Kotak AMC’s Nilesh Shah on real estate sector, internet stocks and more

Nilesh Shah, managing director at Kotak Asset Management Company, is bullish on the Indian real estate market and thinks that investors should pump their monies into stocks of such companies. 

Shah says a number of factors bode well for the sector, including that home loan rates remain lowand home prices have stagnated, making buying a house affordable for many. 

In addition, the Real Estate Regulatory Authority is customer-friendly and has also been looking after developers’ interests, he says.

In an interview with The Economic Times newspaper, Shah said that all these factors together mean that housing is a longer-term trend and the way to play it is through real estate stocks directly as the home improvement sector is connected to real estate. But he also adds a note of caution.

“When you are investing in real estate, be sure that you are backing the right promoters because this sector has lots of issues related to governance. Within real estate, I believe the big is becoming bigger; the better governed companies are becoming bigger. That is going to be the trend,” he said.

On commodity prices

Talking about commodity price cycles, Shah thinks that the unprecedented rise in prices of commodities like gold or crude oil that has happened in the last six months is unlikely to sustain.

“That is the nature of the commodity cycle; at higher prices, supply emerges from dormant capacities and demand starts tapering off, eventually bringing equilibrium which results in commodity prices coming down. This is the nature of the commodity cycle over hundreds of years and this time is no exception,” he said. 

Having said that, Shah does believe that some commodities like copper and aluminium will remain buoyant, as demand and supply imbalances are likely to persist for a while. 

Gainers and losers

Shah believes that as prices of aluminium and copper remain tight, companies in sectors like real estate and construction, wires and cables and electrical appliances will be better off, as they will be able to fully pass on the higher costs to their customers without seeing an adverse impact on demand. 

On the other hand, companies in highly competitive and price-sensitive sectors like automobiles could see a dent in demand as prices rise.

Blindmen and the elephant

Talking about digital companies like Zomato listing at steep premiums, Shah says that when it comes to the Internet economy, Indian investors are like “blindmen trying to figure out the elephant”.

He says that over the past few decades, investors have become comfortable when it comes to valuing companies with physical assets, but Internet-based businesses present a new set of challenges.

He said companies create digital assets, in addition to physical assets, but don’t currently capitalise these virtual assets such as the values of the online platform or the employee and customer base. Instead, they write it off.

“This is all spending which is not capitalised but which is likely to give benefit over a period of time,” he said. “We have to develop expertise on valuing digital assets.”

Shah says that investors like Kotak AMC have developed new models on how to value such companies. “If the quarterly results are indicating movement in that direction, I am sure investors will continue to stay with digital companies. If there is a deviation in that path, the prices will eventually reflect that,” he said.