Chart: In realty, DLF is a sell but Oberoi Realty a buy

Research firm Nirmal Bang and foreign brokerage CLSA are bullish on Oberoi Realty on hopes that new development rules will facilitate simpler approval processes for new launches and improve volumes for Oberoi, but are bearish on DLF as the company’s asset sale targets have not given much confidence on debt reduction.

“Clearance and launch of its Mulund project and potential conclusion of new land deals will be the trigger for Oberoi,” said the CLSA note.

Nirmal Bang has a buy rating on the stock with a target of Rs 298 in its July 4, 2012 research report as it expects the recent clarity on Development Control Regulation to fasten the approval process and allay investor concerns regarding delay in new launches.

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Here is why it is bullish on the stock:

1. New launches are expected to drive the company’s cash flow

Oberoi Realty is a no-debt company with a cash-pile of around 1,500 crore. Clarity in the new DCR rules, wherein areas such as individual terraces, balconies and ornamental projections could be granted in the form of 35 percent chargeable Floor space index, is expected to ease regulatory hurdles and fasten new launches. Uncertainty over the new rules was the main reason for the delays and had resulted in slow launches in the last one year.

[caption id=“attachment_372124” align=“alignleft” width=“380”]  Reuters[/caption]

However, despite tough external environment , Oberoi still managed to post a 5 percent year-on-year growth in pre-sales. This led to un-recognised revenue of Rs1,500 crore, up 34 percent year-on year. Moreover, even if there was no meaningful land acquisition activity in FY12, the management stated that due to macro-economic uncertainty the sellers’ price expectations have come down, which would lead to more land deals in the future.

The management has already short-listed the final bidder for its hotel project Oasis in Worli, and is awaiting completion of final due diligence. Further, it expects the clearance from the Ministry of Environment and Forests (MoEF) for its Exotica project in Mulund by the end of 3QFY13, which will further drive up sales and lead to 88 percent increase in operating cash flow over the same period, said the brokerage.

Oberoi’s rental income has increased year on year

2 .Even though sales were slow, Oberoi’s rental income increased 22 percent to Rs 220 crore in FY12. The prime driver for this is the hospitality segment due to better occupancy rate, lease renewal and higher footfall of 10 million people in Oberoi Mall in Mumbai.

However, the strong recurring cash flow has been offset by acquisitions and advances for new land transactions as the company bought out ICICI Venture’s 50 percent stake in GlaxoSmithKline (GSK) property at Worli in Mumbai for Rs 300 crore in FY12.

Further, it paid refundable deposit of Rs200 crore for its Oasis project and Rs 120 crore as advances for new land transactions under negotiation, which resulted in a decline in the cash balance by Rs170 crore to Rs1290 crore.

Here’s whyDLF is a sell.

Net debt on a rise despite asset sales

But CLSA has a sell rating on India’s largest real estate developer DLF as the company’s net debt has increased despite asset sales due to poor operating cash flows. The brokerage expects similar disappointment exists on debt reduction expectations. Potential delays in the deal closure, could be an additional risk, it said in a report dated 9 July 2012. “DLF realised Rs4900 crore through asset sales, yet the net debt increased by Rs4800 crore over the same period due to poor operating cashflows”,’ said CLSA.

[caption id=“attachment_372116” align=“alignleft” width=“530”]  Reasons for debt increases include premium paid on preference redemption,
land purchases and debt ‘surfacing up’ when asset in SPV’s/JD’s were sold[/caption]

Moreover **DLF has a poor track record of converting asset sales into debt reduction.**The first of the three large asset sale deals is likely to be Aman Hotels for Rs 1500-200 crore in the second quarter. But deals for the wind power business for Rs 800-Rs1000 crore and its Mumbai land deal for Rs 2500 crore are only likely towards the end of the second quarter or early third quarter of FY13. This is a considerable delay since the company’s initial targets. And since the company already has weak cashflows, significant debt reduction is only possible in the third quarter which is the Jan-Feb period in 2013.

[caption id=“attachment_372120” align=“aligncenter” width=“530”]  DLF will retain the Aman Lodhi due to its prime Central Delhi land[/caption]

DLF did not launch any major new project in the first quarter of FY13 nor did it complete any large asset sale

No additional projects is likely to result in weaker earnings for the first quarter of the current year. The sale of hotel land for Rs570 crore in the first quarter will also not lead to any perceptible debt reduction given continued weak cash flows from operations. This is why the brokerage expects 1QFY12 net profit to be down 17 percent YoY and a flat net debt quarter-on quarter.

The sharp rally of 15 percent in the last month is only because of the buzz over asset sales. But on a long-term basis the company is likely to disappoint on debt reduction once again.

Strong performance expected from Sobha Developers

Meanwhile, Prabhudhar Liladhar expects a strong performance from Sobha Developers in the first quarter of FY13 on account of strong launches and monetisation of old sales and steady execution of projects. Moreover the company has also brought down its net debt to Rs 1140 crore in FY12 from Rs 1210 crore in FY11. The company’s sales guidance for FY13 stands at Rs2000 crore as against sales of Rs 1700 crore clocked in FY12.

Prabhudas maintains an accumulate on the stock as Sobha’s net asset value stands at Rs 3,980 crore, translating into Rs406/ share. “We attribute a 20% discount to this to arrive at the value of the real estate business. To this, we are adding the value of the contract business which is calculated at Rs 35which translates to a target price of Rs 360,” it said.