With a combined net debt of 11 firms at Rs 40,300 crore in the September quarter (ex-Oberoi Realty/Jaypee Infrate­ch), which represents 5 per cent quarter-on-qu­arter rise in net debt, develo­pers continue to struggle to keep operating cash flow positive after interest payments.

Although, asset sales may marginally prop cash inflows, we do not expect any material debt reduction in H2FY12. We believe a majority of the companies will be under pressure to generate enough operating cash flow to service their debt obligations. A key monitorable for DLF in H2FY12 will be the closure of the Aman Resorts deal (Rs 2,000 crore sale value), as receipts from asset sales of nearly Rs 1,000 crore in H2FY12 may only serve to bring back net debt to Q1FY12 level (Rs 21,500 crore). Going forward, while we expect Bangalore-based players to sustain sales volume in the near term, driven by new launches, NCR-based players could see an incremental rise in volumes driven by new launches in H2FY12. We expect Mumbai volumes to remain muted because there are no external triggers to change the price-volume equation. The focus over the coming six months is likely to be on macro issues, with all eyes on a possible peaking out of interest rates and easing of regulatory overhang. Till then, we expect developers to continue to depend on high-cost funding and play the waiting game when it comes to reducing prices across projects, especially in Mumbai city/suburbs.

As a result, we expect cash flow/funding concerns to have a bearing on the sector’s underperformance over the near term and maintain our ‘underweight’ stance. We prefer companies with strong balance sheets and exposure to high-visibility rental assets. Oberoi Realty and Phoenix Mills are our top picks.