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Realty sector on shaky ground

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The of listed realty players have been a mixed bag. While it reflects a gradual pick-up in demand in select regions, led by an improving economy and increased hiring and salary revisions – especially in the – key markets like Mumbai have seen demand contract due to a jump in property prices.

Given that over half of the demand in the property sector comes from the information technology (IT) and IT-enabled Services (ITeS) space, analysts say volume growth is likely to continue, unless property prices rise sharply. Thus, even as the sector underperformed the broader markets last year (it, however, outperformed since early July), they expect select companies to deliver decent returns.

Southern push
Residential demand growth may be visible across Tier-I and -II cities, but the reasons for it are different. Research Head Ajay D’Souza believes, while the revival in demand for homes in Bangalore year-on-year is to a large extent due to increased hiring and wage hikes for IT employees, growth in Mumbai is attributable to the economic stability.

However, realty firm Jones Lang LaSalle Meghraj’s MD (Bangalore & Kochi) Karun Varma believes the revival in such markets as Bangalore began with a pick-up in the commercial real estate as larger corporates are once again in expansion mode and leasing activity has increased. For example, while 2.5 million square feet of space was leased in the current quarter in Bangalore, the entire year of 2009 saw only 1.2 million square feet being absorbed, he says. A report by research firm Macquarie says, except for the Mumbai market where prices have moved too, fast too soon (20-25 per cent over the last one year), residential volume growth should remain intact in most other big cities, provided prices do not move significantly from here on.

The other key factor impacting demand is interest rates. Analysts say if interest rates go up 1.5 percentage points or more, it could make the monthly payments (equated monthly installments, or EMIs) difficult to bear for customers.

Profitability
A demand increase, higher prices and produce mix have led to growth in profitability of listed realty players in the June quarter.
 

GAINING FROM LOW BASE, HIGH PRICES
In Rs crore Net
sales
%chg
y-o-y

%chg
q-o-q

Net
profit
%chg
y-o-y

%chg
q-o-q

FY12 E
P/E (x)
D B Realty* 265 123.7

-

61.9 145.3

-

21.0
* 2,029 23.0 1.7 411.0 3.8 -3.6 17.9
451 52.7 3.9 234.3 118.0 31.8 7.9
Orbit Corpn* 120 8.3 38.2 20.1 11.5 0.5 6.2
Puravankar Projects* 116 107.8 -5.3 36.7 258.3 -16.1 14.0
Sobha Developers 316 78.2 -21.0 34.3 170.1 -38.4 8.0
For quarter ended June 2010   *Consolidated Data                                               Source: Capitaline 
E: Analyst estimates, except DB Realty which is FY11

However, there could be pressure on their margins due to higher interest, construction and manpower costs.

We look at results of the key players, the estimates of their 2010-11 earnings as well as their valuations:

DLF: Lower sales led to a disappointing June quarter for DLF. While revenues were flat, net profit declined due to higher interest and depreciation costs. The company raised Rs 300 crore from sale of non-core assets in the June quarter and has a target of Rs 2,500 crore over the next 18 months. These funds and cashflows will be used to retire a part of its current debt of Rs 23,000 crore. Analysts believe DLF, which handed over 1.37 million square feet of projects, will have to significantly improve on its execution ability if it is able to meet the 15 million square feet target in FY11. The stock does not offer major upsides in the medium-term.

HDIL: The company’s June quarter revenues and profits were driven by higher transfer development rights (TDR) -related sales, which account for 70 per cent revenues. Earnings before interest, taxes, depreciation and amortisation (Ebitda) margins jumped 700 basis points to 59 per cent due to higher TDR prices and rise in floor space index (FSI) sales. Analysts believe growth will depend on the company’s execution of the second phase of the Mumbai airport project. While its debt situation is comfortable, the promoters are raising their stake (through a warrant issue) that will add Rs 700 crore to HDIL’s coffers. The stock can fetch 20 per cent returns over one year.

: A recovery in receivables and revenue recognition of existing projects saw Orbit, which operates in the luxury segment, report robust revenue growth in the June quarter even as volumes fell by half quarter-on-quarter. The balance revenue available for recognition for the rest of the year (Rs 707 crore) provides better visibility for the future, according to Sharekhan. Notably, the company’s order book is likely to increase further as new projects to the tune of 1.18 million square feet are launched over the next two-three quarters. Though realisations, which jumped 14-20 per cent (due to higher prices in Mumbai), may come under pressure. Investors can buy with a year’s perspective.

Unitech: For the June quarter, the company is expected to post a 60 per cent year-on-year growth in revenues, while net profit is expected to increase 17 per cent. Ebitda margins are likely to contract due to cost revision of old projects, according to a Motilal Oswal report. While the company has guided for sales of 12 million square feet, the research firm believes Unitech has managed to sell only 700,000 square feet in the June quarter. After the restructuring, assets sales as well as equity sales, its debt has come down significantly with leverage at 0.5 times. These positives are, however, factored in the stock price.

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