Realty stocks have given 100% gains YoY due to impending interest rate reduction
Earlier, it was pointed out that the Nifty Realty Index was then at a 14-year high, several stocks were yet to reach earlier highs.
It was also pointed out that the imminent fall in interest rates will benefit realty stocks. Stocks were languishing & have only now reached a 14-year high. However, several like DLF, Godrej, Oberoi are way below earlier highs implying huge upside potential. Experts say realty sector can generate huge wealth stocks.
#EditorsRoundtable | Nifty Realty Index hit a 14-year high this week. But stocks are yet to reach earlier highs.@nimeshscnbc decodes the data.#markets #StockMarket #NiftyRealty pic.twitter.com/MIZ9QqEfuS
— CNBC-TV18 (@CNBCTV18News) December 15, 2023
Real Estate Cycle lasts 6 years. We are at the middle of the cycle
Expert Mayuresh Joshi of William O’Neil pointed out in the ET that the momentum in realty estate stocks is due to the demand momentum that the Companies are having in their projects. New launches are getting lapped up pretty easily. He also stated that the real estate cycle lasts about six to seven years. We are at that midpoint in the real estate cycle which means there is further acceleration that can be expected in the next few quarters, in a couple of years as well.
He also stated that large unsold inventory is coming off the books of all the developers. The pre-sales velocity will give momentum in terms of cash flows and the reported numbers as far as the next few quarters are concerned. The Balance Sheer is deleveraging debt to a large extent, which is also a very healthy sign. The combination of demand and supply will increase expectations of how profitable earnings will play out for the sector as a whole. So the momentum can very well continue.
Buy real estate ancillaries stocks
Mayuresh Joshi advised that real estate ancillaries from the plywood and laminate sector like Century Ply and Green Ply have not done as greatly as the real estate stocks have and it would be prudent to buy them as they will play catch up.
“My own take is that real estate ancillaries, plywood stocks like Century Ply, Green Ply, laminate stocks have not done as greatly as the real estate stocks have. They should be a proxy to the real estate play as well. Numbers have been pretty bookish so far. Therefore, the expectations in terms of input cost stabilizing, demand coming back and that reflecting on better volumes going forward with better realizations to result into good operating leverage as we see. There might be a chance of good EPS and an RS rating upgrade as we see at markets. And therefore, these ancillaries should also probably be kept on your radar to do well over the next few quarters,” he said.
Cera Sanitaryware is a proxy for the realty sector. Saurabh Mukherjea has added it to the Little Champs portfolio
Saurabh Mukherjea of Marcellus is a staunch believer of the prospects of real estate ancillary stocks. He already has three stocks in the Marcellus’ portfolio which will prosper from a boom in the realty/ building materials sector. These are Asian Paints, Pidilite and Astral Poly.
A few weeks ago, he added Cera Sanitaryware to the Little Champs portfolio. He explained that Cera is the no. 2 player in the mass-affluent segment of the sanitaryware and faucets market in India. It’s a pan-India brand, with maximum revenues from the south (40% of total revenues) – a geography that is likely to continue growing faster relative to other regions. The company has grown revenues at 11% CAGR over the last 5 years, while earnings over the same period have grown at a CAGR of 16%, while maintaining an average RoCE of 20%.
Vijay Kedia and Guy Spier are both strong believers in the prospects of Cera Sanitaryware.
“Cera plays a dominant role not only in the sanitary sector but also in the housing sector as a whole. But it is only a midcap. So, the idea is to find a small cap which can transform into a midcap and a midcap which can transform into a large cap. It might take 10 years or 15 years. This is the job of an investor in the market,” Vijay Kedia said.
Kajaria Ceramics is of the same pedigree as Cera Sanitaryware in terms of its dominance in the market place.
Cement stocks and Housing Finance stocks are also great proxy plays
Experts said we can also consider mortgage lenders like HDFC, Repco Home Finance, LIC Housing etc as ancillary plays into the revival of the realty sector. Cement companies like Ultratech etc are also great plays.