Realty stocks poised for a big rally, consolidation is over: Yash Gupta, Angel Broking

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Real estate stocks are slowly and steadily rising high after a consolidation of 10 years. For instance, the BSE Realty index has more than doubled from its 52-week low of 1,530 levels that it hit on July 27, 2020, to touch a 52-week high of 3,213 on July 19, 2021. However, it is still 77% below its all-time high of 13,848 that it hit on January 08, 2008. So has the real estate stocks come out of ten-year consolidation are they poised for a big up move to understand this Money9 got into a conversation with Yash Gupta of Angel Broking. Here is the edited excerpts of the conversation:

Are real estate stocks out of the decadal consolidation zone?

Well, the real estate sector was always dominated by the unorganized market players. However, in the last 10 years, we have seen continuous market share gain by the organized market. The market share of the Top-10 listed developers has increased from 11% in 2011 to 27% in 2020 and is expected to improve further from here. Many small developers finding it difficult to launch new projects while Top-10 players have a pipeline of more than 5-10 years.

On the other hand, if we look at the S&P BSE Realty index, it has touched a 52-weeks high of 3213 in July 2021 breaking the consolidation of the last 10 years which was made in December 2020. During the real-estate bull run of 2007-08 S&P BSE Real-estate has touched the high of 13848 in January 2008, so real-estate the sector has a long way to go from these levels also.

What are the factors that are affecting unorganized real estate developers?

Unorganized players are not able to complete the projects on time due to the non-availability of credit limits from banks as well as NBFC’s after the IL&FS crises. While demonetization & RERA has set the playing field the same for both organized as well as unorganized, as before both these reforms Unorganized players have some edge over organized players. At the same time now landowners are now not interested in doing joint ventures with the unorganized players as sometimes they are not able to complete the projects on time. While During the covid time, Top-10 developers have shifted their sales force to Online but the same can’t be done by the unorganized sector.

How soon the sector can see demand recovery and by when can it reduce the unsold inventory?

The second half of the calendar year 2020 was very strong for the residential real estate sector in India. This saw many companies reporting the highest residential pre-sales in FY2021. As the demand for big-ticket size apartments has increased significantly with HNIs & Foreign residents got interested in the Indian real estate market after many years. In fact companies like Oberoi Realty, Godrej property and others have seen very strong demand from NRI in the first half of FY2021.

While the unsold inventory ratios are at the lowest of the last 7 years, as customers prefer to buy ready-to-move property. The demand-Supply ratio has improved significantly in the last 1.5 years and expect the same to improve further.

What are the tailwinds for Top-10 developers?

Over the last decade customer preference has changed from buying under-construction property to Ready-to-move property, nowadays organized players offering more ready-to-move property or about to complete property. Simultaneously Top-10 listed players have earned the faith of the customers by delivering the good quality project and that on time or even before time.

Top-10 developers are now focusing on improving the health of their balance sheet and are doing more joint ventures rather than owning the land parcels. By this company not stressing their balance sheets. Despite the pandemic, they have been able to improve their balance sheet on the back of good collections in past two years.

Which are your top picks from the sector?

It seems that the real-estate cycle has just started and a very long way to go from here we may see some good companies become multi-bagger stocks for investors. We are very positive for residential real-estate developers and still cautious on the commercial real estate sector as we see demand for the commercial has not picked up the pace as residential did. Our top picks are Godrej Property, Sobha Developers and Oberoi Realty.