Strong momentum continues in residential real estate: IIFL Capital Services

23 Aug 2022 , 11:15 AM

Strong continued performance in Q1FY23

Listed developers continued to report strong numbers, despite Q1 typically being a weak quarter for real estate. Pre-sales were up 184% YoY (although on a low base), but down 15% QoQ. This is in-line with industry numbers from Anarock, implying market share of listed developers was flat QoQ. Most developers reported healthy launches in Q1, which should help sustain the momentum in Q2, as well. Further, developers have taken price increases of 1.5%-5% during the quarter — enough to offset any increase in input costs (started moderating in Q1).

Net debt flat QoQ

Collections were healthy for Q1, annualized is 3% higher than FY22 levels. Operating cashflow margins were stable for most developers, Godrej Properties and Sobha reported lower margins QoQ on higher construction outflows. Net debt for listed developers was flat QoQ, and down 11% YoY. Borrowing costs were also flat QoQ. Analysts at IIFL Capital Services expect some marginal increases, with interest rate going up.

FY23 pre-sales growth tracking 15-20% YoY

The listed developers continue to be bullish, and are on track to deliver a high 15-20% YoY growth for FY23 despite a high base for FY22 (+50% YoY). So far, the developers haven’t seen any significant impact of rising interest rates and higher input cost on sales velocity. Further, launch pipeline remains robust and intact. Analysts at IIFL Capital Services see FY23 launches nearly doubling, YoY. The on ground momentum for the first five months of FY23 remains strong, Mumbai City registrations (including primary and resale transactions), registration numbers/revenue collection for July and August (so far), meaningfully above the long-term average respectively.

Emerging trend — Developers entering newer cities, foraying into warehousing

With medium-term demand outlook remaining healthy, developers are now looking at entering newer cities to support long term growth, either through land acquisition, and/or through JDAs — the focus cities remain MMR, Pune, Bangalore and NCR. Developers are also looking at tier 2 cities for plotted development, and also getting aggressive on warehousing/logistics park/data centers demand. Within IIFL Capital Services’ coverage, LODHA/Prestige/Brigade/Phoenix Mills are now looking at acquiring greenfield projects for warehousing. However, developers are also mindful of not overleveraging balance sheets. Analysts at IIFL Capital Services expect the expansion to be gradual.

Consolidation could pick up pace, prefer DLF, LODHA among residential plays

Higher cost of construction and interest rates are likely to weigh on the industry demand for FY23, that could accelerate consolidation towards larger listed players. Re-iterate DLF and LODHA as best placed over FY23 with deep pipeline from owned, low cost and well located land bank; retain BUY on Brigade, Sobha, and ADD on Godrej Properties and Oberoi.

Valuation matrix

	Rating	CMP (Rs)	Target Price (Rs)	% change	NAV (Rs)	Net debt/Equity (x)
DLF	Buy	374	430	15%	430	0.1
Lodha	Buy	1,096	1,420	30%	946	0.8
Godrej Properties	Add	1,365	1,460	7%	986	0.1
Oberoi	Add	962	975	1%	975	0.2
Brigade Enterprises	Buy	500	550	10%	550	1.3
Sobha	Add	715	755	6%	755	0.9

Source: Company, Bloomberg, IIFL Research