Amid Indian real estate stocks underperformance, why Jefferies favours these shares

The BSE Realty index is down 12% YTD, underperforming the Nifty post the hawkish Reserve Bank of India (RBI) policy, and the subsequent higher than expected inflation data, which have led to expectations of further rate hikes, though not more than 25-50 bps, as pace of hikes has declined.

A potentially delayed pause in the rate hike cycle and risk-off sentiments, particularly for leveraged companies has led to significant property stock underperformance, said analysts at global brokerage Jefferies who find the 40% valuation contraction since late 2021 is already near past cycle levels. Valuations are now at pre-RERA reform levels; ignoring the much improved sector discipline and also the strong housing cycle, it said. 

“Developers with valuations at/below average include Lodha, GPL, PEPL and DLF. Post the larger correction seen for residential developers (Godrej Prop, Lodha) vs mixed use (DLF, Oberoi) we continue to favor the former. GPL, Lodha and PEPL already trading at 16-38% discount to their PB averages. DLF & GPL are also trading below the average long-term NAV discounts; while Oberoi valuations are above average on both PB and NAV basis. A potential topping out of rates in the next few months will be the key event,” the note stated.

The brokerage house has Buy tags on real estate stocks DLF Limited, Godrej Properties Ltd, Macrotech Developers, Prestige Estates Projects Ltd (PEPL), Sobha Ltd, Sunteck Realty whereas it has Hold rating on Oberoi Realty shares.

“On an absolute Price-to-Book comparison basis, we find the current sector valuations (2.2x) inline with the long term average and close to the pre-RERA rollout (2.0x in 1H17) levels. The RERA reforms since 2017 have triggered significant industry consolidation and ensured much improved sector discipline. Moreover, with the housing cycle still in an early period (3rd year) of typically long (6-8 year) cycles; we believe valuations may be close to bottoming,” Jefferies added.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.