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Jan 24, 2013, 02.19 PM IST | Source: CNBC-TV18

Nirmal Bang bearish on HDIL; Presitge & Oberoi top picks

In an interview to CNBC-TV18, Param Desai of Nirmal Bang Institutional Equities shared his reading and outlook on real estate space and particularly HDIL. At Nirmal Bang, their top picks from the realty space are Prestige Estates and DLF, he asserts

The shares of Housing Development & Infrastructure ( HDIL ) cracked as much as 15.8 percent on Wednesday after vice chairman and managing director Sarang Wadhawan offloaded partial stake in the company. He sold 5 million shares worth Rs 57 crore in secondary markets on Tuesday, reducing his stake to 0.99 percent from 2.19 percent.

Wadhwan told CNBC-TV18, "We are aiming at debt reduction; this move was primarily to fund the land acquisition we had entered into about a year back," No details were shared about this land purchase but the company expects this acquisition to add substantial value.

Goldman upgrades DLF to 'buy' on upcoming projects

In an interview to CNBC-TV18, Param Desai of Nirmal Bang Institutional Equities shared his reading and outlook on real estate space and particularly HDIL.

He says, overall the realty index per se has outperformed the broader index over the last one year. At Nirmal Bang, their top picks from the realty space are Prestige Estates and DLF, he asserts.

Below is the edited transcript of his interview on CNBC-TV18

Q: Housing Development Infrastructure Ltd (HDIL) holding a conference call at 12 O’clock this afternoon. There were some exits from big investors and not to mention that the promoter too sold some amount of shares day before yesterday. What is your view with regards to HDIL the fundamentals and all of the news flow that surrounded it?

A: Over the last two years, HDIL profits were largely driven by floor space index (FSI) sales where the cash conversion cycle is much longer than your normal transfer of development right (TDR) sale which continues to remain weak for HDIL in the event of delay in airport project.

So further new launches continue to remain subdued for HDIL and over the last 12-15 months they have managed to launch only 1.5 to 1.8 million square feet of new launches in Mumbai Metropolitan Region (MMR) vis-a-vis 6-7 million square feet of new launches they had done in FY10 and FY11 in each year. Because of this the liquidity position of the company has taken little bit toll.

Further the promoters have pledged around 96 percent of their holding; this can restrict the company for additional funding and can delay their execution on ongoing projects. We continue to remain negative on the counter.

Q: What explains this immediate capitulation we saw in some of the Mumbai based real estate stocks? Any reason why they fell?

A: We cover HDIL and I have discussed with you the reasons why the stock has not done well. As I said, their dependence on Floor Space Index (FSI) sale has gone up substantially, where the cash conversion has not resulted in that case per se. So any improvement in the liquidity condition for HDIL largely hinges on the monetization of some of their commercial projects or receivables of the cash from the FSI transaction that they have done. However, that is not happening.

Debtor days have gone up from 150 days in FY12 for HDIL to 373 days in FY13 per se. That remains a major concern for the counter and because of that company is likely to look at a higher discount to a NAV vis-à-vis peer group. Our fair value for the counter remains at Rs 80 per share and we continue to be negative on the counter.

On other hand Oberoi Realty the new launches have remained subdued for the counter but the presales have remained pretty much stronger in the last six-nine months. The execution has been stronger because of cash they have done. Oberoi continues to outperform vis-à-vis its peer group.

We believe the companies which have a strong balance sheet and cash flow will do well in this kind of scenario.

Q: Has the fall got something to do with the fact that Lodha Group has now announced a lower rate than the prevailing market rates or at least appears to be an attractive rate? For long the feeling in the Bombay real estate market was that prices are higher than the affordability or ability of buyers to pay but nobody was blinking. Lodha has blinked and that is why the shares fell? Is there any truth to that argument?

A: I don’t think so because Lodha is largely present in the high-end segment, where they have recently launched. HDIL doesn’t have that kind of presence in that segment. Oberoi Realty does have but they are largely present in the Goregaon segment and they have done a soft launch in Worli. So the kind of launch Lodha has done is impacting more to the players like Orbit which have presence in the vicinity of Lower Parel or Worli but not companies like HDIL which doesn’t have presence in this kind of segment.

Q: How would you be placed in terms of stock price or stock performance for these real estate stocks? Stocks like Orbit, HDIL are currently trading off the highs they had made previously. Do you think that it could scale back to those highs in terms of stock performance at all or do you expect it to be subdued or even range bound?

A: I don’t cover Orbit so I won't be able to comment on that. Overall if you see the realty index per se has outperformed the broader index over the last one year. The stocks which have outperformed in this rally are the ones which have reported stronger presales which has led to improvement in the cash flow and improvement in balance sheet. We expect a similar trend will continue going forward in FY14, where we expect the absorption level in cities like Bangalore or Gurgaon should do pretty well. Companies located in that region will continue to perform pretty well.

That is the reason we like Prestige Estates which has strong presence in the Bangalore market. We like DLF where we are betting more on a turnaround strategy with their presence in Gurgaon. So these are the counters which we believe will outperform going forward. Not the once which still has pressure on the liquidity position or on balance sheet per se.

Q: What are your major buys, just taking the argument beyond Mumbai at this point?

A: Our top pick in the sector remains Prestige Estates, which is predominately a Bangalore based player where 88 percent of the NAV come from that segment. We continue to remain positive on the Bangalore market but the absorption has remained pretty strong and that is also reflected in Prestige and Sobha Developers presales numbers.

If we see over the last 12-15 months Prestige has reported 70 percent year on year growth in presales for the first nine months likely to report over there which will now reflect in the earnings. That is the reason we expect Prestige should report earnings Compound Annual Growth Rate (CAGR) of around 50-70 percent in the next two-three years because of the kind of new launches which will start getting revenue recognition over the next coming quarters.
Further the exit rentals for Prestige is likely to go up from around Rs 250 crore to Rs 500 crore the next two-three years, which will act as a hedge in the event of any slowdown. So Prestige remains our top pick.

On the other hand we prefer companies like DLF where we have recently upgraded stock from sell to buy where we are betting more on the turnaround strategy. DLF over the past two years have been focusing more on the plot sales which has helped to keep the margins intact but has not done anything better in terms of cash flows.

Now, since the managements renewed focus more on the new launches in Gurgaon market where the absorption continues to remain healthy which can improve the cash flow. DLF might see first year in FY14 a positive cash flow which has not been the case for the last five years. So these two stocks are our top picks in this sector.

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