Realty share price target

4 July 2018 Oil & Gas Gujarat is one of the most industrialized states in India, with presence of a number of industries such as refining, petrochemicals, chemicals, automobiles, pharmaceuticals, ceramics, textiles and engineering. Gujarat Industrial Development Corporation (GIDC) has a total of 202 estates across Gujarat, including 47 Special Economic Zones (SEZs) GUJGA has access to most part of Gujarat and is expanding its presence in places like Halol, Dahej, Bhavnagar/Jamnagar, Anand, Amreli, Dadra & Nagar Haveli and Thane. There is currently a court order in Ahmedabad staying any development work on gas network. Ahmedabad offers a peak potential of 0.3-0.4mmscmd. Dahej offers a peak potential of 0.5mmscmd. GUJGA is developing newer applications for replacement of LPG by gas. This could be used for ship breaking in Bhavnagar and foundries in Jamnagar each a potential 0.2- 0.3mmscmd market. GUJGA is developing Amritsar & Bhatinda city gas distribution (CGD) networks for GSPL.

Top Sells: Kolte Patil Over last 3M, BSE Realty index has outperformed Sensex by 22.7%. Our channel checks suggest weakness in NCR markets, stability in Western and Southern markets. Investors demand has evaporated post Demonetization and RERA has brought all buyers at same level. This has led to markets being largely end user driven. We believe that next triggers for volume uptick will come from price correction.

Top Picks: DLF and Sobha Developers Over last 3M, BSE Realty index has underperformed Sensex by 3%. Our channel check suggest, dull underlying residential demand as investors remain on the fringes. Launches have slowed as developers are focusing on monetizing nearing completion inventory. Property as an asset class has gone down in the investment pecking order as prices remain unaffordable in the mid-luxury to luxury segments.

Oberoi Realty is to buy GSK Pharma's 60 acre land parcel at Thane for Rs 5.5 bn. The deal is in line with company's strategy of continued focus on the Mumbai Metropolitan Region (MMR). Adding a new micro-market to the portfolio will boost sales traction FY19 onwards.

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).