Residential Q1FY23 update: Strong start to the year: IIFL Securities

19 Jul 2022 , 01:08 PM

Annualized run rate suggests that developers are on track to deliver strong double-digit growth in pre-sales for FY23. Registration data for Mumbai and Maharashtra also continues to trend above the long-term average. Customer collections have been healthy thus far, with strong operating cashflow performance and modest net-debt reduction for Lodha, Sobha and Oberoi. However, given the persistent volatility in input costs and the rising mortgage rates, analysts at IIFL Securities prefer developers with higher margins/share of completed unsold inventory. They retain DLF and Lodha as their top picks.

Listed developers — Q1FY23 performance robust:

So far, six developers have reported an operational update for Q1, pointing to the strong sales momentum having continued from the second half of FY22 (traditionally the stronger period versus first half). Collections also seem to be trending healthy, with commentary suggesting strong operating cashflow generation and QoQ debt reduction (Lodha/Sobha/Oberoi).

Key trends observed include:
1) Prestige Estates reported healthy sales from its projects in Mumbai (>25% share) due to strong response from launch in Prestige City, Mulund

2) Sobha reported its highest-ever pre-sales on the back of strong ~2msf launches in Bengaluru

3) Lodha reported its best-ever Q1 and has given annual guidance of +27% YoY growth on average

On track to deliver strong double-digit growth for FY23

Developers have reported strong response to launches in Q1, and sustenance sales have also been healthy. FY22 registered 46% YoY increase in booking value for the top-10 developers, which are guiding to >20% YoY growth for FY23, largely driven by consolidation gains. Most developers have taken price-increases through the quarter, albeit in a calibrated manner, and largely to cover the cost of raw material/labor inflation.

Residential demand robust so far for the Industry as well

Despite being a seasonally weaker quarter, Q1 has seen flat/marginal decline sequentially, across the top-8/top-7 cities, as per Knight Frank/Anarock, respectively. Annualized run rate for Q1 suggests that FY23 sales (in units) are expected to grow 34% and 22%, respectively, for Knight Frank and Anarock.

According to Knight Frank, an increase of 150 basis points in home loan rate will lead to 11.73% increase in EMI/~3.38% decrease in affordability. Similarly, a 90 basis points increase in home loan rate in May and June 2022 will cause a 2% dip in affordability/6.97% rise in EMI load.

Further, the Q1FY23 registration data (considers both primary and secondary transactions) for Mumbai city and the State of Maharashtra has been 57% and 27% above the long-term average, respectively. The trend has continued into July-to-date as well.

Consolidation could pick up pace

The higher cost of construction and high interest rates are likely to weigh on industry demand for FY23; this could accelerate consolidation towards larger listed players. Analysts at IIFL Securities see developers with high share of finished/near-completion unsold inventory, high operating cashflow margins and low leverage levels to be better placed to cushion the impact of rising construction costs. They see DLF and Lodha best placed, with a deep pipeline from their owned, low-cost and well-located land bank. They have a Buy recommendation on Brigade Enterprises, and an Add recommendation on Oberoi, Sobha and Godrej Properties.