DLF, Macrotech among top 3 realty stocks recommended by Edelweiss

 

• While high interest rates are a concern, Edelweiss believes realty stocks remain attractive from a medium-term perspective

While the FY18-20 period saw working capital/debt creation, realty developers' cash flow generation improved post-Covid, H1FY23 ended with strong operating cash flows across most developers except Godrej Properties (GPL) The trend continued, said brokerages and research firm Edelweiss.

“This was largely due to release of working capital (aided by faster inventory liquidation) and reduced debt. Capex expenditure on annuity projects is also coming down (except for Prestige Estates and Phoenix Mills), aiding free cash flow," the note said.

Surplus cash flow after loan repayment is currently highest in case of DLF and Sobha and both of them continue to be top stock picks of Edelweiss in the realty sector.

"While high interest rates remain a concern, it believes realty stocks are attractive from a medium-term perspective considering the increasing consolidation. Large land banks and companies with strong cash flows such as DLF (Buy), Sobha (Buy) and Macrotech Developers (Buy) may raise rates again going forward.

DLF continued to enjoy the highest operating surplus among developers in H1FY23, followed by Macrotech (Lodha). Interest cost as a part of collections for developers declined to ~7% in H1FY23 (10% in FY22). Purvankar and Lodha have higher interest outflows than their peers with relatively higher debt burden.

“Land/approval related capex collections grew marginally at ~10% (~9% in FY22) with GPL, Lodha and Kolte-Patil being the leaders; Sobha, on the other hand, had land related inflows during H1FY23. Free cash flow was highest for DLF, followed by Shobha and Sunteck; According to Edelweiss, GPL continues to be cash flow constrained, mainly because of its high land capex.

RERA-driven consolidation is providing growth opportunities for organized players, and Covid-19 has only accelerated the process. DLF and Sobha have existing land banks, and hence lower investment requirements are aiding their cash flows, the brokerage highlighted.

"GPL and BEL are using their war funds to fund development plans. Oberoi Realty (OBER) and Lodha can also potentially generate massive cash flows through inventory monetization. Overall, the loan Building seems impossible for most developers," it added.