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India: Real Estate Developers
Equity Research
Lower EPS volatility to command better valuation; Buy Sobha, HDIL
Relative stability in earnings estimates for Sobha Developers, HDIL
We analyze changes in FY11E/12E/13E Bloomberg consensus estimates
and arrive at these observations. (1) Unitech, DLF and Godrej Properties
have witnessed the largest downgrades. (2) Since Sep-2010, we see
significant downgrades in Unitech, with FY11E/FY12E estimates being
downgraded by 25.3% and 30.8% respectively; (3) HDIL has seen the least
downgrades with FY11E/FY12E EPS estimate revisions of 9.8%/-10.5%.
Although we use a RNAV-based valuation framework, volatility in nearterm
estimates reduces confidence in RNAV estimates.
Volume miss, lower execution key reasons for wide EPS volatility
Since most Indian real estate companies have primarily residential
portfolio, key drivers for revenue booking include incremental sales and
the pace of project execution. We observe that DLF and Unitech will likely
miss volume guidance by 20%-30%.In addition, we have seen slower-thanexpected
execution with quarterly execution in 1-2QFY11E being less than
5% of outstanding residential sales. Prestige Estates and Godrej Properties
will likely show the largest increase in incremental sales by value terms for
FY11E, while we see largest drop for DLF/Unitech
Premium valuations likely on lower earnings volatility
We believe that consistent volume growth, driven by a rational pricing
strategy, could lead to lower earnings volatility. Our Buy-rated stocks
(Sobha, HDIL and Oberoi) have a reasonable sales volume momentum on
account of following a market-driven pricing strategy. Consequently,
consensus earnings volatility is among the lowest in our coverage universe
for these companies. We believe such companies could trade at a premium
if they maintain consistent volumes over the next 4-6 quarters.
Buy Sobha (On CL), Oberoi Realty and HDIL
We maintain our Buy rating on Sobha Developers (12-m FY12E RNAV
based TP of Rs344, On CL) as we believe that expansion into new cities will
drive volumes and revenue growth for the company over FY11-FY13E. We
also maintain our Buy ratings for Oberoi Realty (12-m FY12E RNAV based
TP of Rs327) and HDIL (12-m FY12E RNAV based TP of Rs211) on the back
of the rational pricing strategy followed by these Mumbai-based
developers. Key risks to our view include rapid price hikes exerting
pressure on volumes, interest rate risk and volatility in input costs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Real Estate Developers
Equity Research
Lower EPS volatility to command better valuation; Buy Sobha, HDIL
Relative stability in earnings estimates for Sobha Developers, HDIL
We analyze changes in FY11E/12E/13E Bloomberg consensus estimates
and arrive at these observations. (1) Unitech, DLF and Godrej Properties
have witnessed the largest downgrades. (2) Since Sep-2010, we see
significant downgrades in Unitech, with FY11E/FY12E estimates being
downgraded by 25.3% and 30.8% respectively; (3) HDIL has seen the least
downgrades with FY11E/FY12E EPS estimate revisions of 9.8%/-10.5%.
Although we use a RNAV-based valuation framework, volatility in nearterm
estimates reduces confidence in RNAV estimates.
Volume miss, lower execution key reasons for wide EPS volatility
Since most Indian real estate companies have primarily residential
portfolio, key drivers for revenue booking include incremental sales and
the pace of project execution. We observe that DLF and Unitech will likely
miss volume guidance by 20%-30%.In addition, we have seen slower-thanexpected
execution with quarterly execution in 1-2QFY11E being less than
5% of outstanding residential sales. Prestige Estates and Godrej Properties
will likely show the largest increase in incremental sales by value terms for
FY11E, while we see largest drop for DLF/Unitech
Premium valuations likely on lower earnings volatility
We believe that consistent volume growth, driven by a rational pricing
strategy, could lead to lower earnings volatility. Our Buy-rated stocks
(Sobha, HDIL and Oberoi) have a reasonable sales volume momentum on
account of following a market-driven pricing strategy. Consequently,
consensus earnings volatility is among the lowest in our coverage universe
for these companies. We believe such companies could trade at a premium
if they maintain consistent volumes over the next 4-6 quarters.
Buy Sobha (On CL), Oberoi Realty and HDIL
We maintain our Buy rating on Sobha Developers (12-m FY12E RNAV
based TP of Rs344, On CL) as we believe that expansion into new cities will
drive volumes and revenue growth for the company over FY11-FY13E. We
also maintain our Buy ratings for Oberoi Realty (12-m FY12E RNAV based
TP of Rs327) and HDIL (12-m FY12E RNAV based TP of Rs211) on the back
of the rational pricing strategy followed by these Mumbai-based
developers. Key risks to our view include rapid price hikes exerting
pressure on volumes, interest rate risk and volatility in input costs.
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