Top 5 realty stocks under 100 to add to your watchlist

The biggest drag on real estate players is high debt and with interest rates moving up, investors need to be wary of realty companies with the tendency to pile up debt and dines with poor cash flows.
The biggest drag on real estate players is high debt and with interest rates moving up, investors need to be wary of realty companies with the tendency to pile up debt and dines with poor cash flows.

Summary

  • Economic indicators are in realty sector’s favour while one of government’s prime focus is to make housing more affordable and available for everyone

In recent years, there’s been a lot of volatility in the real estate sector, owing to the demand and supply changes.

A changing world order has questioned the value of traditional safe haven assets.

On bad months, demand for commercial real estate buildings such as office towers in big cities has been rapidly declining as work from home trends turn into the market standard.

Meanwhile, the pandemic has also led to a paradigm shift in home buyers' attitudes and reinstated the importance of owning homes. The demand for residential properties has increased, and the unsold inventory has decreased drastically.

Nevertheless, for decades, investors have stored their value in real property during times of uncertainty.

You may have heard people talk about real estate as a good investment for hedging inflation because, as a tangible asset, it has intrinsic value.

Beyond this, real estate has necessary value as housing isn’t a luxury or bonus, it’s a basic human need.

Overall, it seems housing will never become an expenditure that an individual will willingly cut.

As things are now, economic indicators are in favour and one of government’s prime focus is to make housing more affordable and available for everyone.

This could mark the beginning of another cycle for the real estate sector.

In this article, we'll take a look at the top realty stocks below 100 that still have enough headroom to grow.

While we know the top realty players like Godrej, Oberoi among others, it makes sense to also keep a watch on the small players in this space.

#1 NBCC (India)

First on the list we have NBCC (India).

The company is a government of India Navratna Enterprise under the Ministry of Housing and Urban Affairs. It operates in three major segments - project management consultancy, engineering procurement & construction, and real estate.

NBCC currently trades at 68 with a marketcap of 122 billion (bn).

In 2023 so far, shares of the company are up over 65%.

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The sentiment around the stock of NBCC is so strong that despite the government announcing ban on most construction activities in Delhi-NCR region, shares continued their momentum.

The recent rally is a result of NBCC India getting a slew of orders in the past one month. In September 2023, the company bagged a work order worth 1.5 bn from the Khadi & Village Industries Commission.

In the same month, it had signed a quadripartite MoU for monetization of the non-core assets of RINL at Vishakhapatnam.

And before that, NBCC secured a 1.8 bn-order from SAIL, for consultancy & project management services for its upcoming infrastructural-related projects of Bokaro Steel plant.

The biggest of all orders was of course the 20-bn order from the Kerala State Housing Board for the development of 17.9 acres of land parcel at Kochi's Marine Drive.

Till June 2023, it already had an order book of 450 bn and the recent orders just continue to provide more and more revenue and profit visibility.

Despite being in the highly working capital-intensive construction space, the working capital cycle of the company is moderate.

NBCC transfer most of the risks with respect to execution, cost pass-through, etc. to sub-contractors through back-to-back arrangements and bank guarantees. This also leads to sizeable liquid surplus, generating sizeable non-operating cash flow.

The policy of executing projects against customer advances, which is also followed for real estate and redevelopment projects, keeps liquidity comfortable.

The company has no debt and does not have any plans to contract debt in the near term.

Now that ball’s in NBCC’s court and it has to maintain healthy execution of high-margin redevelopment projects and also look at cost absorption measures for maintaining strong liquidity.

#2 Sanmit Infra

Second on the list we have Sanmit Infra.

The company is engaged in the business of bio-medicals, infra & real estate development, and distribution of petroleum in India.

It mainly takes on projects in Mumbai and other cities in Maharashtra. The group has constructed residential & commercial complexes in the western suburbs at Bandra West and Khar Linking Road area in Mumbai.

The company has several upcoming developments in Mahim, Karjat, and Navi Mumbai areas.

Sanmit Infra currently trades at 71 with a marketcap of 11.3 bn.

In 2023 so far, shares of the company are down 9%.

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As part of its expansion strategy, the company forayed into the Bitumen division last year. It started supplying Bitumen in drum packaging.

It intends to initiate bulk storage facilities for direct Bitumen imports from Gulf countries.

Going forward, the company is looking to diversify sales in the biomedical waste disinfection system and planning to initiate an eco-friendly, less wood, or green cremation system (GMS) as a pilot project for various crematoriums in India.

As of March 2023, the company has minimal debt on its book and has a debt to equity of 0.3x.

Sanmit Infra’s financial performance has improved in the past two years and the company is now banking on new areas to deliver profit growth in the next 2-3 years.

Last year, the company had split its shares from a face value of 10 to a face value of 1.

#3 PVP Ventures

Third on the list is PVP Ventures, primarily engaged in the business of developing urban infrastructure.

It owns a large parcel of land in south India, Chennai. The company received good response when it launched the first few projects in the area and now, it looks like PVP is set to become one of the largest realty players in South India.

The company has 6 subsidiaries and 5 step down subsidiaries.

PVP Ventures currently trades at 15 with a marketcap of 3.8 bn.

In 2023 so far, shares of the company are up 47%.

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In June this year, the company was in the news for acquisition of a healthcare company. While there are no developments around this, PVP Ventures focuses on acquisitions and financing that comes out of special situations.

Coming to its financial performance, the company did stage a turnaround in FY23 by reporting a profit of over 2 bn after a slew of losses in preceding years.

It also reduced debt to 1.2 bn from 3.7 bn and brought down its debt-to-equity ratio to 0.8x.

PVP Ventures recently completed a sale of its subsidiaries which could add to its cash-flow requirement.

While FY23 performance was no doubt noteworthy, it has started FY24 on a weak note by posting a minimal loss in the first quarter.

Keep a watch on the company’s quarterly earnings and debt levels for the next couple of quarters.

#4 Supreme Holdings & Hospitality

Fourth on the list we have Supreme Holdings & Hospitality.

The company is engaged in the construction and development of residential and commercial real estate projects.

Belmac is a reputed developer under the umbrella of Supreme Holdings and Hospitality. The group is currently working on two mega townships in Pune and Panvel.

Supreme Holdings currently trades at 73 with a marketcap of 2.6 bn.

In 2023 so far, shares of the company have been beaten down heavily, down 37%.

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The primary reason behind this decline could be the company’s director getting involved in selling one flat to multiple buyers in its residential project Belmac residences.

The other reason is the company making a long delay in project completions.

Apart from that, the company was also in news for getting involved in a case related to forgery and cheating Indian Overseas Bank (IOB).

Going by the latest management commentary, the company is optimistic for the next couple of quarters and is nearing some project deliveries.

As far as financials go, the company has posted strong growth in the past two years while also reporting double digit ROE and ROCE in FY22 and FY23.

The company has also reduced debt over the years and is almost debt free as of September 2023.

Indian real estate stocks are currently on an uptrend as a result of robust sales. Companies have given optimistic commentary for the upcoming festive season so the trend could continue. Supreme Holdings could be a beneficiary in this real-estate upcycle.

#5 Hindustan Construction Company (HCC)

Last on this list is HCC.

Hindustan Construction Company (HCC) is principally engaged in the business of providing engineering and construction services, real estate, infrastructure and urban development and management.

It is one of the oldest infrastructure companies in India.

Hindustan Construction currently trades at 31 with a marketcap of 47 bn.

In 2023 so far, shares of the company have rallied around 50%.

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Shares of the company have rallied ever since August when the company’s board approved a proposal to fund raise up to 3 bn through rights issue.

The other reason why the stock is finding takers is because it posted good numbers for the first quarter of FY24 and investors are now anticipating a strong turnaround.

For the June 2023 quarter, HCC reported a profit of 527 million, as compared to a loss of 2.8 bn a year-ago.

In its earnings presentation, the company said that this growth is attributed to implementation of various projects, streamlining initiatives, and constant emphasis on achieving operational excellence at worksites.

As on June 2023, the company had an order book totalling 136 bn.

Also, after the resolution process, HCC’s debt is restructured such that the principal amount including interest will be repaid annually in the month of March. This gives HCC the flexibility to mobilize funds by end of every year.

Going forward, work execution would be key. For the first half of FY24, the company has already improved margins by getting more order from its core business divisions.

Conclusion

There are a number of potential ways to hedge against inflation, but diversifying into real estate is a tried-and-true approach.

So that’s one advantage.

Nevertheless, it feels like the price movements lately have been providing opportunities for both buyers and sellers.

To navigate in this volatile sector, make sure that you invest in a company with robust cash flow along with minimal debt.

Here's what Tanushree Banerjee, Co-head of Research at Equitymaster, has to say about the realty sector.

The biggest drag on real estate players is high debt and with interest rates moving up, investors need to be wary of realty companies with the tendency to pile up debt and dines with poor cash flows.

Also, this is a sector where investors have to be very careful about the management quality. Poor accounting and lack of corporate governance has been the reason for many large realty companies performing poorly in the past.

Make sure you analyse the fundamentals thoroughly before investing in any real estate company.

In conclusion, just because inflation is running hot and is an economy-wide phenomenon doesn’t mean it has to affect all investors the same way. There’s always a better way to invest…

Happy Investing!

Disclaimer:This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com

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