Real Estate - 1QFY22 Results Preview Report - HDFC Securities

Mr. Parikshit D Kandpal, CFA, HDFC Securities and Mr. Chintan Parikh, Institutional Research Analyst, HDFC Securities.

Real Estate - Long-term drivers intact

Second wave of COVID-19 halts recovery: A large part of Q1FY22 (almost 1.5 months) was impacted by the second wave of COVID-19. This resulted in a sharp drop in footfalls and site visits. Our channel checks with brokers suggest that new launches were postponed to the second half as various key cities saw an increase in COVID-19 cases and respective governments subsequently resorted to lockdowns to curb its spread. On the presales front, this has led to developers clocking 45-70% of Q4FY21 volume. Buying decisions may get postponed until the situation improves. Whilst pandemic fears persist, the macro environment still remains robust with supply shrinkage, stable demand, low interest rates, pent-up demand, economic easing, and strong IT/ITES sector.

Malls on pendulum; office leasing renewals concerns linger: The momentum was slowly picking up on return to office; however, the second COVID-19 wave derailed it. We believe that now tenants may put renewed pressure on landlords to reduce rents and postpone higher rental repricing. For the past one and half years, while the offices have largely remained empty, tenants have been paying rent. We expect increase in vacancy rates and reduction in rental over the next few quarters. New leasing may pick up from Q4FY22 with gradual opening of offices, post vaccination. By Q4FY21, malls consumption rose to ~90% of pre-COVID levels. This time, as malls open, we expect faster pick-up in consumption. We expect consumption-led discount to continue in line with the terms extended during the first wave. In the absence of the third wave, we expect normalcy to return from the Q3FY21E festive season. The hospitality sector recovery may also remain weak on account of delay in resumption and recovery of international travel.

Q1FY22 presales momentum weak; second wave impacts footfalls and deal closures - recovery from H2FY22E: Our channel checks suggest a large part of early Q1FY22 was impacted by the second wave. Whilst digital sales as a concept has picked up, buyers do want to have a 'look and feel' of the property before closing the deal. We expect Oberoi to report presales in excess of Rs 8bn, Brigade - INR 5.5bn, Prestige - INR 10.5bn, Mlife - INR 1.6bn, GPL - INR 17bn. While the fundamental demand remains strong, any unnecessary price hikes may de-rail the recovery momentum. We continue to maintain our stance that FY22 may be better year for presales vs. FY21 with most developers likely to report decade high/all time high sales. Pandemic triggered freebies, discounts, attractive payment terms. This has improved sentiments for the sector, affordability is at decade best and interest rates are at an all-time low.

Q1FY22 earnings trend for the sector: We expect the aggregate revenue/EBITDA/PAT for the coverage universe to decline sequentially by 43.4/45/58.6%. 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.

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' 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.

Source : Equity Bulls

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