2022 in Review: Realty index falls 10% with 4 stocks down over 20%; a good time to buy?

Real estate index Nifty Realty underperformed benchmark indices in 2022 YTD. The index lost nearly 10 percent during and was the third worst-performing index this calendar year. Apart from Nifty Realty, Nifty IT and Nifty Pharma were also in the red in 2022, down 26 percent and 11 percent, respectively.

In comparison, the Nifty50 index rose a little over 5 percent in 2022, despite massive volatility during the year amid major headwinds like the Russia-Ukraie war, rise in inflation, rate hike and growth concerns.

"While the FY18–20 period had witnessed working capital/debt buildup, cash flows generation of realty developers improved post-covid, H1FY23 marked a continuation of this trend with operating cash flows strengthening across most developers," said brokerage house Edelweiss in a recent note.

“This was largely due to the release of working capital (aided by faster inventory liquidation) and led to debt reduction. Capex spends on annuity projects are also moderating (barring Prestige Estates and Phoenix Mills), aiding free cash flows," the note stated.

Among stocks, only Phoenix Mills and Oberoi Realty gave positive returns in the Nifty Realty index with Phoenix rising the most, up 42 percent. Meanwhile, the remaining 8 stocks were in the red. 4 of those fell over 20 percent in 2022 YTD.

Indiabulls Real Estate was the worst-performing stock, down over 45 percent in the current calendar year. While the stock rose 10 percent between October-December, it shed 10.5 percent just in December. The stock has given straight negative returns in the first 6 months of 2022, down 61 percent between January-June.

However, in the September quarter, the net profit of Indiabulls Real Estate rose 920.76 percent to ₹56.55 crore due to a low base as against ₹5.54 crore during the previous quarter ended September 2021. Sales, meanwhile, declined 44.44 percent to ₹194.09 crore in Q2FY23 versus ₹349.32 crore during the previous quarter ended September 2021.

Sobha Developers was the second worst-performing realty stock of the year, down nearly 36 percent in 2022. The stock has been giving negative returns for 5 straight months since August and has lost 18 percent between August-December. Just in the ongoing month, the stock has shed nearly 8 percent. Sobha's consolidated net profit declined 69.6 percent to ₹19.2 crore on a 14.4 percent fall in revenue from operation to ₹667.3 crore in Q2FY23 over Q2FY22.

However, during the quarter, the company recorded the highest-ever quarterly sales value of ₹1,164 crore with a 13 percent increase YoY aided by the highest-ever sales price realization of ₹8,709 per square feet and consistent sales volume at 1.34 million square feet. The company said that it has reported the highest-ever quarterly operational collections at ₹1,336 crore, supported by an increased pace of construction, sustained sales momentum and improved operations in contracts and manufacturing.

The third firm that lost over 20 percent was Godrej Properties. It shed 32 percent in 2022 YTD. The stock has fallen 2.5 percent in December after around an 8 percent jump in November and October combined. In Q2FY23, the firm reported a 54 percent increase in its consolidated net profit to ₹55 crore versus ₹ ₹36 crore in the corresponding quarter last year. Net sales increased by 28 percent and stood at ₹165.09 crore in Q2. However, net sales stood at ₹129.32 crore in the previous year quarter.

During the second quarter last year, it recorded the highest-ever quarterly sales with a total bookings value of ₹2,520 crore. “At the halfway mark of the financial year, we are confident of achieving our booking value guidance of ₹10,000 crore for FY23. We are witnessing a lot of momentum in business development and hope to deliver Godrej’s best-ever year for new project additions through strong momentum in the second half of the year,” said Pirojsha Godrej, executive chairman, of Godrej Properties.

Finally, Sunteck Realty also shed 27 percent in 2022 YTD. The stock lost 11 percent in December after a 4 percent rise in November. Before that, the stock fell for 3 straight months in August, September and October, down 8 percent, 12 percent and 7 percent, respectively.

Apart from these 4 realty stocks, Macrotech Developers lost over 16 percent in 2022 YTD, Brigade Enterprises fell over 8 percent whereas Prestige Estates and DLF were also down around a percent each in this period.

OUTLOOK

However, post Q2, which is usually a soft quarter, analysts have turned positive on the overall sector outlook. While realty firms remained cautious about raising their FY23 pre-sales estimates, market experts expect the demand to remain strong.

Elara securities, in a recent note, pointed out that no major impact of a subsequent interest rate hike by the RBI was seen and that the sector is well-placed to absorb further rate rise. Besides, it noted that most major developers hiked prices amidst an escalation in input costs and overall increased sales. The luxury segment continued to witness sustained demand with a clear shift to larger homes, it added.

Meanwhile, Motilal Oswal stated that it continues to prefer players with an ability to generate robust cash flow over the next three-to-four years and invest in developing their pipeline, which will provide further growth visibility and lead to a re-rating.

It has Buy calls on Macrotech Developers, Oberoi Realty Prestige Estates, Brigade Sobha and Mahindra Life, while the domestic brokerage is 'Neutral' on DLF and Godrej Properties.

Elara, on the other hand, has Elara has upgrade Godrej Properties to Buy from Accumulate with an unchanged target of ₹1,508 and downgrade Prestige to Accumulate from Buy with an unchanged target of ₹525, due to the run-up in the stock price in the past three months. It also has Buy calls on Oberoi Realty, Sobha and Mahindra Lifespace and 'Accumulate' on Brigade Enterprises.

Edelweiss has picked Macrotech Developers, DLF and Sobha as its top realty picks.

“While higher interest rates are a worry, it believes realty stocks are attractive from a medium-term perspective, considering rising consolidation. Companies with sizeable land banks and robust cash flows such as DLF (BUY), Sobha (BUY) and Macrotech Developers (BUY) may re-rate going ahead," it noted. DLF continued to enjoy the highest operating surplus among developers in H1FY23 followed by Macrotech (Lodha), added Edelweiss.

RERA-driven consolidation is throwing up growth opportunities for organised players, and covid-19 has only accelerated the process. DLF and Sobha have existing land banks, and hence lower investment requirements are aiding their cash flows, the brokerage pointed out.

It further highlighted that Godrej and Brigade are using their war chest to fund growth plans. Oberoi Realty and Lodha can also potentially generate sizeable cash flows through inventory monetisation. All in all, debt build-up seems unlikely for most developers, it said.