REAL ESTATE Mixed quarter: Q3FY11 Result Preview: Edelweiss

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REAL ESTATE
Mixed quarter: Q3FY11 Result Preview: Edelweiss


􀂄 Key highlights of the sector during the quarter
Q3 is usually a strong quarter with execution pick up across India post monsoon
and festival seasons typically seeing strong demand for new homes. Although
execution is expected to improve Q-o-Q, a string of negative news flow largely on
account of the loan syndication bribery/2G telecom licence allocation cases
coupled with the Reserve Bank of India’s (RBI) policy intervention has dampened
sentiment. Our channel checks indicate that loan sanctions for developers may be
delayed with interest rates also likely to see an upward bias. Also, volumes may
see pressure on account of loan-to-value ratio for housing loans being capped at
80%. The festival season, which typically sees strong volumes across India, is
expected to post stable volumes on pan-India basis, but cities like Mumbai and
pockets of NCR are expected to post volume decline due to steep price rise over
the past 12 months.

􀂄 Result expectations for the sector and stocks under coverage
Although operational performance is expected to improve on account of improved
execution after a muted performance in Q2FY11, Q3FY11 is unlikely to bring much
cheer on a pan-India basis. However, South India markets of Bengaluru and
Chennai may post robust volumes.
In our coverage universe, we expect a majority of companies to register revenue
growth in the real estate business. Companies like DLF, Sobha Developers and
Anant Raj Industries are expected to post Q-o-Q revenue dip largely on account of
change in product mix and asset sales not being factored in.
􀂄 Outlook over the next 12 months
Outlook for the real estate sector is cautious over the next year. We expect price
correction in overheated property markets like Mumbai and pockets of NCR with
prices for the rest of India expected to see marginal appreciation of 5-10%. In
terms of volumes, we expect the South India market to post uptick in volumes on
Y-o-Y basis on the back of continued hiring/salary hikes in the Indian IT/ITES
sector.
Although underlying demand for housing in India continues to be robust, the focus
over the next 12 months is likely to be on company-specific issues such as
corporate governance, execution capability, and funding position. Fund availability
is expected to be a concern; this is on the back of a number of loans coming up
for repayment in Q4FY11-FY12 and interest rates for loans likely to see a 100-
200bps increase.
􀂄 Recommendations
Top picks: Anant Raj Industries, Phoenix Mills, Brigade Enterprises.