Three real estate stocks you should be eying in FY16

The first quarter of the ongoing financial year went against real estate stocks as the BSE Realty index plummeted 16.45 per cent against a jump of 6.85 per cent in the sequential quarter ended March 2015.

During the April-June period, shares Unitech retreated the most - 51.11 per cent to Rs 7.92 on June 30. DLF shares went down 26.10 per cent to Rs 116.95, Indiabulls Real Estate down 12.68 per cent to Rs 57.15, Sobha down 10.83 per cent to Rs 356.75 and DB Realty down 10.59 per cent to Rs 59.50. On the other hand, shares of Phonix Mills jumped around 8 per cent to Rs 378.95 on June 30 and remained the only gainer in the BSE Realty index.

According to market experts, negative news flow - both, domestic and international - led to the correction in the index.

"Potential impact of proposed new regulations (Land Acquisition Act, Real Estate Regulatory Bill, new development plan for Mumbai, Land Pooling Policy for New Delhi and expectations of new master plan for Bangalore) and negative news flow from international markets (expectations of interest rate hike in US, and concerns over Greece debt crisis), dented market sentiments for the BSE Realty index," says Santosh Yellapu, senior research analyst, infrastructure, Angel Broking.

Inventory overhang, poor earnings and cautious commentary by Reserve Bank of India (RBI) Governor Raghuram Rajan over the possibility of no rate cuts in coming quarters added to the worries.

Overall, the real estate industry registered around 35 per cent year-on-year fall in consolidated net profit for the quarter ended March 2015.

"The rate cuts by the central bank did not have the desired pass on affect, which meant that the cost of borrowing did not reduce for the builders and hence ROE (return on equity) continued to shrink and thereby erode shareholder value and returns," says Sanjiv Bhasin, executive vice-president (Markets and Corporate Affairs) IIFL.

OUTLOOK

Considering the ongoing reforms and strong start to the monsoon season, experts are optimistic that the rate cut cycle would continue in 2015-2016. This, coupled with expectations of improvement in business confidence, strengthens view that real estate inventory would gradually decline, and more announcements on new launches would be seen.

"We expect another rate cut in the second half of 2015-16. Further, sales of the realty companies should gradually pick-up, and this should reflect in developer's financials from FY2017E onwards. However, it needs to be noted that companies with land bank, strong execution track record, approvals in place (for new launches), and clean balance sheets should be able to capitalise on emerging opportunities," Yellapu told to Businesstoday.in. "Post the recent correction, with majority of the negatives captured, we advise investors to pick high quality realty stocks. Diligent stock picking should help investors experience value creation," he added.

FACTORS TO WATCH

While investing in a real estate company, one must keep an eye on the company's sales volume and balance-sheet strength vis-a-vis operations. Most developers give details of operations on their websites. Consistency in sales, project execution and cash flow generation are the key to evaluating a real estate company.

"Management strategy, gearing, CFO background, regional spread, brand, execution capability besides ROE, RoCE (Retun on Capital Employed) and Price-Book Value and Price-to-Earnings ratio should be checked before investing in real estate stocks," says Jaspreet Singh Arora, senior vice president, Systematix Shares and Stocks India.

INVESTMENT OPTIONS

Oberoi Realty: Shares of the company outpaced its benchmark index in the past one year mainly because of near zero debt in the balance sheet and good sales pitch in the Mumbai market. Shares of Oberoi Realty jumped 4.23 per cent to Rs 276.95 on July 3 from Rs 265.70 the same day a year ago. On the other hand, the BSE Realty index tanked 31 per cent to 2,075.90 during the same period. Bhasin believes Oberoi Realty will continue to outperform as pricing power and no leverage are key positives. The two year target for the scrip has been set for Rs 400.

Ashiana Housing: Arora of Systematix Shares & Stocks India is bullish on the company. Shares of the company jumped 107 per cent to Rs 238.45 in the past one year to July 3. For the year ended March 2015, the company reported a consolidated net profit of Rs 46.49 crore, up 112.67 per cent against Rs 21.86 crore last year.

Sobha Ltd: The company is a key player in the South, with Bangalore being its main city. As on March 2015, debt-to-equity ratio of the company was at 0.89. "The company has good management and relatively clean balance sheet. It has been able to maintain price trends in its projects and improve, margins. We believe the share price of the company can touch Rs 550. in the next 24 months," says Bhasin of IIFL. For the year ended March 2015, Sobha registered a consolidated net profit of Rs 238.10, up 1.32 per cent, against Rs 235 crore the year before. On July 3, shares of the company were at Rs 361.60.