Realty Stocks On The Rise - Should You Buy Realty Stocks?

In the past few trading sessions, a good amount of up-move has been seen in realty counters Oberoi Realty, Indiabulls Real Estate and HDIL. All the three are major players in the Mumbai real estate market. In one of our recent updates on Mumbai realty, we had stated that the realty market in the city is battling various issues like slower sales growth, rising unaffordability and stagnation in price rise. In fact, these problems still persist for realty players not only in Mumbai but also in other leading cities. If that is the case, what is the force driving the stocks on the bourses?

Well, these are certain micro factors rather than macro ones. Oberoi Realty is the only player in the realty sector that has no debt on its balance sheet. Currently, the company is facing issues with the approval cycle. However, given the huge land bank it has in Mumbai, we feel they would be the biggest beneficiaries once the approval cycle starts for them. Its strong financial performance in the September 2013 quarter is also another reason why the stock is on an up-move.

As for HDIL and Indiabulls Real Estate, along with some speculative interest, respite on the debt front has helped these counters move northwards. However, both the companies are still reeling under debt pressure. Thus, we advise our readers to stay away from the both these counters.

As regards the sector overall, we are of the opinion that the recovery cycle is still a while away. The country is witnessing issues more to do with macroeconomic factors – higher property prices, housing interest rates and inflation coupled with lower gross domestic product (GDP) income growth and savings rates. These have all lead to lower purchasing power for the consumer, which according to our research, has continued for the month of October and November too. Some of the other reports also suggested that the festive season has not brought much cheer. Where the projects have seen some discounts, there has been some marginal offtake, though that has not been able to move the needle.

Hence, given the balance sheets that the companies have, they need to do a lot more asset churn, and the cash conversion cycle has to improve. Only then can we see the return on equity improving. Unless and until the real estate players reduce prices and generate good cash flows by liquidating excess inventory, their problems are here to stay.