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Realty set for a multi-year bull run, go for direct plays: Dipan Mehta


Eventually the bull run in the larger real estate company will percolate down to some of the smaller ones as well and the entire sector and the industry will suddenly start outperforming. There are some positive trends in this industry but as and when the industry starts to get traction, there will be a further upside in the stock prices, says Dipan Mehta, Director, Elixir Equities.



It is all about real estate now. It started with the south-based real estate companies and now it has moved to north and central or NCR based real estate companies. DLF has made a comeback, as has Max Ventures. Is the excitement in real estate stocks overdone or justified?
There are worries but they are being addressed and one more thought which comes to mind is that typically bull markets climb the walls of worry and that is what is happening just now. Specifically in real estate, after almost 8 to 10 years, we are seeing a revival of the cycles.

The cycles in this industry are typically very long and last for a decade or so. We are seeing a nice upcycle coming through in the industry which is reflected in the stock prices of the real estate companies and overall it is sensitive to the economy with the economy picking up, increased usage and pricing the wealth effect. All these things certainly benefit real estate companies and I am not surprised that the likes of DLF and Macrotech have now come into reckoning because they have a clear advantage in terms of the land bank which they own and because of that land bank, they can execute and launch many new projects and monetise it more quickly than some of the other real estate players.

I think real estate has a long long way to go and fortunately all the listed realtors are focussing more on cash flows and on profitability rather than land banks and increasing the projects without doing proper due diligence. So, there are some positive trends in this industry but as and when the industry starts to get traction, there will be a further upside in the stock prices.

Would you be tempted to buy the surge in real estate? If the real estate sector starts picking up momentum and I am talking about the real estate prices, that could be a multiyear trend and the move in real estate stocks could be a multi-year move?
Absolutely. I am convinced on that count and I have a high degree of conviction as far as real estate stocks are also concerned. Gradually the corporate governance standards have also improved and from these levels, they are all looking like great investment prospects if there is a correction of 5%-10%. So there is quite a bit of a margin of safety but yes, I think broadly these stocks are looking good and eventually the bull run in the larger real estate company will percolate down to some of the smaller ones as well and the entire sector and the industry will suddenly start outperforming.

We have seen real estate companies underperform for almost seven-eight years or so and they are going to play catch up at this point of time. All the worries are well behind them in terms of RERA and higher interest rates and general lethargy in the economy which were preventing the consumer from making large ticket decisions. All those things are well behind and the industry is looking forward to almost a blue sky type of scenario.

How should one go for the real estate play? Is it best to hold the real estate stocks directly or to do it indirectly through home décor or construction or commodity companies?
I will go with holding the stocks directly. It is best to go directly into the sector where eventually they are going to see secular growth for five-six years or so. Also, there is valuation comfort. Do not go by the present price to earnings multiples. A lot of these companies have a lot of potential in terms of launching new projects and all of those projects. Profitability has not completely been captured into the market capitalisation.

I would say that if you like a particular theme, go for the market leaders or niche players. Do not try and play it indirectly through appliances or home improvement or home décor companies. They have their own trajectory and they have their own challenges in terms of rising cost of inputs, supply disruption because of what is happening in China in terms of chip availability and many other factors have also come into play.

Of course, they have their own positive benefits as well in terms of rural consumption going up, higher electricity which is driving appliances. But if you want to play the upswing in the real estate sector, it is best to buy listed companies and they can deliver good returns over next three to five years.

How should one approach the media sector? There is a lot of deal making that is taking place. We will also see the platform play and all of that take place?
Media has also benefited from reopening because their advertising revenues have been declining and bit of a problem area for the sector as a whole. With the festival season coming up, we could see a sharp upswing in advertising and typically media companies have got very high operating leverage. But the revenues are not in their hands and fluctuate with advertising and subscription. And with advertising picking up, a lot of the gains will go to their bottom line. So, I am very positive on media companies as well.

Of course, Zee is in a different league of its own because of the announcement in terms of merger with Sony. If that does take place, then the stock can get rerated even further from these levels in terms of price to earnings multiples. Investors always prefer the larger players who have got scale because of the diversity of their operations as that provides some comfort in times of turbulences in this sector.

We are watching Zee very closely and if this merger actually takes place at favourable terms, then we could see the stock price move up even higher. But there are certain very attractively valued companies within the media space like Sun TV per se which have underperformed and are available at an attractive valuation. These have been suffering from lower advertising spends which might pick up in the upcoming festive season. So, media looks decent at this point of time.

Is it a good time to subscribe to the Bharti issue? It is at a substantial discount?
That is a no-brainer. You have to apply. If you are an existing shareholder of Bharti Airtel, you have been seeing a large degree of underperformance for many years and now the stock finally is zooming up and they have a rights issue also at a good discount. No investor will let that opportunity go and the trends for this sector are looking very good with whatever the government has announced.

I am not yet convinced of buying into Vodafone-Idea but if you want a pure play telecom company, then Bharti Airtel is the only choice. Many were concerned about Bharti Airtel — whether they had a 5G strategy and how they would go about increasing their ARPUs, the competitive intensity from Reliance Jio and of course, the Jio phone which, of course, has got postponed.

All these concerns have now been priced in and people are convinced that Bharti Airtel has the balance sheet, they have the management bandwidth and the desire to invest money into 5G for upgrading their technology platforms. Most importantly, they have been able to gradually increase their subscriber base which is most impressive. So I am very positive on Bharti Airtel as well.

Do not look at the valuation on a historical basis. This business has got high operating leverage and as and when ARPUs move up, you will see very decent profitability coming into Bharti Airtel. Last but not the least, a lot value has got created in the African subsidiary and some of the non-telecom new generation businesses they are getting into. On the whole, very positive on Bharti. Just a disclosure that we and our clients are invested in (8:49) Baharti.

So much is being talked about SaaS. Let us not forget the original wave started with IT– Wipro, Infosys, TCS. Now, we are seeing the midcap IT and commodities do so well. In fact, they are delivering better returns at the moment than the largecaps. Where do you stand in this midcap versus largecap IT conversation?
One can have a bit of both and typically we are seeing rotation within the sector. For a few months, we see midcap IT doing well and then eventually large cap IT also starts to do better once investors realise that valuations are at a discount to midcap IT and that churn keeps on happening. We will make good returns in both midcap and largecap IT. This is again a multiyear surge and considering the kind of secular earnings growth which we see, valuations are reasonable and these are companies which have very high returns and very high corporate governance standards. So, investors are going to lap up IT shares for a long time.

Also, they are a good hedge in terms of any issues coming up in the domestic economy as there is good demand abroad. We are going to see very good prospects. The only issue of course is attrition and rising manpower costs and from that angle, largecap IT has an edge over midcap IT in terms of retaining and training talent and in terms of deploying it on all the various large projects that they have in hand. I would say go for both. One company which comes to mind, and which has underperformed but is very attractively valued is Oracle Financial. It is the subsidiary of the US giant Oracle and it is largely a product company.

Typically we prefer product companies because of their non-linear business models. That is one company which we have on our watch list and looking at investing in that as well at the appropriate time.

There is one pocket which has not participated and since we are talking about the unlock trade here — whether it is hotels, multiplexes or restaurant companies. How about revisiting the fashion retail businesses, Aditya Birla Fashion, Arvind Fashion, Trent which has WestSide and Zara in it? Could that be the best unlock trade once again?
When we are looking at the entire unlock trade, outperformance can be found in the retail stocks. These companies have suffered tremendously because of the pandemic and one can expect revenge buying there as well. These are companies which have got decent balance sheets, good brands, a large network and although there is threat from online the fashion retail, clearly there is not that much concern with online because end of the day, the consumer has to try out the apparel and has to have the look and the feel before they buy it.

So we are very positive on the sector as a whole. There is one company you that remains our top pick within the space and that is DMart. The acquisition of Unlimited has clearly put this company at a different level and expanded the market for them in the southern region where they have had hardly any presence. This is a company which has delivered spectacular returns and a very good track record during the good times and even during this pandemic, they have survived pretty well and I would say managed the entire operations in the best possible way they could.

I am very positive on that particular stock and their expansion into tier-2, tier-3 cities is a very sound strategy. It keeps them away from the competition of the larger players. That would be our top pick. Aditya Birla Fashion also comes into the reckoning and they too have a decent track record, a nice network and they are trying to increase their private label and get into innerwear as well.

All of those are growth triggers for Aditya Birla Fashion. But as I said, the top pick has to be D-Mart which is available at reasonable valuation.



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