Realty to stay hot on robust demand, better cash flows

Mumbai: Real estate stocks that have shown impressive performance over the last three months are likely to continue their momentum in the medium term given the rising consolidation, improvements in operating cash flow, robust demand and declining inventory, said analysts.

Their top picks include DLF, Sobha, Godrej Properties, Macrotech Developers, and Prestige Estates Projects. The Nifty Realty index has gained 15% in three months compared to a 6% jump in the benchmark Nifty 50.

"The Indian residential real estate sector seems to be in a much better shape, compared to other global markets, and the majority of big real estate players in India have deleveraged the balance sheets in the last few quarters," said Narendra Solanki, head-equity research at Anand Rathi Shares & Stock Brokers. "The housing boom witnessed globally has been accompanied by a sharp rise in housing prices, whereas prices in India have stabilised after last few years of correction."

Smaller players such as Hubtown, Marathon NextGen, Anant Raj, and Peninsula Land have rallied between 50% and 131% in the last three months. Mahindra Lifespaces, Oberoi Realty, and Sobha have gained between 25% and 33%.

For most developers, operating cash flow has improved significantly post-Covid, largely due to reduced working capital needs. Investments in land and annuity asset development for most developers are also declining, further boosting cash flow generation and debt repayment, said analysts.

"We believe realty stocks are attractive from a medium-term perspective, considering rising consolidation," said Parvez Qazi, analyst at Edelweiss Financial Services. "Companies with sizeable land banks such as DLF, Sobha and Macrotech may benefit from a re-rating going ahead."

Demand for under-construction projects in the June 2022 quarter was up 47% compared to pre-Covid levels. New supply retracted to pre-Covid levels, accounting for 74% of total absorption, taking inventory overhang down to 20 months. Mumbai witnessed a 20% jump in property sales registration in August 2022 against last year's corresponding period.

"We maintain a buy on the real estate sector given that office demand is returning due to the resumption of offices in hybrid mode and strong hiring by IT/ITeS companies while the increase in residential demand is being supported by positive buyer sentiments and improved affordability," said Poonam Joshi, analyst, Nirmal Bang Equities. "Our top picks include Sobha, Prestige, Mindspace and Brigade."

According to Bloomberg consensus estimates, stocks such as Nesco, Prestige, Sunteck, and Macrotech can give returns between 22% and 37% in the next year.

Solanki prefers Godrej Properties as he believes the company will gain market share in its core markets owing to its aggressive launch pipeline, strong sales engine, and the right mix of projects.