Why is SP Tulsian cautious on realty stocks?

In an interview to CNBC-TV18, SP Tulsian of sptulsian.com is cautious on realty stocks. "All of them (smaller realty stocks) have seen good appreciation largely because of the undervalue at which they were ruling. Market has been seeing the net present value of maybe 15-25 percent of their properties or land bank held by them. So, from hereon, I will definitely exercise caution on these stocks," he says

Tulsian also gives his views on in Rashtriya Chemicals and Fertilisers’ (RCF) 12.5 percent divestment. "It is very strange. I was expecting that dilution from RCF, because 92.5 percent stake is held by the government so either government could have gone for the 17.5 percent dilution because ultimately, they have to bring down the stake to 90 percent that is the required for the PSU,"  he adds. Below is the edited transcript of Tulsian’s interview to CNBC-TV18. Q: What do you make of the next offering from the Government of India? It seems it could be 12.5 percent in Rashtriya Chemicals and Fertilizers (RCF)? Were you expecting that?
A: It is very strange. I was expecting that dilution from RCF, because 92.5 percent stake is held by the government so either government could have gone for the 17.5 percent dilution because ultimately, they have to bring down the stake to 90 percent that is the required for the PSU. Or maybe the government companies should have brought it down to 75 percent, which they are contemplating in case of National Thermal Power Corporation (NTPC).
If you see the capex requirement of the company, even RCF going forward they are increasing their capacity in Thailand. So they were, infact contemplating an issue also. Hence, I am unable to understand it. If you go by the 12.5 percent size, that amounts to maybe Rs 500-600 crore.
I don’t understand the necessity of bringing this RCF in between, because all along they have been focusing on NTPC and other issues before that. So, there seems to be some overlap, some confusion in order of dilution of the stakes in all these companies. The government has seven to eight companies in which they have to bring down the stake to 90 percent. Prominent amongst them are Metals and Minerals Trading Corporation of India (MMTC), Fertilisers & Chemicals Travancore Ltd (FACT), National Fertilisers (NFL) and even RCF, but I don’t understand this meaning of bringing in RCF at this stage. Q: Have you kept an eye out on Eros? There is an Offer for Sale (OFS) scheduled for that one and the floor price will be announced later today.
A: Just to bring down the promoter stake of 70-75 percent, they are going for a stake dilution, because the company is in need of money. So, the fresh issue has not been made and rightly so, because if the fresh equity would have been made, then that would have been seen negatively by the market as dilution.
So, they are going for a minor stake sale of 2-2.5 percent, mainly to bring down the promoter stake. The price should be closer to the current market price only because I don’t think there should be much problem in diluting this or selling this 2-2.5 percent stake by the promoters. Q: There has been quite a bit of excitement in some smaller real estate names like Kolte Patil, Nitesh Estates. Do you track any of these two?
A: Yes, I am closing tracking all of them. Brigade has moved to Rs 90, Kolte Patil has moved to about Rs 140-145. Many other stocks seem to have reached their fair value. I won’t be hesitating to include stocks like Prestige Estate also. Infact, if you see the overall realty which has been holding the level, it has not seen these kind of run ups.
So, all the other stocks were definitely undervalued but we have seen good run up.  Maybe one has to be little cautious. Infact DB Realty is also in the list because all of them have seen good appreciation largely because of the undervalue at which they were ruling. Market has been seeing the net present value of maybe 15-25 percent of their properties or land bank held by them. So, from hereon I will definitely exercise caution on these stocks. Q: Steel looked quite strong yesterday. If you had to pick one steel stock what would it be between the big ones? What would you choose? JSW or Tata Steel or Steel Authority of India (SAIL)?
A: JSW yesterday gave a caution that they are operating at a capacity of 60 percent and if they continue to receive the iron ore at a lower quantity, definitely the performance will take a hit. So, I definitely will remain away.
I have been keeping my cautious stance on ferrous metal stocks. So, naturally if I choose from the non-ferrous one, two stocks come to my mind. One is Hindalco and second is Sesa Goa. Sesa Goa largely because of the merger move emerging with a new avatar of Sesa-Sterlite, where they will be having a combination of everything aluminum, lead, zinc, copper. So that will be my choice. I would prefer Sesa Goa and for the time-being, one can take a call on Sterlite Industries followed by Hindalco.