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Real Estate
Quarterly results in the sector are likely to reflect the land bank sales by
some developers, de-leveraging of balance sheets, lack of momentum in
unit sales and high cost of funding. We prefer companies which: (a)
continue to witness good sales momentum, (b) are not likely to face
funding constraints; and (c) have strong operating cash flows. On this
basis, we reiterate our BUY on Oberoi and Prestige Estates. Whist land
bank purchase will remain a focus for Oberoi in the coming quarters, we
expect Prestige to report acceleration in cash collection from customers.
3QFY12 results from most developers are likely to highlight that the focus is
gradually shifting away from execution, particularly for the capital intensive
projects. Instead, developers are focusing on near-term debt obligations either by
seeking alternate sources of funds or through the sale of unutilized land banks.
Developers in the sector can be categorized into two main buckets:
a) Large land bank, weak sales momentum and high debt/equity ratios:
We expect most developers to fall into this category with their quarterly results
focusing on land bank sales and launch of affordable housing projects. Whilst
recovery in real estate demand will benefit them the most, given the ongoing
economic turmoil we expect continued share price weakening for these players as
they restructure balance sheets/product portfolios to survive the downturn.
b) Strong sales momentum, strengthening balance sheets and 3-5 years
pipeline of new launches: Players such as Oberoi, Prestige Estates and Sobha
are likely to fall into this category. Whilst strong sales momentum and cash flows
are likely to be reported in 3QFY12, we expect these players to focus on
positioning themselves strongly as we approach the bottom of the demand cycle
over the next 12-18 months.
We reiterate BUYs on Oberoi Realty and Prestige Estates
Oberoi Realty: With net cash:equity at around 0.4x, healthy customer demand
backed by a solid reputation around quality and timely execution, Oberoi is better
placed versus most developers. Whilst unit sales are likely to decline by 15%-20%
QoQ for 3QFY12, sales are likely to be more than offset by: a) increase in
realisation rates of 10%-30% across its projects; and b) fast pace of construction in
ongoing projects leading to accelerated cash collection from customers during the
quarter. Advance received from customers on the balance sheet was `6.1bn in
September 2011 whilst sundry debtors remained stable at 0.6bn in 1HFY12.
Prestige Estates: With a high run rate for residential unit sales, a significant
strong pipeline of cash flows yet to be received on sales already made, and
revenue yet to be recognised on collections already made from customers, the
group's overall cash flow position remains significantly strong. Debt:equity ratio
stands at around 0.5x and we expect recurring revenues from lease/rental projects
to increase from `2.3bn in FY12 to `8bn by FY17.
Valuation – scenarios based on project level DCF
Our base case scenarios assume slow execution, delays in cash flows of 2-3 years
beyond project completion and a weak pricing environment. We have assumed a
2-3 year delay in project completion timelines and a further 1-2 year delay in unit
sales relative to management’s expectations. Our SOTP models for Oberoi Realty
and Prestige Estates generate valuations of `284 and `128 respectively with
Oberoi being the higher conviction BUY idea given its stronger balance sheet
positioning.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Real Estate
Quarterly results in the sector are likely to reflect the land bank sales by
some developers, de-leveraging of balance sheets, lack of momentum in
unit sales and high cost of funding. We prefer companies which: (a)
continue to witness good sales momentum, (b) are not likely to face
funding constraints; and (c) have strong operating cash flows. On this
basis, we reiterate our BUY on Oberoi and Prestige Estates. Whist land
bank purchase will remain a focus for Oberoi in the coming quarters, we
expect Prestige to report acceleration in cash collection from customers.
3QFY12 results from most developers are likely to highlight that the focus is
gradually shifting away from execution, particularly for the capital intensive
projects. Instead, developers are focusing on near-term debt obligations either by
seeking alternate sources of funds or through the sale of unutilized land banks.
Developers in the sector can be categorized into two main buckets:
a) Large land bank, weak sales momentum and high debt/equity ratios:
We expect most developers to fall into this category with their quarterly results
focusing on land bank sales and launch of affordable housing projects. Whilst
recovery in real estate demand will benefit them the most, given the ongoing
economic turmoil we expect continued share price weakening for these players as
they restructure balance sheets/product portfolios to survive the downturn.
b) Strong sales momentum, strengthening balance sheets and 3-5 years
pipeline of new launches: Players such as Oberoi, Prestige Estates and Sobha
are likely to fall into this category. Whilst strong sales momentum and cash flows
are likely to be reported in 3QFY12, we expect these players to focus on
positioning themselves strongly as we approach the bottom of the demand cycle
over the next 12-18 months.
We reiterate BUYs on Oberoi Realty and Prestige Estates
Oberoi Realty: With net cash:equity at around 0.4x, healthy customer demand
backed by a solid reputation around quality and timely execution, Oberoi is better
placed versus most developers. Whilst unit sales are likely to decline by 15%-20%
QoQ for 3QFY12, sales are likely to be more than offset by: a) increase in
realisation rates of 10%-30% across its projects; and b) fast pace of construction in
ongoing projects leading to accelerated cash collection from customers during the
quarter. Advance received from customers on the balance sheet was `6.1bn in
September 2011 whilst sundry debtors remained stable at 0.6bn in 1HFY12.
Prestige Estates: With a high run rate for residential unit sales, a significant
strong pipeline of cash flows yet to be received on sales already made, and
revenue yet to be recognised on collections already made from customers, the
group's overall cash flow position remains significantly strong. Debt:equity ratio
stands at around 0.5x and we expect recurring revenues from lease/rental projects
to increase from `2.3bn in FY12 to `8bn by FY17.
Valuation – scenarios based on project level DCF
Our base case scenarios assume slow execution, delays in cash flows of 2-3 years
beyond project completion and a weak pricing environment. We have assumed a
2-3 year delay in project completion timelines and a further 1-2 year delay in unit
sales relative to management’s expectations. Our SOTP models for Oberoi Realty
and Prestige Estates generate valuations of `284 and `128 respectively with
Oberoi being the higher conviction BUY idea given its stronger balance sheet
positioning.
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