Stock market opportunities in energy 038; real estate sectors for investors

Total market capitalisation of the sector has increased 21 times in the last 18 years,with the private sector accounting for a major part of the increase. However,while the overall industry has benefited in the last two decades,OMCs financial health suffered. Indian Oil amp; Gas sectors have reshaped over the last 20 years primarily led by the government policy changes. In event of likely deregulation over coming years,ONGC/OINL in upstream have significant earnings growth opportunity,while BPCL in OMCs has relatively strong balance sheet and Eamp;P potential.

Valuation

Remain invested on Gail India due to headwinds for gas availability. However,Petronet LNG PNG is available at attractive valuation given its medium term earnings potential.

In the private space,policy reforms on upstream will benefit Cairn India and RIL equally in expediting the monetisation of Eamp;P acreage. Buy Cairn India shares for its attractive valuation and remain invested on RIL as the next earnings growth is still some time away when its new core-business/Eamp;P projects commission from FY16/FY17.

CONCERNS

The taxes from the oil and gas sector to the Centre net of subsidies are now at the decade low level at Rs 174 billion against a peak of Rs 1 trillion in FY08.

Also,as a percentage of GDP,the ratio has declined from 2.4 per cent in FY04 to 0.2 per cent in FY13.

We believe this could be should be an inflection point for the government to opt for the bold reforms and also push state governments to reduce their taxes.

REAL ESTATE VALUATIONS

BSE Realty index underperformed the broader index by 22 per cent in 2QFY14. Near-to-medium term risk continues to remain beyond comfort zone due to weakening demand,high inventory,stressed balance sheets and risk of defaults.

Despite strategic discipline adopted by most developers,improvement in operational cash flow,liquidity and Pamp;L would be slow and gradual over the current base due to broader challenges.

We prefer companies which have reasonably cleared their older inventories and are riding on new and strong operating cycles,led by fresh launches,robust pre-sales and favorable market outlook.

Key triggers

Status of planned launches and approvals crucial for Oberoi,UT,MLIFE,PHNX,Godrej. Leasing velocity and managements outlook in commercial verticals PEPL,Oberoi,DLF. Cash flow and trend in leverage DLF,PHNX,Godrej

BET ON COMPANIES with FAVOURABLE OPERATING CYCLE

We prefer companies which have reasonably cleared their older inventories and are riding on strong operating cycles,led by fresh launches,robust pre-sales and favorable market outlook.

With downside risk to realisations and volumes hereon,cash flow certainty lies with players with strong FY12-13 pre-sales and reasonably strong balance sheet to carry forward execution.

While asset valuations are cheap for almost all,the relative strengths in earnings visibility render comforts to select companies.

Prestige,Sobha,Oberoi,DLF and Indiabulls are favourably placed.