 "Time to cherry pick in the real estate sector")
Real estate sector has been affected by slowing economy which has resulted in lower demand. Delayed project approvals and higher interest costs have only added to their woes. Weighed down by these troubles, the BSE Realty index has under-performed broader indices over past six months. The sector now trades at cheap valuations of 0.66 times FY14 estimated book value –a discount of 50% over its historical mean one-year forward Price/Book Value ratio of 1.3 times. However, experts believe, this is the time to enter select good stocks in the sector.
Saurabh Mukherjea, CEO- Institutional Equities, Ambit Capital, says, “Investors should remember that real estate accounts for 10% of our GDP and less than half a% of our market cap. I think that disconnect is not sustainable. Companies like Sobha Developers, Prestige Estates, Oberoi realty are worth looking at.”
Going forward, easing interest rates, higher focus of banks on home loans could ease the macro pressures a bit. Further, with capital expenditure for most companies largely over, their focus is now on de-leveraging their balance sheets. In this backdrop, we short list below names based on key metrics such as reasonably lower debt/equity, higher return on equity, strong new launches pipeline and attractive valuations.
Oberoi Realty
“Among the Indian property names, Oberoi has the strongest balance sheet (it has net cash), attractive relative valuations in terms of P/E and EV/EBITDA multiples, and reasonable ROE. Consequently, this is our preferred pick”, says Anantha Narayan, analyst at Credit Suisse. He has a target price of Rs 275 on the stock. The company plans new launches to the tune of 4 million square feet this fiscal. Clearance of its Mulund project (Exotica) will be a key near-term trigger for the stock. From a medium term perspective, successful entry in non-Mumbai regions will be a key catalyst for the stock. Delay in launches, troubles to expand its land bank and any further weakening in Mumbai commercial markets are key downside risks for the company.
Prestige Estates
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The company plans new launches of 14 million square feet this fiscal and will also increase its dividend payout. The stabilisation of its rental income by FY16 will improve earnings and cash flow visibility. Prestige management expects to generate annual rental income to be about Rs 500 crore by FY16 and plans to distribute half of that as dividend. This will push the dividend yield from 1% currently to about 5%, believe analysts. Its superior brand recall in the Southern markets and healthy access to finance are key positives for the company. Any correction in real estate prices remains a key risk.
Godrej Properties
Godrej Properties aims to raise around Rs 700 crore via a rights issue in September 2013,and will use a significant chunk (Rs 525 crore) to reduce its debt. While its net debt/equity stands at 1.04 times currently, it is expected to come down to 0.68 times post this debt repayment. Its new launch pipeline stands at over 4 million square feet over next year spread across Hyderabad, Kolkata and Mumbai cities. Given that the company has lined up capex of Rs 1,100 crore towards its Bandra kurla Complex (BKC) project, the success of this project will be a key driver for cash flow generation. The stock though has run up recently and partly factors in the positives of lower debt.
Sobha Developers
Sobha is the largest real estate player in Southern India. The company has de-leveraged its balance sheet successfully and reduced its net debt/equity ratio from 1.95 times in FY-08 to 0.6 times in FY13. The company’s new launches (12 million square feet) in FY14, coupled with strong balance sheet have made most brokerages positive on the stock. Sobha has entered into joint development agreements and forayed in Pune, Gurgaon and Chennai cities. It plans to enter four new cities namely Hyderabad, Noida, Ghaziabad and Kozhikode in this fiscal. In addition to diversifying beyond Bangalore, expansion in newer as well as existing markets will drive growth for the company.
Puravankara Projects
Purvankara raised about Rs 300 crore via IPP and Offer for sale in May 2013 and plans to use these funds to retire debt. Consequently, analysts expect its net debt/equity ratio to fall from 0.8 times currently to 0.55 times in FY14. Healthy pipeline of new launches (10.6 million square feet in FY14), successful performance of its affordable housing segment are key growth drivers for the company going forward. Recovery in IT and ITES sector will also be a key catalyst. Any correction in real estate prices, rise in borrowing costs (due to tighter liquidity) are key downside risks.