The May 2022 edition of Motilal Oswald Financial Services Limited’s (MOFSL) India valuation manual ‘Bulls & Bears’ emphasises that the worry of inflation is exaggerated and that the real estate market will continue to develop.

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According to the survey, construction expenses have increased by 10% to 15% in most Indian real estate enterprises. Even if the cost is between 25% and 40% of the sales price. The overall impact on margins is now limited to 3 percent to 4%. And real estate companies have been able to easily push a price raise of 5% to 8% on a portfolio level.

Pre-sales are strong.

Since the start of Covid-19, affordability, increased demand for home ownership. And sector consolidation have opened the way for the Indian real estate sector to see robust pre-sales momentum once more. According to the guide, the Indian real estate industry is projected to witness solid demand in the foreseeable future. With the largest ever launch in the pipeline by most Indian real estate companies.

Inventory overhang is being reduced.

Despite the fact that housing demand has remained stable since 2013-14. Inventory levels have witnessed a major correction, owing to a steady drop in new launches. According to MOFSL, unsold inventory has decreased to 4, 37, 000 units from a high of 7, 70, 000 units in CY13, with the overhang presently at 23 months.

Interest rate hikes have an impact.

According to the MOFSL research, while the impact of an interest rate hike is project to be minor despite a recent boost of a similar magnitude. It could have a detrimental impact if rates approach 8%. In such circumstance, most developers will face a borrowing cost of 10% or more, which will affect their return profiles.

The value of the real estate industry

In FY21/FY22, the top 12 listed businesses saw a 43 percent/45 percent YoY increase in bookings, according to the research. This should have ideally resulted in further stock re-rating. But mounting cost pressures, combined with recent interest rate hikes, have created expectations of margin erosion and a slowdown in demand. As a result, numerous stocks have now entered the value zone following the recent decline.

On a one-year forward basis, the sector’s valuation has corrected to below its long-term average P/E of 23.2x, and is now trading at 21.2x.

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