Realty sector

Siddhartha Khemka , V-P, Head of Research (Retail), MOFSL , says “within the ferrous space, JSW Steel is a preferred pick followed by SAIL . Hindalco in the non-ferrous space is something that we like. The market has shown some appetite for niche luxury properties. So, real estate will do well. Our preferred picks would be Oberoi Realty and Macrotech Developers .”

What is your view on metals and Vedanta specifically because it is a high beta name?All these headlines regarding debt etc keep on circling around and impacting the stock price. What should a medium to long term investor do?
Within the metal space, Vedanta has been very volatile. There have been continuous news flows or developments with regards to the company, with regards to the promoter and the promoter entity as was the case today. But if you look at it from the overall sector perspective, after having some pressure in the past couple of quarters, the companies have now taken price hikes in the last couple of weeks and that is helping to change the sentiment.

This is one sector which is globally impacted and the slowdown specifically in the Chinese real estate market is a direct impact on the metals sector. So do not expect a sharp runaway positivity but within that, selectively some of the ferrous names we like because they have been able to take on the price hikes and a steady demand environment in the domestic market.

So within the ferrous space, JSW Steel is a preferred pick followed by SAIL. Hindalco in the non-ferrous space is something that we like. With regards to Vedanta, there have been issues; the debt is a big concern and currently we have a neutral rating. So it is better avoided given the high beta and the news flows surrounding the debt as well as the parent entity.

I want your view about real estate and the housing finance companies because of late, we have seen quite a bit of momentum there. Signature Global is up almost 20%. Hudco has been doing quite well for the last week or so. Aptus Value Housing is perking up and a lot of other names as well. What are your favourites?
If you look at the broader housing finance companies, the overall interest rate peaking out cycle has been positive for the entire NBFC space. And with the news of interest rate subsidies, especially for the affordable housing segment, a lot of these finance companies which are present in the small ticket or the affordable segment, tend to benefit a lot.

We have some of these companies. Home First Finance is a midcap company in the financing space, which we like a lot. We have a target price of Rs 1,000 there, which is almost 20% upside. Apart from that, we also have Canfin Homes, which is specifically in the tier two, tier three segments. And within the overall real estate space, our coverage is mostly towards the larger ones, where their presence is more in the mid and the higher segment so the likes of DLF , Oberoi, as well as Macrotech, which is Lodha.

They are not directly beneficiary of the affordable segment, but nonetheless, we are seeing strong traction in the overall real estate market as well. The monthly sales data or you get news flows where these companies are able to sell luxury properties within one or two days of the launch. That kind of shows the appetite the market has for some of these niche luxury properties. So, real estate will do well. Our preferred picks would be Oberoi Realty and Macrotech Developers.

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If you want a sustainable, long-lasting growth for the real estate industry, it has to be an overall participation and that comes from the bottom of the pyramid, says Prashant Thakur , Regional Director & Head of Research, Anarock Group . Edited excerpts:

There is a big scheme in the offing from the government side. A $7.5 billion worth of scheme to give the further fillip to urban middle class. Will this really give a lot of push to the realty sector, which is already in massive momentum? How long and potential could this be?
There has been a good upsurge in the overall sales but what we have seen is that while the upper segment is doing quite well, the lower and affordable segment has been kind of lagging behind, and there are a couple of reasons behind it. While the rise in interest rate did not impact the upper and mid-upper too much, the affordable segment got impacted because of interest rate increase; the home loan eligibility of these borrowers came down because most of them work in either unorganised sector or they do not have a steady income source, I am talking about buyers of affordable housing .

What also happened was that because of the increase in material cost, the cost of overall affordable housing went up. So in my opinion, any subsidy, or let us say bringing back the CLSS scheme which gives interest subvention to the buyers of affordable housing will give a push to this segment as well. When you combine the already well-doing upper segment, and when this lower segment also starts to pick up, I think the overall volume will pick up further.

So this move, if implemented, will definitely give a fillip to the numbers. The whole intention of this housing for all was to help the urban poor, the economically weaker section and the low income group. Somewhere in this rally of residential sales, we have seen this segment not participating while the other well-off segment is doing well. So in my opinion, this will be a great, great initiative if it is taken, and overall numbers will get a boost.

What one is witnessing is that the demand is actually scaling up only within the luxury as well as the high ticket size or housing segments. Is that really the case? Is that where all the demand and supply is happening as well?
You are right when you say that we are seeing a lot of action on the top segment. There are a couple of reasons, as I mentioned, that the interest rate, the increase in home loan rate has not impacted the upper segment much. It is the lower strata of the income group that has been impacted because the loan eligibility also comes down. The effect that we are seeing is in 2018, the share of affordable housing in the overall new launches was 48%. Today it stands at 18%. So, while the number has picked up, the overall sales volume and supply volume is getting concentrated towards the 85 lakhs and above segment. These are people who work in formal companies and have a regular stream of income. Even if the home loan goes up, they do not get impacted much. But the real worry is that India is still a housing deficit country and when you talk about economically weaker classes and low income groups, that is where the intention of affordable housing was, the scheme was launched to benefit them. So the talks that we are hearing is that these CLSA schemes would be re-launched and would help that.

Ideally, when the volume picks up in the affordable segment that is where we see the real number coming up. Because the continuous demand on the luxury side might not be sustainable. It might be either a result of pent-up demand or let us say a timeframe demand. But if you want a sustainable, long-lasting growth for this industry, it has to be an overall participation and that comes from the bottom of the pyramid.

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Tracking gains from Asian peers, which stabilised after a recent sell-off, Indian equity markets opened higher on Friday, amid gains in index heavyweights like Reliance Industries, L&T, and banking counters.

Nifty50 rose 60 points or 0.3% to 19,583 while the S&P BSE Sensex was up 138 points or 0.2% at 65,647 points.

From the Sensex pack, NTPC, Tata Steel, JSW Steel, and L&T were the top gainers, rising 1-2%. Tata Motors, Sun Pharma, and SBI also rose in early trade. On the flip side, Asia Paints, Tech Mahindra, Infosys, Wipro, and IndusInd Bank declined.

Among individual stocks, Multi Commodity Exchange of India (MCX) tanked 8% after Sebi asked the company to put on hold the proposed go-live of its new commodity derivatives platform planned for next week.

Uno Minda’s share rose 2% as the firm to increase its stake in JV with Westport to 76% to accelerate growth in growing CNG and other alternate fuel markets.

Sector-wise, Nifty Metal advanced 1.2%, and Nifty Pharma rose 0.8%. Banks, financial, media, realty, and oil & gas sectors also gained. Among the more domestically focused stocks, Nifty Smallcap 100 was up 0.4% and Nifty Midcap 100 added 0.43%.

More to come…

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Vikas Khemani , Founder, Carnelian Capital Advisors , says “they have some cash in hand. More than a macro call, it is always a call on whenever new ideas are found. They have been a little bit cautious recently given some amount of run-up and euphoria in the market. It is not that they are sitting on a lot of cash but they will deploy from there. Carnelian Capital’s investing style is to deploy for three to five years, maybe a longer perspective. There is no change in their stance.”

Crude prices are again getting back to $100-odd levels. Also, the way the dollar index has been moving, does it spell bad news for us?
Crude prices moving up is a sign of worry for sure because it has a direct impact on the inflationary number and which has a direct impact on the monetary policy. So some time ago, we were expecting a bit of a dovish stance by the central bankers and that might get halted and we will have to see what trajectory in crude takes from a medium-term to long-term perspective. While it looks like that this is probably a short-term blip but one cannot say for sure. One has to see how it pans out. But this is definitely a point of worry especially from a short-term perspective.

Are you keeping some powder dry for opportunistic plays if these global macros provide a shake-off in the market? You may have identified ideas. We have seen your stock picking in the last few weeks. Are you keeping some powder dry to add on or spot new opportunities?
We have some amount of cash sitting with us. More than a macro call, it is always a call on whenever we find ideas. We have been a little bit cautious recently given some amount of run-up and euphoria in the market. It is not that we are sitting on a lot of cash. From there we will deploy. Our investing style is to deploy for three to five years, maybe a longer perspective. I do not see any change in our stance.

We do not see crude taking a very long sustainably remaining high upwards of $90. So, we think it will come down, but we will be watching how the situation develops but currently as and when markets correct, we will put in money because we are very convinced about the structural story of India.

I see a lot of names like Aditya Birla Capital, 361, ICICI Securities in your portfolio. Are you betting big on the financialisation theme?
We have been very bullish on the entire financial services theme because it is a structural story, especially, the credit side and India has a very wide range of interesting stories to play and financial services will be one of the biggest beneficiary as the economic group comes. So, we have been very bullish and overweight for quite some time and continue to remain that.

You are in the asset management business. New wealth managers are getting listed. Two of them which have been doing okay in the market and one of them has got a monopolistic or a very largish market share in the wealth management space in India and is in your portfolio as well. Do you see the cyclicality of this business going down and becoming much more structural because of so very heavy flows coming in from the retail towards financial markets?
As the Indian economy goes towards $5 trillion and more, it is very natural that a massive amount of wealth will get created and as the wealth gets created, there will be a need for wealth management and asset management platforms. Again it is that part of the financial services business which structurally is in a good upward trajectory.

Of course, like any business, there will be medium-term, short-term cycles and they will always be around but we remain quite positive in the financial services and in non-credit space advisory, wealth management platform, asset management platform, all those are interesting. Of course, you have to see business trends more. Individual companies have to be studied but generally speaking, we are positive on asset management, wealth management platforms.

Where else do you find interest in the market? Everything from defence to railways to power and its ancillary are moving up right now. You have got EMS names which are propping up. Anything from these themes that you find interesting?
We have said in the past that India is seeing a very fairly wide range of opportunities from banking to auto to manufacturing, IT services to infrastructure space to consumption; within consumption, different places and new age companies. It is the first time this has happened that all guns are firing. When this kind of situation comes about and I always make this comment that one is spoilt for choice even if the markets are at this stage, you are able to find interesting ideas and that is what the real beauty of the Indian markets are.

The more the width and depth is there, the more a bubble kind of situation can be averted or delayed or prolonged, it can absorb a large amount of money, it can create more wealth. I see India’s story continuing to remain very robust. Within that, you will always see many new and emerging opportunities. Also, India is staring at a power shortage in the next four or five years. So we are beginning to see conventional energy segments getting renewed interest.

When this kind of economic growth happens, a lot of interesting opportunities are there. We as asset managers have to look at risk, reward, long term and your own investment philosophy, what fits into that and that is where you kind of buy an idea. It is not about a big macro idea but more about bottom up, good management, good business which can give you sustainable risk adjusted returns.

Let us talk about some of those bottom-up ideas. I see Senco Gold in your portfolio. Would you want to talk about the thesis and the rationale for it?
I always stay away from commenting on stock specific names. But it is a consumer discretionary space, a very well managed company. It recently went public, we participated in the IPO , we like the management, we like the business. More importantly, valuations were reasonable when we bought. So the risk reward was very favourable. The markets were not excited about the IPO. But we were very positive looking at the overall opportunity space. It has given great returns in a short period of time. We never expected this kind of returns in such a short period of time but the market had its own way of surprising on both upside and downside. So we will remain invested in anything which we like from a structural point of view.

What about trimming your position or booking profit? Any other IPO names that you have liked recently, where you saw value on the table?
I would not probably comment on a specific name. But generally, we evaluate every opportunity. Only when we are convinced about the risk reward of trade, we invest.

There is a very big upgrade on L&T coming in today that is also part of your portfolio. But I want to understand your view on the way L&T is changing complexion. There was a buyback, their capital allocation call and especially the overseas opportunities in hydrocarbon and new energy which they are starting to get in a very major manner?
Absolutely If India’s economic growth story has to happen, if India’s investment cycle has to happen, L&T is the flag bearer of that. You cannot build India without L&T benefiting. L&T is present across all segments whether it is hydrocarbons to infrastructure, to industrials, to everything, you know, residential, everything, it is kind of broadly defence everywhere it is kind of positioned well.

All these cylinders are firing and more importantly, in the last five-seven years, the management has worked hard in terms of getting their capital allocation right, focusing on ROC, and also they have created fabulous business in terms of IT services. So the company has transformed over the last decade or so and in the recent past, the focus is on capital allocation.

More importantly, the investment cycle in India and in the Middle East where L&T is very strong is picking up in a big way. According to us, it will remain a beneficiary in the foreseeable future. For the next three to five years, we see nothing changing negatively for the sector and the company in specific. So our idea is to remain invested in structural ideas.

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