Realty index makes a comeback, rises 20% in March; All eyes now fixed on RBI policy
In the near term, the catalyst is RBI’s policy meet tomorrow. Realty firms with high debt to equity ratio may benefit if the RBI lowers interest rates or takes a dovish stance.
The index has rallied nearly 20 per cent since the beginning of March 2014 and looking at the interest in the sector, the trend might continue for some more time, say experts.
Analysts, however, are cautioning investors to be selective in absence of demand due to high interest rates.
Bank of America Merrill Lynch is of the view that realty sector is not out of the woods yet and hence investors should be cautious while taking long positions.
It has identified Oberoi Realty and Prestige Estates as top picks in sector. It is of the view that DLF and Indiabull Real Estate are best placed for this beta rally on liquidity.
The brokerage has raised the target price of Oberoi Realty to Rs 284 from Rs 275. At the same time, it has cut Sobha Developers target to 400 from 410 and Unitech target to 13 from 14.
Jaypee Infratech, HDIL and Unitech should be avoided in the beta rally, the brokerage says.
Gautam Trivedi, MD & Head of Equities, Religare Capital Markets, is of the view that investors can take a short-term trading bet on high-beta stocks, including realty.
“A short-term trading bet is fine, but you have to be careful and cautious about the fact that nothing has dramatically changed regarding the fundamentals. The debt of infrastructure companies has not really changed. Therefore, let us be practical about a situation where the debt has not really significantly come off,” he said to ET Now.
“Debt levels have not changed and interest payment actually has been going up, because the RBI governor continues to raise rates. Thus, nothing has dramatically changed, but from a momentum perspective and a pure trading perspective and from the next two months, you potentially could make more from these sectors,” he added.
In the near term, the catalyst for the sector is the Reserve Bank of India’s policy meet tomorrow.
The realty companies with high debt to equity ratio may benefit if the RBI lowers interest rates or takes a dovish stance. According to analysts, the central bank may leave the rates unchanged at its next policy meet.
Other factor that is bringing the investors back to the beaten down sector is the pace of asset sales that have picked up.
According to a JPMorgan report, the pace of asset sales in the real estate sector seems to have gone up significantly over the last 3-6 months.
“This, as contracted sales rates are falling and developers are rushing to generate cash flows to service fixed costs in the business (interest/ corporate expenses). Some developers have had success in these transactions and have been able to reduce debt materially. However far more is required especially given uncertain environment around pre-sales in Mumbai/NCR,” the report said.
Axis Capital has turned overweight on realty sector on hopes of a stable government at the center. It is bullish on DLF in the Nifty basket and Prestige Industries from non-Nifty realty companies.