Realty recovery cycle still far; pick Shobha, Oberoi: CIMB

Real estate companies such as Indiabulls Real Estate, Ansal Properties & Infrastructure, Unitech and HDIL are seeing a lot of investor interest in recent times. But Prakash Agarwal, Real Estate Analyst at CIMB feels the recovery cycle for the sector is still away.

The festival season did not bring much cheer, he told CNBC-TV18; only projects with some discount have seen marginal offtake. He says given the balance sheets of these companies, they need to do a lot more asset churn, cash conversion cycle has to improve and then only will they see return on equity (RoEs) improving.

Agarwal continues to remain underweight on the sector. He picks Sobha Developers because the company has been focusing on project execution – both in terms of completion as well as sales and is in a better market - that is Bangalore. He is bullish on Oberoi Realty too.

Below is the verbatim transcript of Prakash Agarwal's interview on CNBC-TV18

Q: What is your sense about the buying that we are seeing in Indiabulls Real Estate, the stock has shot up likewise Ansal Properties & Infrastructure did well after the numbers, buys are called on stocks like Unitech and HDIL. Do you smell a recovery in real estate stocks?

A: The recovery cycle is still away. We are seeing economic issues more to say with – apart from high property prices, high mortgage rates, high inflation coupled with lower gross domestic product (GDP) income growth as well as lower savings rates, these have all lead to lower purchasing power for the consumer, which according to my channel checks have even continued for the month of October and November. The festival season has not brought much cheer but somewhere where the projects has seen some discounts, there has been some marginal off take but not to move the needle.

However, given the balance sheets the companies have, they need to do a lot more asset churn, the cash conversion cycle has to improve and then only one could see the return on equity (RoEs) improving, otherwise one could continue to see single digit RoEs for most of the developers.

Q: If you had to separate the men from the boys then what stocks you are recommending now from the sector, what would your top picks be and what would your top avoids be?

A: We are underweight on the sector. Our top picks relatively are Sobha Developers because they have been focusing on the execution. If you see throughout the cycle, they are doing step-up in their execution cycle both in terms of completion as well as sales plus they are in a relatively better market that is Bangalore, where we have seen a recovery in the IT space and given the lower ticket sizes compared to ticket sizes of Mumbai or Gurgaon which is upwards of Rs 15 million. In Bangalore people are still buy apartments at Rs 6 million. So, lower ticket sizes, recovery in the IT sector makes Sobha being in Bangalore a relatively better play.

Our second top pick is Oberoi Realty. Currently the company is having issues with the approval cycle but given the marque land parcels they have in Mumbai, I believe that once the approval cycle starts for them, they would be the biggest beneficiaries.