Real Estate - Stress Analysis - Dejection & Despair - we are getting bored - Karvy

Over last 3m BSE Realty index has underperformed Sensex by 21%, weak market sentiments (as highlighted by media) paint despair and dejection which is getting us bored. Our 2QFY14E channel checks doesn't paint a gloomy picture yet, as we see our coverage universe reporting strong 2QFY14E sales in a seasonally weak quarter despite an extended monsoon, drop in new launches & pitru paksh coming in during Sep'13 vs Oct'12 last year. During such uncertain times we have run scenario analysis on our Realty coverage universe using multiple valuation tools to arrive at 'bargain basement prices' and 'favorable risk reward'.

Sectoral performance - in dissonance with on ground performance: The weak economic sentiments has yet not reflected on pre-sales of our coverage universe (please refer Exhibit 2). The correction in stock prices has brought in recession memories with DLF, Puravankara, Kolte Patil trading closer to recession multiple whilst fundamentals have changed with (i)improvement in BS (ii) strong sales momentum &(iii) dividends payouts.

Scenario analysis - helpful during sentiment weakness: We have run scenario analysis on base & bear case assumptions to arrive at 'margin of safety' range for our Realty coverage universe. We have also compared our 'market assumptions' (at Current market prices using 'reverse DCF') with our base case target price assumptions to get comfort on whether current prices factor balanced assumptions. Divergence from the mean multiple is most amplified in case Sobha, Puravankara, Oberoi Realty & Kolte Patil. Most of our coverage universe at current prices is factoring in a 20-30% price correction & WACC of 17-22%.

Capex stabilizing - realty an attractive end-cycle asset reflation 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.

Multiple triggers in place - to positively impact stocks: Our coverage universe in maturing toward mid-cycle cashflow stage with some of them now having a stated dividend policy of distributing 20-25% profits as dividend. There in triggers in place with (i) pick up in new launches around 3QFY14E (ii) pick up in new approvals before the election code of conduct (iii) likely peak out of the interest rate cycle & (iv) economic recovery from 2HFY14E. All these triggers stand to lend visibility to future cash-flows.

Top Picks - mix of strong execution and diversified portfolio: Our scenario analysis and valuation assumptions yield players operating in strong demand markets, with robust balance sheets and superior ability to tide the current downturn and gain market share. We prefer Sobha & Puravankara in Southern market, Oberoi Realty & Kolte Patil in Western markets. Amongst Northern developers we prefer DLF.

Source : Equity Bulls

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