Sector Review - Realty 2010

Vidya Bala

BL Research Bureau

The stalled township project of Lavasa Corporation over alleged flouting of green laws and the resultant delay in the company's IPO is just one among the many snags that real estate players in the country struggle to cope with.

The real estate sector may have braved the crisis of 2008 and 2009 and managed to reduce borrowings and renew construction activity in 2010; but not too many factors are in its favour to aid a bounce back to the heydays of 2007.

That the earnings of companies in the listed realty space in the first half of FY-11 were still a good 67 per cent below earnings in the April–September half year of 2007, suggest that the climb back is quite a while away.

What 2011 holds

2011 could see the sector earnestly build on volumes, with residential sales remaining healthy and commercial space absorbed picking up. Even so, modest profit margins compared with earlier years and rising interest costs could continue to act as a drag on the sector's prospects.

If the recent trend is anything to go by, it is the mid-sized players that are likely to shake off the slowdown faster than their larger peers.

Residential demand

Residential demand can be expected to be the key revenue driver for developers, thanks to supply not keeping pace with demand as a result of slowdown in execution in 2008 and 2009.

According to a Cushman & Wakefield report, cumulative residential demand could be well over four million units by 2011. About 1.7 million units may be met in 2011, says the report, with the mid-sized housing segment seeing the maximum deficit (around three times).

Players in the listed space such as Sobha Developers, Peninsula Land, Puravankara Projects, who are focussed on the residential space, capitalised on this deficit by coming up with timely launches at a time when interest rates were slashed.

While the commercial space pick-up towards the end of 2010 has been encouraging, estimates suggest that only two-third of the 55 million sq. ft of supply coming in 2011 may be absorbed.

Inability to hike capital values and rentals at a desired pace, even as vacant office spaces are occupied are likely to keep margins depressed.

Modest profit margins

In all, operating profit margins of developers may only continue at more sustainable levels of 20-25 per cent (as against 30-45 per cent in 2007-08) for most mid-sized players for two reasons. One, most of them have altered their strategy from selling high-end homes and instead shifted focus to mid-sized housing, which offers lower margins, albeit with potential for high volumes.

Two, even as capital values of residential properties have risen, the inability to hike prices steeply in the middle-income segment in the face of higher input costs and interest costs could also mean settling for lower returns on projects.

Interest costs, in particular, may see some uptick this year. While most listed realty players have deleveraged their balance sheets, net credit by banks to the realty sector as a whole has risen five-fold to Rs 9,604 crore for the half year ending September 2010 compared with a year ago. Equity raising too, has slowed and may get tougher going forward.

According to data from Venture Intelligence, a research service focused on Private Equity & M&A, private equity investments in the realty sector in 2010 was $1,736 million against the high levels of $6,686 million seen in 2008.

Larger players languish

Overall, mid-sized regional players' focussed approach to select market segments may help outperform a DLF, still struggling to raise funds through divestment of non-core assets, or a Unitech embroiled in the telecom mess or an HDIL which deals with price-sensitive transferable development rights (TDR) market in Mumbai.

Traversing the coming year without being caught on the wrong foot on corporate governance issues also remains a big challenge for most players in this space.

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Scam Tainted Buy on Declines

Investors are flocking back to make a quick buck by hunting for bargains among stocks that were pummeled by investors in wake of the bribe-for-loans scam.

Out of the 21 companies allegedly involved in the scam, BGR Energy Systems has recouped all its losses and surged 40% to Rs 740 after touching recent lows of Rs 528. The stock is thus no more a bargain buy. BGR Energy Systems is a Chennai-based capital goods manufacturer and was among the first to deny allegations of involvement in the scam. Core Projects has also bounced back 70% to Rs 256 from recent low of Rs 155 after it denied any role in the scam.

JP Associates and Suzlon have also regained their lost value. Suzlon has surged to Rs 47 after touching a low of Rs 43. The maker of wind turbine generators has clarified that Money Matters was a financial advisor for raising loans in 2009 and the transaction was under the regulatory compliance. And JP Associates has scaled back to double digits (Rs 110) after plummeting to Rs 99.

Name	19th Nov	Recent Low	% Chg	30th Nov	A	B
BGR Energy Sys	719.20	528.20	-26.6	739.69	40.0	2.8
Unitech	67.95	46.10	-32.2	63.45	37.6	-6.6
Core Projects	276.00	150.00	-45.7	255.65	70.4	-7.4
Suzlon Energy	51.75	43.00	-16.9	47.60	10.7	-8.0
Jaiprakash Associates	120.50	99.00	-17.8	110.00	11.1	-8.7
Adani Enterprises	736.05	565.15	-23.2	667.70	18.1	-9.3
Indiabulls Real Estate	173.50	118.15	-31.9	153.65	30.0	-11.4
Jaypee Infratech	80.15	62.00	-22.6	70.35	13.5	-12.2
Central Bank	216.60	183.05	-15.5	189.35	3.4	-12.6
Orbit Corporation	98.60	57.00	-42.2	82.30	44.4	-16.5
HDIL	230.50	160.10	-30.5	189.20	18.2	-17.9
LIC Housing Fin	1294.05	901.50	-30.3	998.85	10.8	-22.8
India Infoline	107.75	72.55	-32.7	82.95	14.3	-23.016
HCC	56.45	37.55	-33.5	43.45	15.7	-23.029
D B Realty	359.60	190.60	-47.0	207.90	9.1	-42.186
Money Matters Financial	686.10	344.30	-49.8	309.90	-10.0	-54.832
A = % Chg from recent Low; B = % Chg from 19th Low; Source: BS Research Bureau

Despite the rally, the realty players remain on tenterhooks amid the uncertainties surrounding pricing concerns and future funding. Indiabulls Real Estate, HDIL and DB Realty continue to be available at 11-40% discount when compared to the pre-crisis price levels.

HCC, which was up 9% at Rs 43.45 on Tuesday; is still an attractive buy compared to pre-scam level of Rs 56. Analysts sound cautious though. "Need to wait and watch the extent of damage on the performance of the stock. Lavasa was planning to come out with an IPO which is a 100% subsidiary of HCC which would have unlocked value; additionally environment ministry has also issued a notice." Gaurang Shah, Vice President of Geojit BNP Paribas said

LIC Housing Finance, which was up 5% on November 30, is still down 23% since the bribery news. Kotak Securities on Monday raised LIC Housing Finance to "add" from "reduce," saying it believes the recent price correction factors in business moderation. Gaurang Shah said, “LIC Housing Finance is financially sound and well managed entity; it has a proven track record. Numbers in the last two quarters speaks for the company’s fundamentals. It is a very decent investment from the long term point of view."

The other names in the financial space, such as Central Bank, India Infoline and Money Matters, have still not pared their losses.

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Technical Analysis - HDIL

HDIL (Rs 301.1): In our review of HDIL in November last year, we had written that one leg of the up-move had ended at Rs 410 and the stock could launch into a decline to Rs 280 or even Rs 197 over the medium-term.

The stock has tested Rs 290 twice since then and is currently poised around this level.Key medium-term support for the stock is at Rs 280 and sideways move between Rs 280 and Rs 400 for few months will be construed a positive consolidation phase that can be followed by a rally to Rs 460, Rs 590 or Rs 720 over the next 12 months.

Medium term investors should divest their holding on a decline below Rs 280 since that would signal a possible decline to Rs 237 or Rs 196 over the next 12 months. Long-term investors can hold the stock as long as it trades above Rs 196.

Source : BL

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Brigade Enterprises - switch to frontline stocks

Source : businessline 03-05-09

Brigade Enterprises (Rs 51.2): 

Brigade Enterprises has also been reduced to nought in the remorseless correction witnessed over 2008. However some signs of strength are visible since the life-time low of Rs 27 formed on March 6. The strong up-trend from this trough has resulted in a gain of about 114 per cent. The stock has also moved above the long-term down-trend line. Medium-term resistance for the stock is around Rs 70. A downward reversal from here can result in a sideways move between Rs 35 and Rs 70 for a few months. Investors with a medium-term horizon can book some profits on a failure to clear this resistance.

Long-term investors can hold with a stop below the all-time low at Rs 25. Targets for the next two years are Rs 100 and Rs 144.

Our Research Team Views :

Day High Low Rs.52-50 on 29th April 2009
Monthly High Low Rs.56 -37
6M H/L Rs. 56-28

This share has risen sharply more than 90% in the last 2 months. 

Our Recommendation : AVOID better to focus on frontline stocks DLF, India Bulls Reality or HDIL for better returns. Wait for the  weakness in the marekt for buying ; buy on correction in the stock markets.

Sectoral view - Bullish short term

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All eyes on Interim Budget !

all eyes would be on the interim budget on Monday as the market is hoping for a lot of sops to revive a sagging economy. However, because expectations from the budget have risen considerably in the last few days, even a moderately generous budget could actually set a bearish undertone for the bourses. On the contrary, if the budgetary proposals beat or match market expectations, it could start the next leg of the stock market rally.

In terms of the Bombay Stock Exchange’s benchmark index, on its way up the Sensex is now likely to test its first resistance at 9,718 points. This has now become a moderate resistance level and may go easily in case rising prices are supported by rising volumes. Following this level, the next resistance is likely to come up at 9,929 points, which will also be a moderate level. However, the next resistance at 10,186 would be an important level and would offer a rising Sensex strong resistance. If the Sensex closes above this level, then the next resistance would come at 10,454 points.

However, going by the study of technical indicators, it is expected that the Sensex would face profit selling at 10,186 points and if it stabilizes around this level, then selling could intensify.

On its way down, the Sensex is likely to test its first support at 9,441 points. This is a crucial support level and investors should watch this carefully as a close below this level would be bearish and could signal more declines. Following this level, there would be minor support at 9,311 points.

Author Vipul Verma

Source : Livemint.com

However, if the selling momentum is high, then this level might not offer any ground to a falling Sensex. At 9,023 points, the short-term trend for the Sensex would be set.

For the S&P CNX Nifty, there is a strong resistance at 2,981 points going northwards. This is a moderate but important resistance level. If this level goes, then the next resistance would come up at 3,068 points, which would again be an important resistance level. This level might trigger some profit selling.

However, if the Nifty closes convincingly above this level, this would mean further gains, which might take it to the next resistance level of 3,140 points. This would be a trend-deciding level and if the Nifty is able to close convincingly above this level with good volumes, this could start the next leg of the stock market rally.

On its way down, the Nifty would test its first support at 2,874 points. This would be an important support level and a close below this level would be seen as very bearish. The next support level would then come at 2,820 points followed by the next support level at 2,754 points. A close below this level would be extremely bearish.

Among individual stocks, this week ICICI Bank Ltd, Housing Development Finance Corp. Ltd, or HDFC, and Housing Development and Infrastructure Ltd, or HDIL, look good on the charts. ICICI Bank at its last close of Rs434.40, has a target of Rs447 and a stop-loss of Rs419. HDFC at its last close of Rs1,540 has a target of Rs1,580 and a stop-loss of Rs1,487. HDIL at its last close of Rs87.75 has a target of Rs93 and a stop-loss of Rs81.

From my previous recommendations, Tata Steel Ltd touched a high of Rs203.85, which was well above its target of Rs196. Century Textiles and Industries Ltd hit a high of Rs186, which was well above its target of Rs173. Punjab National Bank hit a high of Rs417.95 and met its target of Rs414