Nifty Realty's Best Day in 2 Years: Street's Take.

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The Nifty Realty index experienced a remarkable surge on Thursday, achieving its most significant single-day gain since September 2021. The index soared by nearly 7%, reaching its highest level in 15 years. All 10 index constituents, along with non-index entities like Keystone Realtors and Hemisphere Properties, closed the day higher. Sobha, a prominent player in the real estate sector, saw an impressive 16% surge, marking its best single-day gain since October 2021. This surge was preceded by a 10% increase on the preceding Wednesday.

Motilal Oswal, a reputable brokerage firm, identified Sobha as its top real estate pick for 2024, projecting a potential upside of 25% with a price target of ₹1,400 per share. The firm expressed confidence in Sobha's potential to outperform its peers in terms of growth, especially after a period of underperformance. Motilal Oswal also revised its pre-sales estimates higher by 4% and 12% for the financial years 2024 and 2025, respectively. Sobha released its December quarter pre-sales figures, revealing its highest-ever quarterly sales value of ₹1,952 crore, representing a substantial 37% growth over the same quarter the previous year and 13.2% from the September quarter.

The average price realization also exhibited a positive trend, improving by 14.8% sequentially to ₹11,732 per square foot. Bengaluru, Sobha's core market, witnessed its highest-ever quarterly sales during this period. The company's strong cash flow during the quarter contributed to a further reduction in net debt. Notably, housing sales in 2023 reached a new peak, with the top seven cities recording a remarkable 31% growth compared to the previous year. Mumbai led with a 40% year-on-year growth, while Bengaluru, Hyderabad, and Chennai experienced growth rates ranging from 29% to 34%.

Even before the Thursday rally, most stocks on the Realty index were trading at a significant premium to their Net Asset Value as of December 15. Chart analysis indicates that the realty index faced consistent resistance at its 50-Day Moving Average throughout 2023. However, it successfully broke above this key level on April 6, doubling in value since then. Some individual constituents, such as Prestige Estates, tripled, while others like DLF and Godrej Properties gained up to 100% since April last year. The analyst community has been notably bullish on real estate stocks, with all 17 analysts tracking Sobha providing a "buy" recommendation.

Post this substantial rally, most stocks on the real estate index are trading well above their consensus price targets, implying a potential downside of up to 25% from current levels. This downside risk may increase if the rally continues unabated. Despite these concerns, market experts express optimism about the continued upswing in the real estate sector. Ambareesh Baliga, an Independent Market Expert, believes that the ongoing upmove will persist for a more extended period. He highlights the difference in balance sheets, emphasizing the absence of stretched balance sheets compared to earlier times, indicating a decent upside. Baliga specifically mentions stocks like Godrej Properties and Sobha as having the potential for further growth.

Deven Choksey of DRChoksey Finserv points out that there has been no significant change in the fundamentals of real estate stocks during this rally. He notes that the market tends to attract substantial investment whenever there is a price correction, as a large sum of money is readily available for investment. Choksey sees any price correction as an opportunity for most investors, indicating a resilient and optimistic sentiment in the real estate market.

In summary, the real estate sector, particularly exemplified by the Nifty Realty index and Sobha's outstanding performance, is undergoing a significant uptrend. Despite concerns about potential downsides and stocks trading above consensus price targets, market experts are optimistic about the sustained growth in the sector. The robust fundamentals, positive pre-sales figures, and strong market sentiment contribute to an overall positive outlook for the real estate industry in the coming months.

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