Healthy demand is leading to improving profitability for realty developers as approx 35% cash operating surplus during 9mFY23 compared with 31% during FY22, as per brokerage and research firm Edelweiss.
“With improving cash flows (cash flow generation improving), realty developers have brought down debt levels, enabling them to save on interest costs (which were 7.5% of collections on an average during 9mFY23 compared with 10% during FY22) despite rising interest rates,” the note stated.
They have also stepped up capex on business development (19% of the collections during 9mFY23 compared with 12% during FY22) and free cash flow generation is the highest in DLF’s case (both in Q3 FY23 as well as in 9mFY23); it remains its top stock pick in the realty space, Edelweiss said.
While higher interest rates are a worry, the brokerage house believes realty stocks are attractive from a medium-term perspective, considering rising consolidation.
“Companies with sizeable land banks and robust cash flows such as DLF (BUY) and Macrotech Developers (BUY) may re-rate going ahead. DLF continued to enjoy the highest operating surplus among realty developers during 9mFY23 followed by Macrotech (Lodha). On an average, developers spent ~7.5% of their collections on interest payments during 9mFY23 (10% during FY22); Puravankara, Shriram Properties (SPL) and Lodha with a relatively high debt burden had larger interest outflows compared with their peers,” the note said.
“Developers have also stepped up land related capex with Godrej Properties (GPL) continuing to be a leader in this field (approx 49% of collections for GPL in 9mFY23); Sobha on the other hand had land-related inflows during this period. Free cash flow generation was the highest for DLF, followed by Lodha; GPL continued to have the largest cash flow deficit, largely due to its greater land capex,” the brokerage added.