Investors need to be a little careful about the latest rally in real estate stocks, advance largely by the expectation that a business-friendly government will assume power.
Real estate companies such as Unitech, HDIL, DB Realty and Indiabulls Real Estate have surged 25-80% in the past three months, stimulating expectations of more to come.
But going by the BJP manifesto, urban realty players may not have much to be hopeful of. As per the manifesto, the new government will be focusing on creating 100 new cities and affordable housing, which may not bode well for the debt-trapped urban realty developers, which already have projects lined up.
A quick reality check unveils that such rallies in these stocks in the past soon ran out of steam. In the past, the BSE Realty Index gained much more than the Sensex in the rallies, only to underperform and give negative returns thereafter.
Such as, the index gained 50% between September 2012 and January 2013, but then sharply corrected by 50% over the next few months, antithetical all the gains.
Though most of the stocks lost much more than they had gained, some continued to gain after a mild correction. Here’s a quick check on realty stocks. Best of the lot: Prestige Estates, Oberoi Realty and Sobha Developers.
These companies have strong balance sheets (low debt) and cash flow visibilities, mainly from office and retail assets and residential projects that have crossed 25% of the construction stage.
The Mumbai-based Oberoi Realty gains from its strong brand in the slow city market. Even if fairly valued at current levels, these stocks are potential winners in the real estate segment over the next 2-3 years, given their strong fundamentals.
High-risk bets – Indiabulls Real Estate, DLF and Godrej Properties
Even though these companies are primarily urban developers and may not benefit from weak prices, these could be a strong deleveraging bets and could attract highest investor interest, after the elections.
High on debt, DLF and Godrej Properties are in the process of de-leveraging. In the previous six months, DLF and Godrej have reduced their debt by asset sale and rights issues, respectively. Lower interest outgo and better project mix in coming years can turn the corner of their earnings.
In case of Indiabulls Real Estate, analysts are expecting its earnings to grow by over 50% compounded annual growth rate over the next three years due to a strong project pipeline. At the same time, these stocks are more liquid and will interest institutions.
Avoid – HDIL, Unitech and DB Realty Not much has changed for these companies over the past few quarters.
But these stocks have gained the most in the recent rally. Mumbai-based HDIL and DB Realty have gained 80% and 30%, respectively, in the past two months whereas Delhi-based Unitech has jumped 30% during the same time. However, analysts are doubtful about future earnings of these companies.