Stars getting aligned for realty: Nilesh Shah | Economic Times

Housing loans interest rates are very low. RERA is aligned with consumer and developer interest; affordability has increased; house prices have stagnated. Put all these things together and we believe housing is a longer term trend and the way to play it is directly through real estate stocks directly as the home improvement sector is connected to real estate, says Nilesh Shah, MD, Kotak AMC. We have seen a bit of a reversal in the global commodity prices -- be it gold or crude or the pause in industrial commodities. Do we need to be cognisant that commodities could now reverse and if commodity prices reverse or hit the pause button, then a) commodity stocks will come down, b) it is bad news for a lot of industries?Our view on commodity prices is that the exponential rise which we witnessed in the last six or nine months is unlikely to sustain. That is the nature of the commodity cycle; at higher prices, supply emerges from dormant capacities and demand starts tapering off, eventually bringing equilibrium which results in commodity prices coming down. This is the nature of the commodity cycle over hundreds of years and this time is no exception. However, we continue to believe that some commodity prices will remain elevated as demand supply imbalances are likely to persist. In terms of ranking, copper, aluminium and steel should be the ranking for picking up stocks in commodities sector as copper and aluminium cycle is likely to run longer than the steel cycle. You believe that aluminium and copper will really be seeing more of an uptick compared to maybe steel. So, there are certain commodities that will continue to either go higher or stay elevated. Many Indian companies are commodity consumers. Which ones are going to be most vulnerable to elevated commodity prices?The impact of commodity prices will be across many sectors but essentially top down we have to divide that it into two parts -- companies and sectors which will be able to pass on the cost increases to consumers without impacting volumes, without impacting demand; and companies which will not be able to pass cost increases to the consumers without impacting demand or the overall business volumes. We believe the automobiles sector’s ability to pass on cost increases to consumers will be limited. On the other hand, electrical appliances, wires, cables, real estate, construction sectors should be in a position to pass on cost increases to the consumers. A big chunk of consumption growth is going to come from the salaried segment. IT sector hiring is going on in a big way and that has led to improvement in housing sales and that it is being reflected in the way realty has moved up very unexpectedly. Do you think that these stocks have already discounted for that improved housing sales or is there more room for a rally?Housing is a longer term trend. A decade back it was contributing almost double digit to India’s overall GDP and this is a broad spectrum of housing construction and real estate. Now it is contributing a higher single digit to India’s GDP. Now stars are aligned for the housing sector. Housing loans interest rates are at one of the lowest levels. RERA is aligned with consumer and developer interest; affordability has increased; house prices have stagnated. Put all these things together and we believe housing is a longer term trend and the way to play it is directly through real estate stocks directly as the home improvement sector is connected to real estate. When you are investing in real estate, be sure that you are backing the right promoters because this sector has lots of issues related to governance. Within real estate, I believe the big is becoming bigger; the better governed companies are becoming bigger. That is going to be the trend. How are you viewing the Indian internet companies? After Zomato, all eyes are now on Paytm, Nykaa, Policybazaar. The question is what is left on the table once these companies list because maximum juice is already out? Let me accept that we are like blindmen trying to figure out the elephant in this case digital companies. Over decades, we have developed the ability to value physical assets. Someone puts up a steel plant and if industries write it off in the first year of spending, we are fine with it because we know this steel plant will deliver value over a period of time and we are comfortable using the depreciation charges rather than writing off all the spending. Like physical assets, a company is also creating digital assets. Today they do not capitalise digital assets, they write it off. The value of the platform, the value of contracts which are on the platform, the employee base which they have created, the consumers they have enticed to their platform -- this is all spending which is not capitalised but which is likely to give benefit over a period of time. Now we have to develop expertise on valuing digital assets. It is a work in progress for us. We are taking baby steps. We have built our model in terms of what a digital platform should deliver on the path to profitability. It is a longer and uncertain path, and yet we have tried to build a model to figure out where they will be over a period of time. If the quarterly results are indicating movement in that direction, I am sure investors will continue to stay with digital companies. If there is a deviation in that path, the prices will eventually reflect that. This is one more from a fundamental point of view, but the market is also made up of sentiments apart from fundamentals. As for the digital cess, there are believers as well as non-believers. Now whenever prices correct, believers will continue to buy but the non-believers will panic and they will rush to sell. So the movement on the downside is far higher as believers will wait for non-believers to sell out and then accumulate. This is the kind of sector where we will see higher volatility especially on downside and your conviction about your model will get tested.