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7 January 2019

India Real Estate EQUITIES

REMD 
Year 2019: Will this year set the bottom? India

 2018 marked the sixth consecutive year of unexpected stress Puneet Gulati*, CFA
Analyst
on real estate demand and developers HSBC Securities and Capital Markets (India) Private Limited
puneetgulati@hsbc.co.in
 We expect 2019 to be another critical year for real estate +91 22 2268 1235

developers as it will test their mettle to survive and then thrive Saurabh Jain*
Analyst
HSBC Securities and Capital Markets (India) Private Limited
 Maintain Buy ratings on Oberoi Realty, Godrej Properties, Sobha, saurabh2jain@hsbc.co.in
+91 22 6164 0691
and Prestige – our preferred plays on industry consolidation
Umang Shah*
Analyst, Financials
2018 – Another forgettable year. Ever since the end of 2012, real estate demand HSBC Securities and Capital Markets (India) Private Limited
has been on a downward slide. Concerns about affordability, anti-real estate political umang.shah@hsbc.co.in
+91 22 2268 1243
sentiment, withdrawal of tax incentives, demonetisation, and real estate act and
Goods and Services Tax (GST) have eroded speculative and investor-led demand
* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is
and made end-users defer purchases on expectation for a better bargain. All of these not registered/ qualified pursuant to FINRA regulations
have destroyed real estate demand as well as balance sheets of developers over
2014-17. Even as 2018 was drawing to a close, we saw further liquidity pressure on
non-banking financial companies (NBFCs), which have so far been an oxygen for
dilapidated balance sheets of numerous financially stressed developers. In this
backdrop, sales in CY18 have fallen by 40% and launches by 70% from CY11 levels
as end-users continue to defer their purchases waiting for a better bargain.

2019 – Will this finally set the bottom? We believe while the worst of the liquidity
crisis for NBFCs appears to be over, it is yet to fully translate into increased financial
stress on developers who could see further curtailment of new launches. The positive
is that a sharp fall in the number of launches even at a much reduced sales
momentum is resulting in a reduced overhang of unsold inventory. And some
developers have such high levels of distress that their under-construction unsold
inventory will no longer be counted as available for sale in the eyes of buyers. Thus,
we expect a minimum downward pressure on prices of under-construction inventory
as buyers will prefer to stay with strong developers. We believe developers with a
strong balance sheet and strong brand will gain significant market share in both
project pipeline accumulation (at much more attractive rates) and sales.

OBER IN, GPL IN, SOBHA IN, and PEPL IN are preferred plays. Oberoi Realty
and Godrej Properties having raised money last year and are much better placed for
project acquisitions. We expect market share gains for OBER, GPL, SOBHA, and
PEPL on account of their brands and strong track records of delivery and quality.

Residential real estate companies under coverage

Company BBG ticker Rating CMP TP Implied ___________PE ___________ ______ EV/EBITDA ________ PB ROE
(LCY) (LCY) upside (%) FY18 FY19e FY20e FY18 FY19e FY20e FY18 FY18
Prestige Estate PEPL IN Buy 233.1 320 37.3 23.5 16.0 11.6 13.2 15.0 13.4 1.8 8.1
Sobha Ltd. SOBHA IN Buy 456.5 560 22.7 20.0 17.7 17.5 12.8 15.2 12.3 1.6 8.0
Oberoi Realty OBER IN Buy 448.6 565 25.9 33.2 11.3 11.3 24.6 29.1 26.5 2.5 7.8
Godrej Properties GPL IN Buy 677.1 750 10.8 62.4 120.8 50.7 25.3 69.7 84.8 6.5 11.1
DLF Ltd. DLFU IN Hold 172.5 185 7.3 6.9 7.2 9.2 13.9 16.1 19.1 0.9 15.0
Source: Bloomberg, HSBC estimates. Priced as on 3 January 2018

Disclosures & Disclaimer Issuer of report: HSBC Securities and Capital

Markets (India) Private Limited
This report must be read with the disclosures and the analyst certifications in
the Disclosure appendix, and with the Disclaimer, which forms part of it. View HSBC Global Research at:
https://www.research.hsbc.com
EQUITIES ● REMD
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2018 – The year that was

 Real estate demand has been on a downward slide since 2012

 Various unexpected events since 2014 have destroyed balance
sheets of innumerable developers
 The latest 2018 NBFC crisis could demolish the already dilapidated
balance sheet for numerous developers

Real estate demand has been on a downward slide since 2012

Rea estate sales in India peaked in 2011 while the launches peaked in 2012. Ever since the
end of 2012, both have been on a steady downward slide. It all started with concerns about
affordability in 2012 and accelerated with the rise of anti-real estate political sentiment when the
Modi government came to power in 2014, thus resulting in an erosion of speculative demand.

The year was followed by plugging excess tax incentives for second homes, thus eroding the
second leg of investment demand. 2016 was a big year of setback for the real estate industry as
the government announced demonetisation in an attempt to plug flow and stock of unaccounted
money. Real estate was considered a channel for parking this unaccounted wealth and, hence,
the industry suffered as demonetisation made this alternate source of funding difficult for the
industry.

The year 2017 further dented the balance sheets as the new real estate act came into force
which required stricter compliance with the law and a higher number of approvals before
developers can start their sales. The year also saw the implementation of GST, which effectively
put c12% tax on sales of under-construction property, thus making it more unaffordable.

Chronology of events since 2008

Year Resi New Unsold Remarks
sales launches Inventory
msf msf msf
2008 290 281 398 Beginning of Global Financial Crisis (GFC)
2009 303 309 404 Recovery of demand post the GFC
2010 493 681 592 Smart revival with a sharp increase in property prices
2011 502 647 737 Enthusiasm of developers continued to increase as they accelerated launches
2012 495 653 895 Speculative demand continued which supported higher number of launches
2013 465 602 1,032 Signs of unaffordability started showing up
2014 406 528 1,154 The new government coming to power conceived anti-real estate sentiment
2015 421 466 1,199 False starts in real estate as demand seemed to be on its way up again
2016 387 376 1,188 Impact of withdrawal of excess tax incentive on second home and demonetisation hits
2017 291 208 1,105 Implementation of RERA and GST
2018 223 148 1,030 Buyers continued to defer purchases even as end-2018 saw liquidity pressure on non-
banking financial companies (NBFCs)
Source: Prop Equity, HSBC

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In the last six years of weakening demand as the balance sheets of real estate developers
deteriorated, they resorted to high cost funding from NBFCs. Even as the underlying demand
remained weak, NBFCs have continued to increase lending to the developers.

Growth of the underlying real estate sector and lenders loan book to the sector
50%
Growth rate of lending to real estate developers
40%
30%
20%
10%
0%
FY13 FY14 FY15 FY16 FY17 FY18
-10%
-20%
-30%
Growth rate of sales and new launches in the underlying residential real estate market
-40%
-50% Bank credit to Developers (INR bn) NBFC/HFC credit to Developers (INR bn) New launches (msf) Sales vol (msf) Sales value (INR bn)

Source: RBI, NHB, Prop Equity, JLL, HSBC. Note: real estate sales and new launches are for top 8 cities. NBFC and HFCs lending to developers

NBFCs have become their largest and the last source of oxygen as regulations got tighter and
capital controls became stricter for developers.

Lending to Real Estate Developers (INRbn)

FY12 FY13 FY14 FY15 FY16 FY17 FY18
Banks 1,127 1,261 1,532 1,665 1,776 1,856 1,858
NBFCs/ HFCs 640 759 930 1,191 1,373 1,989 2,591
Total 1,767 2,020 2,462 2,856 3,149 3,845 4,449

Market Share
Banks 64% 62% 62% 58% 56% 48% 42%
NBFCs/ HFCs 36% 38% 38% 42% 44% 52% 58%

Growth (%)
Banks 12% 22% 9% 7% 4% 0%
NBFCs/ HFCs 19% 22% 28% 15% 45% 30%
Source: RBI, NHB, JLL, HSBC. Note: This does not include individual housing loans

NBFC liquidity crisis can put numerous developers on ventilator

Even as 2018 was drawing to a close, we saw further liquidity pressure on NBFCs which have
so far been an oxygen for dilapidated balance sheets of numerous financially stressed
developers.

NBFCs have significantly curtailed fresh lending to the real estate sector in the last three
months of 2018. They are now asking their developer borrowers to return the money, wherever
possible. In some cases, NBFCs had increased their cost of lending to a much higher level to
discourage their teams from lending more.

There is an anecdotal evidence which makes us believe NBFCs declined loan disbursals even
to homebuyers despite having sanctioned the loan as they try to restore liquidity. The
subvention schemes for new projects have been put on hold.

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Corporate bond (BBB) spread over 10Y G-Sec

5

4.5

3.5

2.5

2
Feb-12 Sep-12 Apr-13 Nov-13 Jun-14 Jan-15 Aug-15 Mar-16 Oct-16 May-17 Dec-17 Jul-18
Source: Bloomberg, HSBC

The cost of borrowing for NBFCs has also increased post September 2018 liquidity crisis which
will get passed on to the real estate developers.

In this backdrop, sales have fallen by 40% and launches by 70% from 2011 levels as even end-
users continue to defer their purchases waiting for a better bargain.

Total sales (msf) and new launches (msf)

900
63% 65%
700 55%
45%
500
35%
300 25%
15%
100 4% 4% 5% 5%
2%
-1%
-6% -5%
(100) -8%
-13% -15%
(300) -24% -25%
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18e
Total Absorption (msqf) New Launches (msqf) Absorption Growth (%)
Source: Prop Equity, HSBC

Hugely negative stock performance by real estate players

Ever since the beginning of 2018, real estate stocks have continued to underperform the Nifty
50 Index, partly reversing the gains experienced in 2017. This was also partly due to rising
interest rates in 2018 and partly because of pullback of a sharp revival experienced in 2017.

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CNX Realty Index vs Nifty 50 Index

400 13,000
12,000
350
11,000
300
10,000
250 9,000
8,000
200
7,000
150
6,000
100 5,000
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19
CNX Realty - LHS CNX NIFTY (50) - PRICE INDEX
Source: Refinitiv, HSBC

Slower market share gains

The uptrend in market share gains, which began in 2017 with the implementation of Real Estate
Regulations Act (RERA), slowed a bit in 2018. This was largely because smaller developers
took time to revive themselves after battling the Real Estate Regulations Act (RERA) and
managed to get all approvals only in 2018.

Market share of 5 developers under our coverage

9.0% Prestige Sobha DLF Oberoi Godrej

8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Q1FY 12
Q2 FY12
Q3 FY12
Q4 FY12
Q1FY 13
Q2 FY13
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
Q4 FY14
Q1 FY15
Q2 FY15
Q3 FY15
Q4 FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19

Source: Company, Prop Equity, HSBC

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2019 – Will it set the bottom?

 While the worst of the NBFC liquidity crisis seems to be behind us,
we expect liquidity stress to eventually get transferred to developers
 We expect this stress to slow down launches further and keep buyers
away from under-construction properties of weaker developers
 This should create opportunities for consolidation by stronger
developers and increase their sales market share

NBFCs have so far survived the crisis

Increased lending by banks to NBFCs, roll over of a large part of the mutual fund debt, and
curtailment of fresh lending have resulted in NBFCs tiding over the liquidity crisis without any
defaults.

Bank credit to NBFCs Bank credit to NBFC as % of non-food

credit
70% Non-food credit growth (% yoy) 7.5%
Bank credit to NBFCs growth (% yoy) 7.0%
60%
6.5%
50%
6.0%
40%
5.5%
30% 5.0%
20% 4.5%
10% 4.0%
0% 3.5%
-10% 3.0%
Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18
Apr-14

Jul-15

Oct-16
Jan-13
Jun-13
Nov-13

Feb-15

Dec-15

Mar-17

Jan-18
Jun-18
Nov-18
Sep-14

May-16

Aug-17

Bank credit to NBFCs as % of Non-food credit

Source: RBI, HSBC Source: RBI, HSBC

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NBFC funding by Mutual Funds

1,700
1,600
1,500
1,400
1,300
1,200
1,100
1,000
900
800
Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18
Total NBFC CP funded by MFs (INR bn) Total NBFC NCDs funded by MFs

Source: SEBI, HSBC

However, further lending to the sector will remain slow

We expect NBFCs to be more discerning and exercise greater caution while lending to weaker
developers. We also expect NBFCs to approach stronger developers to take over stressed
projects of smaller and weaker developers in a bid to reduce pressure from non-performing
assets (NPA) on themselves. This curtailment in lending will likely result in a further slowdown
from the current already-slow launch rates.

Sales and new launches in top 8 cities

90 90
80 Absorption New launches 80
70 70
60 60
50 50
(Mn sq ft)

40 40
30 30
20 20
10 10
- 0
Jan-08
Jun-08
Nov-08
Apr-09
Sep-09
Feb-10
Jul-10
Dec-10
May-11
Oct-11
Mar-12
Aug-12
Jan-13
Jun-13
Nov-13
Apr-14
Sep-14
Feb-15
Jul-15
Dec-15
May-16
Oct-16
Mar-17
Aug-17
Jan-18
Jun-18

Source: PropEquity, HSBC

With run rates of launches remaining much lower, we expect the burden of an excess inventory
to reduce.

From a data perspective, the outstanding inventory still remains high. However, given the
increased risk related to completion of projects by numerous developers as financing comes
under further stress, buyers will largely avoid buying apartments of under-construction projects
of small and weaker developers, in our view. This will likely make a part of under-construction
and unsold inventory ‘unbuyable’.

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Unsold inventory (msf) and in months based on last three months sales run rate
1,400 60
Supply - LHS Outstanding Inventory (months)
1,200 50
1,000
40
800
(Mn sq ft)

30
600
20
400

200 10

- 0
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Source: PropEquity, HSBC

Hence, we expect weaker pace of new launches for CY19

We expect a weaker pace for launches even at slower absorption rates to bring down
outstanding unsold inventory even at slower absorption rates and, hence, ease the burden on
the real estate market. This will give the developers an opportunity to improve pricing, which we
believe is the real driver for real estate demand in India.

Absorption and new launches and outstanding inventory for key cities and combined Top 8 cities
Total Real Estate absorption (m sq ft) Total Real Estate Launches (m sq ft) Total Real Estate supply (end of month) - msf
Mum Gur Bang Noida Pune Ahd Top 8 Mum Gur Bang Noida Pune Ahd Top 8 Mum Gur Bang Noida Pune Ahd Top 8
CY08 23.7 27.5 43.5 5.9 44.6 10.4 289.9 CY08 15.7 32.9 36.6 5.1 41.9 14.5 281.1 CY08 31.0 33.4 57.0 7.9 60.8 15.4 397.9
CY09 23.0 34.1 31.6 29.1 39.5 18.0 302.4 CY09 28.4 31.5 22.6 37.6 34.4 25.2 308.6 CY09 36.4 30.9 47.9 16.5 55.8 22.6 404.1
CY10 31.4 40.6 43.6 67.8 50.5 30.9 492.4 CY10 50.2 55.6 55.9 84.5 57.8 51.8 681.2 CY10 55.2 45.9 60.3 33.2 63.1 43.5 592.9
CY11 28.1 46.2 62.4 45.6 56.0 46.5 502.6 CY11 40.6 52.1 96.1 65.2 63.6 68.9 646.9 CY11 67.7 51.8 94.0 52.8 70.8 65.8 737.2
CY12 23.4 41.9 77.1 35.7 56.7 47.2 495.2 CY12 32.8 53.8 105.7 35.9 70.0 54.0 653.2 CY12 77.0 63.7 122.6 53.0 84.1 72.6 895.3
CY13 24.4 27.6 90.8 19.2 52.7 41.0 465.2 CY13 46.1 36.7 136.9 12.4 69.8 36.1 603.0 CY13 98.7 72.7 168.7 46.2 101.2 67.7 1033.0
CY14 25.6 16.6 88.2 12.6 52.1 38.1 406.8 CY14 38.2 18.5 112.3 14.3 73.8 45.5 526.7 CY14 111.3 74.6 192.8 47.9 122.9 75.1 1152.9
CY15 31.6 16.4 80.6 11.9 55.0 46.9 422.8 CY15 42.8 13.9 85.2 11.7 66.4 38.8 465.5 CY15 122.5 72.0 197.4 47.7 134.3 86.2 1195.6
CY16 26.2 13.7 68.7 10.0 47.3 43.2 388.0 CY16 30.8 11.0 59.3 5.7 54.5 38.8 378.8 CY16 127.2 69.3 188.0 43.4 141.6 81.7 1186.4
CY17 23.6 9.9 51.7 6.9 41.2 29.1 295.8 CY17 11.4 6.0 40.6 3.3 32.9 16.0 216.8 CY17 127.2 64.6 162.7 39.8 133.3 68.6 1107.3
CY18e 25.1 11.9 54.4 7.3 46.3 23.0 311.8 CY18e 13.4 6.8 54.3 4.2 26.1 15.0 213.6 CY18e 115.5 60.9 157.3 37.2 117.5 61.8 1009.1
CY19e 25.1 13.1 59.8 8.0 48.6 24.2 332.6 CY19e 13.4 6.4 57.0 4.0 27.4 15.0 213.6 CY19e 103.8 54.2 154.5 33.2 96.2 52.7 890.0

Change Change
CY09 -3% 24% -27% 389% -12% 73% 4% CY09 81% -4% -38% 643% -18% 74% 10% CY09 18% -8% -16% 108% -8% 47% 2%
CY10 37% 19% 38% 133% 28% 72% 63% CY10 77% 76% 147% 125% 68% 105% 121% CY10 51% 48% 26% 102% 13% 92% 47%
CY11 -11% 14% 43% -33% 11% 50% 2% CY11 -19% -6% 72% -23% 10% 33% -5% CY11 23% 13% 56% 59% 12% 51% 24%
CY12 -17% -9% 23% -22% 1% 1% -1% CY12 -19% 3% 10% -45% 10% -22% 1% CY12 14% 23% 30% 0% 19% 10% 21%
CY13 4% -34% 18% -46% -7% -13% -6% CY13 41% -32% 29% -65% 0% -33% -8% CY13 28% 14% 38% -13% 20% -7% 15%
CY14 5% -40% -3% -34% -1% -7% -13% CY14 -17% -50% -18% 15% 6% 26% -13% CY14 13% 3% 14% 4% 21% 11% 12%
CY15 23% -1% -9% -6% 5% 23% 4% CY15 12% -25% -24% -18% -10% -15% -12% CY15 10% -3% 2% 0% 9% 15% 4%
CY16 -17% -17% -15% -16% -14% -8% -8% CY16 -28% -21% -30% -51% -18% 0% -19% CY16 4% -4% -5% -9% 5% -5% -1%
CY17 -10% -28% -25% -31% -13% -33% -24% CY17 -63% -45% -31% -43% -40% -59% -43% CY17 0% -7% -13% -8% -6% -16% -7%
CY18e 6% 21% 5% 6% 13% -21% 5% CY18e 17% 13% 34% 30% -21% -6% -1% CY18e -9% -6% -3% -7% -12% -10% -9%
CY19e 0% 10% 10% 10% 5% 5% 7% CY19e 0% -5% 5% -5% 5% 0% 0% CY19e -10% -11% -2% -11% -18% -15% -12%
Source: Prop Equity, HSBC

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Our preferred stocks

 We believe developers with strong balance sheets will acquire projects

and strong brands will now gain market share at a rapid pace
 Both Oberoi Realty and Godrej Properties have strong balance sheets
as they raised money last year, and should be the biggest beneficiaries
 Sobha and Prestige will also benefit on account of strong local
brands as buyers will likely prefer reputed developers

Balance sheets are real assets

With NBFC restraining their lending to developers, we believe many developers and even
NBFCs will approach stronger and reputed developers to take over the projects of smaller
developers and provide an exit to NBFCs or to reduce their debt.

In the current environment of stress and lack of trust by buyers, reputed developers will be able
to enter into attractive agreements with land owners and NBFCs and generate higher-than-
normative return, in our view. This should also allow them to increase their market share and
better control market pricing.

Trends in net debt (INRm)

Net Debt Q1FY17 Q2FY17 Q3FY17 Q4FY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19
Prestige 50,592 50,935 51,363 52,074 54,679 56,001 58,092 64,560 72,785 75,714
Sobha 19,687 20,265 20,378 20,326 20,262 22,740 22,832 21,991 22,625 23,652
DLF 221,280 231,400 243,970 250,960 258,980 267,990 55,130 62,650 71,200 71,420
Oberoi 640 3,874 3,419 2,715 6,752 9,739 16,108 15,639 -2,761 -3,041
Godrej 30,720 30,060 32,780 34,990 30,910 31,220 30,640 28,460 17,760 15,390
Source: Company data, HSBC

Oberoi Realty and Godrej Properties are best placed to acquire stressed assets
Both the companies raised INR10bn last year and have a very comfortable balance sheet. Both
have demonstrated a track record of adding value to land by virtue of their brand and
construction quality. In line with management commentary, we believe both companies are
looking to buy stressed assets or land at attractive valuations. This would allow them to increase
their portfolio offering and price it competitively in the market. Needless to say, we expect them
to gain sales market share as well as their strong brand and balance sheet to inspire confidence
in the minds of sceptical buyers.

Sobha and Prestige remain strong players in stable real estate markets of Bangalore
While both Sobha and Prestige don’t have enough room on their balance sheet to take more
debt to aggressively acquire stressed projects, we expect them to opportunistically pick up
some projects. They both have a strong brand and reputation to generate buyer confidence. In
the current environment where a buyer is doubting the ability of developers to complete the
projects, Sobha and Prestige will gain greater market share in sales, in our view.

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Coverage universe valuation summary

Company Rationale, investment view and valuation & risks
Prestige Estates Investment view: Buy
PEPL IN PEPL has a good mix of commercial office space, hotels, malls, and residential projects which reduces the cyclicality of its earnings. It is trying to monetise
CMP its annuity portfolio. Recent launches will allow it to accelerate its sales momentum. The company has INR25bn of finished and unsold residential stock,
INR233.1 which should improve its balance sheet as it progresses on its monetisation.

Target Price Valuation methodology: Our valuation is based on a DCF model of project cash flows. We use a WACC of 10.9%, a risk-free rate of 3%, and an equity
INR320 risk premium of 6%. We calculate the 12-month forward fair value by applying a discount of 22% at 1 standard deviation above the mean to our NAV
estimate of INR474. We then discount the value back by one year to reflect the current fair value target price of INR320. Our TP implies 37.3% upside and
Rating we have a Buy rating.
Buy
Downside risks include: (1) Large price cuts by the developer; (2) sales take longer than expected to recover; and (3) increase in debt to meet construction
capex.
Sobha Investment view: Buy
SOBHA IN Sobha has a strong brand name in South Indian markets with a track record of timely delivery with good quality. This should allow it to command a
preference in the eyes of buyers over other developers. Sobha also has a demonstrated ability of delivering affordable housing projects, which should
CMP allow it to maintain its sales momentum in the weak markets as well.
INR456.5
Valuation methodology: We value the company on a DCF model of project cash flows. We use a WACC of 11.1%, a risk-free rate of 3%, an equity risk
Target Price premium of 6%, and a beta of 1.5 (unchanged). We calculate the 12-month forward fair value by applying a discount of 22% at 1 standard deviation above
INR560 the mean to our NAV estimate of INR786. We then discount the value back by one year to reflect the current fair value target price of INR560. Our TP
implies 22.7% upside and we have a Buy rating.
Rating
Buy Downside risks include: (1) Slower-than-expected sales momentum in the Dream Acres and Marina One project in Cochin; (2) large price cuts by the
developer; and (3) an increase in debt to meet construction capex.
Godrej Investment view: Buy
Properties GPL is one of the very few real estate companies which has a pan-India presence to source and sell large projects. We think it has one of the best
GPL IN management teams and processes to execute Joint Development agreements. GPL has raised money last year and also has an access to a fund
platform. This makes it one of the best positioned companies to take over stressed projects at attractive valuations, in our view. Also, a strong brand and
CMP good track record of executions allows it to command a preference over other developers in the minds of the buyers and sell at a premium.
IN677.1
Valuation methodology: Our valuation is based on a DCF model of project cash flows. We use a WACC of 9.7%, a risk-free rate of 3%, and an equity
Target Price risk premium of 6%. We calculate the 12-month forward fair value by applying a premium of 23% at 1 standard deviation above the mean to our NAV
INR750 estimate of INR656. We then discount the value back by one year to reflect the current fair value target price of INR750. Our TP implies 10.8% upside and
we have a Buy rating as we expect strong project additions in the current year.
Rating
Buy Downside risks include: (1) Severe slowdown in the NCR market; (2) large price cuts by the developer; and (3) slippages from the expected launch
pipeline.
Oberoi Realty Investment view: Buy
OBER IN We believe the business model for the company has now become more robust with a greater emphasis on annuity assets, entering into the mid-income
residential segment, becoming more agile by offering schemes to attract customers and, last but not the least, gaining in incremental development
CMP potential stemming from transit oriented development (TOD) policy. This significantly increases the longevity of the development cycle. The company also
INR448.6 has raised money and is well placed to further grow its portfolio in the stressed real estate market. The company has an impressive track record of adding
value to its land and we expect the acquisitions to be accretive.
Target Price
INR565 Valuation methodology: We value the company on a DCF model of project cash flows. We use a WACC of 11.5%, a risk-free rate of 3%, and an equity
risk premium of 6%. We value the company on Mar’19 NAV of INR630. We apply a discount of 1 standard deviation (unchanged) above mean which is an
Rating 8% discount to NAV, as we believe the residential market is at the bottom of the cycle, as management has raised cash in a stressed market and is in a
Buy position to add value to its existing portfolio. We discount it for three months to arrive at current Dec’18 fair value of INR565. Our TP implies 25.9% upside
and we have a Buy rating.

Downside risks include: (1) Any delay in the launch of new phases/new projects could be a threat to expected cash flows in the wake of slow sales in
existing projects; and (2) if the Mumbai market remains weak, there is a threat to sales of prestige marquee projects such as Worli, where significant capex
has already been incurred.
DLF Investment view: Hold
DLFU IN DLF has a large portfolio of unsold inventory, which is largely in the luxury and premium segment of Gurgaon and which we expect will take five years to
sell. It also has a strong commercial office portfolio, which reduces the cyclicality of earnings.
CMP
INR172.5 Valuation methodology: We value the company on a DCF model of project cash flows. We now use a WACC of 12.1%, a risk-free rate of 3%, and an
equity risk premium of 6%. We calculate end-FY19 fair value by applying a discount of 27% at mean discount to our NAV estimate of INR259 (unchanged),
Target Price which leads to a current fair value target price of INR185. Our TP implies 7.3% upside and we have a Hold rating as we expect sales momentum to remain
INR185 at the current level only.

Rating Downside risks include: (1) Severe slowdown in the NCR luxury market, which is DLF’s present focus; (2) any large price cuts by DLF which would hurt
Hold its valuation; and (3) a sharp increase in debt to meet construction capex. Upside risks include: (1) Pick-up in the NCR markets, especially in the luxury
segment; (2) a further reduction in interest rates; and (3) a higher-than-expected valuation of the DCCDL transaction.
Source: Bloomberg, HSBC estimates. Priced on 3 January 2018

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Valuation charts

Oberoi Realty – Price to NAV GPL – Price to NAV

20% 60%
50%
10%
1 std dev above Historic Mean discount 40%
1 std dev above Historic Mean discount
0% 30%
20%
-10%
10%
Historic Mean discount
-20% 0%
Historic Mean discount
-30% -10%
-20% 1 std dev below Historic Mean discount
-40% -30%
1 std dev below Historic Mean discount
-50% -40%

Jan-09
Jun-09
Nov-09
Apr-10
Sep-10
Feb-11
Jul-11
Dec-11
May-12
Oct-12
Mar-13
Aug-13
Jan-14
Jun-14
Nov-14
Apr-15
Sep-15
Feb-16
Jul-16
Dec-16
May-17
Oct-17
Mar-18
Aug-18
Jan-19
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
Source: Refinitiv, HSBC Source: Refinitiv, HSBC

Sobha – Price to NAV Prestige Estate – Price to NAV

10% 30%
20%
0%
10%
-10% 0%
1 std dev above Historic Mean discount 1 std dev above Historic Mean discount
-20% -10%
-20%
-30%
Historic Mean discount -30%
-40% -40%
Historic Mean discount
-50% 1 std dev below Historic Mean discount -50%
-60%
-60%
-70% 1 std dev below Historic Mean discount
-70% -80%
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
Mar-09
Oct-09
May-10
Dec-10
Jul-11
Feb-12
Sep-12
Apr-13
Nov-13
Jun-14
Jan-15
Aug-15
Mar-16
Oct-16
May-17
Dec-17
Jul-18

Source: Refinitiv, HSBC Source: Refinitiv, HSBC

DLF – Price to NAV

60%

40%

20%

0%
1 std dev above Historic Mean discount
-20% Historic Mean discount

-40%

-60% 1 std dev below Historic Mean discount

-80%
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19

Source: Refinitiv, HSBC

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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s)
whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering
analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or
issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other
views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect
their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Puneet Gulati, CFA, Saurabh Jain and Umang Shah

Important disclosures
Equities: Stock ratings and basis for financial analysis
HSBC and its affiliates, including the issuer of this report (“HSBC”) believes an investor's decision to buy or sell a stock should
depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that
investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or
relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in
each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating
because research reports contain more complete information concerning the analysts' views and the basis for the rating.

From 23rd March 2015 HSBC has assigned ratings on the following basis:
The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12
months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will
be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a
Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between
5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20%
below the current share price, the stock will be classified as a Reduce.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage, change
in target price or estimates).

Upside/Downside is the percentage difference between the target price and the share price.

Prior to this date, HSBC’s rating structure was applied on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate,
regional market established by our strategy team. The target price for a stock represented the value the analyst expected the
stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight,
the potential return, which equals the percentage difference between the current share price and the target price, including the
forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12
months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was
expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage
points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.

*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months
(unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which
we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month's
average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however,
volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

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Rating distribution for long-term investment opportunities

As of 04 January 2019, the distribution of all independent ratings published by HSBC is as follows:
Buy 54% ( 34% of these provided with Investment Banking Services )
Hold 36% ( 29% of these provided with Investment Banking Services )
Sell 10% ( 23% of these provided with Investment Banking Services )
For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current
rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy
= Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial
analysis” above.

For the distribution of non-independent ratings published by HSBC, please see the disclosure page available at
http://www.hsbcnet.com/gbm/financial-regulation/investment-recommendations-disclosures.

Share price and rating changes for long-term investment opportunities

DLF Ltd (DLF.NS) share price performance INR Vs HSBC Rating & target price history
rating history
From To Date Analyst
Hold Buy 15 Feb 2016 Puneet Gulati
Buy Hold 11 May 2016 Puneet Gulati
260 Hold Reduce 30 Aug 2016 Puneet Gulati
240 Reduce Buy 26 Jan 2017 Puneet Gulati
220 Buy Hold 18 May 2017 Puneet Gulati
200 Target price Value Date Analyst
180 Price 1 120.00 15 Feb 2016 Puneet Gulati
160 Price 2 125.00 11 May 2016 Puneet Gulati
140 Price 3 130.00 30 Aug 2016 Puneet Gulati
120 Price 4 160.00 26 Jan 2017 Puneet Gulati
Price 5 185.00 21 Mar 2017 Puneet Gulati
100
Price 6 217.00 11 Dec 2017 Puneet Gulati
80 Price 7 185.00 05 Nov 2018 Puneet Gulati
Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Source: HSBC

Source: HSBC

Godrej Properties (GODR.BO) share price performance Rating & target price history
INR Vs HSBC rating history
From To Date Analyst
Hold Reduce 11 May 2016 Puneet Gulati
Reduce Buy 26 Jan 2017 Puneet Gulati
855
Target price Value Date Analyst
755
Price 1 280.00 11 May 2016 Puneet Gulati
655 Price 2 290.00 10 Aug 2016 Puneet Gulati
Price 3 375.00 26 Jan 2017 Puneet Gulati
555
Price 4 450.00 21 Mar 2017 Puneet Gulati
455 Price 5 600.00 18 May 2017 Puneet Gulati
Price 6 750.00 25 Oct 2017 Puneet Gulati
355 Price 7 825.00 05 Mar 2018 Puneet Gulati
255 Price 8 750.00 25 Oct 2018 Puneet Gulati
Source: HSBC
155
Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Source: HSBC

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Oberoi Realty Ltd (OEBO.NS) share price performance Rating & target price history
INR Vs HSBC rating history
From To Date Analyst
Hold Buy 31 Jul 2018 Puneet Gulati
Target price Value Date Analyst
584
534 Price 1 275.00 18 Jan 2016 Puneet Gulati
Price 2 250.00 11 May 2016 Puneet Gulati
484 Price 3 260.00 23 Aug 2016 Puneet Gulati
434 Price 4 300.00 24 Oct 2016 Puneet Gulati
384 Price 5 310.00 26 Jan 2017 Puneet Gulati
Price 6 330.00 21 Mar 2017 Puneet Gulati
334 Price 7 336.00 05 May 2017 Puneet Gulati
284 Price 8 330.00 31 Jul 2017 Puneet Gulati
234 Price 9 460.00 09 Nov 2017 Puneet Gulati
Price 10 470.00 31 Jan 2018 Puneet Gulati
184 Price 11 600.00 31 Jul 2018 Puneet Gulati
Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19
Price 12 565.00 23 Oct 2018 Puneet Gulati
Source: HSBC
Source: HSBC

Prestige Estates Projects (PREG.BO) share price Rating & target price history
performance INR Vs HSBC rating history
From To Date Analyst
Hold Reduce 11 May 2016 Puneet Gulati
Reduce Buy 26 Jan 2017 Puneet Gulati
330 Target price Value Date Analyst
Price 1 180.00 11 Feb 2016 Puneet Gulati
280 Price 2 150.00 11 May 2016 Puneet Gulati
Price 3 200.00 26 Jan 2017 Puneet Gulati
Price 4 230.00 21 Mar 2017 Puneet Gulati
230 Price 5 260.00 18 May 2017 Puneet Gulati
Price 6 285.00 18 Aug 2017 Puneet Gulati
180 Price 7 310.00 09 Nov 2017 Puneet Gulati
Price 8 345.00 30 Jan 2018 Puneet Gulati
Price 9 350.00 24 Aug 2018 Puneet Gulati
130 Price 10 320.00 31 Oct 2018 Puneet Gulati
Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Source: HSBC

Source: HSBC

Sobha Limited (SOBH.BO) share price performance INR Rating & target price history
Vs HSBC rating history
From To Date Analyst
Hold Reduce 18 Mar 2016 Puneet Gulati
Reduce Buy 26 Jan 2017 Puneet Gulati
620
Buy Hold 14 Dec 2017 Puneet Gulati
570 Hold Buy 26 Mar 2018 Puneet Gulati
520 Target price Value Date Analyst
470 Price 1 220.00 18 Mar 2016 Puneet Gulati
420 Price 2 240.00 11 May 2016 Puneet Gulati
Price 3 245.00 12 Sep 2016 Puneet Gulati
370
Price 4 300.00 26 Jan 2017 Puneet Gulati
320 Price 5 370.00 21 Mar 2017 Puneet Gulati
270 Price 6 485.00 18 May 2017 Puneet Gulati
Price 7 540.00 14 Nov 2017 Puneet Gulati
220 Price 8 570.00 12 Feb 2018 Puneet Gulati
Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Price 9 560.00 13 Nov 2018 Puneet Gulati

Source: HSBC
Source: HSBC

To view a list of all the independent fundamental ratings disseminated by HSBC during the preceding 12-month period, please
use the following links to access the disclosure page:

Clients of Global Research and Global Banking and Markets: www.research.hsbc.com/A/Disclosures

Clients of HSBC Private Banking: www.research.privatebank.hsbc.com/Disclosures

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HSBC & Analyst disclosures

Disclosure checklist

Company Ticker Recent price Price date Disclosure

DLF LTD DLF.NS 172.45 03 Jan 2019 6, 7
GODREJ PROPERTIES GODR.BO 677.05 03 Jan 2019 7
OBEROI REALTY LTD OEBO.NS 448.60 03 Jan 2019 7
PRESTIGE ESTATES PROJECTS LTD PREG.BO 233.05 03 Jan 2019 4, 6, 7
SOBHA LIMITED SOBH.BO 456.50 03 Jan 2019 4, 7
Source: HSBC

1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3
months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company.
4 As of 30 November 2018, HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 30 November 2018, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
6 As of 30 November 2018, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-investment banking securities-related services.
7 As of 30 November 2018, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company
12 As of 01 Jan 2019, HSBC beneficially held a net long position of more than 0.5% of this company’s total issued share
capital, calculated according to the SSR methodology.
13 As of 01 Jan 2019, HSBC beneficially held a net short position of more than 0.5% of this company’s total issued share
capital, calculated according to the SSR methodology.
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Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking,
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Whether, or in what time frame, an update of this analysis will be published is not determined in advance.

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Economic sanctions imposed by the EU and OFAC prohibit transacting or dealing in new debt or equity of Russian SSI entities.
This report does not constitute advice in relation to any securities issued by Russian SSI entities on or after July 16 2014 and as
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the authoring analyst.

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Additional disclosures
1 This report is dated as at 07 January 2019.
2 All market data included in this report are dated as at close 03 January 2019, unless a different date and/or a specific time
of day is indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of
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and/or (iii) measuring the performance of a financial instrument.

Production & distribution disclosures

1. This report was produced and signed off by the author on 05 Jan 2019 01:54 GMT.

2. In order to see when this report was first disseminated please see the disclosure page available at
https://www.research.hsbc.com/R/34/7n2WWwt

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Disclaimer
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MCI (P) 116/01/2018, MCI (P) 016/02/2018

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Global Financial Institution Group

Research Team
Banks Umang Shah +91 22 2268 1243 Latin America
umang.shah@hsbc.co.in
Global Head of Banks Jonathan Brandt, CFA +1 212 525 4499
Chris Mallin +44 20 7991 7419 Analyst jonathan.l.brandt@us.hsbc.com
chris.mallin@hsbc.com Ravi Singh +91 22 2268 1238
ravi5.singh@hsbc.co.in Mariano Szachtman 54 11 4121 7629
Europe mariano.szachtman@hsbc.com.ar
Kar Weng Loo +65 6658 0621
Robin Down +44 20 7991 6926 karwengloo@hsbc.com.sg Eduardo Altamirano +1 212 525 8333
robin.down@hsbcib.com eduardo.x.altamirano@us.hsbc.com
Xiushi Cai +65 6658 0617
Domenico Santoro +44 20 7991 0378 xiushicai@hsbc.com.sg LatAm Cement and Constructions, Real Estate
domenico.santoro@hsbc.com Javier Santiago +52 55 5721 2397
javier.santiago@hsbc.com.mx
Kiri Vijayarajah +44 20 7005 8621 Insurance
kiri.vijayarajah@hsbc.com Coleman Clyde +1 212 525 2441
Europe
coleman.l.clyde@us.hsbc.com
Iason Kepaptsoglou +44 20 7991 6722 Co-Head of European Insurance
iason.kepaptsoglou@hsbcib.com Dhruv Gahlaut, CFA +44 20 7991 6728
Credit Research
dhruv.gahlaut@hsbcib.com
Alevizos Alevizakos +44 20 7005 8722 Ivan Zubo +44 20 7991 5975
alevizos.alevizakos@hsbc.com Co-Head of European Insurance ivan.zubo@hsbcib.com
Thomas Fossard +33 1 56 52 43 40
Nigel Fletcher +44 20 7992 0985 thomas.fossard@hsbc.com
nigel.fletcher@hsbc.com Banks and Insurance
Steven Haywood +44 20 7991 3184 Asia
Global Head of Exchanges steven.haywood@hsbcib.com
Johannes Thormann +49 211 910 3017 Head of Global Research, Asia-Pacific
johannes.thormann@hsbc.de Dilip Shahani +852 2822 4520
Asia dilipshahani@hsbc.com.hk
Salman A khan +44 20 3268 3158 Head of Financials Equity Research, Asia-
Salman.a.khan@hsbc.com Pacific Sovereigns and Financial Institutions
Kailesh Mistry, CFA +852 2822 4321 Devendran Mahendran +852 2822 4521
CEEMEA kailesh.mistry@hsbc.com.hk devendran@hsbc.com.hk
Andrzej Nowaczek +44 20 7991 6709
Vinod Rajamani +91 22 2268 1232
andrzej.nowaczek@hsbcib.com Specialist Sales
vinod.rajamani@hsbc.co.in
Carlo Digrandi +44 20 7991 6843
Aybek Islamov +971 44 236 921 carlo.digrandi@hsbcib.com
aybek.islamov@hsbcib.com Real Estate /Conglomerates
Matthew Robertson +44 20 7991 5077
Henry Hall +27 11 880 1855 Europe
matthew.robertson@hsbcib.com
henry.hall@hsbc.com Head of Real Estate, Europe
Stephen Bramley-Jackson +44 20 7992 3102
Dr. Cihan Saraoglu +90 212 376 46 20 stephen.bramley-jackson@hsbcib.com
cihansaraoglu@hsbc.com.tr
Stéphanie Dossmann +33 1 56 52 43 01
Latin America Financials stephanie.dossmann@hsbc.com
Global Sector Head, EM Banks
Thomas Martin +49 211 910 3276
Carlos Gomez-Lopez, CFA +1 212 525 5253
thomas.martin@hsbc.de
carlos.gomezlopez@us.hsbc.com

Neha Agarwala, CFA +1 212 525 5418 Asia

neha.agarwala@us.hsbc.com Head of Real Estate Research, Asia-Pacific
Michelle Kwok +852 2996 6918
Natalie Theodozio +1 212 525 0912
michellekwok@hsbc.com.hk
natalie.theodozio@us.hsbc.com
Puneet Gulati +91 22 2268 1235
Asia puneetgulati@hsbc.co.in
Head of Financials Equity Research, Asia-
Pacific Saurabh Jain +91 22 6164 0691
Kailesh Mistry, CFA +852 2822 4321 saurabh2jain@hsbc.co.in
kailesh.mistry@hsbc.com.hk
Pratik Burman Ray +65 6658 0611
Head of Greater China Banks Research pratikray@hsbc.com.sg
Gary Lam, CFA +852 2996 6926
gary.lam@hsbc.com.hk Raymond Liu +852 2996 6743
raymond.w.m.liu@hsbc.com.hk
Analyst
York Pun +852 2822 4396 Albert Tam +852 2822 4395
yorkkypun@hsbc.com.hk albert.p.h.tam@hsbc.com.hk

Livy Lyu +852 2822 2981 Simon Sin +852 2996 6514
livy.y.lyu@hsbc.com.hk simon.k.c.sin@hsbc.com.hk

Aseem Pant +91 22 3396 0688 Max Liang +852 2996 6629
aseem.pant@hsbc.co.in max.liang@hsbc.com.hk