Are you recommending your clients to buy real estate stocks or is this hot air?
The real estate sector is consolidating. It has not done well for the last 10 years but things are changing structurally. In the last four years, the share of the top 10 developers has gone up to nearly 19% from 6-7% odd. So obviously, supply is limited as more players have moved out. The supply is definitely not going to keep up pace with the demand. The interest rates or the mortgage rates are quite low. The other aspect is that people are now preferring to buy properties which are more readymade and that is where companies which have got better balance sheets have done well or are expected to do well.
The other thing is that the input cost prices have also gone up. Steel has literally doubled in a year. All these costs will eventually get passed on. A combination of things are turning up for the sector and that is why we are structurally bullish on this sector.
Coming to companies, we have a buy rating on Oberoi with the target price of Rs 830. Mahindra Life is turning around the corner. They have guided for Rs 500 crore of annual land buying, targeting a revenue of Rs 2,500 odd crore. Besides, we are also positive on a number of other names. But these are the two better names whose results have come out till now.
How about buying housing finance (HFC) stocks? While the market is at an all-time high, HDFC, Can Fin Home or even for PSU HFCs like LIC Housing are nowhere close to their all time high?
We have not seen any material spike in HDFC numbers while the AUM growth is muted. If you look at something like LIC Housing Finance, the developer book has seen a quite a sharp jump in gross NPAs or the overall restructuring requirement is also quite high. So, we really do not have many options there. But having said that, tier one names like HDFC Ltd. is a buy according to us. We really do not have too much coverage.
Banks are doing quite a good job. Home loan portfolios of Axis Bank, SBI etc have been growing at a pretty fast rate. From that perspective, a lot of it is captured by the tier one banks.
What have you identified in terms of an idea from the sub five billion dollar or the sub 2-3 billion market cap club because that is where the action is?
One sector which is sort of coming out quite good and the management commentary is quite comfortable is the logistic space. We like the entire space. Mahindra Logistics has got a turnover below Rs 3,500 crore but over the next four-five years, they have guided for a turnover of Rs 10,000 odd crore. TCI Express is looking at doubling their turnover in the next five years and quadrupling the bottom line.
Similarly, in the case of Concor, both the EXIM as well as the domestic volumes will continue to grow in double digits. Also they have solved the long term volatility problem regarding the licensing for the land. So, we are seeing a lot more structural things happening. We like Gateway Distripark also. In that space, companies are comfortable delivering double digit top line and bottom line growth for the next four-five years.
For PLI to succeed, there has to be good logistics as a backbone. All these companies are making the right noises and which is why we believe that this is one space where you really do not have much market cap except for Concor which might be about Rs 30,000 crore or probably closer to Rs 40,000 odd crore. All these companies have below Rs 10,000-crore market cap. So balance sheet wise, you will not see much of an issue. Return ratios are pretty good. The logistics space is going to get a fair share of limelight going forward.
What is your house view on the entire metals pack?
Expectations of China further vacating the export base in the future coupled with domestic opportunity, things look quite interesting for steel players. Between ferrous and nonferrous metals. ferrous as a space looks a lot more attractive. It has seen one of the biggest deleveraging on the balance sheet. We like most of the names, especially Tata Metaliks which is a play on the upcoming opportunity. The government is looking to provide tap water to rural households. They are looking to double their ductile iron pipe capacity and we have not seen the kind of realisation aligned to markets which I think will come in the next few quarters.
In general, I think, we have seen good moves in most of the ferrous names but this one particular stock looks a lot more structural to us. It is debt free and in general, we would want to believe that if China curbs continue in future also, despite the rally, further upside possibilities still remain because even with the capacity expansion plans announced by most of the players, a decent amount of deleveraging is happening even for a company like SAIL. So in general, the outlook is good.
On the nonferrous side, Hindalco looks good because it is largely a convertor and it does not really matter what the LME prices are. That way the company has been retaining its spread. So on the non-ferrous side, Hindalco looks good while on the ferrous side most of the companies look good.
What about the QSR space? If Jubilant’s numbers are anything to go by, it seems that they are in a very good space?
Absolutely. After tracking QSR companies, I think it is important to have a right combination of the store size because if your store size is larger, then your lease payouts are quite high. Whereas if it is lower, which is what we see in case of Jubilant, it is a good combination and which is why their gross margins are one of the best in the industry while even something like West Life is struggling because of the higher store size. Jubilant has got one of the best operating metrics and it is one of the best plays in terms of QSR.
