How should you play the real estate theme? Varun Goel answers

Varun Goel, Head- Equity AIF, Nippon India MF, says “that the wires and cables and the building material companies are riding the real estate growth spurt which may continue for the next few years. As such, the growth will definitely be strong though the valuations in some of these names have run up, especially on the wires and cables and some of the ancillary space. One needs to be a little careful in terms of incremental buying from this point onwards.”

What is your take on the home improvement theme? A lot of those stocks are doing well, whether it is consumer durables or whether it is the specialized names or the cable companies. How do you justify the valuations?
Our sense is that we are looking at a revival in the residential real estate cycle. For the first time after 2013, we are beginning to see not only good volume of tech but also price hikes across the country. Particularly in the NCR area, the price hikes have been very, very strong. So our view is this is the beginning of a new residential real estate cycle. As such, we would prefer to play it through the residential real estate players with good clean balance sheets and good corporate governance.

Incrementally, I would believe that the wires and cables companies and the building material companies are also riding the growth spurt which may continue for the next few years. As such, the growth will definitely be strong. Yes, I agree that the valuations in some of these names have run up, especially on the wires and cables and some of the ancillary space. One needs to be a little careful in terms of incremental buying from this point onwards.

I want to talk about one of the groups in the market, one big conglomerate with interest in metal & mining and oil. Let us not name it, but in the last three-four years, I have heard so many different kinds of buzz; we have heard about delisting, we have heard about stake sale, a buyback and now there appears to be initial plans of a massive restructuring, demerging different kinds of businesses into separate companies. How would the market read into all of this?
So, broadly, we have very little understanding of global cyclicals and as such, our exposure to this sector is fairly limited. Our sense, based on my experience in the markets of the last 16-17 years, is that a permanent destruction of capital happens always for two reasons. One is too much debt and second is because of poor corporate governance. As a prudent investment metric, if we can avoid these two things, permanent destruction of capital can be avoided.

Of course, stocks will still go up and down depending on their shorter-term fundamental performance on profits and sales and EBITDA but if we can keep in mind these two factors, permanent loss of capital is avoided and therefore from our portfolio construction perspective, we always keep these two parameters at a very high place in terms of when we are eliminating stocks or selecting stocks for our portfolio.