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Focus List Changes
We are adding Oberoi Realty (OBER IN, OW, Rs225) to
our Focus List and booking losses in DLF (DLFU IN,
EW, Rs199). This follows the downgrade of the DLF
stock to Equal-weight by our analyst (details inside). We
are not making any changes to our Sector Model
Portfolio.
Our Key Calls
We are bullish domestic cyclicals and underweight global
cyclicals. Consumer Discretionary is our favored rate
sensitive. We continue to prefer midcaps over large caps
given the valuation gap. Our top picks are MM, INFO
and DRRD. Our top avoids are Materials and SOE
Banks. Our sector calls remain narrow given our view
that this is still a stock pickers’ market.
Focus List: Adding OBER and Removing DLFU
Why are we adding Oberoi Realty to our focus list?
• OBER is our favorite stock in the sector in view of a strong
balance sheet (Rs16bn net cash), preparedness to monetize
its quality land bank (15msf in Mumbai), strong brand name,
and inexpensive valuation (15x F2012E and 10x F2013E EPS,
30% discount to forward NAV).
• Stock catalysts in the coming months include Worli launch,
Prisma launch, Commerz II Phase I leasing, and potentially
new project acquisition.
• Ongoing slowdown in Mumbai, uncertain policy environment
and delay in Mulund launch (stuck in environment clearance)
are the near-term risks.
• Leverage benefits and JDA opportunities are upside risk to our
NAV estimates.
Why are we removing DLF from our focus list?
• We believe DLF could remain in a financially tight situation in
terms of lower profits and stretched balance sheet for next few
quarters. Hence, our analyst has downgraded the stock to EW
(see DLF Limited (DLF.BO): Earnings Risk and Tight B/S
Drive Our Downgrade – EW, dated September 6, 2011). The
stock is down 29% YTD, underperforming the market by 10%.
• DLF new sales have stagnated for three years (F2010-11;
F2012 DLF target) at 10-12 msf (Rs60-70bn) and land under
execution has been flat for the last six quarters.
• As the older projects are delivered (four to six quarters),
DLF will become more dependent on new launches for
cash generation. In addition, high input cost and higher
interest expense will hurt earnings. Although we expect
debt reduction to commence in F3Q12, we believe it will
be small (10% in F2012 - MSe) and not enough to re-rate
the stock.
• Although the stock may not appear expensive relative to
its history, the valuation should be viewed in the context
of deterioration in fundamentals (curtailed land bank,
higher gearing, slower new sales, tough local/global
macro and lackluster management track record of
delivery) and sluggish earnings growth/low ROE.
Focus List and Sector Model Portfolio performance
• Year to date, our sector model portfolio has
underperformed the MSCI India index by 109bp and our
focus list has outperformed the BSE Sensex by 62bp.
• We are not making changes to our sector model portfolio.
We are Overweight Consumer Discretionary, Utilities,
Energy, and Technology and Underweight Consumer
Staples, Healthcare, Materials and Financials. We are
Neutral on Telecoms and Industrials.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Focus List Changes
We are adding Oberoi Realty (OBER IN, OW, Rs225) to
our Focus List and booking losses in DLF (DLFU IN,
EW, Rs199). This follows the downgrade of the DLF
stock to Equal-weight by our analyst (details inside). We
are not making any changes to our Sector Model
Portfolio.
Our Key Calls
We are bullish domestic cyclicals and underweight global
cyclicals. Consumer Discretionary is our favored rate
sensitive. We continue to prefer midcaps over large caps
given the valuation gap. Our top picks are MM, INFO
and DRRD. Our top avoids are Materials and SOE
Banks. Our sector calls remain narrow given our view
that this is still a stock pickers’ market.
Focus List: Adding OBER and Removing DLFU
Why are we adding Oberoi Realty to our focus list?
• OBER is our favorite stock in the sector in view of a strong
balance sheet (Rs16bn net cash), preparedness to monetize
its quality land bank (15msf in Mumbai), strong brand name,
and inexpensive valuation (15x F2012E and 10x F2013E EPS,
30% discount to forward NAV).
• Stock catalysts in the coming months include Worli launch,
Prisma launch, Commerz II Phase I leasing, and potentially
new project acquisition.
• Ongoing slowdown in Mumbai, uncertain policy environment
and delay in Mulund launch (stuck in environment clearance)
are the near-term risks.
• Leverage benefits and JDA opportunities are upside risk to our
NAV estimates.
Why are we removing DLF from our focus list?
• We believe DLF could remain in a financially tight situation in
terms of lower profits and stretched balance sheet for next few
quarters. Hence, our analyst has downgraded the stock to EW
(see DLF Limited (DLF.BO): Earnings Risk and Tight B/S
Drive Our Downgrade – EW, dated September 6, 2011). The
stock is down 29% YTD, underperforming the market by 10%.
• DLF new sales have stagnated for three years (F2010-11;
F2012 DLF target) at 10-12 msf (Rs60-70bn) and land under
execution has been flat for the last six quarters.
• As the older projects are delivered (four to six quarters),
DLF will become more dependent on new launches for
cash generation. In addition, high input cost and higher
interest expense will hurt earnings. Although we expect
debt reduction to commence in F3Q12, we believe it will
be small (10% in F2012 - MSe) and not enough to re-rate
the stock.
• Although the stock may not appear expensive relative to
its history, the valuation should be viewed in the context
of deterioration in fundamentals (curtailed land bank,
higher gearing, slower new sales, tough local/global
macro and lackluster management track record of
delivery) and sluggish earnings growth/low ROE.
Focus List and Sector Model Portfolio performance
• Year to date, our sector model portfolio has
underperformed the MSCI India index by 109bp and our
focus list has outperformed the BSE Sensex by 62bp.
• We are not making changes to our sector model portfolio.
We are Overweight Consumer Discretionary, Utilities,
Energy, and Technology and Underweight Consumer
Staples, Healthcare, Materials and Financials. We are
Neutral on Telecoms and Industrials.
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