorption

We believe driving up sales with price cuts is the only option given low absorption and liquidity constraints

Given the slowdown in absorptions, lack of funding alternatives available to developers, and liquidity constraints, a reduction in prices seems to be the only option to maintain business momentum and avoid a cash crunch. We believe a 10-25% price correction is likely in the next 6-12 months in most markets. A reversal of the interest rate cycle would be another key positive trigger. These factors, supported by the almost unleveraged balance sheets and high savings rate (23%) of Indian households, will drive a near-term turnaround in the sector.

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A 10-25% cut on the cards

Property price hikes have clearly stopped and there are signs that developers are willing to negotiate and offer discounts to buyers. Also, lower sales volumes are further hurting liquidity of cash-strained players. We believe developers will be looking to tap seasonal demand in the second half of the fiscal (festive season, bonus/ promotion cycles, etc) and will likely reduce prices soon. We expect price cuts across avenues available to builders: Reduction in prices at existing projects. Launch of new projects at prices lower than those of existing projects. Launch of new projects with smaller units, i.e, reducing ticket sizes to increase affordability.
Developers seem to be amenable to negotiation to exploit the festive season

The lessons of 2008-09 We take comfort in the real industrys response to the demand slump in 2008, which forced real estate players to rationalize pricing across markets. Our analysis indicates that in 1H09 most developers in Mumbai, Thane and Gurgaon cut prices by 15-40%, which led to a sharp rebound (60-200%) in quarterly sales volumes from Dec-08 quarter lows. Focus was on launch of new projects at lower prices as well as reduced unit sizes, which led to a significant reduction in total cost of ownership. This stimulated demand across markets and effectively marked the revival of the real estate industry after the 2008 slowdown.
15-40% cut in prices across Mumbai, Thane and Gurgaon led to sharp rebound in sales

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Existing Region
Unitech Woodstock Floors Uniworld Resorts Grande DLF The Magnolias Capital Greens Ph I (NL) Capital Greens Ph II Mumbai Kalpataru Estates Oberoi Splendour Mumbai Mumbai Jogeshwari Jogeshwari Kurla Mulund Santacruz Wadala Chembur Apartments Apartments Apartments Apartments Apartments Apartments Apartments 10,000 11,000 8,400 8,755 25,700 11,600 8,850 Gurgaon New Delhi New Delhi DLF Ph V Apartments 10,500 11,000 4,500 Gurgaon Gurgaon Noida Sector 50 Sohna Road Sector 96 Floors Villas Apartments 4,485 7,000 7,600

New price Correction

3,776 4,900 5,000 8,000 4,500 6,750 -16 -30 -34 -24 50

Location

Type

price

Month Comments
May-09 Jun-09 Jul-09 May-09 Apr-09 Sep-09 1400 apartments sold within a mth 1300 apartments sold within a mth

Shivagi Marg Apartments Shivagi Marg Apartments

8,000 7,200 5,750 4,999 16,000 8,291 7,400

-20 -35 -32 -43 -38 -29 -16

Mar-09 Jun-09 Mar-09 Mar-09 Aug-09 Mar-09 Jun-09 Launched at sharp disc.to market price

Premier Residences (HDIL) Mumbai Zenith (Gundecha) RNA Auroville Dosti Acres Mumbai Mumbai Mumbai

Raheja Acropolis Mumbai Source: PropEquity, IDFC Securities Research

The sharp recovery in volumes in the markets that followed the price cuts is indicative of the kind of demand elasticity that exists in the system for housing across the country.

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Exhibit 37: Increase in absorption (units per quarter) in Mumbai, Thane and Gurgaon in 1H09
14,000 Mumbai Thane Gurgaon

10,500

7,000

3,500

Nov-07

Nov-08

Nov-09

Mar-08

Mar-09

May-08

May-09

Sep-07

Sep-08

Sep-09

Source: PropEquity

Cashflow pressures may drive 10-25% cut in prices over the next few quarters

We strongly believe that given the mounting cashflow challenges, a 10-25% cut in prices is on the cards over the next few quarters. We believe this will lead to a spurt in new launches and accelerate sales given strong latent demand at lower prices. However, a reversal of the interest rate cycle, unaccompanied by a sharp reduction in real estate prices, is unlikely to trigger a demand revival.

Interest rates to peak by early-FY13

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Our strategy team believes that inflation will start to cool down from Nov-11 onwards as a) high base effect kicks in (brent crude rose sharply in Oct-Nov 2010 from $80 to $95) and b) adequate rainfall (monsoon 2% above normal) result in higher crop output and thereby drop in food prices. With target inflation expected to range between 7-8% by Mar-12, we expect interest rates to peak by early-FY13 (Oct-11 RBI policy meet most likely to announce the last rate hike of 25bp). Also, we expect the RBI to start reducing rates from Q1FY13. Robust savings rate to provides a bulwark

Price cuts would revive latent demand as household savings levels are robust

Most Indian households have a high savings rate (23.5% in 2009-10) and largely unleveraged balance sheets. In addition, due to relatively lower mix of debt in property deals, rising EMI payments also does not impact household cashflows significantly. With price corrections, we believe household savings will, therefore, play an important role in driving higher absorptions across regions. Also, on account of higher emotional quotient, indian consumers avoid defaults on housing loans thereby keeping in check asset quality of banks home loan portfolio.

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Mar-10

Jul-08

Jul-09

Jan-08

Jan-09

Jan-10

Exhibit 38: Household savings have remained above 23% since FY05
38 Household savings rate (% of GDP) Gross domestic savings (% of GDP)

34

29

25

20 FY05 FY06 FY07 FY08 FY09 FY10

Source: Economic Survey 2010-11

Cyclical rebound to drive a spike in stock prices

Any rebound in sales volumes, as witnessed in 1H09 (100-200% jump in sales volume yoy), is likely to signal a turnaround in sector sentiment in the near term and result in a cyclical rally in share prices over the next 6-12 months. However, we do not see stock prices touching the highs of 2HFY10. We believe the rally will fizzle out once structural issues start surfacing at elevated valuations.
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Exhibit 39: BSE Realty Index outperformed Sensex by 121% from March-May 2009
400 Sensex BSE Realty

300

200

100

Outperformed Sensex by 121% in 3-month period from Mar-09

8-Oct-09 2-Apr-09 15-Mar-09 24-Mar-09 15-Aug-09 24-Aug-09 17-Oct-09 11-Apr-09 20-Apr-09 29-Apr-09 6-Mar-09 4-Jun-09 1-Jul-09 13-Jun-09 22-Jun-09 6-Aug-09 10-Jul-09 19-Jul-09 28-Jul-09

8-May-09 17-May-09 26-May-09 2-Sep-09 11-Sep-09 20-Sep-09 29-Sep-09

Source: IDFC Securities Research

Rebound in stocks could be substantial though!

The BSE Realty index rose by over 260% from March to October 2009, with most real estate stocks gaining 200-500% during the period (HDIL and Orbit Corp gained >500%), compared with Sensex gains of ~111%. We foresee a somewhat similar phenomenon, but believe the bounce-back this time would not be as high. It could, nevertheless, be a substantial 30-60% given that most stocks have corrected by 40-70% since October 2010 and are now trading below their 52-week lows.
Realty stocks are trading below 52-week lows and could see a substantial 30-60% bounceback

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Exhibit 40: Real estate stocks corrected by up to 70% in the past year
% increase in H1FY10 (from Mar-09 to Oct-09)
Sensex BSE Realty DLF Unitech HDIL IBREL Sobha Developers Puravankara Ansal API Peninsula Land Orbit Corp Phoenix Mills Source: Bloomberg 111 263 239 328 522 240 230 245 261 435 560 236

% correction from 2008 peak (from Jan-08 to Feb-09)

60 90 88 95 93 89 92 92 95 89 96 89

% correction in last 1 year (from Oct-10 to Oct-11)

18 55 42 73 67 65 41 46 62 41 75 24

Key risks to near-term recovery

We see a recovery in the next few quarters driven by a likely reduction in real estate prices and aided by reversal of the interest rate cycle. Our thesis could be at risk if the interest rate environment takes a turn for the worse and there are fewer new project launches due to regulatory bottlenecks. Also, developers may show more willingness to face near-term pain if they believe buyers will be forced to reconcile to elevated property ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF. prices sooner than later.

Worsening of interest rate environment

Risk of increase in funding costs and worsening of macro environment

Demand is fairly neutral to interest rate movements at current levels, but a sharp tightening prompted by an unexpected escalation in inflation rates will be a big negative. This could sharply increase funding costs for home buyers and also signal serious challenges for macroeconomic growth.

No reduction in prices by developers

Delay in approvals may prompt builders to keep prices high

While we do believe that developers will finally blink and be forced to reduce prices soon, those in markets like Mumbai and Gurgaon have shown little willingness in this direction so far. A likely slowdown in real estate supply in the medium term due to regulatory logjam may prompt developers in markets like Mumbai to continue with their current aggressive pricing strategies. This may postpone any major volume revival in these markets and worsen the cashflow problems of the developers.

Regulatory logjam
New launches may be delayed due to regulatory tightening

If project approvals continue to be stretched, held up by issues including land acquisition (Noida and Greater Noida), state-specific concessions (free FSI, public parking FSI in Mumbai, etc) or even due to countless number of approval requirements (>50 in some states), developers will find it increasingly difficult to launch new projects. Instances like the Supreme Court judgement in Greater Noida (popularly called Noida extension) to return >400 hectares (>1,000 acres) to farmers will prevent buyers from investing in real estate in these pockets. This could also restrict supply and lead to strengthening of prices in nearby markets.

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Slowdown in economy
Economies of most developed nations (especially the US) have failed to show any significant improvement despite large quantitative easing programmes, and threaten to snowball into another downturn. The Indian economy, despite its strong domestic consumption story, is not decoupled from the global economy. Any recession or slowdown in the developed economies will impact Indias GDP growth, given that high interest rates have already lowered growth expectations to below 8% for FY12E. This could impact real estate demand (both residential and commercial).

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THE BAD NEWS: VALUATIONS WILL CONTINUE TO LAG

The likely near term rebound in real estate stocks is likely to be limited as re-rating will continue to be capped by the structural issues We do not visualize near term resolutions to the issues around lack of transparency, inadequate disclosures, land bank driven NAVs etc. 2008 valuations are a distant dream, we do not anticipate the stocks even reclaiming their 2010 highs

Structural issues continue to plague the sector

Poor transparency and inadequate disclosures and accounting methods remain overhang on the sector

While macro-economic concerns (high interest rates, inflation, etc) might start to ease by the end of FY12E, we believe structural issues that dog the sector/ listed stocks will persist and cap any substantial rebound in stock prices. We reckon that a lot remains to be achieved in terms of transparency and disclosures, consistency of accounting policies, timely execution, land bank visibility, and discipline in maintaining conservative balance sheets. We believe these structural issues will persist until the sector gets a regulator and a comprehensive regulation act. Until then, a re-rating is unlikely.

Lack of transparency and inadequate disclosures

We believe the level of transparency and disclosures required to arrive at fair valuations of a real estate company is still lacking, and any connecting the dots kind of approach is unlikely to bring back investor confidence in the sector. While some newly listed ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF. bar, disclosure companies (Oberoi Realty, Prestige Estates) have significantly raised the levels of most players are poor. Exhibit 41: Quarterly disclosures by select listed real estate players
but newly listed players like Oberoi and Prestige are exceptions

Source: IDFC Securities Research

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Accounting loopholes IFRS is no silver bullet

The Indian accounting standard, IGAAP, allows real estate companies to recognize revenues based on percentage completion method to avoid lumpiness in revenues given the long project timelines (2-4 years). However, with the accounting standard silent on method of calculating the percentage as well as threshold of revenue recognition, players display no consistency in reporting financials. Exhibit 42: Revenue recognition policy varies significantly across companies
IGAAP does not specify the method to calculate threshold of revenue recognition

Source: Company, IDFC Securities Research, # proportionate land cost is recognized immidiately on sale * includes cost of land/ development rights, borrowing costs, overheads, estimated construction and development cost

Demand for a watered down With IFRS accounting proposed to be implemented from April 2012 (in three phases), a version of IFRS will prevent strong lobby by the industry has managed to include the percentage completion objective ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 ononly will comparisons among DownloadPDF.comparison of methodology in the Indian version of IFRS. Therefore, not 2011-10-22 07:54:19 EDT. companies companies remain vague and inconsequential, the objective of IFRS to enable comparisons with global players will also not be achieved.

Gross NAV skewed to land bank

Annual sales run-rate (measured in msf) of most real estate companies currently comprise <5% of their total land bank. Estimated cashflows from projects to be launched over the next five years also account for a minor component of their estimated NAV. As a result, land bank forms a significant portion of their NAV (DCF of cashflows, assuming the entire development over the next 15-25 years). More importantly, there is limited visibility on the location/ title/ development of such land bank, providing immense scope for variations in NAV computation. Exhibit 43: Land bank valuation factors in >40% of gross NAV for half of our coverage universe
Land bank - % of Gross NAV JIL Sobha APIL HDIL DLF GPL SRL ORL 0 7 10 20 30 40 50 60 70 14 26 29 45 48 57 65

Estimated cashflows from projects to be launched over the next five years make up a low proportion of NAV

Source: IDFC Securities Research

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High debt ghosts of 2008

Limited funding avenues and low sales volumes could spell a debt trap of the kind seen in 2008

Though leverage levels of some developers are significantly better than in the last downturn, they remain a concern given high interest rates and the increasing difficulty in raising fresh debt. Also, as long-term financing (>5 years) is not available to the sector, a substantial portion of the total debt will keep coming up for repayment each year. If internal cashflows are not sufficient to retire debt and the developer fails to refinance the balance amount, a debt trap situation, not very unlike 2008, could arise; the consequences of which are not very difficult to predict (most stock prices crashed 7090% in 2HFY09 over a couple of months). Exhibit 44: Gearing levels of companies under coverage as of March 2011
1.00 0.75 0.50 0.25 (0.25) Net Gearing - FY11

(0.50) ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF. ORL HDIL SRL Sobha DLF APIL

GPL

JIL

Source: IDFC Securities Research

Patchy execution and lack of project management bandwidth

Execution remains among the key challenges facing the sector, with most companies typically failing to scale up construction in line with increase in sale volumes.
Properties sold in FY10 and FY11 could also see execution delays

While the last economic downturn hit companies hard, leading to delays in completion of almost all projects, we believe the properties sold in FY10 and FY11 will also witness execution delays given that most companies sold high volumes in FY10 and are yet to deliver some projects sold even before the downturn (2006-08). We expect this issue to persist as most companies lack project management bandwidth to significantly scale up execution and meet delivery timelines. We see concerns particularly in the NCR, where volumes have shot through the roof in the past two years. The problems are also expected to be compounded by high input cost inflation seen in the past few quarters, making some of the projects, mainly mid-income ones, unviable.

as most companies lack the project management bandwidth to step up execution

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IDFC SECURITIES

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Exhibit 45: On average, 47% scale-up required in FY12 and 142% in next three years to meet delivery timelines
Area delivered in FY11 (LHS) % scale-up reqd (RHS) Area to be delivered in FY12 (RHS)

(msf) 70

(%) 250

(msf) 200

Area delivered in FY09-11 (LHS) % scale-up reqd (RHS)

Area to be delivered in FY12-14E (LHS)

(%) 600

53

175

150

425

35

100

100

250

18

25

50

75

Navi Mumbai

Hyderabad

Source: PropEquity

Absence of a regulatory body

While the sector is still nascent, we believe a regulator and finalization of the draft regulation bill are among key reforms that could improve governance (binding all concerned parties and imposing severe penalties on defaulters) and restore investor confidence. Also, reforms like introduction of REITs remain key to expanding organized real estate and thereby driving increased investment in the sector.
Uniform governance laws could restore investor confidence in the sector

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Market fragmentation adds to the challenges

Real estate is one of the most fragmented sectors in India, with listed players accounting for only a minority of the overall market. The sector is also highly unorganized with a large number of small/ medium players and just a handful of large names. We believe the key reasons for the fragmented nature of the market are: 1) limited entry barriers given an easy outsourcing model for almost every construction process (architectural planning, construction, interior design, etc) and property agents who ease sales, and b) preference for holding on to land (an appreciating asset class). Exhibit 46: Projects by listed players accounted for 5% of the total in FY11
Ongoing projects in FY11 Cities
Bengaluru Chennai Greater Noida Gurgaon Hyderabad Mumbai Navi Mumbai New Delhi Noida Pune Thane All India Source: PropEquity

Limited entry barriers mainly responsible for proliferation of small/ medium players

By listed players
58 14 17 34 3 55 4 7 26 26 9 330

PropE coverage
623 460 138 176 444 956 692 15 141 675 422 6,547

% by listed players
9 3 12 19 1 6 1 47 18 4 2 5

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Hyderabad

Bengaluru

Bengaluru

Gurgaon

Chennai

Gurgaon

Navi Mumbai

Chennai

Mumbai

Greater Noida

Mumbai

Greater Noida

Thane

Noida

Kolkata

Kolkata

-50

-100

Thane

Noida

Pune

Listed players still command only a minority share

Less than 1% of realty firms are listed on the bourses

According to PropEquity, an agency that tracks projects of >4,600 developers across 37 Indian cities, only less than 1% are listed on the bourses. PropEquity data also reveals that only 5% of the ongoing projects in FY11 (330 out of 6,547) were from listed players. The 28 listed real estate players (combined market cap of >Rs1tn) are a minority in the Indian residential market. The value of area sold by listed players in FY11 accounted for 17% of total sales (Rs369bn, vs. a total of Rs2,201bn). In terms of volumes, listed players accounted for only 68msf, or 12%, of a total of 581msf sold in FY11.

Exhibit 47: Listed players are a minority across markets in India

All India
Listed entities Area Sold (msf) Value of space sold (Rs bn) Avg. sale price (Rs psf) All players Area Sold (msf) Value of space sold (Rs bn) Avg. sale price (Rs psf) Listed as % of total Area Sold (msf) Value of space sold (Rs bn) 68.0 369 5,429 581 2,201 3,788 12 17 8.4 127 15,120 43 473 11,089 20 27 4.4 11 2,536 30 102 3,462 15 11 8.2 43 5,260 55 232 4,238 15 18 14.2 58 4,061 74 250 3,400 19 23 7.8 37 4,755 42 152 3,638 19 25 2.6 14 5,204 32 122 3,844 8% 11% 35%

Mumbai

Thane

Gurgaon

Noida

Bangalore

Chennai

Premium in avg. selling price (%) 43 36 (27) 24 19 31 ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF. Source: PropEquity

Listed players account for less than a fifth of sales in key markets

Trends in key tier-I cities show that the share of listed players is less than a fifth of total sales Mumbai accounted for 20%, Gurgaon 15%, Noida 19%, Bangalore 19%, and Chennai 8%.

so unlisted players have a bigger impact on sector trends

Given that listed developers are in a minority, we believe the broader real estate market will be affected more by actions of unlisted players. Given that these unlisted players are not required to conform to the business norms / performance metrics expected by the investors in listed players, they have a relatively higher degree of freedom in terms of taking decisions on critical issues like pricing, payment receipt norms etc.
Weak macro environment and low valuations preventing new listings

Also, given the current uncertain environment and depressed valuations of most listed players, we do not see many companies opting for IPOs soon. This limits the possibility of any increase in the market share of listed players. However, we also note that many listed players are among the biggest names in their key markets and will continue to drive trends in these markets.

Industry consolidation is unlikely

Value of a realty firm lies in land bank, so mergers do not make economic sense

We believe a consolidation is highly unlikely in the sector due to lack of operational synergies from merger. The value of a real estate company lies primarily in its land bank, and consolidation does not make much economic sense. Also, with construction work often outsourced to third party construction companies, scale-up in operations does not require building the relatively complex capabilities of executing large scale construction projects. This reduces the need for acquiring strong execution capabilities through acqiusitions of industry peers.

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Valuations will not attain even 2HFY10 levels

We believe the sector will remain unattractive to long-term investors until the structural issues are significantly resolved. Most investors had burnt their fingers after the 2006-07 boom ended and again in FY10 (QIPs, stake sale, IPOs) resulting in total lack of confidence in real estate valuations. Also, with developers failing to sustain FY10 sales volumes and sharp inflation in input costs (especially labour) as well as rising interest cost eroding operational margins, we believe growth as well as profitability profile of most developers have significantly contracted in the last 12-18 months. In addition, we do not see structural issues being addressed at least in the next 2-3 years. Therefore, we do not see valuations returning even to H2FY10 levels, which were also too expensive to provide meaningful returns. We believe while investors might look for trading gains in the sector, any short-term bounce would be used as exit opportunity.
With structural flaws expected to persist in the next 2-3 years

long-term investors likely to keep away; any bounce could be an exit opportunity

Memories of 2008 and 2010 still haunting investors

While real estate stocks crashed 60-95% in 2HFY09 amid the downturn and recovered to an extent in 1HFY10, they hit new lows in the past three quarters, significantly underperforming the broader index. The BSE Realty index has corrected by nearly 56% (vs. a Sensex decline of 18%) since the breakout of the bribery-for-loan scam in November 2010 and also look vulnerable to negative news-flow on the global and domestic economies. Exhibit 48: Stock price crash in 2008 and end-2010 hurt investors
BSE SENSEX 30 INDEX BOMBAY SE Realty Index 350 ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF.

280

210

BSE Realty down 75% since Aug-08

BSE Realty down another 56% since Oct-10

140

70

Period of outperformance
0

Aug-08

Aug-09

Aug-10

Jun-09

Aug-11

Jun-10

Oct-08

Oct-09

Oct-10

Jun-11

Dec-08

Dec-09

Source: IDFC Securities Research

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Oct-11

Apr-09

Apr-10

Apr-11

Feb-09

Feb-10

Feb-11

Deep discount to NAV to continue

We advise picking companies with strong balance sheets, cashflow visibility and governance

Limited clarity on land bank, inadequate disclosures, and multiple loopholes in managing cashflow as well as profitability make valuation methodologies extremely unreliable. Investors, therefore, will be willing to put their money only in companies with strong balance sheet, high cashflow visibility and superior coroprate governance standards. As a result, we expect deep discounts to NAVs to continue for most companies and only few companies will be able to command premium/lower discount to NAV in the sector. Exhibit 49: Most real estate stocks are trading at significant discount to our FY13E NAV
Current disc/(prem) to NAV (%) APIL JIL Sobha SRL HDIL ORL DLF GPL -10 -5 0 10 20 30 40 50 60 70 7 21 35 34 42 41 62

ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF. Source: IDFC Securities Research

We do not see stocks reclaiming 2010 highs

Most stocks trade at decent valuations, but without material upside potential

While real estate stocks got extreme valuations in the 2006-07 boom period (mainly due to lack of sector understanding), we believe even valuations achieved in H1FY10 were expensive. With developers failing to sustain FY10 sales volumes and sharp inflation in input costs (especially labour) and rising interest cost eroding operational margins, we believe growth as well as profitability profile of most developers have significantly contracted in the last 12-18 months. Given the current state of developers, we do not see stock prices returning to FY10 levels at least in the next two years. We believe most stocks currently trade at reasonable valuations without any material upside from the current levels.

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Exhibit 50: Declining volumes and profitability have significantly deteriorated business models in the last 12-18 months
Falling sales volumes
Coverage sales volumes (msf)

and declining operational margins

160,000 Coverage EBITDA ex-JIL (Rs m) 60 Coverage EBITDA margin ex-JIL (%)

80.0

68

74.9 67.3

60.0

120,000 48

51

EBITDA has grown by mere 12% yoy with margins falling by >500 bps
42 37

51

40.0

37.4

36.6

80,000

34

20.0

40,000

17

FY08 FY09 FY10* FY11

FY07 FY08 FY09 FY10 FY11

have led to significant decline in profitability and growth expectations

120,000 Coverage PAT ex-JIL (Rs m) Coverage PAT margin ex-JIL (%)

49 90,000 44 40
Both PAT and PAT margins have fallen yoy in FY11; expected to be even lower in FY12

60,000 ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF. 26 20 30,000

FY07 FY08 FY09 FY10 FY11

Source: Company, IDFC Securities Research, * JIL sales started from FY10 (21msf sold in FY10)

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HOW TO PLAY THE SECTOR

Indian real players (listed) increasingly reflect a wide diversity in business models and geographical focus. Unlike the herd like behavior which characterized the sector in the past, expect stocks performances to progressively deviate So a broad top down approach to identify winners will have limited utility; we prefer a bottom up approach Winning characteristics: Low gearing, strong near term cashflows, execution capabilities, land bank quality etc Potential Winners Sobha Developers, Oberoi Realty and Jaypee Infratech

Multiplicty of business models/ geographical focus

Regional skew has a significant impact on growth profile of realty players

A real estate company may follow multiple business models (owned land, joint development agreement, joint venture, re-development, slum rehabilitation, affordable housing, etc) to add projects to its portfolio. The dynamics of these business models differ widely with return on investment highly dependent on the model assumed. Additionally, given the increasing diversity in business dynamics across the different regions (Mumbai, NCR, Bangalore etc.), the geographical focus of different business models will have significant bearing on their growth outlooks.

A broad analysis of the business models 07:54:19 EDT. DownloadPDF. ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 of the various listed real estate players in India clearly reflects a full specturm of sharply differentiated business approaches. Further, influenced by the regulatory challenges, we see a growing emphasis on regional focus across developers with clear strategies to eschew growing beyond their home territories. Given the growing disparities across different regional markets in terms of their stablity and growth outlook, the growth visibility for real estate players will be significantly influenced by their target market choices. Exhibit 51: Diverse business models followed by real estate companies
Owned JV JDA (area/ revenue/ profit share) Redevelopment Slum Rehab

Ansal Properties & Infrastructure DLF Godrej Properties HDIL Jaypee Infratech Oberoi Realty Sobha Developers Sunteck Realty Unitech

Source: Company, IDFC Securities Research

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impels a bottom-up approach

In our view, a combination of sharply differentiated business models and varying geographical focus makes it imperative to analyse real estate stocks with a bottoms up approach. We believe the sector is increasingly becoming a stock-specific play. Therefore, we do not expect all real estate stocks to move in a pack even when optimism returns to the sector. The next 1-2 years could see both significant underperformance as well as outperformance by various players. The key challenge, therefore, is to tap the right business models with presence in right locations and asset classes and wait for a recovery. We expect select stocks, depending on the macro (regional presence, asset class, corporate governance) and micro factors (diversified business model, low leverage, higher cashflows in near term, quality land bank, and execution scalability) to do well in the next 1-2 years, while others may continue to trade at discounted valuations. Exhibit 52: Key parameters to identifying winners
Multiple models and varying geographical focus impel our bottom-up approach

Picking the right business model with presence in the right locations and asset classes key to play the sector

Low gearing Visibility on near-term cashflows

Key to success

Execution capabilities and track record

ISIEmergingMarketsPDF in-iimlsingh Quality and quantity of land bank from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF.

Levels of corporate disclosures

Source: IDFC Securities Research

We believe stocks that score high on these five parameters will deserve to trade at superior multiples. This will get reflected in the differing premium / discounts to NAV applied in determining our NAV based target prices.

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Low gearing
DLF, APIL and Godrej Properties have high debt profiles, followed by Sobha and SRL

We see real estate cycles becoming shorter given the uncertain economic environment globally. With unavailability of long-term funding, companies with relatively higher leverage (>0.5x) are more vulnerable to cyclical downturns as internal cashflows may not suffice to meet repayment obligations. We believe debt levels of DLF, APIL and GPL are high while Sobha and SRL are slighly ahead of the comfort zone. While HDILs gearing seems comfortable, the company has failed to reduced gross debt levels despite ~Rs28bn of capital raising in last two years. JILs gearing, though highest in our coverage universe, is entirely due to financing the cost of Expressway and remains net cash in the real estate segment. Exhibit 53: Oberoi and HDIL have the lowest gearing levels in our coverage universe
1.00 0.75 0.50 0.25 (0.25) Net Gearing - FY11

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(0.50) ORL HDIL SRL Sobha DLF APIL GPL JIL

Source: IDFC Securities Research

Visibility of near-term cashflows

Cashflows rather than revenue or profit growth key to premium valuations

We believe cashflows, rather than revenue/ profit growth, will drive valuations of real estate companies. Companies with high development visibility and, therefore, higher cashflows in the next five years (five-year cashflows as a percentage of gross NAV) will trade at a premium to peers. In our coverage universe, SRL and ORL have the highest share of their gross NAV being derived from next 5-year cashflows. While Sobha and JIL remain in the lower half of the table, this is mainly due to their large land banks (234msf, 531msf) which contributes >50% to their gross NAV. Exhibit 54: Over half of SRL and ORLs gross NAV come from cashflows over next five years
5-yr cashflows - % of Gross NAV SRL ORL GPL JIL APIL DLF Sobha 0% 10% 20% 23% 30% 40% 50% 60% 70% 80% 90% 32% 32% 35% 41% 61% 84%

Source: IDFC Securities Research

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Execution capabilities and track record

We believe execution capability will become an increasingly important parameter to compare performances of real estate companies. While pick-up in sales volume remains an important criterion for growth, we believe unless it is backed by a proven ability to scale up execution, developers will not be able to trade at par with or command a premium to NAV. Sobha, DLF and ORL score high on this count. While JILs real estate execution capabilities are yet to be established, completion of Yamuna Expressway 1-year ahead of schedule and proven execution capabilities of the parent (Jaypee Associates) imparts confidence on JILs ability to scale-up execution. Exhibit 55: DLF and Sobha have a strong track record of execution
Area delivered till date (msf) DLF Sobha APIL HDIL GPL JIL ORL SRL 0
% of portfolio under development

Sobha, DLF and Oberoi have demonstrated superior ability of scaling up execution

53.0 43.2 41.7 39.0 10.1 7.0

ORL APIL HDIL SRL DLF GPL

50 20 15 14 14 8 7 7
0 10 20 30 40 50 60

6.5
JIL

1.0
Sobha

10

20

30

40

50

60

Source: IDFC Securities Research ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF.

Quality and quantity of land bank

As the popular saying goes, the real estate sector is mainly driven by three factors location, location and location. The dynamics of a project are seen to significantly vary even across micro-markets within a city. Therefore, strategic location and potential demand for an asset class may ease sales of a project for the developer, but given the varied behavioural patterns across micro-markets within a city, any generalisation of trends is tricky. We believe companies with a large proportion of land in tier-I cities and minimal outstanding payables will command superior valuations. In our coverage universe, JIL and DLF have the largest land bank while ORL, DLF, GPL and SRL have the highest percentage of land in tier-I cities. In terms of land cost paid for, JIL and Sobha clearly scores high given the large land banks holdings.
JIL and DLF have the largest land bank in our universe

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Exhibit 56: Land bank and proportion in tier-I cities

600 Land bank (msf - LHS) % in tier-I cities (% - RHS) 120

450

90

300

60

150

30

0 JIL DLF APIL HDIL Sobha GPL SRL OR L

Source: IDFC Securities Research

Operational transparency and corporate disclosures

For a sector characterized by poor corporate governance, we believe transparency in operations and levels of corporate disclosure will play an increasingly important role. Over the years, corporate governance has evolved from being a mere compliance issue to an important element that delivers value to businesses adopting the best practices. We believe companies that provide maximum quarterly disclosures and are willing to provide project-level details for valuation will be preferred. The preferred names in our ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF. universe are ORL, Sobha anfd GPL.
Oberoi and Sobha are the best placed in terms of transparency

Exhibit 57: ORL and Sobha score high on corporate disclosures

Source: IDFC Securities Research

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Identifying the winners

From the analysis below (Exhibit 58), ORL, Sobha and JIL stand out on most parameters and therefore, are our top picks in the sector. We initiate coverage with Outperformer on Oberoi Realty (CMP Rs234; 40% upside potential) and Sobha Developers (CMP Rs230; 36% upside potential). For other companies in our coverage, we maintain Outperformer on Jaypee Infratech (CMP Rs60; 39% upside potential), Sunteck Realty (CMP Rs352; 23% upside potential) and Ansal Properties (CMP Rs36; 83% upside potential) given the sharp correction in stock prices and attractive valuations at current levels. We maintain Neutral on Godrej Properties (CMP Rs661; 5% upside potential) and HDIL (CMP Rs94; 6% upside potential) and downgrade DLF to Neutral (CMP Rs231; 4% downside potential) as current valuations offer limited upside. Exhibit 58: Ranking coverage companies on the key to success parameters
APIL Low Gearing Visibility on nearterm cashflows Quantity/Quality of land bank record Transparency / disclosures Valuation upside discount to NAV DLF GPL HDIL JIL ORL Sobha SRL Best placed ORL ORL, SRL JIL, Sobha, DLF ORL, Sobha, JIL ORL, Sobha, GPL APIL, Sobha, JIL

Oberoi Realty, Sobha and Jaypee Infra are our top picks in the space

We downgrade DLF to Neutral as current valuations offer limited upside

ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF. Execution track

Source: IDFC Securities Research

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Rationale for premium/discount to NAV

We assign premium/discount on FY13E NAV to arrive at target prices for our coverage companies. The extent of premium/discount is largely the outcome of companies rating on key to success parameters. Exhibit 59: FY13E NAV summary and rationale for premium/ discounts to NAV
Company
DLF Oberoi Realty Jaypee Infratech Godrej Properties HDIL Sobha Developers Sunteck Realty APIL

Price FY13E NAV/ Share

231 234 60 661 94 230 352 36 247 298 105 631 142 392 539 94

Prem./ (disc.)
(10.0) 10.0 (20.0) 10.0 (30.0) (20.0) (20.0) (30.0)

Target
222 328 84 694 99 314 431 66

Upside Current disc to NAV

(7) (21) (42) 5 (34) (41) (35) (62) (4) 40 39 5 6 36 23 83

Rationale for premium/discount

Slowdown in new launches/sales; high gearing Value accretion from new land/project acquisitions Regional agitations impacting new launch/sales; uncertainty over Expressway traffic Value accretion from new JDAs Uncertainty over MIAL and Virar Rental Housing; approval delays in Mumbai Geographic risk; high land bank valuation Execution risk, approval delays in Mumbai High gearing, low margins, significant execution scale-up required

price potential

Source: IDFC Securities Research

Change in estimates
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To account for slowdown in sales volumes and increasing margin pressures, we have reduced our FY12/13 revenue estimates by 1-17% and PAT estimates by 4-30% for the coverage universe.

Exhibit 60: Revision in estimates of coverage companies

Revenues FY12E New
DLF Jaypee Infratech Godrej Properties HDIL Sunteck Realty APIL Source: IDFC Securities Research 100,317 26,349 7,747 21,655 229 13,765

PAT FY13E New % change

(1.5) (11.3) (15.3) (13.3) (6.0) (12.0)

FY12E New
17,215 9,167 1,432 8,759 37 1,124

FY13E New
18,833 5,807 1,797 9,099 5,170 1,574

% change
(0.7) (12.3) (0.0) (16.6) (5.6) (2.6)

% change
(10.4) (12.9) (2.5) (18.6) (0.3) (23.7)

% change
(7.9) (29.3) (28.2) (14.3) (4.2) (28.8)

105,433 33,737 12,727 25,118 11,579 17,565

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COMPANIES

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INDIA RESEARCH

COMPANY UPDATE

BSE SENSEX: 16937

20 OCTOBER 2011

Ansal Properties
Northbound!

OUTPERFORFMER

Rs36
Mkt Cap: Rs5.7bn; US$114m

Ansal Properties & Infrastructure (APIL) is leveraging its core competency of developing integrated townships in tier-II cities with focus on affordable housing. Impressive sales of >35msf (average realization of >Rs1,200psf) in the last 15 months and healthy collections (up >50% yoy to Rs1.5bn/month) underline this resurgence. With >32msf in cumulative sales (>Rs25bn in value), the 3,530-acre Lucknow township has crossed the hump and, along with the upcoming 2,504-acre Greater Noida township and 108-acre Essencia II township in Gurgaon, is expected to drive accelerated profit growth. We estimate cash generation of ~Rs14bn over FY12-14E (before land payments), which mitigates concerns on managing the Rs15bn debt (Rs6.4bn due in FY12; Rs1bn repaid in 4MFY12). Maintain Outperformer with an 18-month price target of Rs66 (30% discount to FY13E NAV of Rs94/ share). Any material step-up in land acquisition strategy and inability to refinance debt remain key risks. An integrated township developer; focus on affordable housing: Having delivered ~230msf in the last four decades, including ~98msf of mid-income housing townships, APIL is Indias leading township developer. It is currently executing 19 projects (311msf; APILs share at ~77%) with Lucknow and Greater Noida hi-tech townships among Indias largest. APILs 10,136-acre land bank (average cost of Rs180psf; ~74% acquired) provides a competitive edge.
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Strong rebound from the lows: Quest to accumulate land for the Lucknow and Greater Noida mega projects led to build-up of >Rs17bn of high-cost debt as of Mar-10 and stifled growth as sales momentum waned over FY0810. Capital-raising of Rs3.8bn in FY11, strong operating performance, >Rs15bn of customer advances and Rs1.8bn of cash generation (before interest payout) have enabled APIL to repay high-cost debt and put wheels back on the business. With strong demand across townships, we expect APIL to sell ~52msf over FY12-14E. A proxy to the affordable housing theme; Outperformer: APILs mid-income housing focus has enabled it to sell a staggering ~33msf of area in last 17 months (sales value of >Rs36bn). Significant growth visibility in three of its largest projects (Lucknow, Greater Noida and Gurgaon) and >Rs35bn of pending cash flows on sold projects lend added comfort on near-term profit growth and mitigate concerns on high debt (gearing at 0.9x as of Q1FY12). At 3.3x FY13E earnings and 30% discount to our FY13E NAV, we see a strong case for re-rating of the stock. Key valuation metrics
As on 31 March
Net sales (Rs m) Adj. net profit (Rs m) Shares in issue (m) Adj. EPS (Rs) % growth PER (x) Price/Book (x) EV/EBITDA (x) RoE (%) RoCE (%)

Price performance
FY09
7,410 339 114 3.0 (80.5) 12.1 0.3 13.9 2.6 4.9

FY10
8,532 508 123 4.1 38.4 8.7 0.3 11.6 3.6 5.9

FY11
12,571 1,015 157 6.4 56.1 5.6 0.3 8.8 6.4 7.0

FY12E
13,765 1,124 157 7.1 10.7 5.0 0.3 7.4 5.9 7.8

FY13E
17,565 1,574 157 10.0 40.0 3.6 0.2 4.6 7.1 12.4

120

Ansal Properties & Infrastructure

Sensex

90

60

30

Aug-11

Jul-11

Dec-10

Sep-11

Feb-11

Oct-10

Nov-10

Mar-11

May-11

Bloomberg: APIL IN 1-yr High/ Low (Rs): 95/26

6m avg daily vol. (m): 0.30 Free Float (%): 53.6

Nitin Agarwal nitin.agarwal@idfc.com 91-22-6622 2568

Vineet Chandak vineet.chandak@idfc.com 91-22-6622 2579

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Oct-11

Jan-11

Apr-11

Jun-11

Income statement
Year to 31 Mar (Rs m)
Net sales % growth Operating expenses EBITDA % growth Other income Net interest Depreciation Pre-tax profit Deferred Tax Current Tax Profit after tax Minorities Non-recurring items Net profit after non-recurring items % growth 326 (81.2) 647 98.6 1,015 56.9 1,124 10.7 1,574 40.0

Key ratios
FY09
7,410 (25.9) 6,038 1,372 (47.8) 154 (972) 113 440 119 320 19 (13)

FY10
8,532 15.1 6,646 1,886 37.5 181 (1,062) 97 908 337 572 (63) 139

FY11
12,571 47.3 10,150 2,421 28.4 307 (923) 96 1,709 629 1,081 (66) -

FY12E
13,765 9.5 10,919 2,846 17.6 140 (1,200) 109 1,678 570 1,107 16 -

FY13E
17,565 27.6 13,015 4,550 59.9 139 (1,105) 109 3,475 1,147 2,329 (755) -

Year to 31 Mar
EBITDA margin (%) EBIT margin (%) PAT margin (%) RoE (%) RoCE (%) Gearing (x)

FY09
18.5 17.0 4.6 2.6 4.9 1.0

FY10
22.1 21.0 6.0 3.6 5.9 1.2

FY11 FY12E FY13E

19.3 18.5 8.1 6.4 7.0 0.9 20.7 19.9 8.2 5.9 7.8 0.7 25.9 25.3 9.0 7.1 12.4 0.5

Valuations
Year to 31 Mar
Reported EPS (Rs) Adj. EPS (Rs) PER (x) Price/Book (x) EV/Net sales (x) EV/EBITDA (x) EV/CE (x)

FY09
2.9 3.0 12.4 0.3 2.6 14.0 0.7

FY10
5.3 4.1 9.0 0.3 2.6 11.7 0.7

FY11 FY12E FY13E

6.4 6.4 5.7 0.3 1.7 8.9 0.6 7.1 7.1 5.2 0.3 1.5 7.4 0.6 10.0 10.0 3.7 0.3 1.2 4.6 0.6

Balance sheet
As on 31 Mar (Rs m)
Paid-up capital Reserves & surplus Total shareholders' equity Total Debt Deferred tax liabilities Other non-current liabilities Total liabilities Total equity & liabilities Net fixed assets Investments Total current assets Other non-current assets Working capital Total assets

Shareholding pattern
FY09
568

FY10
616

FY11 FY12E
787 15,780 17,381 16,100 21 687 39,158 56,539 1,297 122 55,119 1 32,769 56,539 787 16,825 20,931 14,082 21 687 33,926 54,857 1,188 122 53,546 1 34,410 54,857

FY13E
787 18,289 23,150 12,069 21 687 31,346 54,496 1,079 122 53,293 1 34,724 54,496

Public & Others 17.3%

Foreign 23.0%

11,464 12,375 13,944 14,320 14,040 17,183 (46) 449 41 313

Total current liabilities 15,381 18,430 22,350 19,135 18,570 ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF. Institutions

2.8% Non Promoter Corporate Holding 9.2% Promoters 47.7%

As of June 2011

29,823 35,967 43,767 50,287 1,536 281 1 1,243 122 1

41,949 48,922 26,569 30,492 43,767 50,287

Cashflow statement
Year to 31 Mar (Rs m)
Pre-tax profit Depreciation Chg in Working capital Total tax paid Ext ord. Items & others Operating cash Inflow Capital expenditure Free cash flow (a+b) Chg in investments Debt raised/(repaid) Capital raised/(repaid) Dividend (incl. tax) Misc Net chg in cash

FY09
440 113 (6,105) (119) 121 (5,551) (102) (5,652) 17 3,167 97 (67) 1,663 (776)

FY10
908 97 (3,855) (337) (136) (3,322) 196 (3,126) 159 3,143 455 (77) (487) 68

FY11
1,709 96 (2,116) (629) 374 (565) (150) (715) (1,083) 2,615 (79) (577) 161

FY12E
1,678 109 (769) (570) 447 (0) 447 (2,018) (79) 2,522 873

FY13E
3,475 109 (1,584) (1,147) 853 (0) 853 (2,014) (110) (1,271)

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INDIA RESEARCH

COMPANY UPDATE

BSE SENSEX: 16937

20 OCTOBER2011

DLF
Non-core to drive core valuation

NEUTRAL

Rs231
Mkt Cap: Rs392bn; US$7.9bn

DLF is grappling with high debt, input cost inflation and slower sales volumes. Also, operational cash flows have been muted in the last few quarters due to slower approvals and fewer new launches. Nevertheless, leasing business has remained strong with >4msf leased in FY11. To tide over the difficult business environment, DLF is tweaking its business strategy in favour of higher plotted development to maintain margins and limiting new office supply to improve average rentals. However, this conservative business strategy is bound to constrain operational cash flows. While we have assumed Rs30bn of non-core realizations over FY12-13E, DLFs ability to achieve the targeted non-core divestment (Rs60bn-70bn over next 2-3 years) can drive significant debt reduction and improve investor sentiment. Given the limited visibility on core business scale-up and the recent up-move in the stock price (20% in last one month), we believe upside is capped from these levels. We downgrade the stock to Neutral with a revised 12-month price target of Rs222 a 10% discount to FY13E NAV of Rs247/ share. Persistently high debt; falling margins: DLFs gearing has remained high at 0.9x levels for more than a year as customer inflows, led by limited new launches, fail to witness any significant growth. Meanwhile, rising interest rates (cost of debt up by >150bp in three quarters), combined with sharp inflation in input costs, have hurt operational margins and further constrained operational cashflows to reduce debt.
ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 inflation and protect margins, DLF Change in strategy; non-core asset sales key to debt reduction: To tackle high EDT. DownloadPDF.

is now focusing on higher plotted development (less construction-intensive with accelerated cash flows) and limited new office supply to increase average rentals. Also, DLF is targeting to monetize Rs60bn-70bn from noncore asset divestment (over the next 2-3 years) and utilize the same to reduce debt. Sluggish growth; downgrade to Neutral: Given limited volume growth, we believe DLFs operational cash flows will remain constrained in the near term and any debt reduction will be solely on realizations from non-core divestments. We assume Rs30bn of divestment proceeds and ~Rs40bn of operational surplus over FY12-13E, and the same to be utilized to cut gearing to 0.75x by FY13E. With limited visibility on core business scale-up, we downgrade the stock to Neutral with a revised 18-month price target of Rs222 10% discount to FY13E NAV of Rs247/ share. Higher non-core realizations remain an upside risk. Key valuation metrics
As on 31 March
Net sales (Rs m) Adj. net profit (Rs m) Shares in issue (m) Adj. EPS (Rs) % growth PER (x) Price/Book (x) EV/EBITDA (x) RoE (%) RoCE (%)

Price performance
FY09
100,354 44,682 1,697 26.3 (42.6) 8.8 1.6 9.8 19.9 13.4

FY10
74,229 18,141 1,697 10.7 (59.4) 21.6 1.3 17.2 6.5 6.3

FY11
95,606 15,424 1,698 9.1 (15.0) 25.4 1.5 16.6 5.3 5.6

FY12E
17,215 1,698 10.1 11.6 22.7 1.4 14.0 6.2 6.8

FY13E
18,833 1,698 11.1 9.4 20.8 1.3 12.9 6.5 7.2

120

DLF

Sensex

100,317 105,433
100 80

60

40

Aug-11

Jul-11

Dec-10

Oct-10

Sep-11

Feb-11

Nov-10

Mar-11

May-11

Bloomberg: DLFU IN 1-yr High/ Low (Rs): 374/173

6m avg daily vol. (m): 7.45 Free Float (%): 21.4

Nitin Agarwal nitin.agarwal@idfc.com 91-22-6622 2568

Vineet Chandak vineet.chandak@idfc.com 91-22-6622 2579

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Oct-11

Jan-11

Apr-11

Jun-11

Income statement
Year to 31 Mar (Rs m)
Net sales % growth Operating expenses EBITDA % growth Other income Net interest Depreciation Pre-tax profit Current Tax Profit after tax Minorities Non-recurring items Net profit after non-recurring items % growth 44,696 (42.8) 17,199 (61.5) 16,396 (4.7) 17,215 5.0 18,833 9.4

Key ratios
FY09
100,354 (30.5) 44,454 55,900 (42.5) 3,960 2,390 51,710 6,753 44,957 (275) 14

FY10
74,229 (26.0) 39,113 35,116 (37.2) 4,281 3,249 25,055 7,022 18,033 108 (942)

FY11
95,606 28.8 58,079 37,527 6.9 5,838 6,307 20,002 4,594 15,408 16 972

FY12E
100,317 4.9 56,758 43,559 16.1 6,313 (17,747) 6,741 25,384 6,854 18,530 (1,315) -

FY13E
105,433 5.1 59,764 45,669 4.8 6,534 (16,140) 7,138 28,925 7,810 21,115 (2,282) -

Year to 31 Mar
EBITDA margin (%) EBIT margin (%) PAT margin (%) RoE (%) RoCE (%) Gearing (x)

FY09
55.7 53.3 44.5 19.9 13.4 0.7

FY10
47.3 42.9 24.4 6.5 6.3 0.7

FY11 FY12E FY13E

39.3 32.7 16.1 5.3 5.6 0.9 43.4 36.7 17.2 6.2 6.8 0.8 43.3 36.5 17.9 6.5 7.2 0.7

(5,548) (11,100) (17,056)

Valuations
Year to 31 Mar
Reported EPS (Rs) Adj. EPS (Rs) PER (x) Price/Book (x) EV/Net sales (x) EV/EBITDA (x) EV/CE (x)

FY09
26.3 26.3 8.8 1.6 5.5 9.8 1.2

FY10
10.1 10.7 21.6 1.3 8.2 17.2 1.1

FY11 FY12E FY13E

9.7 9.1 25.4 1.5 6.5 16.6 1.1 10.1 10.1 22.7 1.4 6.1 14.0 1.1 11.1 11.1 20.8 1.3 5.6 12.9 1.1

Balance sheet
As on 31 Mar (Rs m)
Paid-up capital Reserves & surplus Total current liabilities Deferred tax liabilities Total liabilities Net fixed assets Investments Total current assets Other non-current assets Working capital Total assets

FY09

FY10

FY11 FY12E
21,498 21,498

FY13E
21,498

Shareholding pattern
Public & Others 4.4% Foreign 15.1% Institutions 0.4% Non Promoter 1.5%

17,354 62,593

224,184 241,735 241,824 254,795 269,385 41,403 46,370 2,515 92,251 (1,633) 38,763 89,231 (1,633) 38,763 89,572 (1,633) 38,763

Total shareholders' equity 247,875 310,606 269,074 282,045 296,635

Corporate Holding Total Debt 163,201 216,766 239,903 220,755 201,214 ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF.
Other non-current liabilities 36,840 41,401

241,445 307,052 369,283 347,116 327,916 136,006 276,868 281,841 285,186 287,890 14,025 55,052 22,651 12,680 9,958 13,840 9,958 13,840 9,958 13,840 316,638 273,058 332,718 320,178 312,862 275,235 226,688 240,467 230,946 223,291 489,320 617,659 638,357 629,162 624,551

Total equity & liabilities 489,320 617,659 638,357 629,162 624,551

Promoters 78.6%
As of June 2011

Cashflow statement
Year to 31 Mar (Rs m)
Pre-tax profit Depreciation Total tax paid Ext ord. Items & others Operating cash Inflow Capital expenditure Free cash flow (a+b) Chg in investments Debt raised/(repaid) Capital raised/(repaid) Dividend (incl. tax) Misc Net chg in cash

FY09
51,710 2,390 (6,753) 7,323 (6,668)

FY10
25,055 3,249 45,873 (7,022) 4,561 71,716

FY11
20,002 6,307 (9,600) (4,594) (2,638) 9,476 (2,964) 45,094 23,136 (7,973) 4,179

FY12E
25,384 6,741 3,351 (6,854) 28,623 18,536 (19,147) (4,244) (1,315) (6,170)

FY13E
28,925 7,138 9,060 (7,810) 37,313 (9,842) 27,470 (19,541) (4,244) (2,282) 1,404

Chg in Working capital (61,339)

(40,086) (134,141) (12,440) (10,086) (46,754) (62,425) (5,134) (41,019) 40,431 4,458 (3,716) 1,250 (9,465) 53,565 (4,168) (2,674)

45,366 (39,696) 6,007 (13,420)

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INDIA RESEARCH

COMPANY UPDATE

BSE SENSEX: 16937

20 OCTOBER2011

Godrej Properties
Premium valuations

NEUTRAL

Rs661
Mkt Cap: Rs46bn; US$927

Godrej Properties (GPL), backed by the strong Godrej brand, remains one of the most scalable business models in the sector (7 new joint development projects added since listing in 2010). However, we see limited value creation from the new JDAs given the significant portion of area/ revenues being shared with land owners (especially the recent agreement with Godrej & Boyce for mere 10% revenue share in all future developments at Vikhroli parcel). Also, sales momentum at Ahmedabad Township is slowing due to sharp price appreciation and competition from another township in vicinity. While sluggish sales in commercial projects in Kolkata and Chandigarh have kept debt levels high (D/E of 0.86x as of Jun-11), the recent commercial project in BKC Mumbai (JV with Jet Airways) will further strain the balance sheet in the near term (incremental debt of ~Rs5bn). Resultant, we reduce premium to 10% (from 20% earlier) on FY13E NAV and arrive at an 18-month target price of Rs694/share. At CMP, we believe valuations are expensive with limited upside potential. Maintain Neutral. Limited value accretion from new JDAs: While GPL has demonstrated strong ability to close new JDAs on a regular basis, we believe value accretion in such projects remains limited due to relatively higher share of the land owner. Also, recent agreement with Godrej & Boyce for mere 10% revenue share in all future developments at Vikhroli parcel caps valuation upsides from the parcel. From seven projects (5.5 msf) added since listing, we estimate an NAV accretion of Rs2bn (Rs305psf) lower than the Rs563psf NAV from existing portfolio.
ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF.

Signs of slowdown in Ahmedabad Township: A sharp appreciation in prices (up ~50% since launch) and increased competition in the region (Adani Township; >600 acres) are dampening the demand for GPLs project in Ahmedabad. We believe sales will not pick up unless there is a 10-15% correction in prices. As a result, we have moderated our sales assumption and deferred sales by 3-5 years for the project. Debt to increase further; expensive valuations: The recent JV with Jet Airways (Mumbai) will increase GPLs debt by ~Rs5bn, further straining the balance sheet. The stock currently trades at premium valuations of 3.9x FY13E P/B and 26x FY13E P/E. We value GPLs existing portfolio at an FY13E NAV of Rs631/share. We assign a 10% premium for potential value creation from the new JDAs (Rs114/share of NAV added from new JDAs since Mar10) over the next 18 months. Maintain Neutral with a price target of Rs697/ share. Key valuation metrics
As on 31 March
Net sales (Rs m) Adj. net profit (Rs m) Shares in issue (m) Adj. EPS (Rs) % growth PER (x) Price/Book (x) EV/EBITDA (x) RoE (%) RoCE (%)

Price performance
FY09
2,053 755 60 12.5 (47.6) 52.9 13.3 65.7 27.9 9.0

FY10
2,427 1,230 70 17.6 40.9 37.5 5.6 293.5 22.0 1.2

FY11
4,515 1,310 70 18.8 6.5 35.2 5.0 51.7 15.0 5.8

FY12E
7,747 1,432 70 20.5 9.3 32.2 4.5 33.0 14.6 8.1

FY13E
12,727 1,797 70 25.7 25.5 25.7 3.9 19.2 16.2 12.3

120

Godrej Properties

Sensex

105

90

75

60

Aug-11

Jul-11

Dec-10

Sep-11

Feb-11

Oct-10

Nov-10

Mar-11

May-11

Bloomberg: GPL IN 1-yr High/ Low (Rs): 845/532

6m avg daily vol. (m): 0.04 Free Float (%): 16.2

Nitin Agarwal nitin.agarwal@idfc.com 91-22-6622 2568

Vineet Chandak vineet.chandak@idfc.com 91-22-6622 2579

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Oct-11

Jan-11

Apr-11

Jun-11

Income statement
Year to 31 Mar (Rs m)
Net sales % growth Operating expenses EBITDA % growth Other income Net interest Depreciation Pre-tax profit Current Tax Profit after tax Minorities Non-recurring items Net profit after non-recurring items % growth 745 (48.3) 1,228 64.8 1,309 6.5 1,432 9.4 1,797 25.5

Key ratios
FY09
2,053 (9.7) 1,348 704 (51.1) 450 (53) 11 1,089 325 764 (9) (10)

FY10
2,427 18.2 2,249 178 (74.7) 1,477 (6) 26 1,624 382 1,242 (12) (2)

FY11
4,515 86.0 3,464 1,051 489.1 1,074 (34) 40 2,051 622 1,429 (118) (2)

FY12E
7,747 71.6 5,988 1,759 67.4 651 (127) 37 2,245 629 1,617 (185) -

FY13E
12,727 64.3 9,715 3,012 71.3 445 (289) 37 3,133 940 2,193 (396) -

Year to 31 Mar
EBITDA margin (%) EBIT margin (%) PAT margin (%) RoE (%) RoCE (%) Gearing (x)

FY09
34.3 33.8 36.8 27.9 9.0 2.2

FY10
7.3 6.3 50.7 22.0 1.2 0.9

FY11 FY12E FY13E

23.3 22.4 29.0 15.0 5.8 1.0 22.7 22.2 18.5 14.6 8.1 1.2 23.7 23.4 14.1 16.2 12.3 1.0

Valuations
Year to 31 Mar
Reported EPS (Rs) Adj. EPS (Rs) PER (x) Price/Book (x) EV/Net sales (x) EV/EBITDA (x) EV/CE (x)

FY09
12.3 12.5 52.9 13.3 22.5 65.7 4.7

FY10
17.6 17.6 37.5 5.6 21.6 293.5 3.3

FY11 FY12E FY13E

18.7 18.8 35.2 5.0 12.0 51.7 2.8 20.5 20.5 32.2 4.5 7.5 33.0 2.5 25.7 25.7 25.7 3.9 4.6 19.2 2.3

Balance sheet
As on 31 Mar (Rs m)
Paid-up capital Reserves & surplus Total shareholders' equity Total current liabilities Deferred tax liabilities Other non-current liabilities Total liabilities Total equity & liabilities Net fixed assets Investments Total current assets Other non-current assets Working capital Total assets

FY09
604 2,384 3,005 4,757 (5) 198 11,514 73 319

FY10
699 7,474 8,202 1,621 (3) 370 9,084 116 2,078 163

FY11 FY12E
699 8,418 9,264 2,920 (8) 500 12,860 22,124 160 141 21,508 315 18,589 22,124 699 9,491 10,338 4,612

FY13E
699 10,965 11,812 5,681 (8) 500 18,558 30,370 2,035 141 27,879 315 22,198 30,370

Shareholding pattern
Foreign 5.6% Institutions 2.0%

Non Promoter Corporate Holding 3.1% Total Debt 6,563 7,096 9,449 12,703 12,385 ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF.
(8) 500 17,807 28,146 1,030 141 26,660 315 22,048 28,146

Public & Others 5.5%

14,518 17,287

14,127 14,930 9,370 13,309 14,518 17,287

Promoters 83.8%
As of June 2011

Cashflow statement
Year to 31 Mar (Rs m)
Pre-tax profit Depreciation Chg in Working capital Total tax paid Ext ord. Items & others Operating cash Inflow Capital expenditure Free cash flow (a+b) Chg in investments Debt raised/(repaid) Capital raised/(repaid) Dividend (incl. tax) Misc Net chg in cash

FY09
1,089 11 (4,006) (325) (212) (3,442) (31) (3,474) 3,832 0 (177) 1 182

FY10
1,624 26 (3,253) (382) 171 (1,814) 88 (1,726) (2,078) 532 4,282 (326) 2 686

FY11
2,051 40 (4,744) (622) 130 (3,146) (236) (3,382) 1,937 2,353 0 (365) (7) 535

FY12E
2,245 37 (3,987) (629) (2,333) (907) (3,240) 3,255 0 (358) (185) (528)

FY13E
3,133 37 (339) (940) 1,891 (1,042) 849 (318) 0 (323) (396) (188)

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INDIA RESEARCH

COMPANY UPDATE

BSE SENSEX: 16937

20 OCTOBER 2011

HDIL
Uncertain time

NEUTRAL

Rs94
Mkt Cap: Rs39bn; US$782m

HDIL, Mumbais largest slum redeveloper, is struggling to get its flagship Mumbai airport (MIAL) rehabilitation project on track as newer problems continue to surface the latest being determination of eligibility criteria for families. While focus on traditional real estate has paid off (>Rs46bn of sales since Mar-09), TDR sales have seen a gradual decline in the last few quarters. With HDIL deciding to halt work till emergence of clarity on MIAL future course, TDR generation is also expected to take a significant hit (current inventory - ~1msf; balance capacity 3-5msf). With MIAL contributing >1/3rd to HDILs NAV, uncertainty around project execution poses a significant risk to overall valuation. Also, a large chunk of HDILs land bank is located in extended suburbs (Vasai and Virar) and outside MMR (Hyderabad and Kochi) with limited visibility on development timelines. Maintain Neutral with an 18-month target price of Rs99 a 30% discount to our FY13E NAV of Rs142/ share. MIAL uncertainty persists: Governments ineptness in determining eligible families has resulted in further delay in the relocation process at Mumbai Airport project. While construction work was underway on ~33K units (>75% work completed on ~24K units; >9K units ready), HDIL has stopped work till further clarity on the eligibility. Although the government is working towards finalizing fresh criteria, we expect further delays and thereby lower TDR sales going forward. Uncertainty also remains over allocation of 65 acres of land key to MIALs valuation.
ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19its projects has yielded substantial Real estate sales too witness slowdown: HDILs strategy to aggressively price EDT. DownloadPDF.

returns - reflected in the >Rs46bn of sales achieved in less than three years. However, slower approvals as well as falling affordability have dented the sales momentum in the last few quarters. We expect volumes to remain muted unless property prices correct by 10-25% from current levels. Limited visibility on land bank; maintain Neutral: With a large chunk of its land bank located in extended suburbs (Vasai and Virar) and outside MMR (Hyderabad and Kochi), we see limited visibility on development timelines. We have excluded Phase II & III of MIAL and also assumed lower sales for land bank valuations. Maintain Neutral with an 18-month target price of Rs99 a 30% discount to our FY13E NAV of Rs142/ share. Favourable development on MIAL project remains the key upside risk.

Key valuation metrics

As on 31 March
Net sales (Rs m) Adj. net profit (Rs m) Shares in issue (m) Adj. EPS (Rs) % change PE (x) Price/ Book (x) EV/ EBITDA (x) RoE (%) RoCE (%)

Price performance
FY09
17,284 6,765 275 24.6 (62.7) 3.8 0.6 8.6 16.8 10.1

FY10
15,021 5,723 359 15.9 (35.1) 5.9 0.5 8.4 10.0 7.3

FY11
18,500 8,273 415 19.9 25.0 4.7 0.4 6.8 10.1 8.2

FY12E
21,655 8,759 441 19.9 (0.4) 4.7 0.4 5.8 8.8 8.2

FY13E
25,118 9,099 441 20.6 3.9 4.6 0.4 5.9 8.3 8.0

110

HDIL

Sensex

90

70

50

30

Aug-11

Dec-10

Oct-10

Sep-11

Feb-11

Jul-11

Nov-10

Mar-11

May-11

Bloomberg: HDIL IN 1-yr High/ Low (Rs): 278/89

6m avg daily vol. (m): 7.23 Free Float (%): 61.4

Nitin Agarwal nitin.agarwal@idfc.com 91-22-6622 2568

Vineet Chandak vineet.chandak@idfc.com 91-22-6622 2579

57 | OCTOBER 2011

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Oct-11

Jan-11

Apr-11

Jun-11

Income statement
Year to 31 Mar (Rs m)
Net sales % growth Operating expenses EBITDA % change Other income Net interest Depreciation Pre-tax profit Deferred tax Current tax Profit after tax Minorities Net profit after non-recurring items % change 6,765 (52.0) 5,723 (15.4) 8,273 44.6 8,759 5.9 9,099 3.9

Key ratios
FY09
17,284 (27.4) 9,503 7,781 (50.0) 540 (582) 25 7,714 943 6,771 (5)

FY10
15,021 (13.1) 7,129 7,893 1.4 345 (462) 723 7,053 1,330 5,723 -

FY11
18,500 23.2 7,464 11,036 39.8 499 (836) 838 9,861 1,582 8,279 (6)

FY12E
21,655 17.1 9,068 12,587 14.1 549 (880) 879 11,376 2,616 8,759 -

FY13E
25,118 16.0 12,027 13,091 4.0 659 (853) 923 11,973 2,873 9,099 -

Year to 31 Mar
EBITDA margin (%) EBIT margin (%) PAT margin (%) RoE (%) RoCE (%) Gearing (x)

FY09
45.0 44.9 39.1 16.8 10.1 0.9

FY10
52.5 47.7 38.1 10.0 7.3 0.6

FY11 FY12E FY13E

59.7 55.1 44.7 10.1 8.2 0.5 58.1 54.1 40.4 8.8 8.2 0.4 52.1 48.4 36.2 8.3 8.0 0.4

Valuations
Year to 31 Mar
Reported EPS (Rs) Adj. EPS (Rs) PE (x) Price/ Book (x) EV/ Net sales (x) EV/ EBITDA (x) EV/ CE (x)

FY09
24.6 24.6 3.8 0.6 3.9 8.6 0.8

FY10
15.9 15.9 5.9 0.5 4.4 8.4 0.6

FY11 FY12E FY13E

19.9 19.9 4.7 0.4 4.0 6.8 0.5 19.9 19.9 4.7 0.4 3.4 5.8 0.5 20.6 20.6 4.6 0.4 3.1 5.9 0.5

Balance sheet
As on 31 Mar (Rs m)
Paid-up capital Reserves & surplus Total shareholders' equity Total current liabilities Deferred tax liabilities Other non-current liabilities Total liabilities Total equity & liabilities Net fixed assets Investments Total current assets Deferred tax assets Other non-current assets Working capital Total assets

FY09
2,755

FY10
3,588

FY11 FY12E
4,150 4,410

FY13E
4,410

Shareholding pattern
Public & Others 8.9% Foreign 42.3%

41,463 66,840 44,217 70,429 6,676 30 16 9,246 63 13

88,767 101,387 110,031 92,918 105,797 114,440 22,245 63 1,070 66,580 1,811 520 12 2,591 26,922 63 1,070 68,690 1,431 520 12 2,591 11,281 63 1,070 53,049 1,008 520 12 2,591

Total debt 41,433 40,517 43,202 40,635 40,635 ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF.

48,155 49,839 749 2,491 6 478 2,046 2,429 12 2,591

Promoters 38.6%

92,373 120,268 159,498 174,487 167,489

Institutions 0.4% Non Promoter Corporate Holding 9.8%

As of June 2011

88,648 113,191 154,564 169,934 163,360

81,972 103,945 132,319 143,011 152,079 92,372 120,269 159,498 174,487 167,490

Cashflow statement
Year to 31 Mar (Rs m)
Pre-tax profit Depreciation Total tax paid Ext ord. Items & others Operating cash inflow Capital expenditure Free cash flow (a+b) Chg in investments Debt raised/ (repaid) Capital raised/ (repaid) Dividend (incl. tax) Misc Net chg in cash

FY09
7,714 25 (943) (1,542) (12,979) (178) (13,157) (576) 10,306 0 677 (2,750)

FY10
7,053 723 (1,330) 153 (1,348) 62 (916) 21,239 (3,507) 7,163

FY11
9,861 838 (1,582) 1,057 (602) 1,909 2,685 16,657 (2,447) (293)

FY12E
11,376 879 (8,890) (2,616) 749 (500) 249 (2,567) 4,558 (438) 1,802

FY13E
11,973 923 (13,435) (2,873) (3,413) (500) (3,913) (455) (1) (4,369)

Chg in Working capital (18,234) (14,966) (28,667)

(8,366) (18,494) (9,715) (19,096)

58 | OCOTBER 2011

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INDIA RESEARCH

COMPANY UPDATE

BSE SENSEX: 16937

20 OCTOBER 2011

Jaypee Infratech
Concerns unwarranted!

OUTPERFORFMER

Rs60
Mkt Cap: Rs84bn; US$1.7bn

With its high quality and low cost land bank (530msf; >60% in NCR; acquisition cost - Rs40psf, entirely paid for) backed by superior execution capabilities, Jaypee Infratech (JIL) is one of the most competitive real estate business models in India. In the recent past, controversies around land acquisition in NCR region have impacted JILs sales volumes in Noida with 1.3msf sold in Q1FY12 vs. its quarterly run-rate of 2-2.5msf and also delayed launch of the Agra and Greater Noida townships. However, with the anticipated launch of the new Greater Noida land parcel (located in the vicinity of F1 race track) in Q3FY12, we expect the sales momentum to revive. With Yamuna Expressway (YE) nearing completion (>90% complete; JIL confident of commissioning by Dec-11), we expect interest cost breakeven in the next 6-7 years. With Rs114bn of real estate sales achieved till date, we estimate operational cash surplus of Rs40bn over FY12-14E reducing concerns over Rs60bn Expressway debt. Maintain Outperformer with an 18-month price target of Rs84 20% discount to FY13E NAV of Rs105/ share. Land acquisition crisis positive for JIL in the medium term: While the ongoing unrest for land acquisitions in NCR has created uncertainty around project execution and driven away housing demand in the region, we expect the issue to be resolved with implementation of the proposed land acquisition bill (expected in next 3-6 months). With its extremely low land acquisition costs, large land bank sufficing for next 20 years and a favorable Supreme court verdict on acquisitions, we believe JIL is in a strong position as costs go up for other players.
ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF.

YE nearing completion; expect good response: Work on YE is >90% complete (20% concreting and 16% interchanges work outstanding) and JIL remains confident of commissioning by Dec-11. We maintain our Jul-12 commissioning date, and expect interest cost breakeven in the 6-7 years with conservative traffic assumptions. Strong cash flows from real estate; attractive valuations: JIL has achieved sales of Rs114bn in Noida till date. With Agra and Greater Noida townships due for launch in next 6-12 months, we expect JIL to generate real estate cash surplus of Rs40bn over FY12-14E. The stock currently trades at >40% discount to our FY13E NAV (Rs105/ share). Reiterate Outperformer with an 18-month price target of Rs84/share 20% discount to the NAV.

Key valuation metrics

As on 31 March
Net sales (Rs m) Adj. net profit (Rs m) Shares in issue (m) Adj. EPS (Rs) % growth PER (x) Price/Book (x) EV/EBITDA (x) RoE (%) RoCE (%)

Price performance
FY09
5,545 2,667 966 2.8 (2,269.7) 21.8 4.7 23.7 24.3 14.0

FY10
6,407 4,867 1,226 4.0 43.8 15.2 3.8 19.1 30.3 10.5

FY11
27,787 14,351 1,389 10.3 160.2 5.8 1.8 7.1 42.7 18.5

FY12E
26,349 9,167 1,389 6.6 (36.1) 9.1 1.5 12.9 17.7 9.3

FY13E
33,737 5,807 1,389 4.2 (36.7) 14.4 1.4 9.5 10.0 10.2

110

Jaypee Infratech

Sensex

90

70

50

30

Aug-11

Jul-11

Dec-10

Oct-10

Sep-11

Feb-11

Nov-10

Mar-11

May-11

Bloomberg: JPIN IN 1-yr High/ Low (Rs): 95/36

6m avg daily vol. (m): 0.78 Free Float (%): 16.8

Nitin Agarwal nitin.agarwal@idfc.com 91-22-6622 2568

Vineet Chandak vineet.chandak@idfc.com 91-22-6622 2579

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Oct-11

Jan-11

Apr-11

Jun-11

Income statement
Year to 31 Mar (Rs m)
Net sales % growth Operating expenses EBITDA % growth Other income Net interest Depreciation Pre-tax profit Current Tax Profit after tax Net profit after non-recurring items % growth 2,667 (2,271.9) 4,867 82.5 14,351 194.8 9,167 (36.1) 5,807 (36.7)

Key ratios
FY09
5,545 2,387 3,159 (8,896.0) 17 140 3,036 369 2,667

FY10
6,407 15.5 493 5,913 87.2 122 (8) 162 5,866 999 4,867

FY11
27,787 333.7 9,677 18,110 206.3 199 (77) 86 18,146 3,796 14,351

FY12E
26,349 (5.2) 14,837 11,512 (36.4) 200 (100) 153 11,459 2,292 9,167

FY13E
33,737 28.0 17,941 15,796 37.2 300 (6,338) 2,500 7,259 1,452 5,807

Year to 31 Mar
EBITDA margin (%) EBIT margin (%) PAT margin (%) RoE (%) RoCE (%) Gearing (x)

FY09
57.0 54.4 48.1 24.3 14.0 1.3

FY10
92.3 89.8 76.0 30.3 10.5 2.0

FY11 FY12E FY13E

65.2 64.9 51.6 42.7 18.5 0.9 43.7 43.1 34.8 17.7 9.3 1.2 46.8 39.4 17.2 10.0 10.2 1.1

Valuations
Year to 31 Mar
Reported EPS (Rs) Adj. EPS (Rs) PER (x) Price/Book (x) EV/Net sales (x) EV/EBITDA (x) EV/CE (x)

FY09
2.8 2.8 21.8 4.7 13.5 23.7 2.4

FY10
4.0 4.0 15.2 3.8 17.7 19.1 1.4

FY11 FY12E FY13E

10.3 10.3 5.8 1.8 4.6 7.1 1.1 6.6 6.6 9.1 1.5 5.6 12.9 1.2 4.2 4.2 14.4 1.4 4.4 9.5 1.1

Balance sheet
As on 31 Mar (Rs m)
Paid-up capital Reserves & surplus Total shareholders' equity Total current liabilities Total Debt Other non-current liabilities Total equity & liabilities Net fixed assets Total current assets Working capital Total assets

FY09
2,794

FY10
7,669

FY11 FY12E
13,889 33,740 47,629 25,327 63,321 5,977 13,889 41,935 55,824 26,552 65,000 5,977

FY13E
13,889 46,769 60,659 25,126 68,090 5,977

9,660 12,260 12,454 19,640 4,616 18,746 18,675 57,210 373 1,377

Shareholding pattern
Foreign 0.7% Institutions 9.7%

Non Promoter Corporate Holding 3.0% Total liabilities 23,664 77,333 94,625 97,529 99,194 ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF.
36,118 96,973 142,255 153,353 159,852 25,716 52,115 10,402 44,858 5,786 26,112 74,068 101,649 106,239 68,187 42,860 51,704 25,153 53,614 28,487

Public & Others 3.4%

36,118 96,973 142,255 153,353 159,852

Cashflow statement
Year to 31 Mar (Rs m)
Pre-tax profit Depreciation Chg in Working capital Total tax paid Ext ord. Items & others Operating cash Inflow Capital expenditure Free cash flow (a+b) Debt raised/(repaid) Capital raised/(repaid) Dividend (incl. tax) Misc Net chg in cash

FY09
3,036 140 (2,638) (369) 372 541

FY10
5,866 162 (999) 1,004 1,628

FY11
18,146 86 (3,796) 4,600 2,968

FY12E
11,459 153 (381) (2,292) 8,939 (27,734) (18,795) 1,679 (972) (18,088)

FY13E
7,259 2,500 (1,821) (1,452) 6,486 (7,090) (604) 3,090 (972) 1,513

Promoters 83.2%
As of June 2011

(4,406) (16,069)

(15,638) (26,561) (22,039) (15,096) (24,933) (19,071) 16,675 250 1,829 38,535 2,600 (289) 15,913 6,111 15,372 (1,736) 289 964

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INDIA RESEARCH

COMPANY UPDATE

BSE SENSEX: 16937

20 OCTOBER 2011

Oberoi Realty
Best bet in Mumbai!

OUTPERFORFMER

Rs234
Mkt Cap: Rs76.9bn; US$1.6bn

Oberoi Realty (ORL), with a premium Mumbai portfolio of~20msf, is an ideal candidate to play Mumbais highend residential and commercial real estate. Coming out of the downcycle (2008-09) almost unscathed (no land acquisition since 2006), ORL has grown from strength to strength in the past three years with focus on execution, high corporate governance and creation of a well-diversified portfolio (~1msf of office and retail; operational fivestar hotel). Operational cashflows have been positive since FY08 and balance sheet unlevered since FY09, driving a higher-than-average RoE of >17% (post IPO). After capital-raising in FY11, ORL is sitting on significant cash of Rs13bn (recently deployed Rs3bn in a new Worli project; 50% stake) and is looking for opportunistic acquisitions in a challenging environment for most Mumbai players. We expect free cashflow of >Rs16bn and PAT CAGR of 30% for ORL over FY11-14E. We initiate coverage with Outperformer and an 18-month price target of Rs328/share 10% premium to our FY13E NAV. Premium Mumbai portfolio; near-term development visibility: ORLs portfolio of ~20msf spans four premium locations in Mumbai (Goregaon, Andheri, Worli and Mulund) and is well-diversified across asset classes (62% residential, 20% leasing). Two parcels (including Goregaon, the flagship project, >11msf developable area) have seen significant development (3.5msf delivered) while others are to be launched in FY12/ early FY13.
ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on for growth: ORL scores high on operational transparency Unmatched governance among peers; well capitalized 2011-10-22 07:54:19 EDT. DownloadPDF.

and disclosures, a key differentiator in the current environment. Also, a conservative land acquisition strategy has helped ORL remain unlevered since FY09. With positive operational cashflows and >Rs10bn from an IPO in H2FY11, ORL will, we believe, use its balance sheet muscle to expand its portfolio at attractive valuations. Strong upside potential, Outperformer: Front-loaded city-centric developments, consistent sales volumes, a superior balance sheet, relatively low execution risk and high return ratios make ORL the best bet in the Mumbai realty space. We initiate coverage with Outperformer and an 18-month price target of Rs328/share 10% premium to our FY13E NAV. Deployment of cash into NAV-accretive projects holds the key to incremental value creation. Potential downside risks to the stock include regulatory delays, inability to acquire new land parcels and a prolonged economic slowdown. Key valuation metrics
As on 31 March
Net sales (Rs m) Adj. net profit (Rs m) Shares in issue (m) Adj. EPS (Rs) % growth PER (x) Price/Book (x) EV/EBITDA (x) RoE (%) RoCE (%)

Price performance
FY09
4,254 2,515 3 967.1 (15.0) 0.2 0.0 (0.4) 18.9 17.0

FY10
7,899 4,573 289 15.8 (98.4) 14.8 3.6 13.5 27.7 27.9

FY11E
9,960 4,435 328 13.5 (14.7) 17.3 2.3 12.5 17.0 18.2

FY12E
9,772 4,684 328 14.3 5.6 16.4 2.0 11.1 13.2 15.1

FY13E
13,399 6,079 328 18.5 29.8 12.6 1.8 8.0 15.0 18.5

110

Oberoi Realty

Sensex

100

90

80

70

Aug-11

Jul-11

Nov-10

Dec-10

Oct-10

Sep-11

Feb-11

Mar-11

Bloomberg: OBER IN

6m avg daily vol. (m): 0.046 Free Float (%): 21.5

1-yr High/ Low (Rs): 307/210

Nitin Agarwal nitin.agarwal@idfc.com 91-22-6622 2568

Vineet Chandak vineet.chandak@idfc.com 91-22-6622 2579

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Oct-11

Jan-11

Apr-11

Jun-11

Income statement
Year to 31 Mar (Rs m)
Net sales % growth Operating expenses EBITDA % growth Other income Net interest Depreciation Pre-tax profit Current Tax Profit after tax Non-recurring items Net profit after non-recurring items % growth 2,522 (14.6) 4,582 81.7 4,430 (3.3) 4,684 5.7 6,079 29.8

Key ratios
FY09
4,254 (16.8) 1,780 2,474 (3.9) 295 (4) 73 2,693 177 2,515 6

FY10 FY11E
7,899 85.7 3,164 4,734 91.4 156 (0) 91 4,800 226 4,573 8 9,960 26.1 4,931 5,029 6.2 627 (2) 237 5,418 983 4,435 (5)

FY12E
9,772 (1.9) 4,062 5,711 13.5 733 (0) 280 6,164 1,479 4,684 -

FY13E
13,399 37.1 5,541 7,858 37.6 536 (0) 288 8,106 2,026 6,079 -

Year to 31 Mar
EBITDA margin (%) EBIT margin (%) PAT margin (%) RoE (%) RoCE (%) Gearing (x)

FY09
58.2 56.4 59.1 18.9 17.0 0.0

FY10 FY11E FY12E FY13E

59.9 58.8 57.9 27.7 27.9 0.0 50.5 48.1 44.5 17.0 18.2 0.0 58.4 55.6 47.9 13.2 15.1 0.0 58.6 56.5 45.4 15.0 18.5 0.0

Valuations
Year to 31 Mar
Reported EPS (Rs) Adj. EPS (Rs) PER (x) Price/Book (x) EV/Net sales (x) EV/EBITDA (x) EV/CE (x)

FY09
969.6 967.1 0.2 0.0 (0.2) (0.4) (0.1)

FY10 FY11E FY12E FY13E

15.9 15.8 14.8 3.6 8.1 13.5 3.4 13.5 13.5 17.3 2.3 6.3 12.5 1.9 14.3 14.3 16.4 2.0 6.5 11.1 1.7 18.5 18.5 12.6 1.8 4.7 8.0 1.4

Balance sheet
As on 31 Mar (Rs m)
Paid-up capital Reserves & surplus Total shareholders' equity Total current liabilities Total Debt

FY09
597

FY10
3,246

FY11E FY12E
3,641 29,834 33,475 6,002 3,641 34,026 37,667 7,515 0

FY13E
3,641 39,531 43,172 8,872 0

Shareholding pattern
Public & Others 0.7% Foreign 19.1%

13,839 15,392 14,436 18,637 3,962 107 6,746 -

Institutions 1.4% Deferred tax liabilities (7) 2 (9) ISIEmergingMarketsPDF in-iimlsingh from (9) 59.165.151.7 (9) 2011-10-22 07:54:19 EDT. DownloadPDF. on
Other non-current liabilities Total liabilities Total equity & liabilities Net fixed assets Investments Total current assets Working capital Total assets 31 4,093 6,587 150 7,831 91 6,839 8,171 790 9,770 410 6,404 39,879 9,691 650 29,538 23,536 39,879 410 7,916 45,583 11,739 650 33,194 25,680 45,583 410 9,274 52,446 14,464 650 37,332 28,460 52,446

18,530 25,477

Non Promoter Corporate Holding 0.4%

11,793 16,516 18,530 25,477

Promoters 78.4%
As of June 2011

Cashflow statement
Year to 31 Mar (Rs m)
Pre-tax profit Depreciation Chg in Working capital Total tax paid Ext ord. Items & others Operating cash Inflow Capital expenditure Free cash flow (a+b) Chg in investments Debt raised/(repaid) Capital raised/(repaid) Dividend (incl. tax) Misc Net chg in cash

FY09
2,693 73 (1,172) (177) 23 1,439 (2,297) (858) 3,692 (1,328) (212) (85) 1,208

FY10 FY11E
4,800 91 (1) (226) 60 4,723 (1,674) 3,049 (640) (107) (25) (85) (254) 1,938 5,418 237 (3,380) (983) 319 1,611 (1,757) (146) 140 10,037 (328) 503 10,205

FY12E
6,164 280 (2,567) (1,479) 2,397 (2,328) 69 0 0 (492) (423)

FY13E
8,106 288 (2,369) (2,026) 3,999 (3,013) 986 0 0 (574) 412

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INDIA RESEARCH

COMPANY UPDATE

BSE SENSEX: 16937

20 OCTOBER 2011

Sobha Developers
Long-term value!

OUTPERFORFMER

Rs230
Mkt Cap: Rs22.6bn; US$455m

Sobha Developers (Sobha), a leading residential player in South India, has a strong business model comprising judicious mix of real estate (2/3rd of total revenues; Bangalore focus) and contractual construction (>24msf area delivered; 88% for Infosys). In addition, Sobhas backward integration model provides scalability while ensuring quality/ timeliness. Over FY10-11, strong operational performance (>5msf of sales; Rs7bn of operational cash (including land sales), combined with equity-raising of ~Rs5bn, has enabled Sobha to reduce gearing levels (from 1.76x to 0.66x) and put to rest concerns on high debt. Going forward, a large low-cost land bank (235msf at an average cost of Rs102psf), an aggressive launch pipeline (11msf in FY12; entry into three new markets including Gurgaon) and enhanced focus on execution give comfort on sustainable growth. With a sustainable EPS of Rs18.5 in FY11, Sobha trades at 10.5x FY13 P/E, 1x 1-yr forward P/B and 40% discount to FY13E NAV (Rs392). Initiating coverage with Outperformer and an 18-month price target of Rs314 20% discount to FY13E NAV. Superior business model backed by large low-cost land bank: Sobhas business is well-diversified across the real estate (residential) and contractual businesses (order book of >11msf; ~3msf annual execution), with a unique backward integration model supporting growth. Proven execution skills (~40msf delivered; 8msf under construction), superior corporate governance and a large yet low-cost land bank (235msf; Rs102psf average cost) impart comfort on the business models efficacy.
ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF.

Strong project pipeline to drive future growth: We expect the rebound seen in FY11 (2.8msf sold vs. 0.88msf in FY10; Rs4bn of operating cashflows) to sustain, driven by an aggressive launch pipeline (11msf), foray into North India (173 acres in Gurgaon; 5.7msf saleable area), comfortable debt position (D/E 0.66x; 0.4x by FY13E) and a strong footprint in Bangalore (932 acres land bank; 90msf of saleable area) - Sobhas best-performing market. Best bet in the South India residential space; Outperformer: Bangalore, with stable absorptions (47msf; +36% yoy) and moderate price rise (+7% yoy), was the most resilient market in FY11. We expect Sobha, a preferred name in South India, to be the largest beneficiary with its strategically located land supporting growth. Initiate coverage with Outperformer and a price target of Rs314/ share 20% discount to our FY13E NAV of Rs392/share. Key risks include weaker response to Gurgaon Township, IT/ITeS slowdown impacting Bangalore demand and dependence on Infosys in contractual business. Key valuation metrics
As on 31 March
Net sales (Rs m) Adj. net profit (Rs m) Shares in issue (m) Adj. EPS (Rs) % growth PER (x) Price/Book (x) EV/EBITDA (x) RoE (%) RoCE (%)

Price performance
FY09
9,740 1,078 73 14.8 (52.8) 15.6 1.5 13.0 10.1 8.2

FY10
11,299 1,513 98 15.4 4.4 14.9 1.3 13.9 10.6 7.3

FY11E
14,739 1,813 98 18.5 19.8 12.4 1.2 11.1 10.0 8.9

FY12E
15,766 1,997 98 20.4 10.2 11.3 1.1 9.9 10.2 9.7

FY13E
17,217 2,185 98 22.3 9.4 10.3 1.0 8.6 10.2 10.1

110

Sobha Developers

Sensex

95

80

65

50

Aug-11

Jul-11

Nov-10

Dec-10

Sep-11

Feb-11

Oct-10

Mar-11

Bloomberg: SOBHA IN

6m avg daily vol. (m): 0.168 Free Float (%): 39.4

1-yr High/ Low (Rs): 389/185

Nitin Agarwal nitin.agarwal@idfc.com 91-22-6622 2568

Vineet Chandak vineet.chandak@idfc.com 91-22-6622 2579

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Oct-11

Jan-11

Apr-11

Jun-11

Income statement
Year to 31 Mar (Rs m)
Net sales % growth Operating expenses EBITDA % growth Other income Net interest Depreciation Pre-tax profit Deferred Tax Current Tax Profit after tax Preference dividend Minorities Net profit after non-recurring items % growth 1,078 (52.8) 1,513 40.5 1,813 19.8 1,997 10.2 2,185 9.4

Key ratios
FY09
9,740 (31.9) 6,953 2,788 (24.7) 148 (1,074) 360 1,501 403 1,099 249

FY10 FY11E
11,299 16.0 8,663 2,636 (5.4) 39 (521) 323 1,831 275 1,556 291 14,739 30.4 11,578 3,161 19.9 75 (444) 278 2,514 669 1,846 324

FY12E
15,766 7.0 12,308 3,458 9.4 75 (392) 288 2,853 856 1,997 324

FY13E
17,217 9.2 13,526 3,691 6.7 82 (354) 297 3,122 937 2,185 324

Year to 31 Mar
EBITDA margin (%) EBIT margin (%) PAT margin (%) RoE (%) RoCE (%) Gearing (x)

FY09
28.6 24.9 11.1 10.1 8.2 1.7

FY10 FY11E FY12E FY13E

23.3 20.5 13.4 10.6 7.3 0.9 21.4 19.6 12.3 10.0 8.9 0.7 21.9 20.1 12.7 10.2 9.7 0.6 21.4 19.7 12.7 10.2 10.1 0.5

Valuations
Year to 31 Mar
Reported EPS (Rs) Adj. EPS (Rs) PER (x) Price/Book (x) EV/Net sales (x) EV/EBITDA (x) EV/CE (x)

FY09
14.8 14.8 15.6 1.5 3.7 13.0 1.2

FY10 FY11E FY12E FY13E

15.4 15.4 14.9 1.3 3.3 13.9 1.1 18.5 18.5 12.4 1.2 2.4 11.1 1.1 20.4 20.4 11.3 1.1 2.2 9.9 1.0 22.3 22.3 10.3 1.0 1.8 8.6 0.9

Balance sheet
As on 31 Mar (Rs m)
Paid-up capital Reserves & surplus Total shareholders' equity Total Debt Deferred tax liabilities Other non-current liabilities Total liabilities Total equity & liabilities Net fixed assets Investments Total current assets Working capital Total assets

Shareholding pattern
FY09
729

FY10
981

FY11E FY12E
981 17,527 18,832 981 19,205 20,509

FY13E
981 21,040 22,345

Public & Others 2.9%

Foreign 33.4% Total current liabilities 5,813 5,984 6,766 7,491 9,465 ISIEmergingMarketsPDF in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF.
11,123 17,329 19,322 14,740 (31) 304 (52) 545 12,418 (74) 942 20,053 38,885 2,040 37 36,808 30,042 38,885 11,914 (74) 942 20,274 40,783 1,852 37 38,894 31,403 40,783 10,914 (74) 942 21,248 43,593 1,655 37 41,900 32,435 43,593

10,145 16,057

25,408 21,218 36,531 38,547 2,247 27 2,061 27

Promoters 60.6%

Institutions 1.7%

34,257 36,459 28,444 30,475 36,531 38,547

Non Promoter Corporate Holding 1.4%

As of June 2011

Cashflow statement
Year to 31 Mar (Rs m)
Pre-tax profit Depreciation Chg in Working capital Total tax paid Ext ord. Items & others Operating cash Inflow Capital expenditure Free cash flow (a+b) Chg in investments Debt raised/(repaid) Capital raised/(repaid) Dividend (incl. tax) Misc Net chg in cash

FY09
1,501 360 (1,858) (403) (595) (993) (466) (1,459) 1 1,491 (85) 397 344

FY10 FY11E
1,831 323 (1,420) (275) 240 699 (136) 563 (4,581) 5,110 (287) (2,697) (1,892) 2,514 278 (104) (669) 398 2,417 (257) 2,160 (10) (2,322) 0 (343) 26 (489)

FY12E
2,853 288 (1,062) (856) 1,223 (100) 1,123 (504) (320) 299

FY13E
3,122 297 565 (937) 3,047 (100) 2,947 (1,000) (350) 1,597

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INDIA RESEARCH

COMPANY UPDATE

BSE SENSEX: 16937

20 OCTOBER 2011

Sunteck Realty
Execution remains key monitorable

OUTPERFORFMER

Rs352
Mkt Cap: Rs22bn; US$445m

Sunteck Realty (SRL) has sacrificed sales in the last few quarters in a bid to maintain its premium price positioning. While cash flows remain comfortable with construction ensuring sufficient customer inflows on ongoing projects, a slow approval process had stalled new launches. The new project launch momentum is set to revive with the recent successful pre-launch of its 1.55msf project in Goregaon (Sunteck City) along with plans to launch another 0.14msf project in Navi Mumbai in H2FY12. Also, construction on the three big ticket BKC (Mumbai) projects is on track with flagship project Signature Island nearing completion (74% by Q1FY12). SRL is focusing on completing these projects to garner better realizations. With lower volume/ price assumptions for BKC projects and a years delay in launches across remaining projects, we believe slowdown concerns are adequately factored into valuations. We believe SRL remains among the few Mumbai focused players with a strong balance sheet, low debt and strong project portfolio (>32msf). Maintain Outperformer with an 18-month price target of Rs431/ share 10% discount to FY13E NAV. Thin volumes in last two quarters; but cash flows remain positive: SRL has recorded extremely weak sales volumes over Dec10-June11 (nil in BKC projects, only a few apartments in Signia High and Oceans) led by the prevailing uncertain demand environment for luxury projects and SRLs decision to hold on to its premium pricing. However, cash flows have remained positive (~Rs1bn of cash surplus in last two quarters) with ISIEmergingMarketsPDF track. construction on in-iimlsingh from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF. BKC projects on track; we factor in one-year delay in new launches: Construction on BKC projects is on track with SRL confident of completing Signature Island in FY12, and Isle and Pearl in FY13 and FY14 respectively. Timely completion remains the key focus as completed projects garner stronger end-user interest and premium pricing. We moderate our sales assumptions for BKC projects and factor in a 1-yr delay for other new launches. Strong cash flows and healthy balance sheet; Outperformer: With positive operational cash flows and comfortable gearing (0.55x as of Mar-11), we expect SRL to generate operational cash surplus of Rs14bn over FY12-14E and utilize the same for new land/project acquisitions. In the last one year, the stock has corrected by ~50% and trades at 36% discount to our FY13E NAV of Rs539/share. Maintain Outperformer with an 18-month price target of Rs431/share 20% discount to NAV. Slower sales in BKC projects remain key risk. Key valuation metrics
As on 31 March
Net sales (Rs m) Adj. net profit (Rs m) Shares in issue (m) Adj. EPS (Rs) % growth PER (x) Price/Book (x) EV/EBITDA (x) RoE (%) RoCE (%)

Price performance
FY09
206 152 12 12.6 27.9 2.1 66.5 15.3 4.3

FY10
284 62 63 1.0 (92.2) 359.3 3.5 242.7 1.5 1.4

FY11
202 26 63 0.4 (57.9) 854.0 3.2 785.4 0.4 0.2

FY12E
229 37 63 0.6 42.1 600.9 3.2 919.1 0.5 0.1

FY13E
11,579 5,170 63 82.1 13,916 4.3 1.9 2.8 54.9 60.7

110

Sunteck Realty

Sensex

90

70

50

30

Aug-11

Jul-11

Dec-10

Sep-11

Feb-11

Oct-10

Nov-10

Mar-11

May-11

Bloomberg: SRIN IN 1-yr High/ Low (Rs): 698/243

6m avg daily vol. (m): 0.08 Free Float (%): 34.5

Nitin Agarwal nitin.agarwal@idfc.com 91-22-6622 2568

Vineet Chandak vineet.chandak@idfc.com 91-22-6622 2579

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Oct-11

Jan-11

Apr-11

Jun-11

Income statement
Year to 31 Mar (Rs m)
Net sales % growth Operating expenses EBITDA % growth Other income Net interest Depreciation Pre-tax profit Current Tax Profit after tax Minorities Non-recurring items Net profit after non-recurring items % growth 152 62 (59.3) 30 (50.6) 37 5,170 21.1 13,916.3

Key ratios
FY09
206 124 82 111 (0) 14 179 28 152 49 -

FY10
284 37.9 176 108 31.3 24 (0) 12 120 58 62 358 -

FY11
202 (28.9) 169 33 (69.3) 103 (37) 15 85 52 32 25 5

FY12E
229 13.7 201 28 90 (40) 15 64 27 37 25 -

FY13E
11,579 4,946.0 3,266 8,313 100 (86) 15 8,313 2,494 5,819 25 -

Year to 31 Mar
EBITDA margin (%) EBIT margin (%) PAT margin (%) RoE (%) RoCE (%) Gearing (x)

FY09
39.8 33.0 73.6 15.3 4.3 0.6

FY10
37.9 33.9 21.7 1.5 1.4 0.6

FY11 FY12E FY13E

16.4 9.1 12.9 0.4 0.2 0.6 12.3 5.9 16.1 0.5 0.1 0.7 71.8 71.7 44.7 54.9 60.7 0.3

(14.4) 29,277.1

Valuations
Year to 31 Mar
Reported EPS (Rs) Adj. EPS (Rs) PER (x) Price/Book (x) EV/Net sales (x) EV/EBITDA (x) EV/CE (x)

FY09
12.6 12.6 27.9 2.1 26.5 66.5 1.7

FY10
1.0 1.0 359.3 3.5 92.1 242.7 2.5

FY11 FY12E FY13E

0.5 0.4 854.0 3.2 128.6 785.4 2.4 0.6 0.6 600.9 3.2 113.3 919.1 2.3 82.1 82.1 4.3 1.9 2.0 2.8 1.5

Balance sheet
As on 31 Mar (Rs m)
Paid-up capital Reserves & surplus Total shareholders' equity

FY09
114 1,824 1,988

FY10
2,202 3,816 6,375

FY11 FY12E
2,984 3,835 6,844 2,984 3,859 6,869

FY13E
2,984 8,966 11,976

Shareholding pattern
Foreign 6.0% Public & Others 16.4%

Non Promoter Corporate Holding Total current liabilities 2,143 4,596 9,921 16,215 15,010 10.5% Total Debt 1,185 3,966 from 59.165.151.7 on 2011-10-22 07:54:19 EDT. DownloadPDF. 4,046 4,631 3,835 ISIEmergingMarketsPDF in-iimlsingh
Deferred tax liabilities Other non-current liabilities Total liabilities Total equity & liabilities Net fixed assets Investments Total current assets Other non-current assets Working capital Total assets 28 3,356 90 1,808 1,304 2 76 8,640 106 473 1,123 8,717 3 16 13,986 20,830 175 606 19,433 680 9,513 20,894 3 16 20,865 27,734 175 606 26,273 680 10,058 27,734 3 16 18,864 30,840 160 606 29,394 680 14,384 30,840

5,344 15,016

3,446 13,313

Promoters 67.0%
As of June 2011

5,344 15,016

Cashflow statement
Year to 31 Mar (Rs m)
Pre-tax profit Depreciation Chg in Working capital Total tax paid Ext ord. Items & others Operating cash Inflow Capital expenditure Free cash flow (a+b) Chg in investments Debt raised/(repaid) Capital raised/(repaid) Dividend (incl. tax) Misc Net chg in cash

FY09
179 14 (1,298) (28) 28 (1,104) (104) (1,208) (1,808) 1,185 1,794 82 46

FY10
120 12 (7,076) (58) 49 (6,954) (1,151) (8,105) 1,334 2,781 4,020 318 349

FY11
85 15 (865) (52) (60) (878) 359 (519) (132) 80 783 (11) (339) (139)

FY12E
64 15 (10) (27) 42 (15) 27 585 (13) 599

FY13E
8,313 15 (2,093) (2,494) 3,741 (0) 3,741 (796) (63) (649) 2,233

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Analyst
Pathik Gandotra Shirish Rane Nikhil Vora Nitin Agarwal Chirag Shah Bhoomika Nair Hitesh Shah, CFA Bhushan Gajaria Salil Desai Ashish Shah Probal Sen Chinmaya Garg Abhishek Gupta Saumil Mehta Vineet Chandak Anamika Sharma Varun Kejriwal Swati Nangalia Nikhil Salvi Kavitha Rajan Dharmendra Sahu Rupesh Sonawale Dharmesh R Bhatt, CMT

Sector/Industry/Coverage
Head of Equities; Financials Co-Head of Research; Construction, Power, Cement Co-Head of Research; Strategy, FMCG, Media, Education, Exchanges, Mid Caps Pharmaceuticals, Real Estate, Agri-inputs Metals & Mining, Telecom, Pipes Logistics, Engineering IT Services Automobiles, Auto ancillaries, Retailing Construction, Power, Cement Construction, Power, Cement Oil & Gas Financials Telecom, Metals & Mining Metals, Pipes Real Estate, Pharmaceuticals, Agri-inputs IT Services FMCG, Mid Caps, Shipping, Aviation Media, Education, Exchanges, Midcaps Construction, Power, Cement Strategy, Financials Database Analyst Database Analyst Technical Analyst

E-mail
pathik.gandotra@idfc.com shirish.rane@idfc.com nikhil.vora@idfc.com nitin.agarwal@idfc.com chirag.shah@idfc.com bhoomika.nair@idfc.com hitesh.shah@idfc.com bhushan.gajaria@idfc.com salil.desai@idfc.com ashish.shah@idfc.com probal.sen@idfc.com chinmaya.garg@idfc.com abhishek.gupta@idfc.com saumil.mehta@idfc.com vineet.chandak@idfc.com anamika.sharma@idfc.com varun.kejriwal@idfc.com swati.nangalia@idfc.com nikhil.salvi@idfc.com kavitha.rajan@idfc.com dharmendra.sahu@idfc.com rupesh.sonawale@idfc.com dharmesh.bhatt@idfc.com

Tel.+91-22-6622 2600
91-22-662 22525 91-22-662 22575 91-22-662 22567 91-22-662 22568 91-22-662 22564 91-22-662 22561 91-22-662 22565 91-22-662 22562 91-22-662 22573 91-22-662 22560 91-22-662 22569 91-22-662 22563 91-22-662 22661 91-22-662 22578 91-22-662 22579 91-22-662 22680 91-22-662 22685 91-22-662 22576 91-22-662 22566 91-22-662 22697 91-22-662 22580 91-22-662 22572 91-22-662 22534

Equity Sales/Dealing
Naishadh Paleja Paresh Shah Vishal Purohit Nikhil Gholani Sanjay Panicker Rajesh Makharia Kalpesh Parekh Pradip Seth Varun Saboo Pawan Sharma Dipesh Shah Jignesh Shah Suniil Pandit Mukesh Chaturvedi ISIEmergingMarketsPDF Viren Sompura Rajashekhar Hiremath

Designation
Co-Group CEO MD, Dealing MD, Co-Head of Sales MD, Co-Head of Sales Director, Sales Director, Sales Director, Sales SVP, Sales AVP, Sales MD, Derivatives Director, Derivatives AVP, Derivatives Director, Sales trading SVP, Sales trading in-iimlsingh from SVP, Sales trading VP, Sales trading

E-mail

Tel.+91-22-6622 2500

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2011-10-22

naishadh.paleja@idfc.com 91-22-6622 2522 paresh.shah@idfc.com 91-22-6622 2508 vishal.purohit@idfc.com 91-22-6622 2533 nikhil.gholani@idfc.com 91-22-6622 2529 sanjay.panicker@idfc.com 91-22-6622 2530 rajesh.makharia@idfc.com 91-22-6622 2528 kalpesh.parekh@idfc.com 91-22-6622 2696 pradip.seth@idfc.com 91-22-6622 2595 varun.saboo@idfc.com 91-22-6622 2558 pawan.sharma@idfc.com 91-22-6622 2539 dipesh.shah@idfc.com 91-22-6622 2693 jignesh.shah@idfc.com 91-22-6622 2536 suniil.pandit@idfc.com 91-22-6622 2524 mukesh.chaturvedi@idfc.com 91-22-6622 2512 07:54:19 EDT. DownloadPDF. viren.sompura@idfc.com 91-22-6622 2527 rajashekhar.hiremath@idfc.com 91-22-6622 2516

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IDFC SEC and its affiliates (i) may have received compensation from the company covered herein in the past twelve months for investment banking services; or (ii) may expect to receive or intends to seek compensation for investment-banking services from the subject company in the next three months from publication of the research report. 2. Affiliates of IDFC SEC may have may have managed or co-managed in the previous twelve months a private or public offering of securities for the subject company. 3. IDFC SEC and affiliates collectively do not hold more than 1% of the equity of the company that is the subject of the report as of the end of the month preceding the distribution of the research report. 4. IDFC SEC and affiliates are not acting as a market maker in the securities of the subject company. Explanation of Ratings: 1. Outperformer 2. Neutral 3. Underperformer : : : More than 5% to Index Within 0-5% (upside or downside) to Index Less than 5% to Index

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