Infra, real estate scrips look up

Budget, RBI proposals augur well for the two sectors and their lenders; however, experts prescribe caution in investing

Stocks related to the real estate and infrastructure sectors, which had reacted positively to the recent Union Budget proposals, were in the limelight again on Wednesday.

This followed the Reserve Bank of India’s (RBI’s) guidelines on lending for housing and infra, announced after market hours a day earlier. RBI said on Tuesday  that banks would not have to maintain the cash reserve ratio or statutory liquidity ratio rules, or priority sector lending targets, for funds raised through bonds for extending credit to these sectors. The definition of affordable housing has also been recast.

The NSE CNX Realty index, a gauge for real estate companies, rose 4.3 per cent as compared to a 1.3 per cent rise in the general benchmark CNX Nifty on Wednesday. Since Thursday, when the Union Budget proposals for 2014–15 were presented to Parliament, CNX Realty has outperformed the market, gaining five per cent as against a 0.5 per cent rise in the benchmark index.

“Banks will have easier infra financing norms post the RBI announcements. For housing finance companies (HFCs), that also have a chunk of their borrowings coming from banks, one can expect the cost to income ratio to dip over time.  However, the key variable here is the reduction of interest rates. With inflation still at elevated levels, a delayed or sub-par monsoon can further negatively impact inflation and also affect the interest rate trajectory,” said Mayuresh Joshi, vice-president (institutional), Angel Broking.

Analysts at Espirito Santo Securities expect ICICI Bank and Axis Bank to be the biggest beneficiaries of the RBI move, as they have large exposure to both project finance and housing loans. Among public sector banks, State Bank of India will be the biggest beneficiary, they say.

IDFC’s scrip moved up nearly nine per cent and hit a 52-week high on Wednesday; it, too, will stand to gain, as 2017-18 will be the first year when it would be subjected to these regulatory requirements, analysts say.

Investment strategy
Despite the positive measures and the fact that the stocks have seen a healthy run-up, analysts advise caution, as the sops will take time to bear fruit.

Sunil Jain, head of retail research, Nirmal Bang, feels although the overall direction of the recent measures is positive, it will take some time for tangible results.

“The infrastructure sector is still plagued with problems like land acquisition for roads, etc. Interest rates are still too high. Having said that, the infra funding problems now seem to be getting addressed by government policies,” he says.

“Introduction of real estate investment trusts (REITs), while expected, is an important step forward and opens a new asset class. New guidelines on raising funds for infrastructure lending should help cut funding costs. More, transfer pricing issues have been clarified, and duties further simplified,” said Neelkanth Mishra and Ravi Shankar of Credit Suisse, in a client note.

Analysts at Motilal Oswal Research expect REITs to be a game changer and add significant value to all stakeholders. Developers would have access to a new source of funding, with retail funds channelised through a regulated network, they believe. Their preferred picks are Prestige Estates, Phoenix Mills, DLF and Brigade Enterprises.

“We have already seen a huge run-up in most of the related stocks, even from a FY15 perspective. We still like LIC Housing Finance and GIC Housing Finance among the HFCs. Among banks, we like Axis Bank, ICICI Bank, HDFC Bank, State Bank of India and Bank of Baroda. They should gain over 15 to 18 months. Though all these stocks have run up, one can still adopt a staggered investment approach. In the realty pack, we like DLF and Godrej Properties,” says Joshi of Angel Broking.

Analysts at ICICI Securities are upbeat on the prospects for the roads sector and maintain a ‘buy’ rating on Sadbhav Engineering and Ashoka Buildcon, and an ‘add’ rating on IRB Infrastructure.