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Real Estate - 2QFY22 Results Preview - Strong presales momentum - HDFC Securities

Posted On: 2021-10-12 22:05:41 (Time Zone: IST)

Mr. Parikshit D Kandpal, CFA, HDFC Securities and Mr. Manoj Rawat, Institutional Research Analyst, HDFC Securities

Robust presales momentum: The rerating of real estate stocks has surprised the street as well as us, with Nifty Realty Index having outperformed the Nifty Midcap 50 Index by 63% over the past year. Whilst we were positive on the sector, the extent of outperformance has been beyond our forecasts. The pandemic played a catalyst in accelerating market share gains into the hands of organised real estate players. Banks, equity capital providers, buyers, and supply chains aligned with stronger developers to further solidify this shift. Economic recovery, high attrition backed by higher salaries, robust stock markets, low interest rates, high affordability, collapse of tier-2 developer ecosystem, new launches and quest for large house ownership/house ownership are some of the tailwinds fueling this recovery. We believe that this recovery has multiple legs and strong branded developers stand to gain disproportionately.

New order in place, affordability high on elasticity: Buoyed by economic/income recovery/robust stock market wealth creation, the top eight cities in India are seeing a strong growth momentum. We see that demand for larger homes has increased. Buyers are chasing the best developers, while demand for plotted, independent floor, and low-rise development is on the rise. Buyers are flexible on capital values, beyond a certain preset threshold, in case a project is good. They are ready to shell out more. Paying elasticity is higher in luxury segment now and developers like DLF and Oberoi stand to benefit.

Malls' consumption smart recovery, re-occupancies to arrest further rise in office vacancies: We have seen strong traction in consumption post the opening of malls. Now with relaxations in multiplexes, the crowd is back. This may result in consumption normalisation by Nov-21 exit. Work from home seems to be ending now with gradual return to office, though offices are still working on hybrid mode and full return may take time until Mar-22. At least in the interim, it will arrest rise in vacancies and some discussion will start on new leasing. Hospitality too is seeing strong traction and, with the resumption of international travel, the occupancies and ARRs may improve.

Q2FY22 presales momentum strong; some impact of demand shift from Q1FY22, while Q3FY22 should be the best quarter: As a change from tradition, buoyed by market sentiment, some of the developers have started disclosing presales numbers ahead of results. Further, we expect DLF to report presales in excess of INR 10bn (Brigade - INR 10bn and Mlife - INR 3bn). The presales momentum may continue into the festive season with incremental delta likely to accrue on account of new launches. We expect Prestige, Oberoi and GPL to make new records during Q3FY22, if launches remain on track.

Q2FY22 earnings trend for the sector: We expect the aggregate revenue/EBITDA/PAT for the coverage universe to grow sequentially by 22/31/0%. The impact of commodities' prices will smoothen over the project completion period as companies will take the hit once projects complete. In our assessment, the non-Mumbai developers need to take about 5-6% price hike to absorb commodity inflation, while higher realisation in Mumbai projects may warrant a 2-3% price hike. Overall, taking price hikes may derail recovery and developers may not go ahead with the same.

Recommendations and stock picks: While the sector may see near-term headwinds, the long-term story remains intact. We continue to believe that tier-1 developers will gain market share, given consumers' increasing buying preference for reputed developers in under construction projects. We remain positively biased towards the sector. Top picks: DLF, Oberoi Realty, Phoenix Mills, Brigade and Mahindra Lifespaces.

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