Ticket size a concern in Mumbai realty, not demand: CIMB

Q: Any good reason why you should be buying Mumbai based realty?

A: Fundamentally we do not see any improvement in sales volume. However, of-late there has been some interest among investors looking at midcaps but fundamentally we do not see an earnings upmove in the near to medium-term. The demand environment continues to remain very soft.

Q: DLF management mentioned that they will hold on to their Rs 17,500 crore debt guidance by the end of the year, which would mean asset monetization in the next couple of months and that has been one of your grouse that the debt problems make you negative on the stock. How would you approach it now after listening to what the management said?

A: There are two issues currently with DLF - high debt and slow asset churn. So, on the debt part they are coming to the comfortable zone of 150 billion to 175 billion where we would be comfortable given their current rental income, which would be able to service 150-175 billion debt. However, the sales volume or value data continues to remain soft, they have guidance and hopefully they could meet the guidance but given the soft demand across National Capital Region (NCR) market as well across India, I believe that could be a challenge.

Q: You wouldn’t pick any of the Mumbai based realty stocks?

A: We have coverage on Oberoi Realty and on a relative basis we like it because of net cash as well as quality projects. The problem with the stock currently is the delay in approvals and whenever that happens, this would be the biggest beneficiary.

Q: What is happening in the Mumbai market in terms of demand? Some of the properties like Lodha Rise in Dombivali, Kalpataru’s property in Thane. They have seen good reception. Is it purely because these prices were 10-15 percent lower than the ones in the surrounding area or do you see a genuine pickup in demand at this point in Mumbai?

A: Demand is never an issue, it’s the question of ticket sizes. In Mumbai the problem is ticket sizes and in the last four years have increased from 1 crore to now around 2 crore and that is why in the peripheries of Mumbai you are seeing lower ticket sizes of 30-60 lakh, seeing a good demand and with lower ticket size offering as well as some discount that is taking off well but in Mumbai the shares volume remains very low.

Q: You have an outperform rating on Sobha Developers as well. What is the key trigger and what target price would you hope to see?

A: We have an outperform rating on Sobha Developers with a target price of Rs 380. However, given it’s well positioned in Bangalore or IT led cities, so from a structural long-term to medium-term perspective, we like the stock but even in the near-term we expect that there could be some pressure given the slowdown in Bangalore market as well. So achieving guidance in terms of the guidance of 4.2 million square feet, Rs 26 billion of sales given the slower demand that could also be a bit of a challenge.