Real estate sector: Which stocks should you own?

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Real estate sector: Which stocks should you own?

Investor interest seems to be coming back into the realty space. In an exclusive interview with CNBC-TV18, Aashiesh Agarwaal, VP-Research, Edelweiss Securities and Param Desai, Research Analyst, Angel Broking, give their top picks.

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Excerpts from Markets Midday on CNBC-TV18 Watch the full show » RELATED NEWS Orbit Corporation can test Rs 150-152: Thukral Buy Indiabulls Real Estate; target of Rs 244: Motilal Oswal See traction in real estate biz in next 2 yrs: Arvind Mills DLF rises again! All you need to know before buying property ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets

Q: And on Unitech on Anant Raj your price targets?

Desai: Unitech, price target is around Rs 105. So, around 24- 25% upside from this level. Anant Raj, our price target is around Rs 178.

Q: While a lot of companies in the real estate space are working on deleveraging, in absolute terms the debt levels that they are sitting on is still very high. So, would that be a risk that you would be monitoring in terms of your outperformance rating?

Agarwaal: Yes, we closely continue to monitor the cash flow position for most developers, how they are receiving cash from the customers as well. And of course for companies like DLF, where the debt level is still much higher at Rs 23,000 crore, we are monitoring those things closely. But for these developers, especially DLF they are looking at asset monetisation quite aggressively. We do think that they should be able to do about Rs 2,000 crore of asset monetisation during the course of the year, which will help them bring down their debt.

Over and above, they are receiving very healthy cash flows on the milestone payments. Over and above that, they have a very strong rental income portfolio. So, we are seeing the debt coming off significantly for DLF, may be slower for Unitech as one of their joint ventures in Mumbai have come up and they were looking at getting some cash from there. But overall for Unitech we expect the debt levels to be slightly declining, whereas we think in DLF the debt levels can decline a lot faster than what we have seen in the past.

Q: The first of the rate hikes have come in and equated monthly installments (EMIs) for those who have loans from SBI or ICICI have already gone up starting August 18, 2010. Would that be a fear at all or for that matter the excessive supply of houses that is expected to be available in mid Mumbai or Central Mumbai, would these change your views at all going forward or do you think that real estate companies should be able to weather this storm because you have a number of Mumbai real estate companies in your buy list, like Orbit and even for that matter Unitech?

Agarwaal: In terms of rate hike, we are expecting 100 basis points rate hike over the course of the year. But we must also take into account that this will also be accompanied by a rise in income levels. We do know that the economy is growing at about 8% in real gross domestic product (GDP) terms and to add some inflation to that we have a normal GDP growth of about 12% to 13% at the minimum. So, we can expect a minimum 10% increase in income levels and that will pretty much offset a 100 basis points increase in interest rates. So, we are not too concerned from that perspective and that is fully well factored in.

As far as supply is concerned, we are cognizant of the fact that a lot of supply has been announced in South Central Mumbai. But there is lot of supply, which has been announced, but we are yet to see a lot of projects which are at construction stage or advanced construction stage. I would feel that these supplies would be staggered over a period of time and they would not hit the market in say five-seven years, or completion within five-seven years as is being talked about. I would rather say that a lot of these supplies would be staggered over a period of time.