Although I'm not heavily into technical analysis, I often seek stock insights from my technical analyst friends. I like to know which stocks they’re bullish on and then apply my fundamental filters to them.
Recently, one of my technical analyst friends expressed strong bullish sentiments about Shriram Properties, going so far as to predict it could become a potential 10-bagger. Yes, you read that right. He believes Shriram Properties could increase tenfold over the next few years from its current levels. This bold prediction, especially coming from a technical analyst, piqued my interest.
Typically, I expect technical analysts to forecast potential upsides of 50-100%, or perhaps even 200% over a few months. But a 10x prediction? That was unprecedented. I’m not sure which tools my friend used to arrive at this forecast, but it certainly intrigued me enough to take a deeper look at the fundamentals of Shriram Properties.
The big question: Are the fundamentals of Shriram Properties strong enough to justify a 10x return in the coming years? Can I arrive at a similar conclusion with the same conviction as my friend?
To be honest, when I first examined the company's historical performance, I wasn’t impressed. Between March 2019 and March 2024, the company's topline and bottomline growth was modest, at 6% and 9% respectively. These figures are far from the kind of growth you would expect from a potential 10-bagger, which typically requires profit growth of at least 25% annually. Shriram Properties fell well short of this over the past five years.
However, when you zoom in on the more recent period between FY22 and FY24, there’s a glimmer of hope. The company managed to double its topline and grow its bottomline by 4x (though from a lower base). It seems the company overcame some challenges by FY22, setting the stage for stronger growth afterward.
Looking ahead, Shriram Properties has set ambitious targets. The company aims to triple its revenues and quadruple its profits to over ₹250 crores in the next three years. If it can achieve these targets, the stock could see a significant upside—potentially a 4x increase—based on simple extrapolation.
But investing is rarely that straightforward. If most investors are aware of the company's growth targets, they may have already started buying the stock, driving up its price. Indeed, the stock currently trades at a PE multiple of 28x, which is 40% higher than its historical average of 20x. This suggests that much of the anticipated growth may already be priced in, reducing the hypothetical upside from 4x to around 3x.
There’s another concern: the quality of Shriram Properties' growth. The company’s return on equity (ROE) for the latest financial year is just 6%, which is significantly below par. Historically, its ROE has been poor as well. An ROE of 5-6% is well below the cost of capital, akin to borrowing money at 10-12% and earning only 5-6% on it. If this persists, the business could become unsustainable in the long run.
Interestingly, Shriram Properties isn’t alone in this struggle. Many large real estate companies in India, such as DLF, Godrej Properties, and Brigade Enterprises, have similarly low ROEs. Over the past decade, these companies have averaged ROEs of 3%, 5%, and 7%, respectively. This reflects the broader challenges the Indian real estate sector has faced, including sluggish sales and high inventory levels, which have dragged down return ratios.
However, the real estate market is cyclical. During the boom period between FY04 and FY09, companies like Unitech and DLF achieved ROEs of 50% and 60%, respectively, as property prices soared and demand surged. If another real estate boom occurs, there's potential for a significant turnaround in ROE for the sector, which could propel stocks like Shriram Properties to become multi-baggers.
For context, during the previous boom, Unitech's share price increased 400 times between March 2004 and March 2008. Such a boom could indeed turn industry players into multi-baggers.
To summarize: Does Shriram Properties have 10-bagger potential as my technical analyst friend predicts? If the company executes its growth plans effectively and profits quadruple over the next few years, the stock could see significant gains. However, for the price to truly skyrocket, India would need to experience another real estate boom similar to the one between 2004 and 2009. Only then could the ROEs—and share prices—of real estate companies like Shriram Properties improve substantially.
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
