Can this Real Estate Stock Become a 10-Bagger? 

Hello everyone, Rahul Shah here, trying to make investing accessible and profitable for the average investor.

Although I'm not at all into technical analysis, I like to take stock inputs from my technical analyst friends.

I like to know the stocks that my technical analyst friends are bullish on and then try and run my fundamental filters on them.

Shriram Properties is a stock that a technical analyst friend is very bullish about.

So much so that he believes that it is a potential 10-bagger in the making. Yes, that's correct.

He is of the view that Shriram Properties can go up 10x over the next few years from its current price levels.

Now, that's huge, especially coming from a technical analyst.

I was under the impression that with their tools of the trade, chartists can predict a potential upside of 50%-100% or perhaps even 200% over the next few months.

But to get a 10x prediction was unheard of.

I don't know which tools did my chartist friend use to predict a 10x return but it certainly left me intrigued.

I decided to do a fundamental deep dive into the stock and see if I can come up with a similar conclusion.

Are the fundamentals of Shriram Properties strong enough to come close to a 10x return over the next few years? Can I predict a huge upside on the stock with the same conviction as my chartist friend?

Let's find out.

To be honest, when I looked at the historical performance of the company, I wasn't too impressed.

Between March 2019 and March 2024, the company did rather poorly on the topline as well as the bottomline front, growing it by a mere 6% and 9% respectively.

If you wish to be a 10-bagger, you need to grow much faster 6% and 9%.

You need a profit growth of at least 25% over the next few years. Shriram Properties has fallen much short of this over the last 5 years.

However, if you adjust your lens and zoom in a little i.e. consider only the two-year period between FY22 and FY24, there is a ray of hope.

The company has managed to double its topline and managed to grow its bottomline by a whopping 4x (albeit on a lower base) between FY22 and FY24. It was as if the company was going through some challenges which were addressed by FY22 and then the growth took off after that.

Mind you, the company has an ambitious target for the future as well.

The company has recently announced that in the next three years, it not only wants to triple its revenues but also quadruple profits to more than Rs 250 crores.

So, on top of the doubling of revenues and quadrupling of profits between FY22 and FY24, Shriram Properties aims to further triple its revenues and quadruple its profits by FY27-28.

If revenues went up from 1 to 2 and profits from 1 to 4 between FY22 and FY24, it wants to further take the revenue from 2 to 6 and profits from 4 to 16 over the next 3-4 years.

Now, this alone is the reason for the stock price to up by 4x over this period.

A stock that manages to take its profits higher by 4x, does deserve to trade at 4x higher market value under normal circumstances.

So, one can end up assuming that the stock is a straight 4-bagger from the current value based on this simple extrapolation.

However, investing is not so simple. If majority of the investors know that the company is trying to grow its bottomline by 4x, they would have already started buying the stock and this would have taken the stock price higher.

So, we will have to see how much of this future growth in profits is already reflected in the stock price.

Here's what I found out. The stock currently trades at a PE multiple of 28x. This is 40% higher than its historical multiple of 20x. This means that investors have already started buying into this stock in the hopes of a strong profit growth and this seems to have pushed the stock price higher by 40%.

So, the hypothetical upside from these levels based on the earlier assumption is not 4x.

It has now come down to around 3x because it is already trading at a 40% higher than historical PE multiple.

There's one more thing I did not like about the company.

And it is the quality of its growth. You see, the company has a return on equity of just 6% for the latest financial year.

Historically too, its ROE has been quite poor.

Trust me, an ROE of 5%-6% is significantly below par.

In fact, it is much lower than even your cost of capital. It is like borrowing money at 10%-12% and then earning 5%-6% on it. If a company continues to earn these returns for a few years, it won't survive for long. The business will become unviable and will need to be shut down.

Hence, if Shriram Properties wants to become a good quality, sustainable business, it needs to take the ROE significantly higher than the 5%-6% that it is currently earning.

Now, here's something very interesting. It is not just Shriram Properties that has a poor ROE of 5%-6%. Most of the large companies in the real estate sector in India have equally poor ROEs.

Consider DLF, Godrej Properties and Brigade Enterprises for example. The 10-year average ROEs of each of these real estate companies stand at 3%, 5% and 7% respectively. No, there is no printing error here. These ratios are correct.

Some of the largest real estate companies in India with some of the biggest balance sheets, have failed to earn more than their cost of capital over the last 10 years on an average.

Well, the reason for their poor ROEs is the slowdown the real estate industry has faced in India over the last few years.

It has been a buyer's market where companies have struggled to sell apartments and have been sitting on huge inventories.

The capital blocked in these inventories has resulted into poor return ratios for majority of the real estate stocks in India.

Compare this with the period between FY04 and FY09, which was one of the best periods for the real estate sector. Do you know what the ROE of companies like Unitech and DLF during this period?

Well, Unitech had an average ROE of 50% between FY06 and FY09 whereas DLF's average ROE during the same period was a staggering 60%. Yes, these numbers are correct.

This was a period of the great Indian real estate boom.

Not only where the apartments and flats selling like hot cakes, but their prices were also rising sharply year after year, thus leading to companies like Unitech and DLF making money hands over fist.

Well, the real estate industry tends to move in cycles. Hence, there is every possibility that the days of 40% and 50% ROEs for the real estate industry may return. And this is what the investors seem to be expecting as well.

Otherwise, they wouldn't have assigned a PE multiple of 20x or 30x and even 40x to the real estate companies.

So, if the ROE of the real estate companies must improve meaningfully, there needs to be another round of the real estate boom in India. Then, there's every chance that a company like Shriram Properties, becomes a multi bagger or even a 10-bagger.

For perspective, in the previous real estate boom, Unitech multiplied investor wealth by a huge 400x. That's true. Between March 2004 and March 2008, the share price of Unitech had multiplied by 400 times. Hence, a real estate boom can certainly turn a lot of the industry players into multibaggers.

Let me just summarise everything that we've learned so far.

Does Shriram Properties have a 10-bagger potential as predicted by my technical analyst friend? Well, if the company gets its execution right and profits indeed quadruple over the next 3-4 years, it will certainly be good news for the stock price.

However, for the price to really take off, there needs to be another real estate boom in India, like the one we saw between 2004 and 2009.

It is only then that the return on equity of the sector companies will improve and by extension, their share price.

Let me know what you think.

Happy Investing.