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Robust launches, strong CF and consolidation drive growth

Our coverage companies estimated to clock 21% CAGR in presales even after market deceleration

* FY25 started on a strong note for the sector, though by year end, the momentum decelerated in launches and absorption in the top seven cities. Launches declined 5% YoY and absorption fell 10% YoY in FY25. In 4QFY25, launches/absorption declined by 11%/17%.

* Launches in FY25 were affected by state and center elections, the absence of regulatory committees, delays in approval, and changes in some rules, among others. As there were limited launches, absorption also decelerated in the top seven cities.

* Inventory months started to mount for the first time after five years in FY25. Inventory stood at 14.4 months in FY25, as launches and absorption declined by 5% YoY and 10% YoY, respectively. In 4QFY25 too, inventory stood at 14.4 months, up QoQ for the first time after 19 quarters. However, absolute absorption was higher than launches.

* In the top seven cities, the top 10 developers have seen a notable consolidation in each market, with their cumulative contribution rising from 22.7% to 31.9% in launches and absorption is catching up from 19.0% to 23.1% over FY15-FY25. We believe consolidation will allow our coverage companies to gain market share and keep growing at a better pace compared to the broader market.

* We estimate a 12% CAGR in launches over FY25-27 for our coverage universe, as the launches planned for FY25 have spilled over to FY26 due to approval delays. We believe that even though presales for the broader market might grow at a lower pace of 7-10%, cumulative presales of our coverage would record a 21% CAGR over FY25-27E.

Tailwinds: Improving affordability, better rental and diversification

* The affordability index (EMI-to-income ratio) for all the top eight markets tracked by Knight Frank is in the range of 20-30%, which indicates better affordability in those markets and consequently consistent growth in housing sales. MMR is the only market where the affordability index is 50%; however, it is important to note that MMR is getting more affordable year after year.

* After Covid-19, the rental started increasing due to the supply constraint, and currently most of the cities have a rental yield of 3-6% because of negligible inventory of 14.4 months in FY25. Better rental yields are attracting investors to invest in residential real estate (RRE), which can give them better yields and strong capital appreciation.

* Demand is also in an uptrend in Indian markets. The Trump Tower in Gurgaon worth INR32.5b was launched in mid-May’25 and fully sold out within two days. DLF has concluded the booking of Privana North worth over INR110b, which was recently launched. The Birla Silas tower in MMR booked INR25b in sales within few days of its launch. Prestige Ocean Towers at Marine Lines saw majority of sales in the INR200m+ apartment. Godrej Madison Avenue in Hyderabad achieved INR10b in bookings within few weeks of launch.

* In the last 2-3 years, many top developers have diversified to other geographies and started demanding a higher market share, thereby adding an incremental income stream apart from their home market. GPL, which has a strong presence in MMR, NCR, Bengaluru and Pune, entered Hyderabad and is now scaling up. Similarly, PEPL and SOBHA are entering Pune and aspire to scale up very fast. PEPL and OBER are also entering NCR and taking up their share of the pie. BRGD is scaling up in Hyderabad and Chennai. DLF and PEPL entered Mumbai to take a piece of the high-demand market.

Healthy collections drive strong OCF generation, BD and debt reduction

* With the timely execution of strong project pipeline, companies will achieve robust collections. Collections are expected to clock a 36% CAGR to INR1.5t over FY25-27E.

* Strong collections should result in healthy OCF generation of INR600b by FY27E, while cumulative OCF is expected to be INR1.4t over FY25-27E.

* With strong cash flow generation, developers are shifting their focus to business development to sustain the strong growth trajectory.

* Additionally, strong OCF generation allows developers to keep net D/E in check and at the comfortable level of below 0.5x.

Strong recognition, improved profitability helps to keep balance sheet lean

* For our coverage companies cumulatively, we estimate a 22% CAGR in revenue over FY25-27E to INR861b, aided by strong collections and delivery lined up for next 2-3 years.

* EBITDA is expected to post a 26% CAGR to INR252b and blended operating margin is estimated to improve by 168bp to 29% over FY25-27E. OBER, PHNX, LODHA and BRGD are expected to report strong margin of 54%, 67%, 29% and 37%, respectively in FY27E, while the remaining companies are likely to be in the range of 15-25%.

* Adjusted PAT for our coverage is estimated to deliver a 25% CAGR over FY25- 27E, with adjusted profit margin of 24% for FY27E.

* Recently, most of the companies under our coverage have completed one round of fundraising and are generating strong cash flow, which will allow them to continue growing without stressing the balance sheet.

* For our coverage universe, net D/E remains below 0.5x for some companies, while many have net cash status. However, SIGNATUR has the highest net D/E of 1.2x as of FY25.

* Due to strong profit accretion, the return profile (ROE/ROCE) has also been improving year on year.

Valuation and view

* The companies under our coverage are expected to record a CAGR of 21%/36% in presales/collections over FY25-27E, aided by the strong launch pipeline owing to strong BD in recent years, strong execution capability, and timely delivery.

* Healthy collections should generate healthy operating cash flow of INR1.4t cumulatively over FY25-27E for our coverage companies, which will allow most of them to keep their net D/E below 0.4x. Most of them are expected to have a net cash status.

* At this juncture, we will take the summation of the discounted cash flow from all the projects and bring it back to the present value, including the business development done by companies.

* To accommodate growth, we will apply premium/discount to 1x NAV and value office assets by applying capitalization rate to discounted NOI.

* Retail and hospitality assets are valued based on the multiple of EV/EBITDA depending the quality of cash flow generated by the assets.

* Currently, most companies are either trading at 1x NAV or at premium, as supply issues are waning and there are strong responses to recent launches. However, continuous business development demands higher valuation and provides leeway to increase the premium or assign a higher valuation.

* After an uncertain phase in RRE, the focus has shifted back to companies with strong geographical diversification and a fine balance of residential and commercial assets (office/retail/hospitality) to reap the benefit of strong growth visibility of both asset classes under. Consolidation in supply and strong absorption will act as additional catalysts for growth for our coverage companies in the residential space.

* Within our coverage universe, we have a BUY rating on BRGD, DLFU, GPL, KPDL, LODHA, PEPL, SIGNATUR, SOBHA, and SUNTECK and Neutral stance on MAHLIFE, OBER, and PHNX. We prefer LODHA , PEPL, and SIGNATUR for their strong growth visibility, geographical diversification and ability to generate income from multi-assets.

Recovery in residential launches to drive demand

* Residential real estate (RRE) has witnessed strong growth in the last three years after Covid-19-induced disruption in FY21. However, baring FY21, the residential segment started showing improvement from FY18 after facing disruption caused by demonetization, RERA implementation, digitalization of records, the Benami Transaction Act, etc.

* For the top seven cities, launches and absorption reported a 4% CAGR each over FY10-25. Over the last 15 quarters, launches and absorption have seen a compounded quarterly growth rate (CQGR) of 4% and 5%, respectively. Absorption was higher than launches in last five years, backed by strong pent-up and intrinsic demand, resulting in a fast reduction in inventory.

* FY25 started on a strong note for the sector; however, by year end, the momentum decelerated in launches and absorption. Launches declined 5% YoY and absorption fell 10% YoY in FY25.

* Launches in FY25 were affected by state and center elections, the absence of regulatory committees, delays in approval, and changes in some rules, among others. As there were limited launches, absorption also decelerated in the top seven cities.

* The deceleration was recorded in most cities, though MMR, Kolkata, Hyderabad and Pune bucked the trend and reported higher absorption compared to launches.

* NCR was the only market that recorded growth in FY25. Though the region recorded a 224% YoY jump in launches in FY25, 56% of total launches were reported in 2QFY25. In 2QFY25, launches in NCR surged 13x YoY/5x QoQ, resulting in higher inventory accumulation.

* While analyzing launches and absorption growth for several years, it is observed that once growth in launches decelerates, demand also starts to deteriorate in the same year, and eventually faster inventory accumulation happens. A deceleration in launches and absorption was witnessed in FY25, though supplydemand dynamics started to improve in 4QFY25 as systemic issues started to resolve and top developers received strong responses to their launches across geographies during the quarter.

* We estimate a 12% CAGR in launches over FY25-27E for our coverage companies, which is significantly higher than the broader market. Accordingly, we believe that even though presales might grow at lower pace of 7-10% for the broader market, cumulative presales for our coverage would record a 21% CAGR over FY25-27E.

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