Management commentaries indicate limited concerns on rising interest rates
In this report, we highlight key insights based on the 1QFY23 results, the management commentaries of major developers, and the near-term demand outlook.
* The YoY performance of the top 12 listed companies looks optically strong on account of a low base. Pre-sales fell 16% QoQ due to seasonality. As 1QFY22 was a washout, most companies have achieved the bulk of their targeted incremental growth for FY23 in 1Q, with managements confident of achieving double-digit growth in the fiscal.
* Except LODHA, PEPL, and SOBHA, launches from the top 12 developers were relatively moderate. Barring the strong response to a few small launches, pre-sales had a higher share of sales from ongoing projects, led by sustained sales momentum across its ongoing portfolio.
* After witnessing a sharp uptick in construction cost until 4QFY22, companies saw some moderation in inflation as the price of key commodities saw a healthy correction. While minor price hikes have already been taken to mitigate the cost impact, companies will be on the lookout for gradual (5-8%) price hikes across the portfolio.
* In a rising interest rate scenario, managements see housing demand remaining strong, and expect the impact of rising mortgage rates to remain transient. Moreover, certain large developers have introduced schemes like fixed EMIs for two years and deferred payment schemes to mitigate the impact of higher EMIs.
Reiterate their strong guidance, brushing aside rising interest rate concerns
* Mortgage rates have seen a sharp uptick in the past few months, but the starting point was the lowest level India has ever witnessed. The impact of an increase in home loan rates appears transitory as they remain way below the levels witnessed during the previous cycle.
* Despite further expectations of an increase in interest rates, most companies maintain their healthy growth guidance provided after the 4QFY22 earnings.
* PEPL is now targeting pre-sales of INR120b (v/s its earlier guidance of sustainingINR100b). SOBHA is confident of achieving a value growth of 15-20% as against its low double-digit guidance earlier. While DLF maintains its sales target of INR80b, we expect it to breach the same comfortably. Similarly, MLIFE is in a position to achieve annual bookings of INR25b, before the stated timeline of FY25.
* The same for other companies remains over 25% in FY23.
Diversification emerges as a new theme
* Companies diversifying their market presence: Over the last few quarters, one common theme that has emerged among listed developers is the attempts by managements to diversify their presence and bolster growth by foraying into newer markets.
? While LODHA and PEPL have forayed into each other’s core market, GPL has closed few opportunistic deals in new cities (Sonipat and Nagpur), which are in the periphery of its core markets.
? OBER continues to scout for opportunities beyond Mumbai. SOBHA/BRGD intends to further firm up its presence in NCR/Hyderabad
Key management commentaries
* LODHA entered the Bengaluru market by signing one JDA project with a GDV of INR12b. Bengaluru has only four-to-five large developers, with the management targeting 10% market share over the next five years. Guidance: It reiterated its FY23 pre-sales guidance of INR115b (up 27% YoY), of which Residential will contribute INR105b (up 24%). Cost inflation: Cost fell 2.2% QoQ, bringing its overall annualized cost inflation since Apr’21 to 9% p.a.. On a cost basis, this translates into a sub-2% impact on its overall portfolio.
* OBER | Launches: The sample flat in its project along Pokhran Road (Thane) is ready, and the project will be launched during the upcoming festive season. The management is targeting another tower launch in Borivali and Goregaon as there is very little inventory available in these projects. The impact of rising cost: OBER has not seen any slowdown on account of rising property cost and mortgage rates. The management said there is a continuous shift towards reputed developers.
* GPL | Business development: The management reiterated its sales guidance of INR100b and is confident of delivering strong growth on the business development front. It is approaching business development with a pre-sales target of INR150b over the next few years. Mortgage rates: The management does not expect a significant impact from the mortgage rate hikes as the starting point for the increase was the lowest level that India has ever seen. Even after another hike, rates can touch ~8%, which, it feels, will still be relatively low as compared to the previous cycle.
* DLF | Demand: On-ground demand remains strong, as reflected by the strong traction across projects. The management feels that the impact of the recent hike in mortgage rates may be transitory. However, it was quick to add that another 100-125bp hike can have an impact on demand. Launches: The management reiterated its sales guidance of INR80b for FY23 as it remains on track to launch 6.6msf of projects, with a GDV of INR65b for the rest of FY23, equally spread across the three quarters.
* PEPL: Driven by a strong launch pipeline across Bengaluru, Mumbai, and Hyderabad, the management aims to grow its pre-sales to INR120b (from INR100b in FY22). Mumbai projects: On the back of healthy traction at Prestige City, Mulund and projects in Marine Lines and Worli (Shiv Shahi), the management is aiming to generate INR35-40b sales from Mumbai in FY23.
* BRGD | Launches and guidance: The management expects demand momentum to continue and reiterated its over 20% growth guidance in the near term. It has a launch pipeline of 7msf/1.2msf in the Residential/Leasing segment. Commercial portfolio: The management is targeting to fully lease out the vacant area in its Commercial portfolio by FY23-end.
* SOBHA | Guidance: Given the uncertainty around rising cost, increase in mortgage rates, etc., the management had earlier guided at a 5msf run-rate. It is now fairly confident of maintaining its 1Q sales run-rate in FY23. Sales value/volume can increase by 15-20%/10-12% in FY23. Land unlocking: While its business development pipeline remains strong, the management is prioritizing investment in its existing land bank as the management aims to bring these projects closer to launch.
* MLIFE | Launches: The company has already launched its Bengaluru project and is aiming to launch its recently acquired projects in FY23. Despite a strong showing in 1QFY23, the management reiterated its sales target of INR25b by FY25. Business development: Its business development pipeline remains strong at INR50b, and includes some society redevelopment projects in Mumbai. MLIFE is receiving several inquiries from this segment, and will announce its first SRD project in FY23.
* KPDL | Guidance: The company achieved sales of INR17b in FY22, and is now targeting 25-30% growth in FY23 on the back of project launches, with a GDV of INR25-30b. Business development: KPDL has already added a new project in Pune, which has a revenue potential of INR14b. The management remains focused on signing new projects, with a cumulative GDV of INR70b in FY23.
* SRIN | Guidance: The management is targeting pre-sales of INR18b, resulting in a 37% YoY growth, led by launches of 3.3msf across four locations. It continues to pursue business development across all segments, and is hopeful to close a few deals in due course.
* PURVA: It has a strong launch pipeline of 16msf, and is targeting aggressive growth in FY23. It is also setting up an AIF of INR7b, of which, it has already raised INR2b. It is in the process of closing the second round. The fund will take care of the land acquisitions, while the projects will be executed by PURVA.
* ASFI | Launches and guidance: The company has a launch pipeline of 2.5msf, equally split between new and existing projects. The management is targeting pre-sales of INR11b in FY23 v/s INR5.7b achieved in FY22. It is also aiming to achieve over 15% RoE in the near term.
Valuation and view
* While rising interest rates is likely to have a sentimental impact on the sector in the near term, in a scenario with: 1) high construction costs and the cost of capital, and 2) constrained industry growth, larger developers will further consolidate their market share.
* We prefer players with an ability to generate robust cash flow over the next three-to-four years and those investing in developing their pipeline, which will provide further growth visibility and lead to a re-rating.
* In our Coverage Universe, we prefer LODHA (Buy), PEPL (Buy) and BRGD (Buy).
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