Will the FPO fund infusion solve Vodafone Idea’s problems?

With benchmark indices showing signs of weakness led by high Eurozone inflation at 3.4% in September, slowing global growth and the existing Chinese crisis bolstered global sell-off. In the midst of this chaos, the real estate sector is standing tall as over the past one month the BSE Realty Index surged 22.65% compared to a rally of just 1.58% rally in the Sensex. To help investors find good investment opportunities amidst a global selloff Money9 got into a conversation with Yash Gupta of Angel One to understand future prospects of the real estate sector. Here are the edited excerpts of the conversation:

Since the time we last spoke BSE Realty Index has advanced 29% to 4,039 levels from 3,170 levels. Are all the positive for the real estate sector priced in at the current level or are we just getting started?

So basically, we are witnessing sector rotation in the market, which is playing one of the very important things as of now. The real estate index hasn’t done anything for the last 10 years. And now it’s just about to begin as it is almost up by 25-30% within one month, but we feel its long term story is intact and big enough, it can be like two or three times from current levels.

The real estate story is intact on both sides, one is demand and the second is supply. If you look from the supply point of view, the top ten cities the supply are coming down. Consolidation is happening, and the share of top ten developers has increased from 10%, almost 20 to 23% last five years and this is likely to continue.

Whereas from the customer point of view the home loan rate has come down to 6.5% which are at two or three decades low. So the demand is continuously improving and along with it, the state governments are giving the benefit like stamp duty cut. So these are all benefits giving a boost to the sector. That apart customers are preferring pan India developers like Godrej, Sobha, Prestige, Oberoi and so on with a good track record compared to a local developer or unorganized developers.

As the index has already given a return of more than 25% expecting some consolidation in the near term for one or two months. Retail investors should take positions in the real estate sector in four to five tranches rather than one go.

The Evergrande Group scenario has sent jitters across the globe. Are there any warning signals for India?

If you look that the particular China scenario it’s already at a very elevated debt level. If you look at the balance sheet of Indian developers debt levels are not all elevated. In fact in the last one and a half years, during Covid times many of the developers were able to reduce their debt by 20 to 35%. If you look at the Evergrande situation, what happened in China, they kept on elevating debt levels which created the issue. That’s not the case with India.

While organized players have managed to reduce debt on their books do you see them spiralling up again as they launch new projects and hunt for growth?

So in the last 10 years, that real estate business has changed a little bit, earlier developers needed to have a land bank and then launch the project which was capital intensive. But nowadays developers are doing the JV thing with the landowners. They launch a project, and they receive a good amount of money from the customer to continue the project they don’t require any fresh cash flow in the project. On completion, they give up a portion of the project to the landowner as a profit percentage thereby making the entire project less capital intensive.

How do you see rising commodity prices impacting the sector?

Well, if you look at the prices some companies across various geography have already increased prices 10 to 15%. On the other hand, prices of raw materials have started cooling down like if you look at iron ore items and all those items prices are coming down. But if there is a continued rise in the commodity prices, then developers would go for more price hikes to safeguard their margins.

So which are your top picks from the sector and why?

Our top pick from the sector is Sobha Developers as it has a huge land bank in Bengaluru on its books with a development potential of around 200 million square feet. Besides IT recruitment are at an all-time high with the top 10 IT companies looking to hire four to five lakh employees and Bengaluru being the IT hub of India augurs well for the company. Besides, Sobha We have a neutral rating on Godrej Properties.