After years of pressure, earnings and return on equity of real estate companies are likely to pick in 2013, a report by CRISIL Research said.
CRISIL expects lower inflation, coupled with rate cuts, to help real estate companies. "CRISIL Research expects the Reserve Bank of India to cut the repo rate at least 50 basis points (bps) next year. This is expected to improve affordability and provide the much-needed stimulus for demand. As a result, earnings and return ratios are expected to improve in 2013," the agency said.
According to CRISIL's analysis, profit before tax of real estate companies is expected to rise eight per cent, and the return on equity is likely to increase 100 bps on the 50-bp cut in interest rates, expected 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, Pune, Bangalore, Chennai and Hyderabad — to increase at a compounded annual growth rate (CAGR) of seven per cent to 251 million square feet in the next two years.
Mumbai is expected to record the highest CAGR of 14 per cent over the next two years on pent-up demand. Capital values across regions are expected to remain at the first half of 2013 levels, and are anticipated to rise marginally in the second half of 2013.
CRISIL added expectations of a 50-bp cut in rates is expected to improve valuation multiples, which might return to the historical levels of FY2009-10. 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 1.0x 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 per cent from the current market price).