In next 10 years, there will be many multi baggers in realty

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We have a weak day at hand in the markets but nevertheless for the entire week we have done pretty well. Do you believe that the global risks emanating may have bottomed out and we were perhaps stressing too much on global worries and hence going forward we may just have an optimistic outlook on the markets?

We have been asking why this correction is happening and if you ask a banker, he would tell you this correction is because of the PNB scam. If you ask a CA, a tax man, he would say that this is because of LTCG. If you ask a global trade guy or global asset manager, he would say it is because of the global markets. If you ask a value investor, he would say this is because of valuations of markets were just too high. If you ask a growth investor, he would say that there is no growth in the market.

The whole thing is that fear and greed markets will keep moving up and down. High quality stocks will keep making new highs. So broadly, I think the correction is largely over but in high quality stocks, not the small cap and the midcap space. The stocks which are making lifetime highs, let us say D-Mart or Jubilant Life or Titan, are extremely expensive companies. These companies are trading at 70-80 PE multiples FY19 and these guys are still making new highs. It is clearly showing that trend is towards high quality stocks and 2018 will be about chasing quality and not about these low-quality stocks. Low-quality stocks are now a part of everyone’s portfolio. These stocks are not going to rally. It is going to be a rally towards high growth, high return on equity, free cash flow and very high quality stocks.

The one thing that every investor wants to know is are we going to see a range-bound market for 2018 because it is going to be an eventful calendar year, especially for the Indian markets given the elections? Is it going to be one that will continue the 2017 rally or will it be the time when investors would stay away from the market?

As a whole, I do not see market doing a lot. At 11,000, we were extremely bearish on your show. On 9300-9400 if it comes there, we will be extremely bullish. At 10,000, it is somewhere around fair value. So plus/minus 500 points from here, that is possible but you have to get into these trends. Small caps will take more than a year to hit new highs and about that I am very sure. Midcaps will probably take more time as well. But stay away from small caps where mutual funds are not buying. Look at quality stocks. Those stocks will start moving higher because that is where big money can be made this year. I am very bullish on high quality stocks. That is very clear now.

You have spoken about road construction projects. A lot of analysts speak about how the infrastructure space aided by government spending is something that will come out as a top gainer. What is your rationale?

We have been very bullish on the road construction sector for some time. Infrastructure is 30% of our portfolio and that is how bullish we are. If you see the biddings which have come in, take an example of Dilip Buildcon, something that we hold in our portfolio. The order book of Dilip Buildcon was Rs 13,000 crore in Q3. This quarter, it will be somewhere around Rs 30,000 crore. Three months ago, people used to ask me how would Dilip Buildcon get so many orders and now the same people ask me how will Dilip Buildcon execute these orders in the next two years.

These guys have done well. The best part which has happened in the bidding is that in 2007-08-09-10, there were 30 bidders for every project. Now, if you take any HAM project, there are not more than four bidders and so the competition is not there.

The best part about the deal is that L&T, which would broadly have 30% market share of road construction, has not bid for even one project and these are not even Bharat Mala orders. Now, the Bharat Mala orders will start pouring in. Which are the players who can take orders and execute as well? Our choice is Dilip Buildcon and a few other infrastructure players that we have gone long on. This is a space that should not be missed out for the next one or two years. There is a lot of alpha that can be created there.

You are one of the few analysts who are actually picking real estate. What is your rationale because most people are saying that they are not seeing a pick-up in demand when it comes to real estate?

You are absolutely right, there is no demand in real estate and Khushru Jijina, the guy who runs Piramal Finance, also said that the same thing that 90% of developers will go bankrupt in the next five years. Now, we like these kinds of things where 80-90% of the industry is going bankrupt and 10% industry will keep taking on market share.

Real estate has been there for the last 50 years and it is going to be there for next 50 years. There will be developers who will make a lot of money and these are going to be organised developers. Now, let us just understand the model of let us say a Godrej Properties.

Godrej Property does not have to buy land because he does a joint development model and there is no upfront cash flow investment and this guy gets pre-bookings. So, basically, he can keep developing new projects for the next 5-10 years whereas competition cannot pre-sell and cannot get joint development land.

Basically the 5-15% market of real estate will keep taking on market share. It is a 10-year trend and I am super confident that in the next 10 years, there will be many multi-baggers in the real estate space. Disruption creates strength and disruption is surely happening in real estate space. So, for organised real estate, just choose the best builders, branded builders in every micro market that is where big money will be made for the next 5-10 years.

This is not a three, four, five, six months trade, but for long term, it is a disruption and I am very confident that real estate will create a lot of alpha for investors.