Infra, realty stocks to gain from RBI, Budget proposals: analysts

CNX Nifty has outperformed market by gaining 2.5% as against 0.48% decline in benchmark index

Union Budget proposals and the Reserve Bank of India's (RBI's) guidelines have seen stocks from the real estate and infrastructure sector gain ground. Though most stocks from these policy-oriented cyclical sectors had run up in the run-up to the Budget in the hope of favourable policy announcements, the recent announcements have seen renewed investor interest in these segments.

In a move seen as a measure that is likely to spur demand for housing and infrastructure, the RBI on Tuesday said that banks would not have to maintain cash reserve ratio (CRR) or statutory liquidity ratio (SLR) and will not have to meet priority-sector lending targets for funds raised through bonds for extending credit to these sectors. The definition of affordable housing has also been recast.

Most frontline stocks are trading higher between 1-3% on National Stock Exchange (NSE). The NSE CNX Realty index, a gauge for real estate companies, rallied nearly 2% as compared to 0.33% rise in CNX Nifty in intra-day deals on Wednesday.

Since July 10 when the Union Budget proposals for 2014-15 were tabled in the Parliament, CNX Realty has outperformed the market by gaining 2.5% as against 0.48% decline in benchmark index.

"If one looks at the proposals holistically, banks will have easier infra financing norms. In terms of housing finance companies that also have a chunk of their borrowings coming from banks; one can expect the cost - income ratio to dip over a period of time. However, the key variable here is the reduction of interest rates. With the inflation still at elevated levels, a delayed and sub-par monsoon can stoke inflation. This, in turn, can impact the consumer price inflation (CPI), wholesale price inflation (WPI) and 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 recent RBI move as they have large exposure to both project finance (nearly10% of advances) and housing loans (nearly 20% of advance). Among PSU banks, SBI will be the biggest beneficiary, they said in a report. IDFC that moved up 7% to hit its 52-week high on Wednesday, too, will stand to gain given FY2018 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 a cautious approach at the current levels as the sops will take time to bear fruit.

Some of the key Budget proposals that excited the markets include according of pass-through status (meaning, no corporate income tax) for real estate investment trusts (REITS), relaxation in norms for foreign direct investment (FDI) and raising the tax-exemption limit on housing loans.

Sunil Jain, head of retail research, Nirmal Bang feels that though the overall direction of all these proposals is positive, it will take some time till we see tangible results.

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

"Introduction of REITs, while well expected, is an important step forward and opens up a new asset class. New guidelines on raising funds for infrastructure lending should help cut infrastructure funding costs. Moreover, transfer pricing issues have been clarified, and duties further simplified," said Neelkanth Mishra and Ravi Shankar of Credit Suisse in a post budget 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 FY15 perspective. However, we still like LIC Housing Finance, GIC Housing Finance among the HFCs. Amongst banks, we like Axis Bank, ICICI Bank, HDFC Bank, State Bank of India and Bank of Baroda. They should gain over 15 - 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," Joshi of Angel Broking says.

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