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Godrej Properties is India’s largest realty player

Godrej Properties
12/07/2021

You may believe that the real estate market is dull but Godrej Properties begs to differ. Consider these numbers. Over the next couple of years, Godrej Properties plans to invest close to $1 billion or Rs.7,500 crore to acquire and develop new projects. Secondly, Godrej has confirmed that in the last fiscal year, it sold 9,345 homes which is an average of 25 homes sold per day. To bankroll its grand plans, Godrej Properties has also raised a whopping Rs.3,750 crore through placement to Qualified Institutional Buyers (QIBs).

What has all this done to the top line numbers of Godrej Properties. For fiscal year 2020-21, Godrej Properties emerged as the largest real estate developer in the Indian markets. Godrej Properties sales bookings for the year were 14% higher at Rs.6,725 crore. This virtually puts the largest real player in the real estate space, Macrotech Developers (formerly Lodha Developers), to the second place. During the fiscal 2020-21, Macrotech reported total sales of Rs.6,000 crore, more than 10% lower than Godrej Properties.

It is said that the proof of the pudding lies in its eating and the proof of a stock’s attractiveness lies in its stock price. Since Sep-20, the stock of Godrej Properties has almost doubled from Rs.819 to Rs.1,517. This is largely on the back of the emergence of Godrej in the top league among real estate developers. More than anything, the markets appear to be excited about the billion dollar investment that the company is infusing into expanding its business to the next trajectory. 
 

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Crude Oil at $75/bbl – Here comes inflation

Crude Oil
12/07/2021

Brent Crude touched $75/bbl after a long gap. The last time Brent Crude was above $75 was back in 2018, when oil peaked around $79/bbl. Of course, crude oil is still a long way off the $100/bbl mark which it scaled prior to 2014. What exactly is driving oil higher? For one, the OPEC talks for increasing oil supply has failed. OPEC is a cartel of oil players led by Saudi Arabia, which controls over 30% of the global oil supply. OPEC had cut oil supply last year to boost oil prices and that has been one of the reasons for the rise in oil prices.

But low supply has a cost to the oil producers too. They are not able to profit fully from the higher prices due to supply constraints. As a result, a clutch of OPEC members including United Arab Emirates have been insisting on a sharp increase in supply. In fact, OPEC was planning to add nearly 7 million barrels per day (bpd) from Aug-21 but that is the crux of the dispute. While UAE and other countries are keen to add supply, big guns like Saudi Arabia want to persist with supply cuts for longer.

This dispute has meant that OPEC supply may not fully return in August. That is not great news for India because every $10 increase in crude oil prices leads to 0.5% increase in inflation. With India relying on imports for 80-85% of its oil needs, this vulnerability is here to stay. That explains petrol and diesel at above Rs.100/litre. As long as the OPEC dispute is on, India must prepare for higher levels of inflation.

Read: Sectors dependent on crude Oil

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SFBs get a boost as they can absorb the holding company

small finance bank
12/07/2021

In the last few days, small finance banks and their parent companies have shown a sharp rally. What exactly has changed? Both Equitas Small Finance Bank (SFB) and Ujjivan Small Finance Bank (SFB) propose to apply for amalgamation of their parent with the SFB. While Ujjivan Financial is the holding company of Ujjivan SFB; Equitas Holdings is the holding company for Equitas SFB. This was after the RBI permitted SFBs to merge their holding companies into themselves. How this announcement relevant.

It assumes significance as both Equitas SFB and Ujjivan SFB are about to complete five years of operations. Under the RBI regulations, on completion of 5 years the holding company must dilute its stake in the SFB to below 40%. Both the holding companies; Ujjivan and Equitas, hold nearly 82% in the SFB arms. Reducing this stake to below 40% would entail a massive surge in free float depressing prices. The new RBI rule will allow the SFB holding companies to avoid dilution by merging the holding company into the SFB. This will ensure that the valuation of the group improves.

In the last few months, this mandatory holding company dilution was the reason for stock prices being tepid. With RBI allowing SFB holding companies to amalgamate with the SFB, this dilution issue is automatically addressed. But there is a bigger takeaway. Most holding companies in India are subjected to a holding company discount and this was depressing valuations. With the new rule, that discount should go away, allowing more value based pricing for SFBs. That is what is getting markets excited about Ujjivan and Equitas.
 

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Inflation poses a challenge at above 6% in June

Inflation
13/07/2021

The good news was that inflation at 6.26% for Jun-21 was way below the consensus estimate of 6.9%. The bad news was that inflation was just marginally below the May-21 inflation level of 6.3% and well above the RBI tolerance level of 6%. Remember, the 6% is the outer tolerance limit of RBI with respect to inflation and its median inflation target for the Indian economy is 4%. So, the current inflation is still way higher.

Let us turn to the components of inflation. Core inflation (which excludes food and fuel) was slightly down from 6.55% in May to 6.16% in June. However, food inflation spiked from 5.01% to 5.15% in June on the back of higher oil, fat and egg inflation. But the bigger concern for the RBI would be the sharp spike in fuel inflation and transport inflation. Fuel inflation spiked from 11.6% in May-21 to 12.68% in Jun-21 while transport inflation also came in sharply higher at 11.56%. Food inflation was much sharper in rural India.

The steep levels of inflation can be attributed to higher crude prices. Typically, a $10 per barrel increase in crude oil prices lead to a 0.5% rise in inflation in India. Additionally, higher fuel prices and higher transport inflation have strong externalities in the sense that they seep into almost all goods and services. For the RBI, the bigger challenge is the pressure on real rates of interest and the pressure to hike interest rates to compensate investors. We will await the RBI monetary policy in August for greater clarity.
 

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What is so hot about fertilizer stocks?

Fertilizer sector - stocks to watch
13/07/2021

In the din and euphoria over steel and internet stocks, investors appear to have forgotten a silent multi-bagger in the last 8-9 months. Of course, we are referring to fertilizers. The robust Kharif output last year gave an impetus to fertilizer stocks. Since Sep-20 most fertilizer stocks have at least doubled. Then there are the likes of Chambal Fertilizers that is up 3 times and Deepak Fertilizers up nearly 4 times in this period. What exactly has been the trigger for this fertilizer stock rally?

During the last few months, the government has made a series of announcements, hiking the subsidy on fertilizers to reduce the burden on farmers. Yes, fertilizer input prices have gone up and most fertilizer companies have had to raise prices. In June, the government hiked subsidy on key fertilizers by 140%. For example, the government will now offer a subsidy of Rs.1,200 per bag of NPK (Nitrogen, Phosphatic, Potassic) fertilizers as compared to Rs.500 offered so far. When you combine with the robust MSP offered by the government to farmers for Kharif procurement, it puts fertilizer stocks in a sweet spot.

But, what is more interesting is that valuations of fertilizer stocks are still attractive. For example, Chambal Fertilizers is available at 9.2X P/E while Deepak Fertilizers is available at about 20X P/E. Then there are the PSU fertilizer plays like NFL and GSFC, that are still available at just about 10X P/E and GNFC at 8X P/E. These valuations are after the sharp rally. With the government willing to stretch its fertilizer subsidy bill higher, it surely spells good times for farmers and for fertilizer stocks.
 

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Happy days for realty sector as Realty Index scales 10-year highs

BSE Realty Index
13/07/2021

An unlikely sectoral index, BSE Realty Index, hit 10-year highs recently. Even as experts have been talking about weak offtake in residential properties, the undertone appears to be changing gradually. A host of stocks like Godrej Properties, IB Real Estate, Macrotech Developers and Mahindra Lifespaces scaled new highs in the stock market. Smaller names like Prestige Estates, Sobha and Brigade have also showed traction. What is driving these realty stocks?

Two factors contributed to the surge in residential real estate demand. Home loan rates are at an all-time low and most states have given concessions or waive on registration charges. This spurred a spate of investments in residential properties. In FY21, Godrej Properties sold an average of 20 homes per day, even as it beat Macrotech to become India’s largest real estate company. In the Jun-21 quarter, real estate developers have reported a sharp fall in residential inventory and that is changing the outlook for realty stocks.

Also Read: Godrej Properties is India’s largest realty player

The real estate story in India is not just about the crisis of the last few years, but the recovery that is expected in the next few years. Consider some numbers. Macrotech is up over 80% since its listing in April this year. Godrej Properties has doubled since September while Mahindra Lifespaces has tripled in the last 1 year. That is the story with most real estate companies. The moral of the story is that after a very long time, the stock market appears willing to bet on a full-fledged recovery in residential real estate demand. That is the difference!
 

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