Real Estate results preview for Q3FY12: Motilal Oswal

Motilal Oswal has come with its December quarterly earning estimates for Real Estate sector. According to the research firm, for Q3FY12, developers are expected to make meaningful progress in some major divestments to handle the liquidity concern.

Underperformance persists, regulatory overhang continues:

In 3QFY12, the BSE Realty Index declined sharply by ~20% and underperformed the broader Sensex by 15%. Barring steady sales momentum in Bangalore projects, key overhangs are yet to subside: (a) Approval delays and regulatory uncertainties continue to haunt project launches; (b) Liquidity concern still impacts construction pace, leading to slower customer collection; and (c) Stock specific overhangs such as CCI probe (DLF), 2G issues (Unitech), farmers' protest on land acquisition, etc. (However, of late, there is some short-term respite on these issues.)

3Q likely to belie expected operational recovery in 2HFY12:

Seasonally, 2H accounts for 55-60% of overall annual sales. Based on management guidance, in 2HFY12, we expect an even more skewed performance, post a subdued 1/2Q. Further, our interaction with managements suggests 2HFY12 launch schedules and sales volume will be back-ended. Therefore, we don't expect any huge boost in sales momentum in 3Q for most developers. Bangalore-based players could emerge as outperformers, given prevailing steadiness and supply in the market.

De-leveraging exercise to gain momentum:

In 3QFY12, we expect developers to make meaningful progress in some major divestments to handle the liquidity concern. We also expect first signs of trend reversal in DLF's debt figure. This is post a recent deal conclusion, resulting in actual cash flow. News of HDIL's assets and FSI sale is also a positive development for its de-leveraging target.

Key factors to watch out for:

(a) Response to new launches and progress in approvals for planned launches;

(b) Leasing velocity and rental movement in the commercial vertical;

(c) Ground-level impact of global concern on IT/ITES sector; (d) Progress in deleveraging target and re-financing.

Attractive entry points for select players:

Valuations are at steep discount for major stocks due to several sector-specific and company-specific headwinds. While current valuations seem to be pricing in most major concerns, near-term catalysts are yet not visible and headwinds are yet to subside. We prefer stocks with prudent balance sheets and strong business models with near-term triggers. Oberoi Realty remains our top pick, while DLF offers play on de-leveraging theme.

Company Name	Net Sales (Rs mn)		Net Profit
	Dec.11	Var. QoQ (%)	Dec.11	Var. QoQ (%)
Anant Raj Inds	835	-8.5	308	-11.4
DLF	25,372	0.2	3,930	5.5
HDIL	5,648	28.2	1,952	31.3
Mahindra Lifespace	1,197	27.6	216	-31.2
Oberoi Realty	2,306	3.6	1,115	0.1
Phoenix Mills	490	3.5	232	-2.8
Unitech	7,012	12	1,021	10.4

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