Q1FY14 Results Review - Real Estate stocks

by IndiaNivesh Securities Private Limited

E‐mail: research@indianivesh.in

Website: www.indianivesh.in

Nesco & Phoenix Mills in last 1‐year outperformed DLF & Oberoi Realty from our coverage universe and Sensex. Nesco and Phoenix Mills delivered 1 2% and 25 1% returns given the stable revenue model 1.2% 25.1% model.

DLF & Oberoi delivered negative 28.8% and 25.7% returns in last 1‐year. Negative returns of these 2 stocks is due to (1) Overhang of the pending Real Estate Regulator bill, (2) likelihood of up‐tick in interest rate cycle (3) lower revenue booking from new launches (as it would take few more quarters for revenue recognizition threshold level to be attained), (4) concerns over debt burden on books of

DLF, and ( 5) mandatory promoter’s , ) y p stake dilution ahead for Oberoi Realty.

Sensex Vs Real Estate stocks

                           1 m    3 m     12 m

Sensex              ‐ 9.4%       ‐9.8%     2.0%

Oberoi Realty  ‐9.6%      ‐31.4%   ‐25.7%

Phoenix Mills   ‐10.6%   ‐20.0%   25.1%

Nesco                ‐10.5%     ‐15.9%   1.2%

DLF                      ‐9.3%    ‐36.0%   ‐28.8%

Source: BSE

Recent Quarter Performance in Real Estate Sector..

All companies in our coverage universe reported y‐o‐y revenue growth. Despite increase in blended realizations, inventory exhaustion of

old projects led to single digit y‐o‐y revenue growth.

Higher trading density and rental rates at HSP led to strong revenue growth at

Phoenix Mills; Strong revenues from Exhibition & Building business led to 28.2% y‐o‐y revenue growth at Nesco. Commercial real Estate market in NCR region shown slight improvement, whereas, at Mumbai it continued to be weak (as seen across Oberoi & Nesco).

Higher effective tax rate (DLF and Oberoi Realty), decline in other income (Oberoi Realty) led to y‐o‐y PAT de‐growth at DLF and Oberoi

Realty. 17.0% increase in Other income and lower tax rate led to 29.1% y‐o‐y growth in PAT for Nesco.

Outlook..

• Despite higher residential sale volumes, DLF’s revenues were impacted due to lower revenue booking from change in revenue

recognition a/c’ing policy. We sense thatwe are 4‐6 quarters away from any traction in revenues for DLF. Oberoi’s performance was

impacted due to inventory exhaustion across their projects.

• We sense that for both Oberoi & DLF, we have to wait for another 4‐6 quarters for strong uptick in revenues. Whereas, Nesco at

40% occupancy for Building III, should start seeing revenue contribution from FY14E onwards.

• We do not see any major slow‐down in residential sales across select Delhi NCR pockets and Mumbai.

• Commercial lease rental market continue to be weak in Mumbai. Lease rental streams of PML continued to see improvement

across the country.

• With overhang of Real Estate Regulator bill, we sense that all stocks from our coverage universe may not get re‐rated sooner.

Also, bleak economic scenario would continue to put some pressure on growth prospects in the near term.

• On the back of predictable stable revenue model, we expect Nesco & PML to report continued growth. Traction across Worli

projects could lead to strong growth for Oberoi.

• Apart from Nesco and PML, Oberoi being a zero debt company should benefit the most in Real Estate space.

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