Motilal Oswal: REAL ESTATE: 2QFY11 Preview; Execution impacted due to heavy monsoon

Visit http://indiaer.blogspot.com/ for complete details 􀂄 􀂄

REAL ESTATE: 2QFY11 Preview; Execution impacted due to heavy monsoon; Expect muted quarter; Watch out for commercial recovery

-          We expect our RE universe to post 2QFY11 revenue growth of ~29% YoY, EBITDA growth of ~8% YoY and PAT to remain flat YoY. The impact of heavy monsoon on construction activity could have an adverse effect on revenue in 2QFY11, as most companies follow a percentage of completion method for revenue booking.

-          Residential sales are healthy across key markets and with most of the micro-markets witnessing steady decline in inventory levels and improved buyer sentiment, the fundamental outlook for the residential vertical remains strong. However, significant price appreciation in some specific micro-markets of Mumbai and Delhi has resulted in stagnancy in demand growth in the last couple of quarters. Concerns of oversupply and affordability have impacted sales momentum in central Mumbai, where the capital values of some projects have already crossed their previous peaks.

-          There has been some recovery in leasing activity in the commercial offices and retail verticals. In 1HFY11, leasing activity picked up across markets such as NCR, Bangalore, Chennai and Mumbai, particularly in the office segment. Absorption rate strengthened to 16% in 1QFY11; almost 7.3msf of office space was absorbed in 1QFY11 compared to ~6.3msf in 4QFY10. Among the key cities, Mumbai led with ~2.8msf absorption.

-          Industry experts expect the commercial and retail verticals to gain further momentum in 2HFY11. This should be a key positive for players like DLF, Phoenix and Anant Raj.

-          Key companies are poised to report strong execution ramp-up going ahead. We expect them to deliver ~146msf of RE projects over FY11-13, which would likely boost their cash flow visibility.

Top picks: Our top picks in the RE sector are Unitech and DLF among large cap stocks and Anant Raj among mid-cap.

-          DLF: Best geared to leverage uptick in commercial vertical with 20msf operational and 18msf of under-construction assets; improved cash flow on the backdrop of a slew of new launches to address concern of debt; 22% earning CAGR expected till FY12; possible REIT listing of annuity assets by DLF with the revival of commercial market and downward trend of REIT yields could be key positive.

-          Unitech: Impressive execution scale-up coupled with strong sales momentum; most comfortable balance sheet among large cap; 25% earning CAGR expected till FY12; listing of UT Infra and UCP acquisition at an attractive price could be key triggers.

-          Anant Raj: Key beneficiary of the ongoing recovery in commercial vertical with its 4msf of operational and ~3msf under-construction assets; estimate rental income in FY11 to be Rs815m and expected to increase to Rs1.8b in FY12; revenues to increase at 70% CAGR over FY10-12 and net profit to increase at 35%; launch of premium residential projects at Hauz Khas and Bhagwandas to be a key near-term trigger for ARIL.