Improving core market, consolidation and REIT listing to fuel gains for DLF

The company has plans to launch multiple projects over the next few years

For the second day in a row, the BSE Realty index was the highest sectoral gainer registering a cumulative uptick of about six per cent. Gains for the index today were led by Phoenix Mills and Oberoi Realty, which were up 11 per cent and five per cent respectively. The gains for the realty sector has been on the back of improving trend of residential sales, lower inventory, improving balance sheets and market share gains from the unorganised segment. 

DLF, the largest listed realty player too has seen smart gains moving up seven per cent in two trading sessions and 21 per cent over the last month. The company has outperformed its peer index, the BSE Realty which has generated returns of 18 per cent. DLF recently announced that it had sold about 90 independent floors in Gurugram fetching it over Rs 200 crore and is looking at more such sales in its core markets. 

After a strong September quarter performance and improving sales data, most brokerages upgraded the stock and believe that DLF is among the better placed realty bets going ahead. Morgan Stanley in a recent report highlighted that the company’s home market of Gurugram could be on the mend after a gap of six years. They add that there has been a sharp decline in inventory of unsold projects under construction and is one of the lowest among Indian metro areas. 

The investment argument for the real estate major are plans to launch projects of 35-40 million square feet over the next few years with revenue potential of Rs 36,000 crore to Rs 40,000 crore. An improving market, better affordability and consolidation is expected to help the company double is quarterly pre-sales/bookings to Rs 1,000 crore in FY22, according to the brokerage. The company had posted better than expected bookings and collections in the September quarter while the annuity office portfolio also saw 98 per cent collection. 

In addition to the development portfolio, what could act as another trigger for the rental assets are plans to list its real estate investment trust over the next 12-18 months. Analysts also believe that valuations are inexpensive and are at a 45 per cent discount to net asset value.  Morgan Stanley has a target of of Rs 264 which offers an upside of 32 per cent from the current levels.

Among other realty players, Godrej Properties is expected to be a major beneficiary of the ongoing consolidation. Its strong brand, financial strength and execution capabilities are expected to help it double its pre-sales/bookings over the next four years from its current levels of 1-2.5 million square feet in key micro markets. 

Brokerages are also positive on Phoenix Mills which announced the signing of a non-binding term sheet with GIC to sell a 26 per cent stake for an enterprise value of Rs 5,600-Rs 5,700 crore. Analysts at IIFL say while tenant renegotiations and pick up in consumption could help earnings return to normalcy in FY22, the GIC deal offers comfort on valuations.