Strong momentum continues in residential real estate: IIFL Securities

Continued strong performance in Q1FY23

Listed developers continued to post strong numbers, although the first quarter was generally a weak quarter for real estate. Presales were up 184% YoY (albeit off a low base), but down 15% QoQ. This matches Anarock’s industry figures, implying that the listed developers’ market share was stable QoQ. Most developers reported healthy launches in Q1, which should also help maintain momentum in Q2. Additionally, developers took price increases of 1.5% to 5% in the quarter – enough to offset any increases in input costs (began to moderate in Q1).

QoQ stable net debt

Collections were healthy for the first quarter, annualized, 3% higher than FY22 levels. Operating cash margins remained stable for most developers, Godrej Properties and Sobha recorded lower QoQ margins on higher build outputs. Net debt of listed developers was stable quarter-on-quarter and down 11% year-on-year. Borrowing costs also remained stable QoQ. IIFL Securities analysts expect marginal increases, with interest rates rising.

Tracking FY23 presales growth of 15-20% YoY

Listed developers continue to be optimistic and are on track to generate strong growth of 15-20% YoY for FY23 despite a strong base for FY22 (+50% YoY). So far, developers have seen no significant impact of rising interest rates and rising input costs on sales velocity. Additionally, the launch pipeline remains robust and intact. Analysts at IIFL Securities see FY23 launches nearly doubling, year-on-year. Momentum on the ground 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), significantly above the long-term average respectively.

Emerging Trend – Developers are entering new cities and making a foray into warehousing

With the medium-term demand outlook remaining healthy, developers are now looking to enter new cities to support long-term growth, either through land acquisition, and/or through JDA – targeted cities remain MMR, Pune, Bangalore and NCR. Developers are also looking to Tier 2 cities for mapped development, and also getting aggressive on demand for warehousing/logistics park/data centers. Under IIFL Securities coverage, LODHA/Prestige/Brigade/Phoenix Mills are now considering acquiring greenfield projects for warehousing. However, the developers are also careful not to overuse the balance sheets. IIFL Securities analysts expect the expansion to be gradual.

Consolidation could accelerate, prefer DLF, LODHA among residential games

Rising construction costs and interest rates are expected to weigh on industry demand for FY23, which could accelerate consolidation towards larger listed players. Reiterate DLF and LODHA as best placed in FY23 with a deep pipeline from an owned, low-cost, well-located land bank; keep BUY on Brigade, Sobha and ADD on Godrej Properties and Oberoi.

Valuation matrix











Evaluation

CMP (Rs)

Target Price (Rs)

% change

NAV (Rs)

Net debt/Equity (x)
LDF To buy 374 430 15% 430 0.1
Lodha To buy 1,096 1,420 30% 946 0.8
Properties of Godrej To add 1,365 1,460 seven% 986 0.1
Oberoi To add 962 975 1% 975 0.2
Brigade companies To buy 500 550 ten% 550 1.3
Sobha To add 715 755 6% 755 0.9

Source: Company, Bloomberg, IIFL Research

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