Look for opportunities in real estate, capital goods and tourism and travel. If we can find opportunities in those spaces which are reasonably priced, there is room for money to be made there. We believe this cycle is not anywhere close to the end, says Anshul Saigal, Chief Investment Officer – Kotak Portfolio Management Services.
What will be the next trigger for RIL? Is it here?
Yes. If we talk in terms of the telecom space in general, a large proportion of Reliance’s value is coming from telecom. More and more, it is becoming clear that this is becoming a two-player market and this is a market in which prices have bottomed and there’s no room for prices to go down further. However, there is definitely room for prices to go up. Their key competitor has indicated that by the end of this year, prices should be higher by a margin and those will definitely be taken positively by the markets.
In addition to that, their legacy business has faced headwinds because of various issues. But increasingly as volumes pick up as economies across the globe open up, it is possible that even the oil and gas business will start looking up because of demand pick up. On both those accounts, it looks like for companies in these spaces, times ahead may be interesting and positive.
The real estate sector has made a comeback and indirectly we will also see the comeback of home improvement and other such sectors. How are you approaching that pack?
First up, I am extremely positive on that space and that does not mean that I am extremely positive for the next two or three months. For the next three-five years, this space should see an upward trajectory by quite a margin. Over the last five or six years, there have been a slew of reforms in this space which have led to a whole lot of unorganised and relatively smaller developers going out of business. There are some estimates that 52% of the entire real estate developer pool is down. So by that much, the real estate pool is down. What remains is about 48% of the pool and clearly the market has not shrunk so much and that means this pool will gather a large part of the market and just on that count it is positive.
If we go back six years and look at the prices today, we can see prices have come off by a margin. In some markets, prices are down 30% to 40% even today. In this period, incomes have gone up. Also interest rates have come down and so affordability is significant higher this time. In fact, if you do some calculations, it looks like affordability for residential real estate is at 2003 levels and that tells us that there should be tailwinds on demand for real estate.
Accompanying this is the factor that we are in an opening up scenario where people have been working from home and they require larger spaces. We have seen the worst in real estate with Covid. It does not get any worse than this. All of these combined, I believe that in the next three to five years, both volumes as also prices should be quite positive for real estate, particularly residential real estate.
The beneficiaries will be the organised players in the space and also the home improvement companies. One has to really look at the gems and identify opportunities. In our opinion, in many ways, the market has become simpler. The easier way to do this is to just look for the leaders in respective home improvement spaces. If one is looking for cables and wires, look for the leader. If one is looking for cement, maybe look at the leader or the few leaders in respective markets.
If one is looking for plywood, look at the leader. It is very hard to go wrong if you do that because this is going to be a multi-year cycle and so we are positive on home improvement as also on real estate.
The other way of playing this entire real estate revival could be through ancillaries like tiles, paints, cement. How should the ancillary space be approached because some of these sectors have also seen a run up?
That is absolutely true and of course there are pockets within this ancillary space where because of expectations, prices have become expensive and one has to be cautious in those pockets. But there are other pockets where value is still available. Some of the segments that you mentioned for instance, like tiles also have certain pockets of cement.
There are other home improvement pockets. These segments are reasonably priced even now and there is opportunity here. This would not be a one way straight line upwards; this will be a play on volatility and that will be on account of quarter to quarter issues where the market liquidity or certain amount of disappointment due to various reasons on company fundamentals.
If you are a holder for three to five years, this space holds a lot of promise and there are opportunities here and there is another interesting leg which is because Indian manufacturers are sought after globally. The export leg from India has opened up and that has taken oversupply out of the market within India. As a result, the pricing is becoming stronger within the country. Prices of tiles etc are moving up and that is getting reflected in stock prices. When I say prices moving up, I mean tile prices moving up.
Are you still seeing certain pockets where it can be a good buy? What are the sectors that are exciting you? Is the momentum moving towards the largecaps?
What happens in small and midcaps is that when the cycles turn away from mid and smallcaps, they get liquidity constraints. They get impacted quite meaningfully as we saw during 2018-2020, where the small cap index was down 50%. It works both ways. When that cycle turns on the upside because of low liquidity, these stocks also do very well.
The other thing that one has to keep in mind is that these stocks are very dependent on economic activity picking up and if economic activity is strong, prices do very well. We anticipate that for the next three to five years, economic activity in the country is going to remain strong and that is going to give tailwinds to earnings for these companies.
In addition, if the global liquidity scenario is going to be benign and there is going to be sufficient liquidity, on both those factors — earnings as well as liquidity — work is in favour of small and midcaps. On that count, I would say that they are in a favourable phase for some time to come just like in the 2003-2007 cycle. In May 2006, they saw a significant drawdown because of valuation concerns. We could well see that phase come anytime in the coming future.
We have seen a sort of glimpse of that last month but till such time, one is not concerned about liquidity and earnings tailwinds. This space is going to do very well. Earlier, there was significant value even in the small and midcaps. One of those pockets is real estate. The other is capital goods and to some extent, tourism and travel. If we can find opportunities in those spaces which are reasonably priced, we believe there is room for money to be made there and in general, we believe that this cycle is not anywhere close to the end. If at all, it is somewhere in the middle and the cycle has room to go between now and sometime to come. We are positive on that space in the small and midcap space as we speak today.
