See sustainable demand for equities; like real estate & related spaces: CLSA

The house is very upbeat on the real estate space and expects a 15-20 percent earnings and revenue growth for related sectors like building materials, cement, housing finance companies etc., in the coming 5-10 years. The multiples although a bit of stretch should sustain, he said in an interview to CNBC-TV18

Government's focus on affordable housing and RERA are the two big drivers for this space, he said. Beyond these two positives, the overall affordability is close to its all-time best in two-decade, said Nandurkar.

However, he said the house is not very upbeat on the Medium and Heavy Commercial Vehicles (M&HCV) because of the shift in the market share of freight business to the railways, which is clear from cement dispatches. Moreover, there is not revival seen in the capex cycle too which could be a threat to the M&HCV segment, said Nandurkar.

Below is the verbatim transcript of the interview.

Sonia: I am going to start off with one theme that everyone is looking at very positively and that is the monsoon theme this time around because the hope is that monsoons will go down well and the rural plays will once again start to pick up. What is your own assessment of the situation?

A: It looks like going by the initial forecast that we are going to see a consecutive second year of good monsoons and that will be an important factor to watch out for because what we have seen over the last almost two and a half, three years, is that the rural wage growth has been languishing at just about 5-6 percent. We have seen a very small uptick in that but nothing meaningful.

So, a good consecutive second monsoon, plus the government initiative on various rural schemes, social schemes should ideally help. So, it is something that we are looking forward to, but as you know, especially in case of monsoon, nothing is done till it is done.

Anuj: From here on do you think the market is now maybe beginning to price in something that we have not seen yet, on-ground recovery -- of course we will have goods and services tax (GST) also kick in at some point, but do you think the market is beginning to price in capex revival, earnings revival much earlier or are we building in a bit of a bubble here?

A: The market is definitely building in more optimism. Clearly that is very obvious from the valuation trends. If you look at where the Nifty trades at today, at about 17.5 times or maybe a little over that, these kind of valuations if you look at historically, we had seen only during the second half of 2007. So, that is almost 10 years ago. So, we are well into the top five percentile category in terms of the overall valuations. So, it is definitely building in a lot of optimism.

However, the thing is that what I would want to highlight here is that this is clearly driven by a good demand-supply equation for equities. We are clearly seeing very stable flows from the domestic, the foreign inflows have also improved. So on an overall institutional demand, domestic plus foreign put together, we are looking at a number say between USD 20-25 billion a year. If you look at the net issuances by the corporates, net of the buybacks because buybacks is also a very big factor, the net of buybacks, that number is probably USD 15 billion or less.

So, clearly, we have greater demand for equities than there is supply of equities and the demand for equities appears to be more sustainable because the large part of the USD 25 billion that I mentioned, is coming from the domestic side which appears to be more sustainable. So, while valuation is a concern, but I feel that we will have to live with elevated valuations for the visible future.

Sonia: I have to talk about your big theme that you are focusing on which is the housing theme. We were just speaking to Rashesh Shah of Edelweiss and he spoke about how Real Estate Regulatory Authority (RERA) could be a game changer for the sector and the cherry on the cake is the affordable housing boost by the government. However, don’t you think that the stocks have rallied far too much in anticipation of these positives?

A: If you look at what are the drivers for the housing theme, obviously you highlighted RERA and the affordable housing, those are clearly two very big drivers, more so the affordable. However, what I want to highlight is that beyond these two, if you look at the overall affordability in general, our analysis shows that the current of level of property affordability is close to its two decade best and that is obviously helped by the falling mortgage rates, the fact that the property prices have remained more or less stable, but the per capita income has grown by 9-10 percent CAGR even over the last five years or so.

So, overall affordability is very close to its all-time best and these factors are only going to add after that. So, we are clearly looking at extended next five to seven year period of a 15-20 percent kind of growth in the revenues and earnings for many of the stocks, whether it is housing finance stocks, or some of the other building material segments such as cement, or other building material products like pipes and so on. So, I think with long-term visibility of earnings growth, the multiples, although a bit of a stretched, should sustain in my view.

Anuj: On autos, you were talking about some risk to medium and heavy commercial vehicle (MHCV) segment. That is important not just because it is Ashok Leyland and Tata Motors, it is also important for economy. What are the risks right now here?

A: The risk clearly that one is we are seeing incremental activism from the railways. Over the last five years or so, we have seen railways consistently losing market share of the freight business to road. However, we are seeing that trend reversing at the margin over the last few months. That is very clear if you look at the overall let us cement dispatches. The cement carried by railways is growing by 5-8 percent, but the overall production is down by 5-10 percent.

So, I think we are clearly seeing some amount of market share shift which can potentially happen. Obviously we have to keep in mind the long-term threat of dedicated freight corridor (DFC), etc. So, that is one thing. Secondly, as of now, we are not really seeing any capex cycle revival as yet. So, those will be the risk for the commercial vehicle segment.