Stable quarter likely for EPC, real estate companies – Infra Real Estate Q2FY23 preview

What’s Buzzing

We expect stable execution for construction companies despite a seasonally weak quarter due to monsoons amid a healthy order book. New order inflows, however, have remained muted. For real estate companies, sales volume growth is likely to be stable QoQ. Commercial leasing is expected to see a marked pick-up while malls, hospitality segment are expected to be robust, with consumption showing a healthy uptick. 

Context

We anticipate residential sales momentum will remain healthy amid sustained demand and new launch offtake. According to Anarock, real estate sales across India’s top seven markets recorded QoQ growth of 4% during Q2FY23 at 88230 units, boosted by an improvement in homeownership sentiment post pandemic and despite increase in home loan rates. For Brigade, we expect sales volumes to be flattish QoQ at 12 lakh sq ft, despite weak seasonality, driven by strong offtake from launches during the quarter. For, Oberoi Realty, sales bookings are expected at ~4 lakh sq ft area during Q2FY23, flattish QoQ. Mall activity has been strong with Phoenix Mills’ Q2FY23 like to like malls consumption at 118% of Q1FY20. 

Order inflows across the construction universe have remained muted during Q2FY23. Intake for coverage companies post Q1FY23 was at a) Ashoka Buildcon (won orders totalling ~Rs 1,880 crore), b) NCC (declared jobs amounting to Rs 2,330 crore) and c) PSP projects (secured orders worth ~Rs 962 crore). However, major developers such as KNR Constructions, PNC Infratech, HG Infra, and GR Infraprojects failed to attract any major order inflows amid heightened competitive intensity and their conservative approach on margins. On the execution front, we expect our road & construction universe to witness 15.4% YoY growth in topline (to Rs 9,604.5 crore) backed by companies’ elevated order book position and pick-up in execution with receipt of appointed date in most projects. However, EBITDA margin of our universe is expected to moderate to ~12.9% (down 135 bps YoY) due to a change in project mix and higher raw material prices. 

Our Perspective

We highlight that usually Q2 is seasonally weak but overall demand seems to be steady despite higher interest rates for the residential real estate companies. Key monitorable for real estate will be Q3 demand trajectory, which will confirm or negate the thesis that intrinsic demand remains strong notwithstanding higher mortgage rates. On the construction companies front, despite heightened competition, most road developers are sitting on the healthy 2.5-3.5x TTM revenues providing visibility over the next two to three years. We also expect some benefits on margins from Q3 onwards on superior execution and moderation of commodity prices.