REAL ESTATE Quarterly Preview, Edelweiss

By Accommodation Times Bureau

Recovery on the way
We believe the worst is over for the real estate sector with a visible pick up in approvals in Bengaluru/ Chennai and expectations of pick up in Mumbai post introduction of the new DCR. Volumes continue to be steady / improve in most markets while prices are firm / rising. In terms of reported performance, we do not expect any material change sequentially, except for an upward bias in margins as realizations continue to be firm while inflation pressures are easing. Given easing headwinds, we are ‘overweight’ on the sector. We continue to prefer developers with quality assets and our top picks in the sector are Jaypee Infratech (BUY) and Phoenix Mills (BUY). Other companies that we like in the space are Mahindra Lifespaces (BUY) and Brigade Enterprises (BUY). We have a ‘HOLD’ on DLF as we believe stock performance will be contingent on debt reduction.
Key highlights of the sector during the quarter
Volumes: Q4 tends to be a strong quarter on account of pick up in execution and increased NRI activity in the market. Additionally, Q4FY12 has witnessed peaking of interest rates / inflation while project launch / pre]launch activity has picked up in Chennai and Mumbai markets. We anticipate volumes to remain strong for most developers, ex Mumbai.
Prices: Prices have continued to rise across most micro markets, increasing about 5% in MMR, 10-20% in NCR and 0-5% in Bengaluru. Price discounts are project / developer specific depending on the liquidity profile of the developer with evidence of such discounts in Mumbai, where prices have risen sharply since March 2009 lows.
Result expectations for the sector and stocks under coverage
We expect revenue / profit for most companies in our coverage universe to remain flat in absence of any major sequential variance of volumes. We expect the margin squeeze to subside as realizations have continued to improve while inflation has been moderating. Debt levels will continue to be a key monitorable for the sector.
Outlook over the next 12 months
While certain dark spots remain in terms of high debt and expected PE exits, the overall picture appears much brighter with improving volumes, stabilizing margins, pick up in approvals and peaking of interest rates. We prefer companies with quality assets to play the recovery in the sector.

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