Multibaggers! DLF, Oberoi Realty to Mahindra Lifespace, 7 realty stocks to buy; Axis Capital reveals why
Residential cycle volume trajectory in the top 6 cities is now clearly moving upwards, making stocks like DLF, Oberoi Realty, Mahindra Lifespace and others a must-look for investors.
Trading in realty stocks has been volatile over the last 1 year. On Tuesday, the S&P BSE Realty index was trading at 2,056.28 up by 12.09 points or 0.59%. However, in last one year, this index has been hovering between 2,100-2,400 levels. Since October, 2018 it has picked up. In fact, the last six months show that realty stocks are on an upward trend. What that means for investors is that they can actually enter into this sector. Axis Capital, in fact, provides a window of opportunity, saying it has put a buy rating on 7 realty stocks which investors can look at positively.
Axis Capital research note revealed that housing has a 10-12 year cycle. Right now the segment is on an upturn. Residential cycle volume trajectory in the top 6 cities is clearly moving upwards. Here's the list of 7 realty stocks which can emerge as best bets on stock exchanges, as per Axis Capital.
DLF is already generating positive FCF for the past couple of quarters and is likely to continue (with improved sales, lower outlay towards construction and debt-servicing), which will help it pare down debt further. Management targets to make DevCo debt free by FY20. While NCR market remains tepid, any revival over the next 1-2 years can benefit DLF disproportionately as its peers remain stressed (due to liquidity crisis). Re-iterate BUY with SoTP-based target price of Rs 240.
Thane project (to be launched in FY20) can garner very strong response considering that it is a greenfield project, it is the lowest ticket size product in its portfolio coupled with Oberoi’s premium brand. ORL has received good response to the deferred payment schemes introduced in its ready Goregaon projects and under-construction Borivali and Mulund project. This highlights management’s focus on monetizing inventory than holding prices – ORL saw strong volume growth in 9MFY19 to 0.7 msf (vs. 0.6 msf over the whole of FY18).
It has one of the lowest gearing in the industry (net D/E of 0.1x), which will aid in expanding its portfolio (capitalize on growth opportunities post RERA). Buy with a target price of Rs 608.
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Due to strong growth in consumption and potential of rental escalations, investors are willing to pay a premium for stake purchases in its malls. PML has acquired land/under-construction assets in Pune, Bangalore, Indore, Ahmedabad and Lucknow over the last few quarters – taking its retail space under development to 4.6 msf. Once stabilized (>80% occupancy achieved), these assets will add ~Rs 5.4 bn to PML’s rental income by FY23. Total capex of Rs 45 bn (including land cost of Rs 20 bn, already incurred) implies healthy yield on cost of 13-14%. Buy rating at a target price of Rs 782.
Prestige Estates Projects!
Prestige has already sold ~75% of area in its ongoing projects. Further, in its balance unsold inventory, ~75% is concentrated in mid-income projects, where visibility of sales is high. It also has ready inventory worth Rs 28 bn. From its ongoing projects of ~40 msf, PEPL is yet to receive ~Rs 36 bn of cash. With 9.7 msf of unsold inventory worth ~Rs 73 bn and ~Rs 50 bn of pending costs, net cash of ~Rs 65 bn is expected over 4-5 years. Buy rating with a target price of Rs 326.
Sobha will be a continued beneficiary of market consolidation (due to RERA, GST) in Bangalore and South India. The company’s affordable/middle-income housing foray, if it goes well, could change the pre-sales and earnings outlook over the next 2-3 years. Also, significant portion (~36%) is located in Bangalore where demand remains healthy and pricing too is affordable. Unlocking of the company’s vast residential land holding via new project launches can sustain the stock re-rating (up ~35% in last one year) given margins on these projects will be likely higher than current average. Buy rating with a target price of Rs 623.
Having completed ~25 msf of developments across residential, offices, retail and hospitality segments, Brigade Enterprises Ltd (BEL) is a well-known brand in south India with its marquee integrated development projects such as Gateway, Metropolis and Orchards. The company to increase its annuity income from Rs ~5 bn to Rs 16-17 bn over 4-5 years. Brigade expects to generate net cash flow of Rs ~20 bn (equal to its current market cap) from its ongoing projects over next 3-4 years. Buy rating with a target price of Rs 319.
Mahindra Lifespace Developers!
Unlike peers, it has focused on smaller projects (0.75 to 1.5 msf) with the aim to quickly monetize (timeline of ~5 years from acquisition to delivery). MLDL has dedicated management team for “Happinest” brand and ‘affordable ready’ land bank in areas like Chennai & Pune (realizations of ~Rs 4,000 to 7,000 psf). MLDL has manageable leverage (net D/E of 0.7x) and cost of debt (9.5%) with higher cash flow visibility in its residential portfolio (Rs 19 bn over next 5 years). Buy rating with a target price of Rs 436.
Hence, if you are looking for having an appetite for equities then you might want to take into consideration the above mentioned stocks!