Realty stocks offer good entry points post fall

Investors could consider accumulating shares of residential real estate developers amid the recent weakness as the upcycle in the sector is likely to extend over the next three years, said analysts. Macrotech Developers, Oberoi Realty, DLF, Brigade Enterprises and Sunteck Realty could gain as much as 20-27% over the next one year, according to analyst consensus estimates compiled by Bloomberg.

"Outlook for real estate companies remains optimistic as the majority of the companies give strong growth guidance," said Biplab Debbarma, analyst, Antique Stock Broking. "Developers like DLF, Lodha, Brigade, and Century Textiles with enough inventory or monetizable land parcels in key micro markets to keep the launch pipeline intact for the next 2-3 years would have a significant advantage over others." DLF, Lodha, Brigade, and Century Textiles are Antique's top picks in the sector.

Real estate stocks have been among the top performers in the market rally between March 2020 and October 2021. However, these too have declined amid the broad-based sell-off. So far in 2022, the NSE Real Estate index has dropped 18% as against the Nifty's 5.4% slide. Godrej Properties declined 29%, DLF has fallen 18.4% and Macrotech has shed 15.2%. Mahindra Lifespace, however, climbed 72.5%.

Analysts said the sector is witnessing a pick-up in sales on account of weak prices in the past few years, lower interest rates and extended outperformance in the stock market. Property registration in Mumbai increased by nearly 73% year-on-year to 9,630 in May.

Improved cash flow has led to healthier balance sheets with companies in the sector seeing an aggregate net debt reduction of ₹3,100 crore in FY22. Currently, the debt-equity ratio of top companies is below one.

DLF, Prestige Estates, and Lodha witnessed the maximum growth in collection at 136%, 90%, and 51% year-on-year, respectively. Century Textiles saw growth of 208% in FY 22 though the increase was on lower base of ₹620 crore in FY21. Also, collections were robust on the back of two consecutive good years and picked up on construction activities.

"Going forward, the outlook remains positive as low-interest rates and increasing aspirations would aid growth for residential space," said Ajit Mishra, VP- research, Religare Broking. "Likewise, the reopening of the economy and the ongoing economic recovery would benefit the commercial real estate space."

Prestige Estates reported a strong March quarter backed by new launches as booking values came in at Rs 3,268 crore, up 77% from the same period a year ago.

Sobha witnessed its highest-ever quarterly cash inflow of Rs 1,291 crore in the March quarter, up 32% year-on-year. The management was able to reduce net debt by Rs 317 crore.

Arun Malhotra, portfolio manager at CapGrow Capital Advisors said the rally in real estate stocks may continue for 2-3 years.

“The real estate sector is witnessing a higher number of new launches that may create an oversupply situation in next the 2-3 years, but till then, the sector looks to be in a sweet spot.”