JM Financial bullish on Indian real estate, picks 3 stocks to buy including DLF #IndiaFinance

India’s real estate sector has reached unprecedented heights in FY24, shattering records and redefining industry standards. A remarkable surge in residential property demand across key cities has sparked a launch spree among developers, leading to a drastic depletion of inventory levels. Defying expectations, the demand juggernaut has continued unabated, with luxury projects selling out within days of pre-launch.

This phenomenal success has triggered a bull run in real estate stocks, which is expected to sustain, according to JM Financial projections. The brokerage firm predicts a seamless continuation of FY24’s stellar performance into FY25.

It said FY24 marked a historic high for residential real estate absorption, with pan-India sales surpassing a staggering 1 billion square feet. Since FY21, the top 7 markets have consistently seen pre-sales outpace new launches, resulting in a drastic reduction in inventory levels to just 11 months.

Godrej Properties, Prestige, Signature Global, and Brigade emerged as top performers among listed players, posting remarkable growth in FY24. The industry’s unsold inventory has hit multi-year lows, and new launches continue to attract strong demand.

Looking ahead, the brokerage predicts a continuation of this momentum in FY25E, with an anticipated 18% market growth driven by 12% volume expansion and 6% price appreciation. Supply is expected to increase moderately, aligning with annual absorption rates.

Furthermore, with substantial cash flow growth on the horizon, developers are likely to prioritize business development over debt reduction, setting the stage for sustained growth.

The brokerage favors developers with a proven track record of timely project launches and strategic business development. Against this backdrop, it has initiated coverage on five real estate companies, including DLF, Macrotech Developers, Keystone Realtors, Oberoi Realty, and Sobha.

The brokerage has assigned a ‘buy’ rating to DLF, Macrotech Developers, and Keystone Realtors. It has set a target price of ₹1,000 for DLF, indicating a 20% upside, ₹1,480 for Macrotech Developers, suggesting a 16% upside, and ₹895 for Keystone Realtors, signaling an upside potential of 16.5%.

Meanwhile, Oberoi Realty and Sobha have been assigned a ‘hold’ rating, with target prices of ₹1,820 and ₹1,755, respectively.

Diversification out of core markets is the key to sustained growth

The brokerage noted that real estate companies are expanding into new micro-markets to reduce their reliance on core regions and capitalize on growth opportunities. It mentioned some notable moves, including the likes of DLF expanding beyond Gurgaon into Mumbai, Prestige Estates entering Mumbai & Hyderabad, Brigade expanding its presence in Chennai and Hyderabad, and Oberoi Realty exploring Delhi-NCR.

The brokerage also highlighted that Tier 1 listed developers are gaining market share by focusing on branded and high-end products, which are increasingly preferred by consumers. Improved cash flows over the last three years have allowed these developers to reduce leverage, enabling higher spending on business development and outright land purchases.

Two major themes: consolidation and premiumisation

According to JM Financial, the top 10 listed developers have made significant inroads into the market, steadily chipping away at the informal segment’s share. Citing data from Propequity, the brokerage notes that these Tier 1 developers have collectively gained around 8 percentage points in market share since CY19, a clear indication of their growing dominance in the industry.

The demand for luxury properties in Tier I cities has surged since FY22, driven by a post-Covid preference for spacious, well-equipped residences that cater to remote work and enhanced security needs.

Rapid sales of high-quality launches have created a shortage of such inventory, pushing prices higher. Developers are also launching new phases of existing projects at increased price levels.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.