Real estate (Abhishek K Gupta/ Gagan Agarwal) Underweight ::BofA Merrill Lynch,

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Real estate (Abhishek K Gupta/ Gagan Agarwal)
Underweight
Key drivers of sector outlook
􀂄 Residential volume remain the key: We expect volume recovery in residential
segment from 2HCY12 as developers correct prices over the next six months to
clear off rising unsold inventory. We believe stock performance is closely linked to
recovery in volume as it will improve cash flow and earnings visibility.
􀂄 Prefer Gurgaon to Mumbai/ Bangalore: Gurgaon continues to sustain good
volumes and we believe it will see the swiftest recovery post price correction given
limited inventory. We expect Mumbai to see sharpest correction while Bangalore
will see disappointing volume for next 12 months and a delayed recovery.
􀂄 Office the safe heaven: Commercial real estate has been steady in terms of
rentals and leasing momentum. While the headwinds to commercial space
demand in 2012 are increasing, we believe downside is well protected with
rentals still at 2009 levels and supply/demand mismatch less glaring.
􀂄 Leverage remains key concern: Leverage across our real estate coverage universe
remains a key concern as volume shrinks while interest costs are at its peak. Pressure
is expected to remain intense over the next six months, but as rates ease and some
players manage to reduce leverage through asset sale, the concern will subside.
􀂄 Regulations to remain unsupportive: We expect the regulatory environment
will remain difficult for developers with increased oversight by the government.
While these measures like uniformity on FSI regulation in Mumbai or creation of
a real estate regulator are beneficial for the sector on the whole, it may lead to
reduction in margin for the developers over the next 2-4 years.
Top Buy: Oberoi, DLF, IBREL and Anant Raj
Top U/P: Sobha, HDIL, Jaypee Infra, Puravankara
Top stock pick: DLF
􀂄 We foresee strong operational performance by DLF from FY13 as we expect its
core market, Gurgaon, to see volume rebound with minimal correction of 10%.
The stock’s performance in the medium term will depend on its ability to
conclude non-core assets sales and a corresponding cut in debt.
􀂄 DLF derives 40% of its NAV from Gurgaon which we expect will outperform all
other markets in FY13. We are not only expecting prices to hold up in DLF’s
prime Gurgaon land but also expect demand to remain robust when DLF
launches its luxury project in 4Q, given the limited supply.
􀂄 The gross debt of around Rs240bn remains a concern and DLF needs to cut it
by 25-30% to get its balance sheet in shape. But given the strong asset base of
leased office assets and some of the most prime land parcels, we believe DLF is
unlikely to get into trouble similar to that witnessed by Unitech in 2008.
􀂄 The focus on plotted development working out well, as on the one hand it has
improved operational cash flow and on the other has reduced execution
pressure. We believe the plotted launches will help it keep its volume stable in
near future. Also we expect its execution to catch up with sales volume from
FY12, helping it to reduce delays and cost overruns.
􀂄 Key risk: Sale of non-core assets fall through and it is not able to deleverage its
balance sheet. The interest rates and property prices continue to remain high,
impacting demand and thus leading to de-growth in its sales volume in FY13.