Credit Suisse says the demand environment in the Indian real estate sector remains uncertain, with low absorption and high inventory levels in residential space. "On the commercial side, although absolute inventory has dropped significantly in the past two-and-a-half years, the inventory levels as a proportion to absorption remain very high," Credit Suisse said in its report.
Real estate markets across the country are currently witnessing a downturn, along with investments into the sector. The realty sector attracted Rs 42,000 crore new investments during last financial year, down nearly 55 percent compared to the previous fiscal, industry chamber Assocham said in its report in May.
The balance sheet becomes important in this environment, says Credit Suisse. "We prefer stocks that have low leverage, which will enable them to manage a poor demand environment better and buy land parcels, if attractive," it said.
Keeping this theme in mind, Credit Suisse has initiated coverage on Mumbai-based Oberoi Realty with an "Outperform" rating. "Oberoi has the strongest balance sheet (it has net cash), attractive relative valuations (FY14 P/E of 8x, EV/EBITDA of 5x) and reasonable ROE (15 percent in FY14)," it says.
It has a target price of Rs 275 for the real estate firm, implying 43 percent upside.
Meanwhile, the broking firm has a "Neutral" rating on India's largest real estate company DLF , with a target of Rs 190. While the stock has come off 23 percent in the past one month, Credit Suisse says, the stock does not look attractive compared to many regional and local peers.
"DLF seems focussed on bringing down the debt in its balance sheet, aided by operational cash flows, equity issuance and further divestment. However, its guided 'steady-state' gross profit of Rs 82.5 billion and free cash flow (FCF) of Rs 30 billion appear aggressive. Also, there is some uncertainty on the cash inflow of the recent sale of Aman that it has announced," it says.
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