Indian realty stocks continued their bullish trend, outperforming the benchmark stock indices Nifty and Sensex by huge margins, backed by pent-up demand and limited supply following Covid-related restrictions.
While the benchmark Nifty 50 has risen by 7.6% on a year-to-date basis, the real estate gauge of the exchange has surged nearly 45% during this period, preceded by a nearly 75% rally in the index last year. Sobha Ltd. led this year's rally, rising over 120%, followed by Prestige Estates Projects Ltd. and Brigade Enterprises Ltd.
Despite this, the sector is relatively undervalued, according to experts, and has the potential to see a further rise on the back of the government's continued focus on infrastructure.
Real estate can't be valued based on price-to-earnings ratio and should be looked at based on inventory levels and potential bookings over the next few years, according to Samit Vartak, founding partner and chief investment officer at SageOne Investment Managers.
"If you use that metric, most of the real estate players, the kind of bookings they have done in the last two years and the potential in the next four to five years, their current market is equal to the Ebitda they will make over the next five to seven years," Vartak told NDTV Profit in an interview.
The realty index saw a turn around in 2023 and 2024, driven by pent-up demand and limited supply due to Covid-related execution delays, which pushed prices up, according to Sunil Damania, chief investment officer at MojoPMS.
Typically, rising interest rates would dampen price increases, but this period defied that trend, Damania said, adding that as long as the market maintains a risk-on strategy, the realty index should perform well. "Yet, if market sentiment shifts to caution, the sector may underperform."
The stocks could also see further momentum going forward, given the strong demand outlook, brokerages said. The industry's existing inventory is at a multi-year low, and new launches are continuing to garner strong demand, Kotak Securities said in a June 13 note. "We expect the sales momentum to continue unabated in fiscal 2025," it said.
It also pointed out that the valuations for most residential real estate stocks stand at the higher end of their past trading range, reflecting the strong underlying business performance and changing investor interest.
Given the sector's strong performance over the last 18 months, much of the positive outlook is already factored in, making the risk-reward balance less favourable, Damania said.
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