Reality check! Realty may be offering an opportunity for bottom fishing

Realty is showing the first signs of bottom out on Dalal Street. If brokerage reports are anything to go by, the worst for the sector seems to be behind us and opportunity for bottom fishing is emerging in select pockets.

Look at the first signs:
1. Companies in the BSE Realty index have posted 48 per cent year-on-year (YoY) rise in net profit on 3.16 per cent YoY rise in gross sales during June quarter.

2. Top realty players like DLF are sounding confident of demand revival this financial year.

3. Brokerages are saying margins are unlikely to compress further.

4. Some sector watchers, such as Deutsche Bank, believe the cash flow momentum is set to improve in the coming quarters.

The BSE Realty index, which last year rallied nearly 100 per cent against 28 per cent rise in the Sensex, is down around 20 per cent for this calendar against a 13 per cent jump in the 30-share BSE benchmark.

Barring Sunteck Realty, which has rallied 15 per cent on a year-to-date basis, others such as HDIL, Indiabulls Real Estate, Sobha, Prestige Estates, DLF and Phoenix Mills are down between 3 and 50 per cent in 2018.

Godrej Properties, Mahindra Lifespace Developers and Oberoi Realty have remained flat.

Regulatory and government-level push have helped improve delivery of pending projects, which, analysts say, should help boost consumer sentiment and improve sales.

Realty portal PropTiger in a recent report projected handover of some 8.6 lakh units to buyers by 2019-end. Realtors are looking forward to a demand revival in the coming festival season.

Realty major DLF has given a guidance that its sales bookings would more than double to Rs 2,250 crore this financial year on improved demand for ready-to-move-in flats.

Market watchers say the pace of consolidation in the realty sector has accelerated after the implementation of RERA and GST.

“Post RERA and GST, the regulatory environment has become demanding, especially for smaller developers. Currently, the industry is highly fragmented with over 11,940 CREDAI members. Some company representatives say only five to 10 large developers will remain in key cities in a few years from now. Besides higher regulatory ask, a sharp drop in profitability would also result in faster consolidation within the sector,” Deutsche Bank report said.

Implementation of the new real estate law RERA from May last year has forced developers to focus on execution of projects, leading to a 33 per cent rise in deliveries of flats to over 1.93 lakh units in nine major cities during January-June 2018.

Deutsche Bank in a report sounded bullish on the sector, citing recent trends of gradual improvement in demand and reduced supplies from the unorganised sector, which it said should boost profitability of organised players.

Deutsche Bank’s other top picks include Sobha, Godrej Properties and Oberoi Realty.

Oberoi Realty and HDIL posted over 200 per cent YoY rise in bottomline figures for June quarter, while others like Suntech Realty, Mahindra Lifespace Developers, DLF, Phoenix Mills, Prestige Estate Projects and Sobha posted 95.20 per cent, 93 per cent, 56 per cent, 40 per cent, 29 per cent and 10 per cent year-on-year rise in bottomline numbers for the quarter under review.

ICICI Securities projects more than 10 per cent upside in the Sunteck Realty (SRL) stock with a revised price target of Rs 525 (Rs 475 earlier) for next 12-18 months.

SRL is trading at a valuation multiple of 2.1 times FY20E P/BV. “Considering the strong cash flow visibility from its completed projects, better leverage position (net D/E: 0.17x), affordable housing foray and quality of land bank, SRL is currently trading at attractive valuations,” the brokerage said.

Furthermore, the growth capital raised through QIP should help build a stable rental portfolio and boost its position in the affordable housing segment.

Arihant Capital Markets has a ‘buy’ rating on Sunteck Realty with a target price of Rs 585.

Among others, Indiabulls Real Estate and Godrej Properties posted 5 per cent and 65 per cent decline in June quarter net profit on a YoY basis.

JM Financial is bullish on Phoenix Mills with a target price of Rs 685. “Chennai and High Street Phoenix (HSP) consumption is expected to improve, as the category changes introduced in malls over last 2-4 quarters are expected improve operations. Hotel revenues have improved on stable room rents with rising occupancy. Phoenix Mills has deployed all equity from CPPIB on land acquisition (including approval cost) in Pune, Bangalore and Indore. In addition, the company has acquired land parcel in Ahmedabad and semi-completed a mall in Lucknow for future retail expansion. The company expects all the under-construction assets to be operational by FY22/23. We expect market-leading malls to have a significant advantage over next 3-4 years as low competition will lead to improvement in consumption and rentals,” JM Financial said.

Macquarie has an ‘outperform’ rating on Phonix Mills with a target price of Rs 732.

Promoters of realty firms have changed their strategies to tap opportunities in the affordable housing segment. Accordingly, the average size of apartments has shrunk in all major cities over the last five years.

In percentage terms, the drop has been maximum in Bengalore (21 per cent), where the average apartment area has reduced from 1,750 sq ft to 1,375. Pune has seen a 19 per cent fall, NCR 17 per cent, Mumbai Metropolitan Rrea (MMR) 17 per cent and Chennai 15 per cent, says a report by Anarock Property Consultants.

JM Financial believes a combination of lower ticket sizes, improving income and stable interest rates should improve the house economics going forward. In a recent analysis, the brokerage also observed an improvement in eligibility age across cities.

Non-index realty stocks such as Ashiana Housing, Brigade Enterprises, Ganesh Housing and Kolte Patil Developers have slipped 20 per cent, 38 per cent, 46 per cent and 23 per cent, respectively, on a year-to-date basis till August 21.

HDFC Securities has a ‘buy’ rating on Brigade Enterprises with a target price of Rs 299 and a ‘neutral’ recommendation on Kolte Patil with a target price of Rs 315.