Net commercial leasing (gross leasing minus exits) is presently weak in India because of slowdown in IT industry and continuation of work from home (WFH) model. Global Capability Centres (GCC) are filling some of these vacant spaces, but comeback of Indian IT sector will be the real kicker for commercial property space.
With India doing better than most major economies, there shall be more traction in influx of GCCs, higher FDI investment, strength in BFSI leasing, etc. From management’s commentary it seems that the bottom for commercial leasing in India has perhaps been made and there shall be slow but sure increase in occupancy levels from FY25 onwards.
Another factor which will help in better valuation for Embassy will be the decline in interest rates which could start happening sometime in CY 2024. At present, its expiring loans are being repriced higher by around 50 bps thereby affecting its profitability negatively. With decline in interest rates, Embassy’s profits are going to increase and the discount rate for valuing its future cash flows will also fall. These two factors will have the multiplier effect similar to the rerating that happens in a stock when its EPS increases, and PE also expands.
At CMP of @ Rs 315 and expected DPU of Rs 21-22 in FY24, Embassy is trading at current pre-tax yield of @ 7%. Could be an interesting quasi debt exposure to consider but with time horizon of 2-3 years since IT recovery is dependent on growth in developed countries especially US and EU which could take more time than expected. Increase in crude prices and consequent increase in global inflation will delay the anticipated decline in interest rates thus being a major negative variable to track.