Citi raises targets for DLF, Sobha, other realty stocks; flags expensive valuations

Over the past year, the Nifty Realty index has soared 93 percent, compared to a 27 percent rise in the Nifty index.

The rally in real estate stocks has not lost steam this year with the Nifty Realty index surging 32 percent year-to-date (YTD), significantly outperforming the Nifty's 14 percent gain over the same period. This rally is driven by robust demand, strong bookings, and new project launches.

According to a recent report by Motilal Oswal, real estate companies have a project pipeline that supports their ambitious growth targets of 20-30 percent for FY25, despite already being on a high base.

Realty firms have expressed confidence in sustaining demand over the next few years, with timely launches remaining a top priority due to the low inventory levels among developers.

As a result of these positive trends, international brokerage Citi has increased the target prices for several real estate stocks, including DLF, Prestige Estates, Phoenix Mills, Oberoi Realty, and Sobha. But it cautioned on expensive valuations.

Over the past year, the Nifty Realty index has soared 93 percent, compared to a 27 percent rise in the Nifty index. This sharp increase has raised valuation concerns, with analysts suggesting that many real estate stocks might be overvalued, despite their positive outlook and earnings growth potential.

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DLF

In the quarter ended June 2024, DLF reported a more than three-fold jump in pre-sales as it clocked bookings of Rs 6,400 crore, largely driven by the successful launch of the second phase of Privana West, Gurugram. The company continues to sustain momentum at its ultra-luxury project, The Camellias, in DLF 5, with bookings of Rs 250 crore.

DLF is targeting to launch Rs 42,000 crore worth of projects in FY25 across all segments. Citi has raised the target price for DLF from Rs 702 to Rs 790. The increase in target price is attributed to the healthy demand environment and strong cash flows. However, the brokerage retained its "Sell" rating on the realtor due to expensive valuations.

Sobha

Sobha posted bookings of Rs 1,900 crore in Q1FY25, driven by the launch of its premium project, Sobha Aranya, in Gurugram. The company is on track to launch Rs 8,000 crore worth of inventory and achieve bookings of Rs 3,500 crore in FY25.

While Citi raised its target price for Sobha from Rs 1,479 to Rs 1,600 due to recent positive operational trends, it maintained a "Sell" rating, believing that current valuations leave little room for any execution misses.

Phoenix Mills

Phoenix Mills posted a revenue of Rs 900 crore in Q1FY25, and a net profit of Rs 240 crore, with a margin of around 26 percent. The consumption in mature malls was hit by the elections, infrastructure development in the vicinity, and harsh summer. However, the management is not seeing any structural reason for the slowdown and is undertaking various asset upgradation initiatives, which are expected to enhance the experience and attract footfalls.

Citi has maintained its "Buy" rating on Phoenix Mills and increased the target price from Rs 3,885 to Rs 4,040. The brokerage has also raised its FY25/26 earnings estimates by 2-4 percent as the brokerage stated that Phoenix Mills remains well-leveraged to consumption growth in its key malls and continues to execute effectively on its pipeline of new malls across India.

Oberoi Realty

Oberoi Realty’s pre-sales more than doubled YoY to Rs 1,070 crore in Q1FY25, driven by strong bookings at the ‘360-West’, Worli project, which contributed Rs 480 crore to pre-sales across bookings of six units. The company is witnessing strong leasing traction across all three office assets, and they can be fully leased out by the end of FY25, it said.

Citi has retained a "Neutral" rating on Oberoi Realty, increasing the target price from Rs 1,649 to Rs 1,840 earlier. The revision reflects recent operational trends and the addition of Commerz III to the NAV. However, the brokerage notes that valuations are expensive, and a consistent pickup in pre-sales velocity is needed.

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Prestige Estates

Prestige Estates Projects reported bookings of Rs 3,000 crore in Q1FY25, down 23 percent YoY on account of muted launches and lower inventory. The company had a very minimal inventory to sell as the new launches were hit by regulatory delays. However, management notes that demand continues to remain strong, and the company has enough pipeline to capitalize on it.

Prestige Estates is confident of meeting the 20-25 percent growth guidance in bookings and can even exceed it if launches occur on time. Citi remains bullish and reiterated its "Buy" rating on the stock, raising the target price from Rs 1,841 to Rs 2,020 noting that the company continues to scale up effectively which should help sustain its valuations.

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