First came demonetisation, then the crisis in the non-banking financial companies (NBFC) sector and finally, the pandemic.
To further complicate matters the industry had to deal with a new law – Real Estate (Regulations and Development) Act, 2016 (RERA), which made life difficult for most players…and ofcourse, the launch of the Goods and Services Tax (GST) regime.
All of these posed challenges to the real estate industry.
However, in an odd way, the pandemic came as a saviour for this ailing industry.
What seemed to be the death knell for the real estate companies, was in fact a blessing.
It led to a paradigm shift in home buyers’ attitudes and reinstated the importance of owning homes.
And this was supported by ultra-low interest rates making borrowing really cheap.
After that, there was no turning back. The demand for residential properties increased, and the unsold inventory decreased drastically.
Though the commercial sector hasn’t seen much growth due to the work-from-home trend, it is soon expected to revive on the back of what could be a long-term economic recovery.
After residential, the retail segment has also been doing well as the lockdown restrictions have completely been lifted.
This marks the beginning of another cycle for the real estate sector. With this in mind, we have shortlisted six stocks that you should have on your watchlist.
#1 Oberoi Realty
First on our list is Oberoi Realty, one of the most reputed brands in the real estate market.
The company develops residential, commercial, retail, and social infrastructure projects in one of the major real estate markets in the country, Mumbai.
It also offers hospitality and property management services.
Oberoi Realty has developed 42 projects across Mumbai, aggregating around 11.9 m square feet (sft) of spaces.
Some of its notable projects are Oberoi Garden City, Oberoi Mall, and Exquisite.
Currently, it is developing two premium high-storey residential towers, Eternia and Enigma, in Central Suburbs Mumbai.
Apart from this, it is also developing a few residential projects, namely Sky City and Three Sixty West.
During financial year 2022, the company sold a carpet area of 1.32 m sft, an improvement of 24% from the previous year.
It launched the second tower in Elysian Project. Also, it entered into two agreements for plots of land in two different locations in the financial year 2022.
Revenues grew 31.7% year-on-year (YoY), driven by growth in hospitality and project revenues. Net profit also grew 9.7% YoY during the financial year 2022.
With the real estate sector back on track, Oberoi Realty plans to capitalise on this growth and borrow funds for its new project.
The company’s debt-to-equity ratio stands at 0.2x leaving room to take on more debt comfortably.
The company’s new land acquisitions in strategic locations (South Mumbai and Thane) pave the way for revenue growth in the medium term.
#2 Godrej Properties
Second on our list is Godrej Properties, the real estate arm of the Godrej Group.
The company primarily focuses on developing residential properties across ten cities in India.
Being a part of the Godrej Group, it also has access to the land bank of the group. In the past, it has entered into agreements with other companies of the group for land development.
So far, it has successfully developed 84 projects in Pune, Mumbai, Bangalore, and Delhi that account for 80% of the saleable area.
During the financial year 2022, revenues at Godrej Properties grew 94% YoY, driven by strong sales. It reported the highest net profit of ₹5 bn against a loss of ₹0.7 bn the previous year.
The company sold 9,121 homes and also recorded the highest bookings and cash collections.
It launched 16 new projects. The company also added projects of 9.3 m sq ft across four major cities.
Despite a strong project pipeline, the company managed to maintain its debt-to-equity ratio at 0.1x. However, its Return on Capital Employed (RoCE) improved by 6.7% during the year. The RoCE for the financial year 2022 stood at 9%.
Going forward, its strong market position, robust collection and sales, and long track record will drive the company’s growth in the medium term.
It is also planning to expand its business in tier 2 cities.
#3 Macrotech Developers
Next on our list is Macrotech Developers, one of India’s largest real estate developers.
The company’s projects cover all segments of society, such as premium, middle income and affordable.
Some of its residential property brands are Lodha, Crown, CASA, and Lodha Luxury.
It also develops commercial spaces.
The company is also diversified into industrial and logistics parks and is currently working on a project in Navi Mumbai.
During the financial year 2022, the company launched 13 new projects, with a saleable area of 5.6 m sft. Apart from this, it added 11 new projects to its pipeline.
In the financial year 2022, revenues grew 77% YoY, mainly due to a ramp-up in construction activity. Net profit jumped 2,420% YoY due to higher realisations and lower interest costs. And of course, the base effect.
Last year, it reduced its net debt by ₹67.7 bn. As a result, the debt-to-equity ratio reduced from 0.9x to 0.2x.
The RoCE stood at 16.3% for the financial year 2022.
The company has recently entered the Bengaluru market through a joint development agreement (JDA) to develop a land area of nearly 1.3 m sft.
In the financial year 2023, it plans to launch 15 new projects in Pune and MMR.
Going forward, a strong project pipeline and expansion in existing and new markets provide revenue visibility in the medium term.
#4 Phoenix Mills
Fourth on our list is Phoenix Mills, India’s largest mall owner.
The company is engaged in the business of operation and management of malls. It is also involved in the construction of residential and commercial properties. Phoenix Mills also offers hospitality services in India.
It operates eight malls across six cities with an area of six m sft. Some of the well-known malls are Phoenix Palladium and Phoenix Market City.
The company is also developing four new malls across four cities. Currently, the company is operating an area of 13 m sft and developing another 11.1 m sft across residential, retail, and commercial segments.
Its underdevelopment assets are worth ₹2 bn, majorly in the retail segment.
In the financial year 2022, revenues grew 38.2% YoY, driven by hospitality and commercial segments. Net profit also improved 675.8% YoY.
During the year, the company refinanced its debt to reduce its interest cost. Its debt to equity ratio and RoCE stood at 0.2x and 4.36%, respectively, for the financial year 2022.
Going forward, a diversified revenue portfolio, strong leadership and growing consumption in the retail malls’ segment will drive the revenues in the medium term.
#5 Ajmera Realty
Next on our list is Ajmera Realty, a smallcap real estate stock.
The company develops residential and commercial properties in Mumbai, Bengaluru, and Ahmedabad. It also develops properties in the UK and Bahrain through collaborations with local companies. It has completed projects with an area of 30.5 m sft and is currently developing an area of 3.9 m sft in Mumbai, Bengaluru, and Ahmedabad.
It plans to launch six new projects in Mumbai and Pune in the next two years.
Revenue at Ajmera Realty grew 39% YoY, driven by higher realisations during the financial year 2022. Net profit also improved 47% YoY due to operational efficiency.
Its debt-to-equity ratio stood at 1.1x as compared to 1x the previous financial year. However, its RoCE improved to 7.9%.
Going forward, a strong project line and the growing demand for housing will drive the company’s growth.
#6 Sunteck Realty
Last on our list is Sunteck Realty, a Mumbai-based real estate company.
It is engaged in the business of developing premium residential and commercial properties.
So far, it has completed 13 projects and has seven under development projects, of which most are in Mumbai.
Apart from real estate development, it also offers construction and maintenance services.
In the financial year 2022, revenues and net profit declined due to lower sales. However, it has managed to keep its debt-to-equity ratio at low levels, of 0.2x. This is the result of the JDA route it follows to develop properties while keeping its capex low.
Going forward, Sunteck Realty’s partnerships for new projects and demand for housing will help reduce its high sold inventory, thereby improving sales and revenues.
Is the real estate industry a good bet?
The real estate industry sure looks like to be on an uptrend.
Government initiatives such as ‘Housing for All, the introduction of RERA to increase transparency and instil home buyers’ confidence, and moratorium benefits during Covid have pushed the sector up on the growth curve.
Apart from this, the opportunity for real estate development that emerging cities provide is massive. All these pave the way for future growth in the sector.
However, there are going to be several hiccups in the industry. The rising home loan interest rates might reduce the affordability for home buyers.
One can only wait and see how the industry spans in this rising interest rate regime.
Here’s what Tanushree Banerjee, Co-head of Research at Equitymaster, has to say about the realty sector.
The biggest drag on real estate players is high debt, and with interest rates moving up, investors need to be wary of realty companies with the tendency to pile up debt and dines with poor cash flows.
Also, this is a sector where investors have to be very careful about the management quality. Poor accounting and lack of corporate governance has been the reason for many large realty companies performing poorly in the past.
Make sure you analyse the fundamentals thoroughly before investing in any real estate company.
Also, investing in a staggered manner would help you tide over the volatility.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
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