Friday, March 30, 2007

Picking Stocks in Real Estate Sector

One of the questions asked of my earlier post was how to choose a stock to invest in.

It is alright to say, " You can start with identifying a list of 10-15 companies out of 3-5 sectors which you know or which interests you. You can keep a tab on their management team, financials and future outlook and over a period of time, you will be able to take a call on them." I guess, it's good in theory.

How about we do an analysis of a sector and then take a look at some of its stocks. Let's take a look at the Real Estate/Infrastructure sector which is so much in the news.

When we do an industry analysis, what are the things we look at? Companies producing similar products are subsets of an Industry/Sector. For example, National Hydroelectric Power Company (NHPC) Ltd., National Thermal Power Company (NTPC) Ltd., Tata Power Company (TPC) Ltd., etc. belong to the Power Sector/Industry of India.

It is very important to see how the industry to which the company belongs is faring. Specifics like the effect of Government policy, future demand of its products etc. need to be checked. At times prospects of an industry may change drastically by any alterations in business environment. For instance, devaluation of rupee may brighten prospects of all export oriented companies. Investment analysts call this Industry Analysis.

To start with, let's look at some macro facts and observations about the industry.
  • The Tenth Five Year Plan has estimated a shortfall of 22.4 million dwelling units in the country. According to one estimate, over the next 10 to 15 years 80 to 90 million housing units will have to be constructed.
  • The investment required for constructing these dwelling units and for providing related infrastructure during this period will be of the order of $666 billion to $ 888 billion at roughly $33 billion to $44 billion per year ($1 billion = Rs 4,400 crore).
  • There is a steady growth in Housing Finance sector of approx. 30% over last four years. The rate of interest for housing finance has become reasonable and affordable which has resulted in more credit offtake and subsequent maturing of the housing industry. Even though there is an increase, the rates are still reasonable to my mind after factoring in the tax benefits.
  • Fiscal benefits provided by the Government of India have encouraged the end users and investors alike.
  • Income of the urban buyer has grown substantially. There is tremendous scope and growth in the Infrastructure Development.
  • Foreign investment by way of FDI has been approved. Emergence of professional builders in the market with proper accounting standards. There has been an emergence of rating systems for building projects.
  • The high growth of the real estate sector has led a lager financial institution to launch a dedicated real estate fund. These funds are simultaneously enticing large institutional investors as well as High Net worth Individual (HNIs) to expand their portfolio.
  • The award of ultra mega power projects and privatization of airports demonstrates a commitment at the highest level. So the momentum to build up roads, ports and urban infrastructure is building up for sure.
  • The JawaharLal Nehru Mational Urban Renewal Mission (JNNURM) initiative in 63 cities and urban transport projects will also drive up Investments in Infrastructure. Water Supply projects and sewerage projects would be part of the JNNURM.

So what do you think about the future of Infrastructure stocks in India? Ready to take a call?
There are three major stocks in the Infrastructure sector which are worth talking about: 1. Nagarjuna Construction (NJCC) 2. IVRCL and 3. HCC

Remember, do not go by the order book size alone, which is what many people do without understanding the intricacies. We need to understand the execution period of the order book, and the kind of margins that the company would make, given the kind of raw material prices at which it has booked these orders.

Even though it may look daunting, a little bit of research helps you in understanding the stocks as well as improving your general knowledge.

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