We expect 1QFY13 pre-sales of the sector to decline sequentially on account of subdued new project launches, while we expect it to remain healthy for South India-based developers on the back of steady absorption. DLF, which went for aggressive launches in 4QFY12, did not launch any new significant project in 1QFY13. Further, we expect debt to remain constant sequentially on lack of meaningful asset sales/lower pre-sales, thereby leading to lower cash flow generation (for DLF, HDIL), ongoing annuity capex (for Prestige Estates Projects or PEPL), and purchase of JV partner’s stake (for Sobha Developers or SDL). The likely sequential jump in DLF’s profit will largely be on account of costs provided to the tune of Rs3bn in 4QFY12, while the likely steep QoQ fall in SDL’s profit will be on account of land sales amounting to Rs1,365mn reported in 4QFY12. Consequently, we expect the companies in our coverage to post decline in revenue by 13.4%, EBITDA by 1.0% and PAT by 26.2% QoQ.

Subdued new launches: New launches remained soft as 1Q is a seasonally weak quarter. DLF, which went for aggressive launches in 4QFY12, did not launch any new significant project in 1QFY13. We expect 12% YoY (down 64% QoQ) pre-sales decline for DLF because new launches remaining subdued. However, we expect South Indiabased developers to show steady pre-sale absorption, with SDL reporting Rs4.8bn (up 3% QoQ), largely driven by unsold inventory from projects launched earlier. Further, we expect PEPL to report strong pre-sales of around Rs7bn (up 8% QoQ) in 1QFY13E, driven by 1mn sq ft of new project launches and its project launched earlier, Bella Vista (in 4QFY12). While Mumbai witnessed some uptick in property registrations and leasing activity, we expect QoQ decline in volume for Oberoi Realty (ORL) following the recent hike in prices and expect new launches to pick up from 2HYF13. Godrej Properties (GPL) launched 0.65mn sq ft in 1QFY13 and we expect pre-sales to decline QoQ in the absence of 0.36mn sq ft of sales to a group company in 4QFY12.

Debt reduction unlikely: We expect the debt to stay unchanged QoQ in 1QFY13 in the wake of subdued pre-sales/asset sales. Lack of meaningful asset sales by DLF (Rs5.7bn in 1QFY13) will keep debt stagnant QoQ. HDIL’s debt reduction largely hinges on cash mop-up via FSI sales. SDL paid Rs550mn in 1QFY13 to buy out its JV partner’s stake in the Coimbatore project, which will result in debt staying unchanged QoQ. Meanwhile, the ongoing capex in annuity and hospitality assets will keep debt levels constant QoQ for PEPL, which is in line with the company’s growth strategy.

Outlook: We believe the volume recovery hinges on price correction in over-heated markets, faster approvals for projects and quick project execution. We expect South India-based developers to outperform owing to better absorption level, stable inventory and better affordability. While share prices of most real estate companies are at a significant discount to our NAV barring GPL, we believe those having good visibility on new project launch/pricing strategy, well capitalised balance sheet and positive cash flow generation will be able to outperform. Our top picks are PEPL and ORL.