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Worries of inventory pile-up, lower sales and higher leverage, owing to a slowing economy, saw the BSE realty index recently fall to a six-year low. Though it has seen some recovery, on a financial year-to-date basis, it is still down 29 per cent at 1,328. Poor earnings visibility and investor apathy towards listed entities in this space means the index has been among the most underperforming ones this year.
Analysts, however, feel this could be a good time to look at the sector.
UBS analyst Ashish Jagnani, while accepting sales volumes are near the 2008 crisis levels and earnings are likely to stay weak, says valuations, which are at trough levels, cannot be ignored. "Several property stocks are trading at trough valuations of about a 60-65 per cent discount to their net asset value," he says. A large part of this is due to the fact that rental asset valuations account for 50-70 per cent of the stock price, with the Street ignoring or undervaluing land bank owned by developers. "The wide gap between the enterprise value of developers and land/asset value is unsustainable, as recent land reforms and rising FSI (floor space index) costs will keep land/asset prices firm," he says.
Further, valuations, when measured on a book-value basis, are quite attractive. The sector now trades at cheap a valuation of 0.66 times the estimated FY14 book value — a discount of 50 per cent over its historical mean one-year forward price/book value ratio of 1.3.Analysts, however, feel this could be a good time to look at the sector.
UBS analyst Ashish Jagnani, while accepting sales volumes are near the 2008 crisis levels and earnings are likely to stay weak, says valuations, which are at trough levels, cannot be ignored. "Several property stocks are trading at trough valuations of about a 60-65 per cent discount to their net asset value," he says. A large part of this is due to the fact that rental asset valuations account for 50-70 per cent of the stock price, with the Street ignoring or undervaluing land bank owned by developers. "The wide gap between the enterprise value of developers and land/asset value is unsustainable, as recent land reforms and rising FSI (floor space index) costs will keep land/asset prices firm," he says.
Given these factors, experts believe investors could consider investing in realty stocks, but with a focus on quality names. Saurabh Mukherjea, chief executive (institutional equities), Ambit Capital, says, “Investors should remember real estate accounts for 10 per cent of our GDP (gross domestic product) and less than half a per cent of our market cap. I think that disconnect is not sustainable.”
Analysts say a few listed entities continue to generate strong investor interest because of their sales performance, deleveraged balance sheets and attractive valuations, and this is what the focus of investors should be, should the sentiment turn from bad to worse.
Mukherjea believes Sobha Developers, Prestige Estates and Oberoi Realty are worth looking at.
BofA-Merrill Lynch analyst Abhishek Kiran Gupta, who expects price cuts this festive season, advises investors to stick to quality names within this space. He backs Prestige Estates and Oberoi Realty on execution, pre-sales growth, corporate governance, free cash flow and debt-to-equity levels. Analysts at Morgan Stanley give a thumbs up to Sobha Developers, owing to its large diversified and quality land bank, as well as the steady pace of new launches and pre-sales. Axis Capital analysts prefer Phoneix Mills due to the company's strong operational annuity portfolio, steady cash flows and due launches.
"Among Indian property names, Oberoi has the strongest balance sheet (it has net cash), attractive relative valuations in terms of price/earnings and enterprise value/Ebitda (earnings before interest, tax, depreciation and amortisation) multiples, and reasonable RoE (return on equity). 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 Mumbai-focused company is planning new launches to the tune of four million sq ft this financial year. Clearance for its Mulund project (Exotica) would be a key near-term trigger for the stock. From a medium-term perspective, a successful entry into regions other than Mumbai would be a key catalyst.
Prestige Estates
The Bangalore-based company plans new launches of 14 million sq ft this financial year; it would also increase its dividend pay-out. As of September 2013, the company had achieved 66 per cent of the launch target. By FY16, the stabilisation of its rental income would improve earnings and cash flow visibility. The Prestige management expects to generate annual rental income of about Rs 500 crore by FY16 and plans to distribute half of that as dividend. This would raise the dividend yield from the current one per cent to about five per cent, analysts say. The company's superior brand recall in the southern markets and low debt-equity ratio of 0.6 stand it in good stead.
Sobha Developers
Sobha is the largest real estate player in south India. The company has de-leveraged its balance sheet successfully and reduced its net debt/equity ratio from 1.95 in FY08 to 0.6 in FY13. The company has guided for 4.2 million sq ft of new launches in FY14 and has achieved about 47 per cent of this in the first half of this financial year. A strong new launch pipeline, coupled with a robust balance sheet, have made most brokerages positive on the stock. Sobha has entered into joint development agreements and forayed into Pune, Gurgaon and Chennai. It plans to enter four new cities—Hyderabad, Noida, Ghaziabad and Kozhikode—this financial year. In addition to diversifying beyond Bangalore, expansion in new, as well as existing markets, would drive growth for the company.
