At a time when real estate companies are battling debt issues and declining home sales, equity analysts are recommending stocks of companies with better visibility of returns and lower debt of functioning in markets that see good traction.
Stocks of Sobha Developers, Phoenix Mills, Prestige Estates and Sunteck Realty are seeing ‘Buy’ recommendations from brokerage houses. According to analysts, stocks of Bangalore-based companies such as Sobha and Prestige look promising, as the market is seeing record absorptions in commercial and residential properties. “In the Bangalore market, the demand and supply situation is not bad and developers have lesser inventories as compared to other parts of the country. Prices are affordable and consumption of residential units is healthy. Hence, companies based there are tending to do well," said Rikesh Parikh, vice-president, market strategies, Motilal Oswal Securities.
Bangalore, touted as the information technology sector’s hub, consumed a third of the country’s total absorption of commercial space in 2011, at 11.7 million sq ft. This was equivalent to the total absorption in the National Capital Region and Mumbai in 2011, says a recent report by Kotak Institutional Equities.
Similarly, the city has seen absorption of 49 million sq ft of residential properties in 2011, more than any other Indian city, Kotak Equities says. “Sobha has also corrected its balance sheets by selling land parcels,” says Parikh.
Analysts are also preferring stocks of companies with steady annuity income. According to Suman Memani, an analyst with PINC Research, the Mumbai-based Phoenix Mills, with strong presence in retail space, has a good stream of cash flow from its flagship High Street Phoenic Mall. “The rental portfolio is further growing strong with the operations of its Market City projects,” Memani said in a recent report.
Phoenix has launched mixed use Market City projects in Mumbai, Pune, Bangalore and Chennai, where it is selling office properties and leases out malls. It is looking at converting some of its hotel properties in these projects into residential and commercial projects, to get faster cash flows. “The consolidated profit after tax of Phoenix Mills is likely to see a major jump with contribution coming from three Market City projects – Kurla, Bangalore and Chennai – and also contribution from subsidiaries in Pune and Bangalore,” Memani said.
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Analysts also say Sunteck Realty, with low debt and recent land acquisitions, is a good bet. Which is why stock prices of these companies have stood ground, while those of bigger companies such as DLF, Unitech and HDIL have declined 20-25 per cent since the markets started falling. Stocks of Sobha, Sunteck Realty, Prestige and Phoenix have lost between four and 12 per cent since February 21, 2011, since when the markets have started falling. The BSE Realty Index has seen an 18 per cent decline since then.
“Companies where visibility of returns is better and debt to equity ratios are lower have seen smaller corrections,” said Memani of PINC Research.
“These are stronger companies. In troubled times like this, they are better than other leveraged companies. That is why investors are making difference between these two varieties,” said an analyst with a Mumbai-based brokerage, who did not want to be named.
While companies such as DLF, HDIL and Unitech, have posted a decline of up to 90 per cent in their net profit in the third quarter, these companies have seen better performance.
Barring Sunteck, most of these companies have net debt to equity levels of 0.4 to 0.6 times, considered healthy for those in this sector.Big ones such as DLF and HDIL are selling their land parcels and development rights to reduce debt and most of their cash flows are going towards debt repayment, analysts say.