? It must be a difficult question for most investors, as the last time real estate stocks did well was way back in 2009, when most doubled investor wealth.
It's been a steep ride downhill sine December 2009. Stocks such as Unitech, Indiabulls Real Estate and HDIL have fallen over 70 per cent while DLF and Anant Raj Industries are down 44 per cent and 63 per cent, respectively.
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The reasons, say market experts, are the fall in demand for houses in the past two years due to rising interest rates and low liquidity. The impact of the overall economic slowdown is clearly visible on real estate stocks
, they say.
Between 2010 and 2012, the Bombay Stock Exchange (BSE) Realty index fell over 45 per cent. It was at 1,777 on 30 March 2012 as against 3,274 on 31 March 2010.
24% is the negative return given by the BSE Realty index during 2011-12.
Last financial year, companies in the BSE Realty index posted aggregate net profit of Rs 2,753 crore, down 30 per cent from Rs 3,951 crore in 2010-11. The index has fallen 8 per cent to 1,638 between April 1 and August 3.
From the start of the financial year till August 3, Parsvnath Developers (down 31 per cent to 39), Unitech (26 per cent to Rs 21), Anant Raj Industries (down 18 per cent to Rs 48) and Godrej Properties (down 17 per cent to Rs 514) have been the major losers among stocks in the index.
"Since April 2012, inflation has been moving up sharply. If inflation remains firm, RBI may not reduce interest rates, which will have a negative impact on interest ratesensitive sectors such as real estate," says Alex Mathews, head of research, Geojit BNP Paribas Financial Services.INDUSTRY OUTLOOK
With little hope that the RBI will cut interest rates further this year and most real estate companies posting poor results, market experts are bearish on the sector for the current financial year.
Companies with a low debt-toequity ratio, focus on using operating cash flow to reduce debt and strong execution can be considered for investment.
Parikshit D Kandpal
Sr Research Analyst, Karvy Stock Broking
Vivek Mahajan, head of research, Aditya Birla Money, says, "The 2011-12 performance of major real estate companies was sluggish. The numbers for 2012-13 will be by and large lacklustre owing to high interest rates and slowdown in economic activity."FACTORS TO WATCH
Investors should keep in mind that real estate companies are highly sensitive to interest rates. Any rise in interest rates and inflation affects them adversely. Also, if the economy is in a bad shape, the sector will face a lot of challenges.
Parikshit D Kandpal, senior research analyst, Karvy Stock Broking, says, " Companies with a low debt-to-equity ratio (preferably 0.5-0.7 multiples), focus on using operating cash flow to reduce debt, strong execution and history of clean corporate governance can be considered for investment."REPORT CARDFalling Net Sales:
Overall, the real estate industry posted net sales of Rs 9,733 crore during the financial year ended March 2012 as against Rs 11,387 crore in 2010-11.
Unitech, HDIL, Indiabull Real Estate and Prestige Estate Projects booked net sales of Rs 1,206 crore, Rs 917 crore, Rs 142 crore and Rs 728 crore, respectively, as against Rs 1,806 crore, 1,821 crore, 159 crore and Rs 1,364 crore, respectively, in 2010-11.
However, DLF and Oberoi Realty registered net sales of Rs 3,491 crore (up 20 per cent) and Rs 390 crore (up 1 per cent), respectively, as against Rs 2,916 crore and Rs 386 crore, respectively, in 2010-11.
"We expect 2012-13 results to be muted from the earnings perspective with 10 per cent growth," says Kandpal of Karvy Stock Broking. Rising Debt:
According to the balance sheets of real estate companies, in 2011-12, the debt of Godrej Properties, Phoenix Mills and Sobha Developers was Rs 256 crore, Rs 328 crore and Rs 44 crore, respectively, as against Rs 180 crore, Rs 65 crore and Rs 22 crore, respectively, in 2010-11.INVESTMENT OPTIONS
If you want to invest in some stocks which can give good returns over the next six to 12 months, market experts suggest Oberoi Realty, Mahindra Lifespaces, Sobha Developers and Prestige Estates.Sobha Developers:
During the first quarter of the ongoing financial year, the company posted a net profit of Rs 46 crore, up 49 per cent from Rs 30 crore in the year-ago quarter. It sold 0.84 million square feet of new space valued at Rs 479 crore. Mathews of Geojit BNP Paribas Financial Services says, "The stock can touch Rs 410 in the medium term." The debt-to-equity ratio is 0.02x. On August 8, the price-toearning ratio was 15.52.Godrej Properties:
The numbers of real estate companies for 2012-13 will be by and large lacklustre owing to high interest rates and slowdown in economic activity.
Head of Research, Aditya Birla Money
For quarter ended June, the net profit rose 323 per cent to Rs 26.9 crore as against Rs 6.3 crore in the same quarter a year ago. The company plans to build townships in Panvel and Mumbai. "The stock has a medium-term target of Rs 575," says Mathews.Oberoi Realty:
The zero-debt company reported new sales of 1,23,871 msf in the April-June quarter as against 1,65,252 msf in January-March 2012.
According to a research report by Edelweiss Institutional Equities issued in the stock can touch Rs 270 in the next few quarters. On 8 August, it was at Rs 232.70.
"Oberoi Realty and Mahindra Lifespaces are debt-free companies, which enables them to leverage their balance sheets even under tough market conditions. Further, their inventory levels are controlled, which does not put pressure on balance sheets," says Sneha Poddar, research analyst, Sharekhan.Prestige Estate Projects:
249% is the return given by HDIL stocks during the financial year 2009-10.
This year till August 8, the stock has risen 63 per cent. At present, the company has price-to-book value and price-to earning ratio of 1.77 and 27.13, respectively.
Kandpal of Karvy is positive on the company. "The stock is attractively priced with the company reporting strong booking in new projects. It can jump around 30 per cent over the next one year."
In the first quarter, the company posted an operating profit of Rs 97.54 crore as against Rs 81.5 crore in the corresponding quarter a year ago.