We expect the I-Sec Real Estate universe to report benign 29% YoY and 11% YoY revenue and EBITDA growth in Q1FY09E; on QoQ basis, revenue and EBITDA will drop 31% and 38% respectively. In Q1FY09E, we expect companies to struggle given the difficult operating environment. Rising home loan rates, low liquidity and expectations of further property price dip have reduced transaction volumes significantly. Also, rising input costs, in terms of raw material, and financing cost have decreased margins. We expect realty companies to face difficulty in booking incremental sales; focus will shift towards executing ongoing projects. We believe there exists downside risk to earnings and NAV in FY09E. Our top picks in the sector are HDIL and Lanco Infratech in large-caps and Marg in mid-caps.
· Negative trend in transaction volumes and prices. The sector witnessed lacklustre transactions and drop in selling prices. Increasing interest rate scenario has further moderated demand from home buyers, who are deferring purchase plans. Further tightening of interest rates will dry up liquidity leading to additional downward pressure. Q1FY09 saw moderation in residential and retail demand, although office demand remained buoyant. We believe that additional supply expected in the next few quarters may further soften prices.
· Drop in revenues & margins. We expect real estate companies to post muted revenue and PAT growth owing to lower transaction volume and prices. On a sequential basis, we expect the companies to post an overall 31% and 38% drop in revenue and EBITDA respectively, given that real estate companies book higher revenues in the last quarters of a fiscal year. We also expect companies to report drop in operating margins owing to higher input cost and financing cost. Higher prices of steel, cement and labour have increased the average construction cost 300-500/sqft and developers are unable to increase prices in line with costs.
· New launches & project execution at risk. This quarter, we observed few project launches as most of them were extended to later dates. Higher costs and sluggish sales have also dented ongoing project execution. This could lead to further stress on cashflows.
· Compelling valuations. Real estate stocks have corrected significantly with most companies trading at 40-60% discount to NAV. At the current valuations; we believe that most concerns are priced in and reiterate our positive stance on the sector. We continue to prefer companies with diversified business segments, value-added offerings, comfortable cash situation, low land costs and transparent management. Our top picks in the large-cap space are HDIL and Lanco Infratech; in the mid-cap space, we prefer Marg.
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