Brokerages dare to recommend Anant Raj, Sobha even as realty struggles
Munira Dongre 10 December 2010

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.)  

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