Institutional Equities

3QFY12 Realty Sector Preview

11 January 2012

Still not out of the woods yet

We expect 3QFY12 results of companies under our coverage to remain muted sequentially, despite the festive season, on account of slower project execution, regulatory hurdles and subdued new project launch. Barring DLF and Godrej Properties (GPL), none of the companies were able to launch any projects during the quarter on account of delay in government approvals and weak demand. Further, DLFs 4mn sq ft of new projects launched in 3QFY12 was skewed towards low value plot sales (3mn sq ft). We expect most of the companies to miss their guidance on FY12 project launch. Consequently, we expect them to post revenue decline of 2.0%, EBITDA decline of 3.3% and profit growth of 2.3% sequentially.

Param Desai param.desai@nirmalbang.com +91-22-3926 8128

Sector Preview

High debt levels to remain an overhang

We expect muted debt reduction over the next one year on account of subdued volume and contraction in margins. The focus on meeting debt commitment will hamper project execution. Hence, we believe revenue recognition will lag on account of slower cash collection, which exerts pressure on working capital, as buyers make construction-linked payment rather than time-linked. Going forward, we expect operating cash flow to remain negative for GPL, Sobha Developers and DLF.

Outlook
We believe earnings growth will be muted over the next 2-3 quarters, with interest rates likely to peak by the end of 4QFY12. Further, volume recovery hinges on price correction in over-heated markets, faster government approvals for projects and quick project execution. While share prices of most real estate companies are at a significant discount to their NAV barring GPL, we believe those having good visibility on new project launch/pricing strategy, strong balance sheet and pre-sales will able to withstand any further downturn. Our top pick remains Oberoi Realty.

3QFY12 Estimates
CMP Rsmn DLF Godrej Properties HDIL Oberoi Realty Sobha Developers Total TP Sell Sell Hold Buy Hold 174 503 73 283 227 24,311 1,534 4,495 1,892 3,667 35,900 Net sales EBITDA OPM (%) RPAT (Rs) Rating (Rs) 3QFY12E YoY (%) QoQ (%) 3QFY12E YoY (%) QoQ (%) 3QFY12E YoY (%) QoQ (%) 3QFY12E YoY (%) QoQ (%) 191 631 71 227 220 (2.0) 218.4 (1.3) (52.5) 1.0 (4.1) (4.0) 10.0 2.0 (15.0) 12.0 (2.0) 11,183 368 2,293 1,056 821 15,721 (5.1) 463.8 (14.0) (57.2) 0.2 (11.7) (4.7) 14.9 (1.2) (8.6) 100.8 (3.3) 46.0 24.0 51.0 55.8 22.4 43.8 (150bp) 1,044bp (753bp) (612bp) (20bp) (370bp) (32bp) 102bp (166bp) 389bp (5bp) (57bp) 3,812 347 1,447 1,013 469 7,088 (18.2) 96.1 (42.5) (50.7) (4.4) (28.4) 2.4 78 (2.6) (9.1) 14.6 2.3

Source: Bloomberg, Nirmal Bang Institutional Equities Research

Please refer to the disclaimer towards the end of the document.

Institutional Equities
Company-wise result expectations
DLF: The company aggressively launched 4mn sq ft (1.1mn sq ft in 1HFY12) in 3QFY12, unlike its peers, but new projects launched were largely skewed towards low value plot sales. Hence, we expect it to report 2.2mn sq ft of development volumes in 3QFY12, up 72% QoQ (but down 29% YoY). However, we expect DLF to report a marginal decline of 4% QoQ on the revenue front, as it recognised sales from FSI of ~Rs6bn at Gurgaon in 2QFY12. DLF could manage to successfully complete asset sales at Noida IT Park and Pune IT SEZ during the quarter. Both these transactions will fetch Rs6.8bn (before tax) of cash inflow. We do not expect any meaningful debt reduction during 3QFY12 because of new launches skewed towards low value plot sales. Key things to watch out for are net leasing activity and further non-core asset sales. Godrej Properties: The companys volumes are expected to register marginal growth of 5% QoQ in 3QFY12 on account of subdued new project launch (0.9mn sq ft). However, we expect profits to jump 78% QoQ as the company sold 49% stake in one of its subsidiaries for Rs450mn, out of which Rs183mn will be booked during 3QFY12 and the rest will be invested in the subsidiary. We expect GPLs net debt to remain flat and expect it to dilute stake at the parent level, or project level, in order to bring down its debt. Key things to watch out for are the volumes from its Garden City project in Ahmedabad and the companys strategy on de leveraging. HDIL: Revenue will be largely driven by FSI sales at Goregaon and Virar/Vasai projects (in Maharashtra) as the transfer development rights (TDR) market continues to remain weak. We expect HDIL to report 0.25mn sq ft of TDR sales at Rs2,400/sq ft as against 0.3mn sq ft at Rs2,545/sq ft in 2QFY12. This is the second consecutive quarter in which HDIL did not launch any project because of uncertainty in approvals. However, recent amendments to DCR (Development Control Regulations) rules will accelerate the approval process in Mumbai property market. We expect HDIL to report 42.5% YoY decline in profits on account of weak TDR sales and also as it reported a lower tax rate (6%) in 3QFY11. Key things to watch out for are incremental pre-sales, update on Mumbai international airport project and de-leveraging. Oberoi Realty: The company is expected to report a sequential drop in volumes, in line with the slowdown in Mumbai property market. Volumes will be largely driven by the newly launched Esquire project (at Goregaon in Mumbai) in 4QFY11. However, revenue booking will be largely driven by Oberoi Splendor, Oberoi Splendor Grande and rental assets as the Esquire project has still not crossed the threshold limit, which we expect it to take place in 4QFY12. We expect 389bps QoQ improvement in operating margin, as it had reported one-time cost re-adjustment of Rs100mn in 2QFY12. However 50.7% YoY degrowth in profits is on account of revenue commencement of Oberoi Exquisite from 3QFY11 onwards. Key things to watch out for are the status of its Worli project launch in Mumbai and the execution status of Esquire project. Sobha Developers: The company reported strong pre-sales of Rs4.4bn (up 47% YoY) in 3QFY12, thanks to sales at its Gurgaon project, but they were down 7.8% QoQ on no new project launch during the quarter. We expect a 12% QoQ growth in revenue led by some of its projects crossing the threshold limit. However, we expect the company to report a marginal 1% YoY growth in revenue, as it had reported Rs340mn of land sales in 3QFY11. Key things to watch out for are the status on de-leveraging and the margins in its real estate business.

3QFY12 Realty Sector Preview

Institutional Equities
Ratings track - DLF
Date 4 October 2011 11 November 2011 Rating SELL SELL Market Price (Rs) 201 234 Target price (Rs) 174 174

Ratings track - Godrej Properties

Date 4 October 2011 5 October 2011 24 October 2011 Rating SELL SELL SELL Market Price (Rs) 660 626 667 Target price (Rs) 600 503 503

Ratings track - HDIL

Date 4 October 2011 14 November 2011 15 December 2011 Rating BUY BUY HOLD Market Price (Rs) 92 91 65 Target price (Rs) 142 113 73

Ratings track - Oberoi Realty

Date 4 October 2011 17 October 2011 Rating HOLD BUY Market Price (Rs) 208 225 Target price (Rs) 227 283

Ratings track Sobha Developers

Date 4 October 2011 10 October 2011 15 November 2011 Rating HOLD HOLD HOLD Market Price (Rs) 208 212 226 Target price (Rs) 227 227 227

3QFY12 Realty Sector Preview

Institutional Equities
Disclaimer
Stock Ratings Absolute Returns
BUY > 15% HOLD 0-15% SELL < 0%
This report is published by Nirmal Bangs Institutional Equities Research desk. Nirmal Bang has other business units with ind ependent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication.

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Name Rahul Arora Hemindra Hazari Sales and Dealing: Neha Grover Ravi Jagtiani Sudhindar Rao Pradeep Kasat Michael Pillai AVP Sales Dealing Desk Dealing Desk Dealing Desk Dealing Desk neha.grover@nirmalbang.com ravi.jagtiani@nirmalbang.com sudhindar.rao@nirmalbang.com pradeep.kasat@nirmalbang.com michael.pillai@nirmalbang.com +91 22 3926 8093 +91 22 3926 8230, +91 22 6636 8833 +91 22 3926 8229, +91 22 6636 8832 +91 22 3926 8100/8101, +91 22 6636 8831 +91 22 3926 8102/8103, +91 22 6636 8830 CEO Head of Research Email Id rahul.arora@nirmalbang.com hemindra.hazari@nirmalbang.com Direct Line +91 22 3926 8098 / 99
+91 22 3926 8017 / 18

Nirmal Bang Equities Pvt. Ltd.

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3QFY12 Realty Sector Preview