Enam Research
  Real Estate: Another Downgrade

  As liquidity departs....

All our realty sector reports since our 1st sector report of Jun 07 have been bearish and we continue to maintain this Underweight stance. For a sector that is fundamentally addicted to
 continuous fresh liquidity doses, the rapidly deteriorating liquidity environment now moves our valuations to a Bear case scenario (Base case earlier).

Key contributing factors are:

-    Slowdown in sales and delays in customer payments
-    Subdued equity markets
-    Private equity too choking off, as return expectations have gone up to guaranteed IRRs of ~22%+
-    Inability to raise further debt on account of already high leverage
-    Put options being exercised on current debt pre-maturely due to worsening perceptions, forcing developers to fund EXISTING debt repayments thru exorbitantly high short-term
 loans/ highly discounted land deals.

What went wrong?

-    Aggressive land acquisition at peak prices through short term, high cost debt + huge working capital mismanagement (short term debt used for long term projects).

-    Developers stubbornly held on to selling prices and high cost inventory on hopes of renewal of demand and uptick in prices.

Outlook

We maintain our Underweight view on the sector and reduce our EPS estimates and target prices downward. While there  is deep-value (even based on our Bear case) in some small/ mid cap stocks, these are also expected to continue to underperform until liquidity starts quenching this sector.

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

  Nothing in this article is, or should be construed as, investment advice.