IGI Logo

The recent run-up in stocks just a catchup of two years of strong performance; Growth outlook remains positive

*  As per Knight Frank, residential sales in top 8 cities grew by 5% YoY to ~330,000 units in CY23, matching the CY13 run rate but 9% below the peak sales of 360,000 units clocked in CY12, leaving further headroom for growth.

*  Supply inched up 7% YoY to 350,000 units in CY23, but it was just marginally above the demand, keeping inventory levels in check (inventory overhang of 17 months). As a result, realizations increased by 6% YoY.

*  Despite the price hikes, affordability improved across markets as income growth surpassed pricing growth, which should keep momentum intact in demand and pricing. Further, demand revival in the affordable segment, macro tailwinds amid rising per capita income, and scale-up in demand in cities like Bangalore, NCR and Chennai can further increase the absorption beyond the previous cycle’s peak.

*  Thus, we believe that we are in the middle of a 7-8 year-long real estate growth cycle; accordingly, we believe that growth momentum in both demand and pricing should continue. While the Nifty Realty Index has doubled in last one year, its returns since Jan’22 (two years) has been ~80%, similar to pre-sales or cash flow growth for top-12 listed players. Thus, the recent run-up has just been the catchup and future growth is yet to reflect.

*  PEPL, SOBHA, GPL, and Sunteck are our preferred picks as we believe their valuations do not reflect their robust cash flows and strong growth potential.

Demand at multi-year high, surpassing previous peak

*  As per Knight Frank, residential sales in top 8 cities grew by 5% YoY to ~330,000 units in CY23, matching the CY13 run rate but 9% below the peak sales of 360,000 units clocked in CY12.

*  However, going by the numbers from ANAROCK and PropEquity, absorption in CY23 surpassed its previous cycle’s peak. As per ANAROCK, absorption in top 7 cities was up ~30% at 470,000 units. As per PropEquity, it is estimated to have increased by ~15-16% in CY23 to 510,000 units.

*  Thus, on the blended basis, industry volumes seem to have grown by mid-teens in CY23. Along with ~6% of pricing growth, value growth was healthy at ~20%, which should help organized listed players to clock over 30% YoY growth in presales in FY24, driven by the ongoing consolidation.

Gradual price hikes continue; affordability improves YoY

*  Supply in top 8 cities grew 7% to 350,000 units and exceeded the demand for the second year in a row. Inventory increased to ~474,000 units for top-8 cities but remained flat for top 4 cities and was 40% below the peak in CY13.

*  The inventory overhang was flat at 17 months in CY23. With supply matching demand, prices continued to move up and grew 6% YoY in CY23.

*  Despite price increases, the affordability ratio witnessed a marginal 100-200 bp improvement in top 8 cities as income growth surpassed pricing growth and mortgage rates remained flat.

*  Sustained affordability will ensure that gradual price hikes will continue without affecting the demand momentum.

Outlook: further demand uptick imminent; sector in the middle of upcycle

*  As indicated by ANAROCK and Propequity, housing demand in top-7 cities exceeded the previous cycle’s peak, but we believe that there are few triggers in place, which can lead to a further uptick in demand.

*  Firstly, the affordable segment, which contributes 29% of total absorption, has been most impacted by the hike in mortgage rates. The decline in interest rates will lead to a revival in affordable housing demand. Further, the government is expected to provide incentives for affordable housing, which would be a key positive trigger.

*  Absorptions in MMR and Pune at 87,000 and 49,000 units, respectively, have exceeded the previous cycle’s peak; however, markets like Bengaluru and Chennai are yet to unlock their full potential, given a strong commercial cycle seen in CY15-19. NCR will also witness a further uptick in demand once Noida sees a revival in supply.

*  On the macro front, the rise in per capita income above USD3,500 (USD2,400 as of CY23) would be a key trigger for the increase in home ownership as seen in China between CY08 and CY15.

*  These factors could build a sustainable uptick in demand over the next threefour years. Inventory is yet to see a major uptick, while prices have increased by 14% on an absolute basis in the last two years vs. 25-70% in the previous two cycles, indicating that the sector is in the middle of an upcycle.

*  We believe that the existing demand-supply balance, low inventory, favorable affordability, and gradual price hikes should keep the momentum intact for at least three to four years.

Valuation and view: Cycle yet to top out; remain constructive

*  The Nifty Realty Index has doubled in the last one year; however, since its performance in CY22 was flat, its return since Jan’22 (two years) has been ~80% similar to pre-sales or cash flow growth for top 12 listed players during the same period. Thus, the recent run-up seems just a catchup of the two years of strong performance, while future growth is yet to reflect.

*  The consensus estimate is now building in three-four years of continued demand traction. As a result, for companies with limited growth pipeline, we built in new projects which are sufficient for companies to report a 15-20% CAGR through FY28E and we calculate the terminal value based on FY28E post land investment cash flows.

*  We continue to prefer players that have the ability to report steady growth on pre-sales with sustainable profitability and cash flows. We retain our BUY rating on LODHA, GPL, PEPL, SOBHA, and BRGD. We downgrade MAHLIFE to Neutral and maintain Neutral on DLF and OBER.

* PEPL, SOBHA, GPL and Sunteck are our top picks.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412