Realty share price target

Top Picks: Sobha Developers, Kolte Patil and Prestige Estate remain our top sectoral picks. Over last 3M, BSE Realty index has risen 15% outperforming Sensex by 6%. Whilst there has been volume recovery post demonetization, its not significant to drive growth. RERA has resulted in sharp drop in new launches, which shall continue to impact pre-sales and cashflows. Sectoral overhangs (IT/ITES weak job sentiment) continue to be key headwinds whilst GST may not result in meaningful savings for buyers. Unorganized to organized shift yet to reflect in numbers.

Change in rating: With a sharp rise in share prices, we downgrade the real estate sector coverage to NEUTRAL. Changes in TP: We increase TP of Kolte Patil to Rs 177/sh (reduce NAV discount from 35% to 20% as demonetisation is largely behind us). We increase our TP of Brigade Enterprise to Rs 230/sh (reduce rental cap rate to 8.5% and change base property price correction from 15% to 10%.)

We maintain our preference for Prestige Estates (well diversified residential/office rental recovery play, REIT?s play), Kolte Patil (strong presence in affordable housing) & Sobha (key beneficiary of residential recovery and strong brand ).

In a characteristically swift move, PM Narendra Modi informed the nation last evening that government was demonetising Rs 500 and Rs 1,000 notes. Stock markets (and especially directly affected sectors like Financials, Real Estate, Cement, Consumer) may initially react negatively to the announcement (given the near term stress and slowdown in velocity of business that is likely), but the broader structural benefits are immense, in our view.

We expect pickup in earnings momentum once the nearing completion/unsold inventory sales improve. During 2QFY17E, aggregate sales growth (ex DLF) will be 2.1% YoY. However, EBIDTA margins contraction of ~153.5bps YoY will result in 3.4/17.2% EBIDTA/PAT de-growth.

Top picks: We like Oberoi (strong pre-sales in recent launches), Prestige Estates (well-diversified residential and office rental recovery play) and Sobha (residential play on Southern market).

Residential real estate is showing signs of stabilisation with improvement in volumes during 3QFY16. Our initial checks for 4QFY16E suggest further volume uptick in residential volumes. While new launches have shrunk, the uptick in volume absorption indicates higher sales from the unsold inventory. This is also reflected in months of inventory trending down. Prices remained muted with 10-15% discount offers during final negotiations.

Parliament passed the Real Estate Development and Regulation Bill, 2016, on 10 March 2016. The much-awaited reform will bring cheer to high-quality real estate developers/consumers and other stakeholders like financial institutions, private equity players, construction companies and shareholders.

Buy at CMP and add on dips to Rs.221 - Rs.233 range; Price Targets: Rs.274 and Rs.308 in 1-2 quarters