Wake up and smell the paradigm shift, er coffee
To us FY13 was disappointing but then again expectedly the sector
suffered due to: (i) budgetary changes; (ii) delayed approvals; and (iii) high
interest costs. Correction of such magnitude demands confidence to
outweigh caution as fundamentals on ground remains robust, presenting
an opportunity for investors to access high returns through bargain‐
basement purchases. BSE Realty now trades at one‐year forward P/BV of
0.6x and P/E of 11x.We initiate coverage on the sector with BUY.
Rear view not pretty – though rendering sector cheap on historical
Last 6M has seen stock prices of real estate developers getting cratered with
10‐50% absolute underperformance. The correction of such magnitude has
left the sectorlooking cheap relative to its historical valuations, with most of
the stocks trading at touching distance to FY09‐10 recession multiples.
Capex stabilizing ‐ realty an attractive end‐cycle assetreflation play
Our analysis of the real estate players asset portfolio suggest that bulk of the
office/retail assets have become commercially operational during FY13‐14E.
With Capex peaking out being supported by a more conducive interest rate
cycle, reflation shall help ease pressure on the parent’s balance sheet. Likely
beneficiary include DLF, Oberoi, Phoenix Mills & Prestige Estates.
Competitive positioning Real estate players
We have done macro(top down) and micro (bottom ups) competitive
mapping of Indian real estate players and screened developers with firm
grisp of their composure, right mix of defense (annuity assets) and offense
(residential) and relatively high transparency/governance. These developers
are maturing toward mid‐cycle cashflow stage with some of them now
having a stated dividend policy of distributing 20‐25% profits as dividend.
Valuation undemanding – Initiate coverage with BUY
DLF, Oberoi, Prestige & Phoenix are ourtop picks owing to a well balanced
mix of defense (annuity assets) and offense (residential). Sobha, Puravankara
& Kolte Patil are our pure play residential bets owing to strong launch
pipeline, history of meeting expectations & high dividend payouts in case of
the later two. Our stock selection offers high margins of safety owing to a
robust past track record of braving cycles and a more confidentfuture.
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To us FY13 was disappointing but then again expectedly the sector
suffered due to: (i) budgetary changes; (ii) delayed approvals; and (iii) high
interest costs. Correction of such magnitude demands confidence to
outweigh caution as fundamentals on ground remains robust, presenting
an opportunity for investors to access high returns through bargain‐
basement purchases. BSE Realty now trades at one‐year forward P/BV of
0.6x and P/E of 11x.We initiate coverage on the sector with BUY.
Rear view not pretty – though rendering sector cheap on historical
Last 6M has seen stock prices of real estate developers getting cratered with
10‐50% absolute underperformance. The correction of such magnitude has
left the sectorlooking cheap relative to its historical valuations, with most of
the stocks trading at touching distance to FY09‐10 recession multiples.
Capex stabilizing ‐ realty an attractive end‐cycle assetreflation play
Our analysis of the real estate players asset portfolio suggest that bulk of the
office/retail assets have become commercially operational during FY13‐14E.
With Capex peaking out being supported by a more conducive interest rate
cycle, reflation shall help ease pressure on the parent’s balance sheet. Likely
beneficiary include DLF, Oberoi, Phoenix Mills & Prestige Estates.
Competitive positioning Real estate players
We have done macro(top down) and micro (bottom ups) competitive
mapping of Indian real estate players and screened developers with firm
grisp of their composure, right mix of defense (annuity assets) and offense
(residential) and relatively high transparency/governance. These developers
are maturing toward mid‐cycle cashflow stage with some of them now
having a stated dividend policy of distributing 20‐25% profits as dividend.
Valuation undemanding – Initiate coverage with BUY
DLF, Oberoi, Prestige & Phoenix are ourtop picks owing to a well balanced
mix of defense (annuity assets) and offense (residential). Sobha, Puravankara
& Kolte Patil are our pure play residential bets owing to strong launch
pipeline, history of meeting expectations & high dividend payouts in case of
the later two. Our stock selection offers high margins of safety owing to a
robust past track record of braving cycles and a more confidentfuture.
Company Specific Summaries
DLF: Hysteria Creates new buying opportunity
(BUY, CMP Rs175, upside 42%)
Over the last twelve months the share price of DLF has underperformed the
Sensex by 20% and the stock is trading close to its 52‐week low. The risks over
deleveraging roadmap, margins recovery and pick up in new sales & cashflows
seems overpriced as we derive comfort from (i) strong annuity asset mix (ii)
successful high value Gurgaon Phase‐V launches (iii) concrete non‐core assets sale
and; (iv) strong competitive positioning. Hysteria around stock price correction
has created a new buying opportunity we initiate coverage with BUY stance and
42% upside. Our valuation is based on 0.8x our end‐FY14E NAV forecast. We
believe that the near‐term catalysts are:(i) success of new launch; (ii) balance sheet
deleveraging & (iii) margins improvements.
Oberoi Realty: A lot to blue sky
(BUY, CMP Rs200, upside 54%)
Over the past 6 months Oberoi Realty Ltd. (ORL) share price has fallen by 32%,
owing to (i) concerns on slowing sales & unaffordable property markets; (ii) delay
in getting Mulund projectregulatory clearance and (iii) pessimistic outlook on new
sales booking for FY14E. In spite ofthis we initiate coverage with a BUYbecause of
ORL’s strong competitive positioning, healthy balance sheet and upcoming strong
launch pipeline. Our valuation is based on 1x our end‐FY14E NAV forecast. We
believe that the near‐term catalysts are: (i) Mulund & Worli launch; (ii) successful
foray outside Mumbai & (iii) new land acquisitions.
Prestige Estates: Plotting a careful trajectory
(BUY, CMP Rs162, upside 28%)
Following a catastrophic summer of negative sectoral news flows, slowing
markets, unaffordability, within the realty sector, the share price of Prestige
Estates (PEPL) has largely been insulated, outperforming Sensex by 29% on 12M
relative basis. Going into FY14, we expect sharp re‐rating owing to (i) Robust new
launch plans of 14mn sqft; (ii) annuity portfolio nearing maturity by FY15‐16E (iii)
likely balance sheet deleveraging and (iv) stated dividend policy announcement.
We initiate on the company with a BUY stance and a SOTP‐based target price of
Rs207/share. Our valuation is based on 1x our end‐FY14E NAV forecast. We
believe that the near‐term catalysts are:(i) success of new launch;(ii) new dividend
policy & (iii) annuity business ramp up.
Phoenix Mills: The right ingredients
(BUY, CMP Rs259, upside 22%)
Overthe past 6 months Phoenix Mills (PML) share price has outperformed Sensex
by 11%, owing to (i) improving annuity income; (ii) successful Bangalore launches
and (iii) no incremental Capex. Despite such an outperformance we initiate
coverage with a BUY because of PML’s strong annuity asset base, balance sheet
deleveraging and upcoming launches. We adopt a DCF based approach and a
SOTP‐based target price of Rs315/share. We believe that the near‐term catalysts
are: (i) Success of residential launch; (ii) improvement in Shangrila occupancy
rates.
Sobha Developers: The Southern Architect
(BUY, CMP Rs382, upside 30%)
Over the past 6 months Sobha Developers’ (SDL) share price has fallen by 1.3%,
owing to (i) generic factors bedeviling the Real Estate sector; (ii) muted FY13
performance and (iii) likely oversupply in the Southern market. In spite of this we
initiate coverage with a BUY because of SDL’s strong competitive positioning,
healthy balance sheet, geographical diversification and upcoming strong launch
pipeline. We value the real estate business at Rs466/share using a NAV model and
the contracting and manufacturing business (C&M) at Rs29/share. We believe that
the near‐term catalysts are: (i) strong launch pipeline and (ii) focus on further
balance sheet de‐leveraging.
Puravankara Projects: Fresh ambition,fresh upside
(BUY, CMP Rs81, upside 70%)
Over the past 6M Puravankara Projects (PPL) has underperformed the BSE Realty
index by 16%, partly owing to the slow IT/ITES recovery and partly because of
PPL’s deteriorating leverage. PPL’s stronger financial positioning post IPP & OFS,
healthy competitive positioning in the Southern Indian market and successful
foray into affordable housing would lead to material recovery over 2HFY14E. We
initiate coverage with BUY stance and 70% upside. Our valuation is based on 0.65x
our end‐FY14E NAV forecast. Near‐term catalysts for PPL are: (i) strong launch
pipeline; (ii) margin expansion due to change in product mix; and (iii) balance
sheet de‐leveraging.
Kolte Patil Developers: Savings the good news for next year
(BUY, CMP Rs77, upside 134%)
KPDL share has corrected 30% over past 6M, whilst the underlying business
dynamics continue to remain strong with (i) new launches on track (ii) new
approvals picking pace; (iii) improvement in transparency & (iv) strong earnings
growth CAGR of 22% FY13‐15E; the correction present good opportunity as KPDL
has 5‐7% dividend yield at current prices and strong cash‐flows support long term
capital appreciation. We maintain our BUY on KPDL with target of Rs180 per
share (10% discount to NAV of Rs200) offering 134% upside. We value KPDL on
NAV based target of Rs180 (giving a 10% NAV discount). At CMP the KPDL
trades at 3.7xFY15E EPS.
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