Anecdotal evidence indicates that land prices have declined 30-70%. We have examined the impact of a 50% cut in land cost on the balance sheet of all three companies.
Our model indicates that the balance sheet will deteriorate with the decline in the book value. Moreover, debt equity ratio (FY10E) would increase from 0.98x to 1.78x for DLF, 1.9x to (3.7x) for Unitech, and from 1.2x to 1.6x for HDIL.
Most real estate companies are in the process of restructuring their debt, by converting short-term loans into long-term ones.
While this is expected to alleviate the immediate cash flow problems in the near term, we remain concerned on the weak cash flows and the credit ratios in the medium term due to meager sales and increasing evidence of cancellations.
Recent reports state that the Reserve bank of India (RBI) is examining the books of ten real estate companies to verify their solvency.
The apex Bank is also assessing the systemic risks arising from possible defaults by these companies on various loans and public deposits.
We initiate coverage on DLF with SELL rating, target price of Rs80 (52% downside from current levels), on Unitech with SELL rating, target price of Rs22 (downside of 21%), and on HDIL with HOLD recommendation, target price of Rs67.
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