Markets
Resilient realty stocks: Green clouds and signs of opportunity
Summary
- The Nifty Realty index has shown remarkable resilience and growth post-pandemic. Despite a dip following the recent Budget, real estate stocks are still a hot topic. The first edition of Profit Pulse, a new Mint column, dives deep into the performance metrics and potential of real estate stocks.
As the new futures and options series commences with a bullish tone, real estate stocks continue to draw interest. This indicates that the removal of the indexation benefit (a tax adjustment to account for inflation) on long term capital gains in the budget may have been only a minor concern for real estate investors.
The Nifty Realty index has been on an impressive upward trajectory since its pandemic low of March 2020, growing by nearly nine times since. In 2021, it surged 54%, before shedding 11% the following year. It then retested the breakout levels of 2021 and regained its bullish momentum in 2023 with a stellar 81% increase. In the first seven months of this year, the bullish momentum continued with a 40% surge.
Sure, following the Union budget for 2024-25 announced last month, the Nifty Realty index has declined by 7-8% as investor sentiment shifted to defensive sectors such as consumer goods, pharmaceuticals, and healthcare. So will the bullishness in the real estate sector now wane?
Real estate sales are heavily influenced by per capita income and cultural shifts. Over the years, Indian preferences have evolved from affordable housing to premium or semi-premium housing in metro, tier 1, and tier 2 cities. This is reflected in the performance of real estate stocks, especially post the pandemic.
Before analysing individual stock performance, let us analyse the Nifty Realty index.
Nifty Realty weekly chart
The index has been consolidating within a rectangular pattern or horizontal channel for over a decade. The first significant breakout occurred in July 2021 at 375 points, leading to a 3x rally over three years. The momentum intensified with a second breakout at 560 points in October 2023, doubling the index’s value in just 10 months.
D-Smart Line is a proprietary indicator that considers two lines: the Running Line (RL), which is also a fast line considering the recent momentum, and the Walking Line (WL), a slow line considered from a medium perspective.
Clouds denote the difference between the RL and WL. When the RL is above the WL, the trend is bullish, denoted by green clouds on the chart. The red clouds denote a bearish tone, with the RL below the WL.
When the index retraces its way to the green cloud, it signals an opportunity for investors.
Performance of Nifty Realty index constituents
Let us analyse the performance of leading real estate companies.
This chart clearly shows that, in general, real estate stocks have performed strongly across time frames, especially in the post-pandemic period.
Commercial and premium housing real estate stocks Prestige Estates Projects Ltd, Brigade Enterprises Ltd, and Phoenix Mills Ltd have performed exceptionally well, even through the pandemic.
Will real estate stocks still outperform as the broader market continues to rise?
To answer this, let us analyse the Nifty Realty/Nifty 500 ratio chart. Given that most constituents of the Nifty Realty index are mid-cap and small-cap stocks, the Nifty 500 is an appropriate benchmark.
Nifty Realty/Nifty 500 ratio chart, monthly
The monthly ratio chart shows breakouts similar to those of the Nifty Realty index. Based on historical patterns, a decade-range breakout typically signals a multi-year rally with a multiplier effect. A retest of this breakout presents a potential opportunity to accumulate stocks.
The Average Directional Index (ADX), which identifies trends, continues to indicate a bullish scenario, suggesting that the Nifty Realty index will likely outperform broader market indices.
Which stocks will outperform the Nifty Realty index?
Using the Multi-Denominator Matrix scanner—which compares each constituent of the Nifty Realty index against both the Nifty 500 and the Nifty Realty index using a 1% and 3% point-and-figure charting method on the weekly chart—we can identify potential outperformed.
The 1% will highlight the medium-term trend, while the 3% will be helpful for long-term investors.
The table generated from this analysis highlights stocks with scores ranging from +10 to -8 based on their performance (data as of the end of trade on 2 August 2024). The higher the number, the better the chance the stock will perform well.
If we base it purely on this, then Godrej Properties Ltd, Suntec Realty Ltd, Brigade, Phoenix, and Prestige lead the table. Conversely, DLF Ltd, Mahindra Lifespace Developers Ltd, and Lodha (Macrotech Developers Ltd) are found wanting.
Having said that, it is important to closely monitor these top-performing realty stocks as the bullish trend continues, and review the Multi-Denominator Matrix on a monthly basis. Any change could warrant a change in view both on the sector and the stocks.
Note: The purpose of this article is only to share interesting charts and data points. It is not a recommendation. If you wish to consider an investment, you are strongly advised to consult your adviser. This article is strictly for educative purposes only.
Brijesh Bhatia has over 18 years of experience in India’s financial markets as a trader and technical analyst. He has worked with the likes of UTI, Asit C. Mehta, and Edelweiss Securities. Presently, he is an analyst at Definedge.
Disclosure: The writer or his dependents may or may not hold the real estate stocks mentioned in this article.
