Q1FY13 was a seasonally soft quarter. All operating metrics (revenues/volumes/margins) declined sequentially while exhibiting relatively a stable YoY performance. We expect volumes to remain weak in Q2FY13 with a pick-up seen in mid-Q3FY13. We maintain our overweight stance (upgraded on Feb 27, 2012) on (1) focus on execution and debt reduction, (2) a below par exposure of banks to retail credit and (3) a declining bank credit to the sector as a whole. While there is a pick-up in approvals, the overall pace remains tardy and overall debt remains high. Hence we prefer developers who are able to launch new projects and monetize assets to bring down debt. Our top picks in the space are DLF and JPIN.
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Volumes soften across most cities
Sales volumes softened across most micro markets led by NCR, Chennai and Hyderabad, offset by a strong performance of the Bangalore market and an improved performance by Mumbai. Within the listed space, most developers reported a seasonal decline with the exception of PEPL, ORB and MLIFE. On a YoY basis, Sobha, PEPL, GPL and JPIN outdid its peers, most of whom reported declines.
Revenues flat, debt levels inch up
Revenues declined by a marginal 2% YoY and were down 19% QoQ across a universe of 13 companies. PAT margins ex-DLF remained constant QoQ, declining by 270bps YoY. Aggregate net debt of 11 companies (ex-JPIN, OBER) was up marginally to INR422bn as against INR416bn at end of Q4FY12, driven by an increase in debt by GPL, PEPL and ARCP. On a YoY basis, debt has gone up 9.6% led by DLF (5% YoY increase) and GPL (86% YoY increase – driven by Jet BKC transaction). Bank debt reported has decreased marginally by 2% QoQ even as channel checks indicate tight liquidity conditions persisting for the sector.
Outlook: A seasonal pause; maintain ‘Overweight’
The sector exhibited a seasonal weakness in Q1FY13. Volumes and reported revenues dropped sequentially (largely flat YoY) despite pockets of good performance. We expect volumes in Q2FY13 to remain muted due to a large overhang of inauspicious days. We, however, see volumes recovering by mid-Q3FY13 with the return of the festive season. While we agree that affordability is stretched, we believe concerns over a price bubble in the physical markets are overplayed given the low exposure of retail bank credit to the sector and existing prudent lending norms (~75% LTV). Attractive valuations, waning headwinds and a focus on execution and debt reduction are key positives that underline our overweight stance on the sector. However, given the generally tardy pace of approvals and high debt, developers who are able to launch projects and monetize assets (to bring down debt) are likely to outperform the sector. Our top picks in the space are DLF and JPIN.
Regards,
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