See continued appetite for realty IPOs in pipeline: Enam

Yesterday, Enam took investors on a Mumbai real estate visit from Nariman Point to Goregaon. In an interview with CNBC-TV18, Pankaj Jajoo, Senior VP, Enam Securities and Chirag Negandhi, Head Analyst, Real Estate, Enam Securities spoke about the feedback from investors and a general outlook on the real estate and cement space.

Below is a verbatim transcript of the interview.


Q: What was the feedback from investors right from the town of Mumbai all the way to the suburbs? We have seen a bit of bounce in the prices, what is the feedback from the investors that you have got?

Negandhi: To look at why we did the tour, it was primarily to give the investors a sense of different real estate businesses which is residential, commercial, retail, hospitality, slum rehabilitation and other kind of redevelopment across Mumbai, be it the northern suburbs or in the South Mumbai, and also to get a sense of whether infrastructure is keeping pace with all the development that is happening.

What we have seen and even from the feedback yesterday is that investor interest is back, end users are back, you have seen volumes at all time highs, disbursements on first loans across all banks are also at highs.

So, it clearly is good times for the real estate sector especially the residential. Commercial has started picking up now. You are hearing of IT and all other commercial leasing also picking up. So, clearly in the residential you are already above the 2007 highs in terms of the volumes. So, it is definitely good times for the sector right now.

Q: What’s happening in the cement space? There was one merger ratio announced between Samruddhi and UltraTech, what is your own take on this ratio? Do you think it is fair to UltraTech and fair to Grasim as well? More importantly, your view on the cement sector itself, there was a sense of overcapacity that was looming on the industry, but with all those noises coming on road construction, do you think cement companies are still good value?

Jajoo: The merger ratio between Samruddhi and Ultratech is fair to the shareholders of both companies and factors in the differential capacity between the two companies as well as their financial standing.

And that’s also reflected in the fact that stock prices of both Ultratech and Grasim looked up and the markets gave a thumbs up to the ratio. What this will really do is create a very large cement company with almost 50 million tonnes of capacity and a 20% market share in India, and that is something that investors cannot ignore or will find hard to ignore.

Hence there is healthy potential of becoming not only a very valuable company in terms of cash flows and assets but also a company that will find attraction with investors.

The second point that you had in terms of cement demand and supply, really in any commodity industry you have capacities coming in and they tend to get bunched up as is expected in the current year where large capacities are going on stream.

At the same time the infrastructure story continues to be robust and if demand picks up the way it has picked up in other growth economies, for example China, we need a lot more cement than what companies are currently producing and are planning to produce over the next few years.

Q: One concern is about the kind of dilution, what it is getting from Grasim’s cement business is pretty much what it already has in terms of capacity and that too at slightly lower margins than its own margins. So in that sense there is a bit of a disappointment with the merger ratio?

Jajoo: What one has to take into account is the fact that Grasim would have a capacity of over 25 million tonnes while UltraTech’s capacity is about 23 million tonnes. Grasim also has a very valuable white cement business where profitability is very high and taking into account the fact that the plant vintages of the two companies, their marketing presence, overall I think it’s a fair ratio.

And the dilution that you spoke about is correct in terms of the share exchange ratio that equity will go up. But this also removes all doubts or concerns or apprehensions that investors had over two cement entities within the group. So really what both set of shareholders now get to own is a consolidated combined cement entity with huge potential.

Q: How are the investors looking at the real estate space? It’s a fairly motley space and even in terms of price increases there is a wide difference between what’s happening in Mumbai and what’s happening in the IT cities like Bangalore which is again different from what’s happening in Hyderabad. Sector wise or stock wise what are the preferences you are selling?

Negandhi: Even if you talk about in let’s say an IT city of Bangalore, what we are getting as a sense across all cities is that volumes have started picking up, which is usually a precursor to prices moving as well. So residential is definitely a space that we like.

If you look at even the list of companies that are now actually trying to list, we are seeing more city-centric players where the visibility of cash flows is much higher, whether you look at Bangalore or Mumbai or even in the Pune region, and compared to larger and more pan-India players what you are getting now is more city-centric players and even the ones that are coming in as pan India players are coming in with tier-II and tier-III cities as a focus area. There is no one really in the organised space.

So, clearly those residential and those levered on commercial because of the pickup that we are seeing in commercial volumes by itself are the ones that we really like. So they stand out if you look at one of the city centric properties developers, they stand out amongst the others.

Q: You also took investors to HDIL’s property what is your view on that stock, I believe Enam tracks this particular stock?

Jajoo: I can talk about the IPOs in the real estate space. On the point about companies that are going public now, we are as an investment bank leading a large number of the IPOs that are going to market and the initial interaction with investors indicates that there is continued appetite for real estate stocks in India.

The total amount of money that was raised in the previous rally by real estate companies, we have raised almost the same amount already by way of QIPs and secondary block.

For the IPOs that are lined up there is continued appetite. People want to look at cash flows and people are finding that there is a differentiation in the stories that are coming about and hence there is appetite.