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Ground Rules

Enam Securities believes that the sell-off in the real estate and construction sector has cleaned out the froth .

Enam Securities believes that the sell-off in the real estate and construction sector has cleaned out the froth and led to the emergence of select value.

“With the rising interest rates and the recent budgetary announcements, real Enam Securities believes that the sell-off in the real estate and construction sector has cleaned out the froth and led to the emergence of select value.

With the rising interest rates and the recent budgetary announcements, real estate stocks have corrected significantly from their all time high.

While we continue to monitor the above risks, we believe select value has emerged post the recent correction. Given the uncertainty surrounding this sector, we believe developers should continue to trade at a discount of 15-20% to their net worth per share.

In view of the governments thrust on infrastructure, the overall outlook for the construction sector remains positive. Strong order books of 3-4 times sales provide adequate visibility over the medium term. Further, given the favorable demand supply situation, we believe the pricing power of companies has been improving and this is reflected in the increase in margins at the bidding stage.

This should eventually improve profitability over the long term. However, given the net worth criteria (net worth should equal about 10 times order backlog), equity dilution overhang remains. The one-time writeoff from net worth being less than 5% is unlikely to stretch the balance sheets currently.

However, companies not able to manage working capital cycles or not adequately providing for liquidated damages are vulnerable to more ‘big baths’ which could stretch their balance sheets and this remains a concern.

In our view, the correction in stock prices has been in line with the downward revision in earnings having largely discounted the impact and provides an opportunity to accumulate stocks; though we reiterate—we only favour ‘earnings accretive growth’.

Real estate plans of construction companies are also likely to be impacted due the non-extension of Section 80IB, extension of service tax to include rental income from commercial real estate and the rising interest scenario.

We have adjusted the real estate values to correctly reflect the current scenario. Also, IRR’s of BOT projects being sensitive to interest rates, we have factored in a higher risk free rate of 8.5% vs 8% earlier.

The equity investment in the BOT project should therefore be given a price book value multiple calculated by the ratio of the estimated IRR of the given project to the risk free rate.”


This selection of research reports g ives information and opinions on companies and industries.They are often filled with jargon, which we must reluctantly inflict on readers since the excerpts are verbatim. Seven such terms occur in these extracts: EBITDA = Earnings Before Interest,Tax, Depreciation,Amortisation, EV = Enterprise Value, EPS = Earnings Per Share, PE = Price-Earnings, PAT/PBT = Profit After/ Before Tax,YoY = Year-on-Year