Real Estate Result Preview: Earnings recovery yet to catch up

Analyst: Parikshit Kandpal, +91-22-6184 4311, parikshit.kandpal@karvy.com
Analyst: Varun Chakri; +91-22-6184 4326; varun.chakri@karvy.com

We expect ~5-54% YoY decline in Q4FY14E earnings for (Puravankara, Kolte Patil, Prestige, Oberoi Realty), whilst DLF performance may improve YoY owing to contribution from Aman Resort sale. Our channel checks suggest recovery/stability in the pre-sales volume in Bangalore and Pune whilst new sales in Mumbai & NCR may remain elusive on account of unaffordability. On a consolidated basis, Q4FY14E would be tad better vs festive Q3FY14 as affordable launches by developers resulted in strong pre-sales. We expect pre-sales momentum for the sector to remain positive for the Southern developers (Prestige, Sobha & Puravankara) whilst DLF, Oberoi would continue to see volumes declines YoY on account of unaffordability in home markets.

Midterm drivers for the sector: Our channel checks suggest some improvement in Southern markets & Pune, post a weak festive 3QFY14, whilst NCR and Mumbai volumes continue to languish. The key reasons for the pre-sale improvement include (i) price correction/discount offered by developers (5-10%) (ii) new launches & (iii) improved sentiment on expectation of stable Government. Whilst the volume growth recovery may witness sequential pick up, the sustainability still remains a concern. Much has been bet on stable Government post Central elections, with expectation of accelerated volumes recovery and hardening of rental yields, the uncertainity remains a key overhang. Only solace lies in calibrated price corrections. Demand micro analysis suggests clear tilt towards affordable category in the ~Rs7mn/flat category whilst there is sharp slowdown in bulge bracket of >~Rs10mn/flat. Near term drivers for the sector include (i) dividend policy announcements (Prestige Estates, Oberoi Realty) (ii) capex stabilization (Phoenix, Prestige, Oberoi Realty) & (iii) balance sheet deleveraging (DLF, Puravankara).

Expect Q4FY14E to be a muted quarter: We forecast 18.8% YoY revenue de-growth for our coverage universe whilst EBIDTA margin contraction should result in 20.3% YoY EBIDTA de-growth (largely attributable to cost overrun resets). Flattish interest outgo & higher other income to result in YoY net profit growth of 0.3% (excluding DLF, we estimate 36.1% YoY PAT de-growth for our coverage universe). On positive side, we may see marginal deleveraging in DLF, Prestige & Puravankara. We expect strong pre-sales traction in completed and nearing completion inventory of Prestige Estate & Sobha. On EBIDTA margins front, we expect contraction in margins for Oberoi (slow traction in sales) & Puravankara (higher share from affordable housing company Provident) whilst EBIDTA expansion may augur well for Prestige Estates (high share from premium projects) & Sobha (lower contracting revenue share).

Near-term Recommendations
Over past 1M, BSE Realty Index has outperformed Sensex by 15.3% owing to (i) central banks pause on rate hikes (ii) mortgage rate discounts offers by SBI, HDFC etc, (iii) real estate project discounts & (iv) expected economic recovery. We downgrade Prestige Estates to HOLD from BUY (strong price performance). Despite sharp outperformance, BSE Realty Index continues to trade close to recession multiples & presents a good entry point, DLF, Oberoi Realty, Puravankara & Kolte Patil remain our preferred picks for further meaningful upside from current levels.