Realty: Make room for a breather

livemint.com:

Sobha Ltd are among examples of companies that are diversifying their presence. Both the stocks saw impressive gains of over 130% each in the last year.

Having said that, the Street could now be expecting pre-sales trajectory to remain stellar amid skyrocketing valuations. Many realty stocks are trading at a 20% premium to net asset value - a scenario that was last seen in the previous upcycle, which was around 2007, said Nuvama Research report.

This has led to concerns among investors regarding valuations and future stock performance. Unlike the earlier cycle, this time there is an increased focus on cash flow generation, which is comforting.

For instance, in the previous upcycle Macrotech Developers Ltd (Lodha) witnessed a significant build-up in leverage due to high working capital requirements, but the company has significantly improved its working capital management over the past decade, according to Nuvama’s analysis. Robust cash flows have helped many companies pare debt in recent quarters, but borrowing costs remain elevated.

Going ahead, interest rate cuts by the Reserve Bank of India remain a key trigger for the sector. Lower rates bode well for the ailing and interest-rate-sensitive affordable housing segment, although a meaningful recovery could come with a lag.