 "Caution advised on realty rally")
Realty stocks have been one of the highest gainers in the market rally in the run-up to the elections and the subsequent developments.
The BSE realty index has risen 60 per cent in three months, half of which came over the past fortnight. The gains have largely been on expectations that an improvement in sentiment and economic growth will spur demand.
More specifically, the stated plan of the new government to promote affordable housing is expected to mean a construction boom and demand for houses at a lower price point. Further, analysts say if there is an improvement in macro sentiment and demand comes back, the funding for both existing and new projects could ease, with realty companies going to the capital market.
While job creation will lead to an improvement in demand, analysts say one of the key triggers continues to be a fall in interest rates. Standard Chartered analysts Gaurav Pathak and Shashikiran Rao say a pick-up in economic activity will lead to a recovery in residential demand and corporate leasing. Benign inflation and interest rates will improve operating and financial leverage of the developers and purchasing power of consumers.
While some of the biggest realty companies by market capitalisation have run up significantly, analysts such as Pathak and Rao argue that within the broader market rally, real estate stocks still offer room as second-round beta plays. However, others such as Adhidev Chattopadhyay of HDFC Securities believe investors should be cautious and focus on fundamentals, as demand on the back of high prices continues to be sluggish and execution is still an issue. He says, “Stick to high quality names from the Bangalore and the Mumbai markets such as Sobha Developers and Oberoi Realty.”
Analysts believe specific markets such as Bangalore and Pune will continue to be stable, as demand remains strong on the back of growth in the information technology, pharmaceutical and consultancy sectors, with prices more reasonable. While these factors will favour Sobha, the niche positioning and superior fundamentals of Oberoi stand it in good stead.
Sobha Developers
The company was not able to meet its volume and value expectation of 4.2 million sq ft (actual was 3.6 msft) worth Rs 2,600 crore (Rs 2,320 crore actual) for FY14, due to slow movement in its Gurgaon projects. However, it managed to beat expectations for the March quarter and given the strong pre-sales and project pipeline, the indications are FY15 will be better.
While the margins were flattish (down 40 basis points over a year to 27.3 per cent) in the March quarter, given the higher proportion of lower margin contractual revenues (35 per cent verses 26 per cent earlier), net profit growth was flattish, with tax charges up 27 per cent year-on-year. Most analysts continue to have a ‘Buy’ rating on Sobha, as its gearing levels are expected to remain at around 0.6 times, the strong pipeline, and visibility for both the real estate and contractual business. In addition to operational performance, how it manages to monetise its 2,600-acre land bank will act as a trigger.
Oberoi Realty
The Mumbai market has not seen volumes grow as much as other cities such as Bangalore but Oberoi Realty’s premium positioning and brand perception, as well as strong financials, have been its key strengths. The company is a favoured mid-cap pick among most brokerages, with Credit Suisse noting the outsourcing model had helped it increase the speed of construction, allowed scalability and to enhance the design and quality aspects.
The company has some positives going for it recently, which will boost revenue visibility in the medium term. These are the Rs 1,100-crore purchase of a 25-acre site in Mumbai which will improve its land bank, a tie-up with Ritz Carlton for a mixed-use project which will improve realisations, and a Supreme Court go-ahead for a project in Mulund, Mumbai, earlier stuck due to issues related to forest land. These, coupled with its existing developments in Goregaon (Mumbai), will drive revenues in FY15 and thereafter.
Axis Capital analysts predict a net cash inflow of Rs 9,300 crore over the next four years from ongoing projects (five msf, of which 3.6 msf is already sold) and coming projects of 11 msf worth Rs 12,000 crore.
The BSE realty index has risen 60 per cent in three months, half of which came over the past fortnight. The gains have largely been on expectations that an improvement in sentiment and economic growth will spur demand.
More specifically, the stated plan of the new government to promote affordable housing is expected to mean a construction boom and demand for houses at a lower price point. Further, analysts say if there is an improvement in macro sentiment and demand comes back, the funding for both existing and new projects could ease, with realty companies going to the capital market.
While job creation will lead to an improvement in demand, analysts say one of the key triggers continues to be a fall in interest rates. Standard Chartered analysts Gaurav Pathak and Shashikiran Rao say a pick-up in economic activity will lead to a recovery in residential demand and corporate leasing. Benign inflation and interest rates will improve operating and financial leverage of the developers and purchasing power of consumers.
While some of the biggest realty companies by market capitalisation have run up significantly, analysts such as Pathak and Rao argue that within the broader market rally, real estate stocks still offer room as second-round beta plays. However, others such as Adhidev Chattopadhyay of HDFC Securities believe investors should be cautious and focus on fundamentals, as demand on the back of high prices continues to be sluggish and execution is still an issue. He says, “Stick to high quality names from the Bangalore and the Mumbai markets such as Sobha Developers and Oberoi Realty.”
Analysts believe specific markets such as Bangalore and Pune will continue to be stable, as demand remains strong on the back of growth in the information technology, pharmaceutical and consultancy sectors, with prices more reasonable. While these factors will favour Sobha, the niche positioning and superior fundamentals of Oberoi stand it in good stead.
Sobha Developers
The company was not able to meet its volume and value expectation of 4.2 million sq ft (actual was 3.6 msft) worth Rs 2,600 crore (Rs 2,320 crore actual) for FY14, due to slow movement in its Gurgaon projects. However, it managed to beat expectations for the March quarter and given the strong pre-sales and project pipeline, the indications are FY15 will be better.
While the margins were flattish (down 40 basis points over a year to 27.3 per cent) in the March quarter, given the higher proportion of lower margin contractual revenues (35 per cent verses 26 per cent earlier), net profit growth was flattish, with tax charges up 27 per cent year-on-year. Most analysts continue to have a ‘Buy’ rating on Sobha, as its gearing levels are expected to remain at around 0.6 times, the strong pipeline, and visibility for both the real estate and contractual business. In addition to operational performance, how it manages to monetise its 2,600-acre land bank will act as a trigger.
Oberoi Realty
The Mumbai market has not seen volumes grow as much as other cities such as Bangalore but Oberoi Realty’s premium positioning and brand perception, as well as strong financials, have been its key strengths. The company is a favoured mid-cap pick among most brokerages, with Credit Suisse noting the outsourcing model had helped it increase the speed of construction, allowed scalability and to enhance the design and quality aspects.
The company has some positives going for it recently, which will boost revenue visibility in the medium term. These are the Rs 1,100-crore purchase of a 25-acre site in Mumbai which will improve its land bank, a tie-up with Ritz Carlton for a mixed-use project which will improve realisations, and a Supreme Court go-ahead for a project in Mulund, Mumbai, earlier stuck due to issues related to forest land. These, coupled with its existing developments in Goregaon (Mumbai), will drive revenues in FY15 and thereafter.
Axis Capital analysts predict a net cash inflow of Rs 9,300 crore over the next four years from ongoing projects (five msf, of which 3.6 msf is already sold) and coming projects of 11 msf worth Rs 12,000 crore.