Jefferies Expects Housing Upcycle To Last 5-7 Years; Lists Top 7 Stock Picks
Indian housing sector is emerging from an eight-year downturn and 2020 was the bottom, according to Jefferies. The upcycle, it said, is now expected to go on for the next five to seven years.
“Housing affordability is at the best in the last 20 years and huge pent-up demand exists. The missing link was buyer sentiment which has now turned. Unsold inventory is already trending down and should drive a positive price impact, required for sustained positive sentiments,” a team of analysts led by Mahesh Nandurkar said in a note.
Buying homes, according to joint survey by the Confederation of Indian Industry and property consultants Anarock, has gained precedence over renting and bigger-sized houses are seeing increased demand. With deals and discounts being offered by developers and lower home rates, 62% out of the 39,000 survey respondents intended to buy homes immediately. Stamp duty cuts in Maharashtra and reduced circle rates across categories in Delhi, too, aided the sector, prompting real estate stocks to outperform the benchmark indices over the last six months.
“Primary property sales have grown only at about 2% CAGR since 2008 and as such, we see significant pent-up demand which can drive the cycle higher for multiple years,” Jefferies said.
Unsold inventory peaked out over 2015-17 and is already down 22% since then.Jefferies Note
The firm expects unsold inventory to correct by another 8% by December 2021, bringing in a healthy price momentum.
Besides, the research firm expects housing revival to drive India’s GDP growth higher by about 1 percentage point and create an additional 2.5 million jobs per annum incrementally over the next five years. “Housing as a percentage of GDP is estimated at 5% currently and should hit 9-10% at the peak. The sector is labour intensive with 25-30 million labour employed and has deep connections with building materials, home improvement and several other industries,” the note said. “A housing cycle turnaround could thus kickstart India’s long stagnant capex cycle as several industries co-invest around the theme and real estate development dovetails into many infrastructure projects.”
That prompted the research firm to list its top picks in the sector. Godrej Properties Ltd., Sobha Ltd., HDFC Ltd., Kajaria Ceramics Ltd., ACC Ltd., Larsen & Toubro Ltd., and Supreme Industries Ltd., it said, are expected to deliver 50-80% returns over the next three years.
Here’s a look at Jefferies’ top picks in the housing sector and its rationale...
Price Target: Rs 1,757 apiece
Potential upside: 17%
Only one with truly pan-India, mid-income focussed model.
Will see dual benefit of rising market share and expanding market.
Build in 81% sales growth over FY21-23 with volume sales rising 45%.
Premium launches in Mumbai, Delhi should help blended realisations move higher.
Positive cashflows, profitability should improve as projects mature.
Sees 35% sales CAGR over FY21-23.
Stock can reach Rs 2,671 in three years, a potential upside of 78% from current levels.
Segment: Housing Finance
Three-Year Price Target: Rs 4,600
Three-Year Upside Potential: 64%
Affordability, negative real interest rates and low mortgage penetration should lift mortgage credit demand growth to 14% CAGR over the next three years.
Strength of mortgage demand can be stronger in India given low penetration levels.
Banks and housing finance companies with access to cheap funding should gain share from smaller peers and grow at a faster pace.
HDFC to be key beneficiary of a pick up in housing demand.
Segment: Cement Utilisation
Three-Year Price Target: Rs 3,125
Three-Year Potential Upside: 72%
Cost savings should bridge cap with peers.
New capacity also improves medium-term volume growth outlook.
Expects Ebitda CAGR of 7% — much higher than peers.
Change in dividend distribution taxes in FY21 budget should encourage higher payout.
Expects multiples to rerate as margin gap with peers contracts.
Segment: Engineering & Construction
Price Target: Rs 1,745
Three-Year Price Target: Rs 2,553
Three-year Upside Potential: 65%
Execution pick-up to drive engineering & construction’s return on capital employed recovery.
Peak of non-core investments behind; focus back to core.
Strategic five-year plan update in May-June 2021 should be watched out for.
Core E&C business should continue to rerate in the next 12-36 months.
Segment: Building Materials (Pipes)
Price Target: Rs 2,360
Three-Year Price Target: Rs 3,310
Three-Year Potential Upside: 73%
Sales, profit after tax can see 12% and 20% CAGR, respectively, over FY20-24.
Sturdy balance sheet acts as a strong moat amid tough times, exhibiting nil leverage.
Value-added mix, new launches, cost control and high operating leverage key positives.
Segment: Building Materials (Ceramics)
Three-Year Price Target: Rs 1,440
Three-Year Potential Upside: 46%
Demand revival in housing, new product launches and market share gains to aid 11% CAGR revenue growth over FY20-25E.
Expects operating margin expansion of 420 basis points over FY20-23E on optimising product mix, operating leverage and effective cost control.
Sees 20% profit CAGR led by revenue growth and robust margin expansion.
Three-Year Price Target: Rs 893
Three-Year Potential Upside: 100%
Bengaluru, mid-income segment helped build a growing core business.
Cycle pick-up can drive non-Bengaluru, premium sales higher.
Higher gearing can decline as cashflows pick-up, contracting revives.
Successful scale-up, balance sheet management can drive rerating.
If it manages to scale-up along with the cycle in a disciplined manner, the stock can stay strong and provide nearly 100% returns over next three years.