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Still not out of the woods yet
We expect 3QFY12 results of companies under our coverage to remain
muted sequentially, despite the festive season, on account of slower project
execution, regulatory hurdles and subdued new project launch. Barring DLF
and Godrej Properties (GPL), none of the companies were able to launch
any projects during the quarter on account of delay in government
approvals and weak demand. Further, DLF’s 4mn sq ft of new projects
launched in 3QFY12 was skewed towards low value plot sales (3mn sq ft).
We expect most of the companies to miss their guidance on FY12 project
launch. Consequently, we expect them to post revenue decline of 2.0%,
EBITDA decline of 3.3% and profit growth of 2.3% sequentially.
High debt levels to remain an overhang
We expect muted debt reduction over the next one year on account of subdued
volume and contraction in margins. The focus on meeting debt commitment will
hamper project execution. Hence, we believe revenue recognition will lag on
account of slower cash collection, which exerts pressure on working capital, as
buyers make construction-linked payment rather than time-linked. Going forward,
we expect operating cash flow to remain negative for GPL, Sobha Developers
and DLF.
Outlook
We believe earnings growth will be muted over the next 2-3 quarters, with interest
rates likely to peak by the end of 4QFY12. Further, volume recovery hinges on
price correction in over-heated markets, faster government approvals for projects
and quick project execution. While share prices of most real estate companies
are at a significant discount to their NAV barring GPL, we believe those having
good visibility on new project launch/pricing strategy, strong balance sheet and
pre-sales will able to withstand any further downturn. Our top pick remains Oberoi
Realty.
Company-wise result expectations
DLF: The company aggressively launched 4mn sq ft (1.1mn sq ft in 1HFY12) in 3QFY12, unlike its peers, but
new projects launched were largely skewed towards low value plot sales. Hence, we expect it to report 2.2mn
sq ft of development volumes in 3QFY12, up 72% QoQ (but down 29% YoY). However, we expect DLF to
report a marginal decline of 4% QoQ on the revenue front, as it recognised sales from FSI of ~Rs6bn at
Gurgaon in 2QFY12. DLF could manage to successfully complete asset sales at Noida IT Park and Pune IT
SEZ during the quarter. Both these transactions will fetch Rs6.8bn (before tax) of cash inflow. We do not
expect any meaningful debt reduction during 3QFY12 because of new launches skewed towards low value
plot sales. Key things to watch out for are net leasing activity and further non-core asset sales.
Godrej Properties: The company’s volumes are expected to register marginal growth of 5% QoQ in 3QFY12
on account of subdued new project launch (0.9mn sq ft). However, we expect profits to jump 78% QoQ as
the company sold 49% stake in one of its subsidiaries for Rs450mn, out of which Rs183mn will be booked
during 3QFY12 and the rest will be invested in the subsidiary. We expect GPL’s net debt to remain flat and
expect it to dilute stake at the parent level, or project level, in order to bring down its debt. Key things to
watch out for are the volumes from its Garden City project in Ahmedabad and the company’s strategy on deleveraging.
HDIL: Revenue will be largely driven by FSI sales at Goregaon and Virar/Vasai projects (in Maharashtra) as
the transfer development rights (TDR) market continues to remain weak. We expect HDIL to report 0.25mn
sq ft of TDR sales at Rs2,400/sq ft as against 0.3mn sq ft at Rs2,545/sq ft in 2QFY12. This is the second
consecutive quarter in which HDIL did not launch any project because of uncertainty in approvals. However,
recent amendments to DCR (Development Control Regulations) rules will accelerate the approval process in
Mumbai property market. We expect HDIL to report 42.5% YoY decline in profits on account of weak TDR
sales and also as it reported a lower tax rate (6%) in 3QFY11. Key things to watch out for are incremental
pre-sales, update on Mumbai international airport project and de-leveraging.
Oberoi Realty: The company is expected to report a sequential drop in volumes, in line with the slowdown in
Mumbai property market. Volumes will be largely driven by the newly launched Esquire project (at Goregaon
in Mumbai) in 4QFY11. However, revenue booking will be largely driven by Oberoi Splendor, Oberoi
Splendor Grande and rental assets as the Esquire project has still not crossed the threshold limit, which we
expect it to take place in 4QFY12. We expect 389bps QoQ improvement in operating margin, as it had
reported one-time cost re-adjustment of Rs100mn in 2QFY12. However 50.7% YoY degrowth in profits is on
account of revenue commencement of Oberoi Exquisite from 3QFY11 onwards. Key things to watch out for
are the status of its Worli project launch in Mumbai and the execution status of Esquire project.
Sobha Developers: The company reported strong pre-sales of Rs4.4bn (up 47% YoY) in 3QFY12, thanks to
sales at its Gurgaon project, but they were down 7.8% QoQ on no new project launch during the quarter. We
expect a 12% QoQ growth in revenue led by some of its projects crossing the threshold limit. However, we
expect the company to report a marginal 1% YoY growth in revenue, as it had reported Rs340mn of land
sales in 3QFY11. Key things to watch out for are the status on de-leveraging and the margins in its real
estate business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Still not out of the woods yet
We expect 3QFY12 results of companies under our coverage to remain
muted sequentially, despite the festive season, on account of slower project
execution, regulatory hurdles and subdued new project launch. Barring DLF
and Godrej Properties (GPL), none of the companies were able to launch
any projects during the quarter on account of delay in government
approvals and weak demand. Further, DLF’s 4mn sq ft of new projects
launched in 3QFY12 was skewed towards low value plot sales (3mn sq ft).
We expect most of the companies to miss their guidance on FY12 project
launch. Consequently, we expect them to post revenue decline of 2.0%,
EBITDA decline of 3.3% and profit growth of 2.3% sequentially.
High debt levels to remain an overhang
We expect muted debt reduction over the next one year on account of subdued
volume and contraction in margins. The focus on meeting debt commitment will
hamper project execution. Hence, we believe revenue recognition will lag on
account of slower cash collection, which exerts pressure on working capital, as
buyers make construction-linked payment rather than time-linked. Going forward,
we expect operating cash flow to remain negative for GPL, Sobha Developers
and DLF.
Outlook
We believe earnings growth will be muted over the next 2-3 quarters, with interest
rates likely to peak by the end of 4QFY12. Further, volume recovery hinges on
price correction in over-heated markets, faster government approvals for projects
and quick project execution. While share prices of most real estate companies
are at a significant discount to their NAV barring GPL, we believe those having
good visibility on new project launch/pricing strategy, strong balance sheet and
pre-sales will able to withstand any further downturn. Our top pick remains Oberoi
Realty.
Company-wise result expectations
DLF: The company aggressively launched 4mn sq ft (1.1mn sq ft in 1HFY12) in 3QFY12, unlike its peers, but
new projects launched were largely skewed towards low value plot sales. Hence, we expect it to report 2.2mn
sq ft of development volumes in 3QFY12, up 72% QoQ (but down 29% YoY). However, we expect DLF to
report a marginal decline of 4% QoQ on the revenue front, as it recognised sales from FSI of ~Rs6bn at
Gurgaon in 2QFY12. DLF could manage to successfully complete asset sales at Noida IT Park and Pune IT
SEZ during the quarter. Both these transactions will fetch Rs6.8bn (before tax) of cash inflow. We do not
expect any meaningful debt reduction during 3QFY12 because of new launches skewed towards low value
plot sales. Key things to watch out for are net leasing activity and further non-core asset sales.
Godrej Properties: The company’s volumes are expected to register marginal growth of 5% QoQ in 3QFY12
on account of subdued new project launch (0.9mn sq ft). However, we expect profits to jump 78% QoQ as
the company sold 49% stake in one of its subsidiaries for Rs450mn, out of which Rs183mn will be booked
during 3QFY12 and the rest will be invested in the subsidiary. We expect GPL’s net debt to remain flat and
expect it to dilute stake at the parent level, or project level, in order to bring down its debt. Key things to
watch out for are the volumes from its Garden City project in Ahmedabad and the company’s strategy on deleveraging.
HDIL: Revenue will be largely driven by FSI sales at Goregaon and Virar/Vasai projects (in Maharashtra) as
the transfer development rights (TDR) market continues to remain weak. We expect HDIL to report 0.25mn
sq ft of TDR sales at Rs2,400/sq ft as against 0.3mn sq ft at Rs2,545/sq ft in 2QFY12. This is the second
consecutive quarter in which HDIL did not launch any project because of uncertainty in approvals. However,
recent amendments to DCR (Development Control Regulations) rules will accelerate the approval process in
Mumbai property market. We expect HDIL to report 42.5% YoY decline in profits on account of weak TDR
sales and also as it reported a lower tax rate (6%) in 3QFY11. Key things to watch out for are incremental
pre-sales, update on Mumbai international airport project and de-leveraging.
Oberoi Realty: The company is expected to report a sequential drop in volumes, in line with the slowdown in
Mumbai property market. Volumes will be largely driven by the newly launched Esquire project (at Goregaon
in Mumbai) in 4QFY11. However, revenue booking will be largely driven by Oberoi Splendor, Oberoi
Splendor Grande and rental assets as the Esquire project has still not crossed the threshold limit, which we
expect it to take place in 4QFY12. We expect 389bps QoQ improvement in operating margin, as it had
reported one-time cost re-adjustment of Rs100mn in 2QFY12. However 50.7% YoY degrowth in profits is on
account of revenue commencement of Oberoi Exquisite from 3QFY11 onwards. Key things to watch out for
are the status of its Worli project launch in Mumbai and the execution status of Esquire project.
Sobha Developers: The company reported strong pre-sales of Rs4.4bn (up 47% YoY) in 3QFY12, thanks to
sales at its Gurgaon project, but they were down 7.8% QoQ on no new project launch during the quarter. We
expect a 12% QoQ growth in revenue led by some of its projects crossing the threshold limit. However, we
expect the company to report a marginal 1% YoY growth in revenue, as it had reported Rs340mn of land
sales in 3QFY11. Key things to watch out for are the status on de-leveraging and the margins in its real
estate business.
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