Expensive construction stocks may take longer to deliver

MUMBAI: Shares of construction companies have been on a tear since the government announced plans to bring the sector back on track.

The stocks rallied today, with DLF surging nearly 6% in intraday trade.

Unitech gained over 3% to Rs 19.05. HDIL was up 2.34% at Rs 81.05. Indiabulls Real Estate was up 1.88% at Rs 78.75.
The government has now formalised a decision taken by the Cabinet in October to attract foreign capital and give a fillip to the cash-starved industry.

As per the Department of Industrial Policy and Promotion Press Note, the conditions related to built-up area and minimum capitalisation have been relaxed for projects where overseas investors can put in money.

The new rules also make it easier for foreign investors to exit projects.

According to analysts, a lot depends on the government’s actions to boost the sentiment and bring investment in the sector.

“Much of the focus, whether it be on construction, whether it be on infrastructure, has been more on the hope that there will be reforms, which would help in many ways,” said TS Anantakrishnan, Managing Director, Religare Portfolio Managers and Advisors to ET Now.

“Our hope and expectation is that within the next two to three quarters, we should start to see the pickup given how the government is looking to implement many of the land and power reforms. So from that perspective, we are bullish, but we have not yet allocated a huge amount of capital,” he added.

According to Sanjeev Prasad, Senior Executive Director & Co-Head, Kotak Institutional Equities, better government policies and reforms would eventually result in a better climate.

“As far as money going into industrial, infrastructure, construction, real estate is concerned, there is little interest as of now. A lot of things have to change as far as the investment cycle in India is concerned, and the government is working hard in those areas,” said Sanjeev Prasad, Senior Executive Director & Co-Head, Kotak Institutional Equities.

“Investment coming in more from the FDI side is more relevant rather than money just coming from the FII side in the space,” Prasad added.

Analysts are cautious after the sharp rally in stocks even as earnings have not shown any improvement and investments are yet to trickle in.

“Quite a lot of that is already in the price as we have seen these stocks have had a phenomenal run over the last few months. One really needs to see translation in terms of earnings growth being seen over the next couple of quarters,” said UR Bhat, MD, Dalton Capital Advisors.

He is of the view that investors can book profits in stocks which have started looking expensive in terms of valuations.

“May be it is time for us to do some profit taking because as we have seen, quite a lot of good intentions are not really translated into action as of now and may be at least a quarter or two away. So I do not think there is any great wisdom in holding onto these stocks or for the short term at least because the market itself has run up quite a lot,” Bhat told ET Now.

“Legislative action in Parliament does not seem to be going very smoothly. So there might be some scope for some disappointment in the very short run. Therefore, it might be worth booking some profits in these stocks,” he added.