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While the FY18–20 period had witnessed working capital/debt buildup, cash flows generation of realty developers improved post-covid, H1FY23 marked a continuation of this trend with operating cash flows strengthening across most developers, barring Godrej Properties (GPL), said brokerage and research firm Edelweiss. 

“This was largely due to release of working capital (aided by faster inventory liquidation) and led to debt reduction. Capex spends on annuity projects are also moderating (barring Prestige Estates and Phoenix Mills), aiding free cash flows," the note stated.

Surplus cash flow after debt repayment is currently the highest in case of DLF and Sobha and these two remain Edelweiss' top stock picks in the realty space.

“While higher interest rates are a worry, it believes realty stocks are attractive from a medium-term perspective, considering rising consolidation. Companies with sizeable land banks and robust cash flows such as DLF (BUY), Sobha (BUY) and Macrotech Developers (BUY) may re-rate going ahead," it added.

DLF continued to enjoy the highest operating surplus among developers in H1FY23 followed by Macrotech (Lodha). Interest cost as a share of collections for the developers declined to ~7% in H1FY23 (10% in FY22). Puravankara and Lodha with a relatively high debt burden have high interest outflows compared with their peers. 

“Land/approvals-related capex increased marginally to ~10% of collections (~9% in FY22) with GPL, Lodha and Kolte-Patil being the leaders here; Sobha on the other hand had land-related inflows during H1FY23. Free cash flow was the highest for DLF, followed by Sobha and Sunteck; GPL continued to have a cash flow deficit, largely due to its greater land capex," as per Edelweiss.

RERA-driven consolidation is throwing up growth opportunities for organised players, and covid-19 has only accelerated the process. DLF and Sobha have existing land banks, and hence lower investment requirements are aiding their cash flows, the brokerage highlighted. 

"GPL and BEL are using their war chest to fund growth plans. Oberoi Realty (OBER) and Lodha can also potentially generate sizeable cash flows through inventory monetisation. All in all, debt build-up seems unlikely for most developers," it added.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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