Top 4 real estate stocks to add to your watchlist
When demonetization took place in 2016, there was a shortage of liquidity in the financial system. The same thing happened again in 2018 during the IL&FS crisis.
Lenders have tightened their access to funds, which has made it difficult for real estate companies to access funds. On top of that, the lack of demand for homes has added to their woes. The double whammy of these factors has thrown the Indian real estate sector into a slump for years.
However, the Covid-19 pandemic has caused a paradigm shift in demand and the sector has come back from the dead.
Demand is mainly driven by record mortgage rates, supported by favorable government policies.
Mumbai, the financial epicenter and the most expensive real estate market in India (according to Statista) is in the lead. In fiscal year 2021, the city had the highest number of enrollments in the past 10 years. Momentum also appears to be solid in the current fiscal year, with no signs of waning.
Many developers reported record pre-sales and collections for nine months ending December 2021. In addition to record sales numbers, average inventory days fell from 60 months in fiscal year 2017 to 28 months in 2021 .
This indicates robust demand that could continue. Looking at the industry’s strong growth prospects, this article introduces you to the top 4 listed real estate players that deserve a spot on your watch list.
#1 Godrej Properties
Godrej Group is the largest landowner in Mumbai. The group owns approximately 3,400 acres of land in the country’s most expensive real estate market. This plot of land has development potential estimated at Rs 1 tn.
Godrej Properties, the real estate arm of the Godrej Group, is entrusted with the responsibility of carrying out development projects on behalf of the group.
Being the largest developer in terms of residential sales, the company has a pan-India salable area of 186 sq.m. as of December 2021.
For the nine months ended December 31, 2021, the company sold 6.6 square feet of space, down 1% from the prior year. However, it saw a 13% growth in booking value year over year (YoY).
The company had unsold inventory (completed projects) worth Rs 5,350 crore as of December 2021. After considering the impact, the lockdowns had on the company’s inventory; Godrej Properties takes approximately 900 days to sell its inventory.
On the balance sheet side, the company is deleveraging its books as it reported a net debt to equity ratio of 0.04x compared to 0.64x recorded during the corresponding period of the previous year.
Godrej Properties has a huge cash bank of which Rs 7,500 crore is to be invested over the next 12-18 months to acquire and develop new property projects in four key markets – Mumbai, Delhi-NCR, Pune, Bengaluru – where the company has a solid foundation.
Gurugram is to DLF what Mumbai is to Godrej. DLF owns 104 square meters of land in Gurugram, also known as DLF town. Gurugram represents 56.2% of DLF’s total land reserve.
DLF is one of the leading brands in the Indian real estate industry. It has an extensive experience of 75 years in the development of both residential and commercial projects.
The company has developed more than 330 m² of underlying surface in 150 projects since its creation. It has land units with a development potential of more than 215 m2.
DLF’s commercial projects are home to many large IT and Fortune 500 companies.
In December 2021, the company reported record sales with booking value growing 97% year-on-year. The business sold a total of 1.2m square feet during the same period.
For the nine months ended December 2021, DLF’s revenues and net profit increased by 13% and 78% compared to the corresponding period last year.
As of December 2021, DLF had a total inventory (completed projects) worth Rs 4100 crore. The company takes an average of 1,311 days to liquidate inventory, which is above the industry median.
Regarding debt, the company had total net debt worth Rs 3,220 crore as of December 2021. This translates to a net debt to equity ratio of 0.09x.
The company has pledged to reduce its debt by focusing on high-end residential projects and increasing rental yields.
#3 Sobha Ltd
Sobha Ltd is an Indian multinational property developer headquartered in Bengaluru. Incorporated in 1995, the company develops and offers residential and commercial properties in major cities of India.
Additionally, it offers end-to-end engineering, procurement and construction (EPC) solutions as part of its contract business. Its clients include some of India’s largest companies such as Infosys, ITC, HCL Technologies, etc.
Sobha is the only retro-integrated property developer in the country. This means that the company manufactures all the materials that go into their projects, be it furniture, concrete blocks, aluminum doors and windows, even mattresses to that extent.
This helps the company to significantly reduce its input costs. As a result, the company’s gross margins have grown at a CAGR of 11% over the past five years.
In a very competitive market where developers take between 500 and 600 days to sell a real estate unit, Sobha sells a unit in just 136 days.
The developer does this by scattering its projects across major IT hubs instead of focusing on a single city.
As of December 2021, the company had unsold inventory (completed projects) worth Rs 320 crore, which is one of the lowest in the industry.
The company had reported flat numbers until the pandemic hit.
The first two quarters were a total slump as sales dropped drastically due to nationwide shutdowns.
However, demand came back strong thanks to low interest rates and the business had a decent recovery.
Since then, the company has been reporting good numbers every quarter. In December 2021, its net income increased by 51.4% compared to the corresponding period last year.
Due to high debt, the company’s net profit margin is quite low. Sobha’s debt ratio is above 1.07x in December 2021. However, going forward, the company is confident to bring the ratio below 1x.
The company has rewarded its shareholders with dividends fairly consistently.
#4 Sunteck Real Estate
Sunteck Realty is one of the fastest growing property developers based in Mumbai.
Although the company develops residential and commercial projects, it mainly focuses on residential projects, with 72% of its projects being residential projects.
Sunteck has a portfolio of 21 projects spread across Mumbai. This makes Sunteck a city-centric developer focusing on a single market.
Sunteck’s projects together have an area of 50 square meters.
The company had unsold stock worth Rs 1,700 crore as of December 2021 which it aims to eliminate over the next 3-4 years.
Sunteck’s inventory days are quite reasonable by industry standards. The company sells a unit of its property in 300 days (less than a year).
For nine months ending in December 2021, the company saw its sales bookings increase by 23% year-on-year.
Even though the industry is capital intensive, Sunteck is less leveraged than its peers.
Its net debt to equity ratio stands at 0.16x in December 2021. The company aims to clear the remaining debt over the next 3-4 years.
Insights into India’s top real estate players from Equitymaster’s stock analyzer
Here is a brief overview of these companies based on crucial financial data.
Please note that these parameters can be modified according to your selection criteria.
This will help you identify and eliminate actions that do not meet your requirements and focus on actions that are well within the metrics.
Tread carefully in tumultuous times
Although the Indian real estate sector is in good spirits, a rate hike could quickly dampen the mood.
As the conflict between Russia and Ukraine escalates, a rate hike is likely to tame the inflation monster.
In such a volatile environment, be sure to invest in a company with strong cash flow and minimal debt.
Here’s what Tanushree Banerjee, co-head of research at Equitymaster, has to say about the real estate industry.
The biggest drag for real estate players is high leverage and with interest rates rising, investors should be wary of real estate companies that tend to rack up debt and eat with low cash flow .
Moreover, it is a sector where investors must be very attentive to the quality of management. Poor accounting and lack of corporate governance have been the reason many large real estate companies have performed poorly in the past.
Make sure to carefully analyze the fundamentals before investing in a real estate company.
Moreover, investing in a laddered manner would help you overcome the volatility.
Warning: This article is for information only. This is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)