Earnings, RoE of realty firms to pick up in FY14, says Crisil

Expects lower inflation coupled with rate cuts to help real estate companies

After years of pressure, earnings and return on equity (RoE) of real estate companies is likely to pick up in FY14, says a report by Crisil Research.

Crisil expects lower inflation coupled with rate cuts to help the real estate companies in FY14. "CRISIL Research expects the Reserve Bank of India (RBI) to cut the repo rate by at least 50 basis points in the next one year. This is expected to improve affordability and provide the much-needed stimulus to demand. Consequently, earnings and return ratios are expected to improve in FY14," the agency said in a report.

According to Crisil's analysis, profit before tax (PBT) of real estate companies is expected to rise 8% and RoE of real estate companies is likely to increase by 100 bps on 50 bps cut in interest rates which it expects next year.

Crisil Research also expects health absorption of homes to help realty firms. It expects absorption of new residential units across six key cities - Mumbai, National Capital Region (NCR), Pune, Bengaluru, Chennai and Hyderabad - to increase at a compounded annual growth rate of 7% to 251 million square feet in the next two years.

Mumbai is expected to record the highest CAGR of 14% over the next two years due to pent-up demand. Capital values across regions are expected to remain at first half of 2013 levels and are anticipated to rise marginally in the second half of 2013.

Crisil further added that expectations of 50-bps cut in rates in next one year and following demand is expected to improve valuation multiples and return to historical levels of FY 2009-10. Currently, they are trading at an average price to book (P/BV) of 0.9x and on a three year and five year P/BV of 1.ox and 1.1x, respectively.

"Though most companies have good land banks, subdued demand has led to delays in monetisation. Also, high debt levels and rise in interest costs have impacted profitability; hence, valuations are under pressure. We believe pessimism in the real estate sector is largely factored in the current valuations," Crisil Research said.

Crisil Research has assigned Nitesh and Parsvnath a valuation grade of 5/5, indicating strong upside (more than 25 per cent from the current market price). Ashiana, Phoenix and Bhartiya have been assigned a valuation grade of 3/5, indicating that current market price is aligned (±10% from the current market price).