As real estate sector sees supply-demand hiccups; three stocks to buy with as much as 24% upside 

By: |
June 25, 2020 4:33 PM

With Rs 6.70 lakh crore worth inventory standing unsold in just 7 cities across the country, it is fair to say that the real estate sector has been at the receiving end of demand and supply shock.

As things get back on track Oberoi Realty will see residential sales jump helping the company generate cash.

With Rs 6.70 lakh crore worth inventory standing unsold in just 7 cities across the country, it is fair to say that the real estate sector has been at the receiving end of demand and supply shock. The sector has seen massive changes in the last few years, be it demonetization, homebuyers’ dented confidence, and now the coronavirus pandemic. However, brokerage and research firm JM Financial, while initiating its coverage of the real estate sector has listed three stocks that might fare well for investors. JM Financial in a recent report said that the real estate sector will witness consolidation with listed developers gaining market share and some amount of pricing power.

Sobha Ltd | Target price: Rs 270 (BUY)
Upside: 24%

Share price of Sobha Ltd is down 60% in the last one year and has only managed to gain 3% in the last three months. However, JM Financial said things might improve for the company in the post coronavirus world. “We expect growth recovery on a pipeline of launches which is expected to earn Rs 7,474 crore of net cash flow leading to moderation in debt and higher sales volume,” it said. These factors make Sobha Ltd an attractive bet for investors. The debt that Sobha Ltd is sitting on expected to be the peak. Monetisation of existing land banks by new project launches can act as a major trigger for the stock price. However, major concerns remain around slower than expected pickup in residential sales and any adverse news on the promoter stake sale. The brokerage values Sobha Ltd at 1.0x March 2022 NAV. 

Oberoi Realty | Target price: Rs 435 (BUY)

Upside: 20%

This premium developed is expected to attract Rs 1000 crore in inflows once it completes the construction of its large diversified annuity portfolio. This annuity portfolio consists of hotels (Ritz Carlton, Worli, and another small hotel in Worli), offices (Goregaon and Worli), and malls (Worli and Borivali). JM Financial thinks this could help Oberoi Realty generate cash in just 4-5 years. As things get back on track Oberoi Realty might see residential sales jump helping the company generate cash. “We consider 9% exit cap rate across all offices and retail leasing assets to arrive at our terminal value. We value Oberoi Realty at 1.0x March 2022 NAV,” the brokerage said. 

Prestige Estates Projects | Target price: Rs 240 (BUY)

Upside: 15%

With a large diversified portfolio that ranges from residential projects to commercial and retail ones, Prestige Estates is expected to perform as demand and supply equilibrium comes back to normal. JM Financial said that Prestige Estates has brought down ongoing projects in the residential segment to 26.82msf as of 3QFY20 from 55.61msf in1QFY17 through aggressive delivery. “Going forward, the embedded trigger is the monetisation of the annuity assets through a combination of stake sale or a REIT listing,” the brokerage said. Key risk aligned with the stock may stem from its inability to monetise assets and a slowdown in the commercial real estate market. 

(The stock recommendations are from the abovementioned brokerage frim. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)

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