In its first leg , the rally was rampant and all across . It was less discriminating and more democratic . It was “inclusive” to use the right political term . This was till June when the tide was high across and lifted all and sundry . Market is not as generous now in its second leg of its rally which began early Aug . It is more selective and choosy rewarding staunch stock pickers than fickle stock flirters. It is less forgiving and more grievous for the punters who bet too much on hope rally .
Going by the sectors that have been hit the most , it appears that the market could be suffering from the so called “Hi-beta Blues” . High beta sectors such as Real Estate , Infra , Power , Metals , Cap goods etc have terribly underperformed the benchmark in this leg of the rally . Realty with 14% fall in its index is the most hit followed by power (11% fall) , capital goods (9.5% fall) and PSU ( by 7.0 %) to name a few . Metal index is not far behind with its 5.5% drop. In contrast , Sensex is up 4% this period with much sharper rise in Auto / Healthcare and other indices .
While the fall in index in itself quite sharp , it does not tell the full story . Underneath , some of the prominent sector stocks had a much sharper knock . DLF and Unitech took the steepest cut of over 40% followed by India Bull Real Estate , DB Realty and Omaxe falling by over 30% . These are not small names . They are the bell weather stocks for the sector . This does portend ominous signals for the sector that one can ill afford to ignore .
The bite is quite deep and sharp for the Realty . Reasons are not difficult to fathom . Overburdened by excess supply and muted demand , the sector has been reeling under vicious cash flow pressures for a while now . Add to that the funding pressures and lack of credit from the banking channel , the fundamentals could not be more shaky . Muted demand outlook does not help much either . So the earning upgrade that the hope rally was factoring in , was met with a huge shock when the results were announced for the leading lights of the sector . Post the earnings shock , cracks started creeping in for the sector stocks , notwithstanding the hype around REIT ( Real Estate Investment Trusts) announcement in the budget . Relief from REIT is not anytime soon in terms of easing funds for the sector as the fund industry is less enthusiastic on the prospects given the tax tangles ( stamp duty from state side etc) and regulatory rigor ( restrictions on allocation to residential / under construction projects etc) .
On fundamentals metrics , does the sector offer value at the current prices ? . While the macro recovery will help demand bouncing back in realty , the recovery is unlikely to be sharp given the sector headwinds discussed above. Moreover , given the stretched and opaque balance sheets of many underlying companies , the sector is unlikely to match up with the stringent quality guidelines of long term investors any time soon .
As someone remarked , “Simplicity is the ultimate sophistication “. Wise investors look for one-foot hurdle that one can “step over” in simple companies with clean balance sheets that are well-run by focused management in a mature sector and strike it at opportune time when price is right . Realty with its entangled balance sheets , murky governance and cyclical prospects would hardly qualify for the above prescription.
Happy Value Investing !!!
ArunaGiri . N