Brokerages dare to recommend Anant Raj, Sobha even as realty struggles

CLSA is recommending Anant Raj, based on a low debt level and strategic shift towards residential sales; Kotak is betting on Sobha as it believes that the impact of new launches is not reflected in the stock price

From a high in January this year, the BSE Realty Index slid to the year's low late November. Since then it has only managed to recover a little. However, with the 20-50% fall in real estate stocks, brokers have started pushing the ones they believe are better placed-essentially with higher visibility and low debt-to-equity levels. Frontline brokers CLSA and Kotak are recommending Anant Raj Industries and Sobha Developers, respectively, to institutional clients.

CLSA's argument is that "Anant Raj stands out as one of the few developers that has stuck to its core geographical area (National Capital Region) and it has avoided the temptation of excessive landbanking over the last few years-evident in the D/E of 0.2x." Kotak has upgraded Sobha to a 'buy' saying, "We see three key positives: (1) steady demand and pricing in Sobha's primary market, Bengaluru, (2) Sobha's new launches in Q3FY11 validate sales guidance of three million square feet, and (3) current stock price implies steady-state real estate development of only one million square feet."

Anant Raj Industries (CMP Rs105, CLSA target Rs172)

Anant Raj Industries, which has incidentally constructed Delhi's landmark India Gate, currently has 73 million square feet of projects in hand, the land cost of which is completely paid for. Out of its total land bank of 1,178 acres, 42% is in Delhi, 17% in outer Delhi, 24% in Manesar and 17% in Gurgaon. According to CLSA, out of its gross asset value of Rs76 billion (GAV), 58% comes from Delhi, 14% from outer Delhi, 12% from Manesar and 16% from Gurgaon. To arrive at a March 2012 net asset value of Rs230/share, CLSA has assumed 47 million square feet of development.

Between March 2007 and March 2010, Anant Raj added very little to its landbank-only 72 acres, or 8% of its total land bank. However, after land prices contracted substantially thereafter, it turned a little aggressive and has undertaken an addition of 150-200 acres in Gurgaon and Manesar at a cost of Rs10 billion. Even with these purchases its gearing is expected to stay low at 0.2x in March 2011. From a cash surplus level of Rs3.5 billion in FY10, CLSA assumes net debt at Rs6.9 billion in FY11 falling to Rs6.1 billion in FY12. CLSA believes that a lot of the new land that Anant Raj has purchased will have a low gestation period, or turnaround time, since it is very close to large developments by its competitors. Most have a development potential of just 2-3 years.

CLSA points out that Anant Raj's business model transformation to a faster turnover/residential portfolio started in early FY11 and it expects residential sales to scale up substantially from FY12 onwards. From nothing in FY10, the residential area sold is expected to be 9,00,000 square feet in FY11, 2.3 million square feet in FY12 and 2.5 million square feet in FY13. Comparative value sales are expected to be Rs5.3 billion in FY11 and Rs13.2 billion in FY12 against nothing in FY10. "The 150-200 acres of new land that Anant Raj is acquiring is entirely in the residential segment and will shift the percentage contribution of residential land to 38-41% from 25%," says the CLSA report.

A key trigger for the stock could be the launch of the Hauz Khas property that was stalled due to litigation. CLSA expects to re-launch in the fourth quarter of FY11. Another positive is its rapidly increasing rentals portfolio. "Anant Raj's portfolio of rental assets started maturing in FY10 with the company adding a 1.1 million square feet IT Park at Manesar and four hotels with 190 rooms to its rent-earning portfolio by March 2010 end. Its area on lease is to triple to 3.6 million square feet by March 2013."

A big risk is that 52% of Anant Raj's NAV comes from the commercial space, making it sensitive to the capitalisation rate. CLSA has assumed 11% cap rate, and estimates that a 1% compression in cap rates can lead to a 4.3% increase in NAV. But the reverse will also be true. Another overhang is that its Delhi land parcels have faced considerable delays in monetization on various regulatory and legal counts and further delays could be a big risk to expectations.

Sobha Developers (CMP Rs331; Kotak target Rs408)

Kotak's main argument is that absorption in the Bengaluru residential market (Sobha's primary market) remains stable. Also, prices are relatively steady. Sobha's new launches are also comforting and Kotak believes it will achieve its target of three million square feet in FY11. 

 "Sobha has already sold 1.4 million square feet in H1FY11 and broad demand trends remain similar, so achieving 10% higher sales in H2FY11 would not be difficult-it has 2.65 million square feet of inventory to sell from ongoing projects, apart from the  on million square feet launched in Q3FY11, implying that the target can be achieved even without further launches in Q4FY11E," Kotak says in a report.

Kotak believes that the current value of the stock is factoring in execution of only one million square feet per year on an ongoing basis. 

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife.)  




6 years ago

When most people feel there is a glut of properties available and demand becoming more scarce, how can these brokers recommend these stocks??

Friday Closing Report: More gains possible

The domestic market made a good comeback today, recovering over half the losses it had suffered in the previous trading session. Gains in select blue-chips and stocks in the broader markets supported the rally.

The market is likely to see a continuation of the upmove next week as the European markets, in early trade on Friday, discounted the rate hike announced by the Chinese central bank after the Asian markets closed for the week.

The market opened lower following weak cues from the global arena and the broader markets underperformed the key indices in early trade. However, buying at select counters at lower prices lifted the indices into positive terrain. The market got a boost on the release of upbeat industrial output numbers for October. In post-noon trade, it pared some of the gains and was range-bound, before rebounding in the last hour on buying in select heavyweights. It touched the day's high, but closed marginally off that mark.

The Sensex added 266.53 points (1.39%) at 19,508.89. The index touched a high of 19,537.40 and a low of 19,074.57, intraday. The Nifty finished the session at 5,857.35, gaining 90.85 points (1.58%). The barometer touched a high of 5,865.50 and a low of 5,721.15 during trade.

The market breadth was positive. The Sensex had 22 gainers while eight stocks ended lower. The Nifty came home with 37 advancing stocks and 13 losers. Ending a five-day slide, the broader markets outperformed the key benchmarks. The BSE Mid-cap index surged 2.02% while the BSE Small-cap index advanced 2.32%.

The top Sensex gainers included ICICI Bank (up 5.71%), Jaiprakash Associates (up 4.65%), Reliance Industries (up 4%), Wipro (up 3%) and Reliance Communications (up 2.98%). Prominent losers were Bajaj Auto (down 2.65%), Bharti Airtel (down 2.27%), Tata Motors (down 1.90%), HDFC Bank (down 0.82%) and Cipla (down 0.78%).

The sectoral space wore a green coat today. The top sectoral gainers were BSE Consumer Durables (up 3.20%), BSE Bankex (up 2.83%), BSE Oil & Gas (up 2.51%), BSE Metal (up 1.59%) and BSE PSU (up 1.42%).

Markets in Asia ended mostly lower, as investors chose to take profits off the table on renewed speculation after the release of Chinese trade data that the government might hike rates once again. China's trade surplus stood at $22.9 billion in November, the customs bureau said today. Exports rose 35% from a year earlier, while imports grew 38%, higher than analysts' estimates. A cut in Ireland's credit rating also weighed on investors.

Just as the markets in Asia and India closed for the day, the Chinese central bank announced a hike in the reserve requirement ratio by 50 basis points. The revision comes into effect from 20th December.

The Hang Seng was down 0.04%, the Jakarta Composite tanked 1.01%, the KLSE Composite declined 0.92%, the Nikkei 225 fell 0.72%, the Straits Times was down 0.77%, the Seoul Composite lost 0.14% and the Taiwan Weighted shed 0.40%. On the other hand, the Shanghai Composite jumped 1.07%.

The government announced today that industrial output in October rose by 10.8% on the back of healthy performance of sectors such as automobile, electronic goods and power. Industrial production, which crossed 15% in July, had dipped to 6.91% in August and further to 4.4% in September.

It was back in double-digit figures at 10.8% in October, better than 10.1% in the corresponding month a year ago. The government attributed the rise in the Index of Industrial Production (IIP) to improved performance of ship building, power equipment and generators manufacturing.

The US markets closed with modest gains overnight with two of the three key indices ending higher on good economic news. Investors kept a watch on the bond market following a slump in demand in recent days that prompted sharp gains in bond yields. In economic news, initial unemployment claims fell higher than expected last week. Besides, inventories of US wholesalers rose more than expected in October, while fast-growing sales also signalled some underlying support for the economy.

The Dow declined 2.42 points (0.02%) to 11,370.06. The S&P 500 Index added 4.72 points (0.38%) to 1,233. The Nasdaq gained 7.51 points (0.29%) to 2,616.67.

Foreign institutional investors were net sellers of stocks worth Rs1,296.30 crore on Thursday. On the other hand, domestic institutional investors were net buyers of stocks worth Rs827.92 crore.

The country's biggest iron ore miner NMDC (up 2.18%) today said it will partner with Russia's largest steel maker Severstal for setting up a 5 million tonnes steel plant in Karnataka.

The proposed plant will entail an investment of about Rs25,000 crore. According to sources, both the companies may have 50% stake in the JV. For the project NMDC has sought 2,500 acres of land from the Karnataka government, they added.

Fortis Healthcare (up 0.03%) today said it has taken over operations and management of Vivekanand Hospital and Research Centre in Moradabad. The development follows an agreement with the Moradabad Charitable Trust that runs the Vivekanand Hospital and Research Centre.

As per the agreement, while the trust will maintain the ownership of the hospital, Fortis will pay an undisclosed fee for running it, and revenues generated from the hospital will go to its account henceforth.

Public sector lender IDBI Bank (up 4.11%) has secured a $100-million ECA (export credit agency) line of credit from Germany's DZ Bank.

The $100-million fund, raised through the bank's Dubai International Finance Centre branch on 6th December, can be used to fund project imports from 24 west European nations, the bank's executive director and head of international banking, Melwyn Rego said.


GAIL proposes to set up 5500km gas connectivity

GAIL India Ltd has proposed to set up 5,500km of gas connectivity over the next two-three years investing $4 billion.

"We have planned to add 1,000km of gas connectivity every year and in another two-three years we will be laying gas connectivity to around 5,500km across the country... We are investing $4 billion for these projects," GAIL India general manager (gas marketing) Rajendra Tiwari said. He hoped that that it would help reduce the production and demand gap in the country.

GAIL is in the process of laying additional pipelines in the Dadri-Bawana-Nangal and Chainsna-Jhajjar-Hissar region so as to serve the Northern market and this year alone around 1,000 km were laid, Mr Tiwari said.

On Friday, GAIL declined 0.67% to Rs493.60 on the Bombay Stock Exchange, while the benchmark Sensex closed 2.31% down at 19,242.36 points.


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