Indian Residential Sector on a strong wicket: IIFL Capital Services

13 Jun 2023 , 12:19 PM

After more than doubling their pre-sales over last 2 years, listed developers are guiding to another strong year for FY24. Operating cashflows have also followed suit, aiding developers to de-leverage balance sheets with debt-to-OCF for analysts of IIFL Capital Services coverage universe now ~1x for FY23. This has thereby reduced vulnerability to any sector downturn. Real Estate stock prices have been more reactive to monetary policy actions than operational performance; though analysts of IIFL Capital Services believe the latter could be the driver from hereon, as valuations are not inexpensive. Analysts of IIFL Capital Services  prefer developers with low debt and strong operating cashflows – DLF and BRGD continue to be their preferred picks.

Developers guiding for continued strong performance in FY24:

After more than doubling pre-sales over FY21-23, developers remain bullish about the outlook over next few years, guiding 15-20% YoY growth in pre-sales for FY24. This will largely be driven by higher launches (guidance of >20% growth YoY), on the back of a very strong FY23 with >60% YoY growth. Collections and cashflows are expected to remain healthy, and developers are increasing investments in business development to support future demand. Developers continue to take calibrated price hikes across projects, although analysts of IIFL Capital Services do not expect it to be meaningful enough to improve margins across OCF and Ebitda.

Healthy balance sheet and cashflows lower vulnerability to sector downturns: 

In FY23, operating cashflows across analysts of IIFL Capital Services coverage universe increased 36% YoY, broadly in line with 34% increase in customer collections. Further, over last 2-3 years, improving collections and partly due to equity raising, developers have steadily reduced their leverage with Debt-to-OCF for their coverage universe declining from 8x in FY19 to 1x in FY23. In FY24, while analysts of IIFL Capital Services build a much lower pre-sales growth vs mgmt estimates (8% vs 15-20%) primarily due to high base, analysts of IIFL Capital Services expect cash collections to remain strong and expect developers to invest higher share in business development to fuel growth.

Listed developers continue to gain market share, despite strong industry performance: 

According to ANAROCK, Residential demand increased 37% YoY in FY23, whereas supply growth (new launches) was up 43% YoY; leading to industry-wide inventory levels being flat YoY. Further, share of High-end and Luxury sales (ticket size of >Rs 8mn/unit) for CY22 doubled from CY18, while the share of Affordable (ticket size <Rs4mn) has halved. Top 11 listed developers have registered a pre-sales growth of 44% for FY23, implying continued market-share gain. Listed developers are also expected to continue focussing more on launching Premium/Luxury projects over FY24.

Macro factors to support incrementally; but valuations not cheap: 

While operating performance has been strong all through FY23, real estate stocks underperformed broader markets during the policy rate hike period (underperformed ~12% over May 2022 to March 2023). However, since RBI paused rate hikes in April 2023, the sector has outperformed ~19%. Analysts of IIFL Capital Services Strategy team expects monetary easing later in 2023 across advanced economies, which could trigger a risk-on phase and strong FII inflows; especially from 2024, benefitting Real Estate during this period. While valuations (vs NAV) are not cheap, they reiterate that developers with low leverage levels (in Residential business) and strong operational cashflow generation will outperform. Analysts of IIFL Capital Services revise their target price upwards for DLFU, LODHA, BRGD, OBER, and PEPL; reiterate DLFU and BRGD as their top picks.