Mumbai realty firm stocks may climb wall of worry, one valuation at a time

The stocks of Mumbai-based real estate companies have been hitting lifetime highs on expectations that launches, steady demand, and price increases in the largest real estate market in the country would boost their financials.

Macrotech Developers (Lodha) and Oberoi Realty hit their all-time highs recently, while Godrej Properties came close to its 52-week high last month before witnessing a sharp correction.

While sales figures for the largest market in the country in the July and June quarter booking numbers were lower than the growth trends in the recent past, companies are bullish about their launch pipelines in 2023-24 (FY24).

Registrations for the Mumbai market saw a drop over the year-ago quarter as well as on a sequential basis.

On a high base, registrations were down 10 per cent year-on-year (YoY) and 1 per cent compared to June.

While these numbers were down, brokerages point out that registrations in July were above the 10,000-unit mark and higher than the 12-month average of 9,814 units.

Knight Frank, a real estate consultancy, says that this is a reflection of the ongoing strength in Mumbai’s residential market and the confidence of homebuyers, even in the face of recent interest-rate hikes.

Such resilience can be attributed to factors like rising income levels and positive attitudes towards home ownership, it added.

Even as volumes for July fell, the proportion of homes worth upwards of Rs 1 crore has seen an uptick, moving to 57.5 per cent in the period January to July this year as compared to just under 48 per cent three years ago.

The trend towards higher-priced apartments should benefit Oberoi Realty the most, while overall gains for the micromarket will help other players such as Godrej Properties, Macrotech Developers, and Sunteck Realty.

Ninety to 100 per cent of the sales and operations for Oberoi Realty, Sunteck Realty, and Macrotech Developers are from the Mumbai Metropolitan Region (MMR), while Godrej Properties is more diversified, with MMR accounting for 40 per cent of its revenues.

While management commentary after the June quarter results was positive, the bookings in the quarter were underwhelming.

Oberoi Realty, for example, reported muted first-quarter (Q1) FY24 pre-sales numbers due to a lack of near-term launches.

The company’s sales in Q1 fell 46 per cent by volume to 0.15 million square feet (msf) and 37 per cent by value to Rs 476 crore.

The company, however, has planned a raft of launches in the second half (H2) of the current financial year (FY24).

It will launch projects worth ~12,000 crore in H2FY24, helping it register a growth rate of 74 per cent.

Although this is positive, the 24 per cent gain from its lows in May could cap near-term gains.

Motilal Oswal Research says that the stock trades at a 30 per cent premium to its total net asset value (NAV) and a 60 per cent premium to its residential (NAV), thereby factoring in a large portion of the company’s expected growth.

The brokerage has thus downgraded the stock to ‘neutral’. Godrej Properties too delivered a subdued pre-sales figure of Rs 2,250 crore, which was down 11 per cent over the year-ago period and 44 per cent lower than on a sequential basis.

About 80 per cent of the sales were from ongoing projects, with launches limited to three projects with a saleable area of 1.09 msf.

The booking area of 2.3 msf was down 21 per cent YoY and 57 per cent sequentially.

Even as sales in the quarter were muted, the company has reiterated its target of hitting Rs 14,000 crore of pre-sales in FY24 on the back of launches to the tune of 20 msf.

ICICI Securities believes that debt levels remain the key monitorable for the company.

While the company may continue to impress on gross sales bookings with a large launch pipeline in H2FY24, it will continue to incur land costs for ongoing and new projects.

The brokerage had downgraded its rating to ‘sell’ from ‘hold’ after the sharp rise in stock price over the past three months.

Unlike its peers, Macrotech Developers had steady June quarter bookings, up 17 per cent, even as launches remained muted.

The company has guided for a robust 20 per cent annual growth in bookings for 2022-23 (FY23) through 2025-26, led by a higher share of joint development projects and expansion into the Pune and Bengaluru markets.

While the company ended FY23 with a booking of Rs 12,060 crore, it is targeting sales of Rs 14,500 crore in FY24.

While new project additions are pegged at Rs 17,500 crore, it expects operating cash flows of Rs 6,000 crore for the financial year.

Analysts Murtuza Arsiwalla and Abhishek Khanna of Kotak Institutional Equities highlight that the company continues to execute well across parameters, with new business development providing incremental visibility, coupled with stable embedded margins.

However, the brokerage has lowered its rating on the stock from ‘buy’ to ‘add’, given the 55 per cent return in the past three months.