Ride the Indian Real Estate Revival with this 'Different' Smallcap Stock

Mar 23, 2021

Richa Agarwal, Research analyst

Almost a year ago, the citizens were asked clap hands or thalis in honour of professionals delivering essential services.

India had announced a nationwide lockdown in the wake of the pandemic.

But it was yet to assume the gigantic proportions. After all, the daily covid cases in India then were well below 100.

Despite the lockdown, the cases surged to almost one lakh per day. Everyone wanted the vaccine to be developed as soon as possible.

Well we have developed two home-grown vaccines now.

But we have developed something else too...

As per a recent serological survey done just last month in Delhi, around 56% of the people whose samples were collected have developed anti bodies.

This was well before the vaccination drive began.

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As surprising as it might seem, it's entirely plausible that more than half the population might already have some immunity against covid-19.

Herd immunity is here.

This suggests the ability of complex organisms (like humans) to adapt in the wake of threat to survival.

And the human body isn't the only thing with this ability.

We have seen this kind evolution and adaptation in the world of business and in the markets as well.

Contrary to everyone's expectations, markets have been on a dream run across market caps.

You could attribute this to huge liquidity, stimulus, and money inflow in a low yield world.

And this would be true.

But here's something we need to give these businesses credit for.

For Indian listed companies, operating profit for the quarter ended December 2020 is higher by 13.2% compared to last year.

I mainly focus on the smallcaps. So here are some of my specific observations.

Of the small cap companies that reported profits last quarter, the growth in operating profit was 18% over last year, despite muted sales growth.

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That's a comparison of business profitability in a pre-covid quarter versus a post-covid quarter.

This is nothing short of a great feat at a time when the economy has just come out of a lockdown.

Not only does it show resilience of smallcap companies at a time when sales were flat, but also their ability to adapt to a new environment.

And there's more...

The growth in the smallcap space has come only for about 60% of companies. The other 40% are still struggling to come back at pre-covid levels.

This is a function of the industry to which a business belongs as well as the company's DNA i.e. the fundamentals and management quality.

Needless to say, unlike humans, businesses will not see herd immunity. In line with Darwin's theory, only the fittest will survive.

The stronger businesses are likely to gain market share at the expense of weaker players.

Amid the post-covid rally in smallcaps, most stocks are likely to go up.

But when it comes to stock picking, you need to be mindful of industry dynamics and the relative strength of the companies within sectors.

In May 2020 and the months following, when the fog had still not lifted, we limited our stock picking to the essential sectors in the economy.

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That was then. Now we have enough clarity and data.

It's time to cast our net wider beyond 'essential businesses', most of which have already witnessed a spectacular run up, towards the next big opportunity.

One of the themes that I find interesting is real estate, especially housing.

The industry data suggests that affordability (loan EMI to monthly income) is best ever in one and a half decade.

Managements of NBFCs expect this segment to be a key growth driver for their loan book. This is due to affordability, better regulations, and favourable government policies.

For now, I want to draw your attention to a specific company that has been a key beneficiary of consolidation in the sector.

What I especially like about this company is its clean management. It's rare in an industry which does not have a good track record of corporate governance.

The management doesn't believe in collecting huge land banks. They strive to be as asset light as possible.

This has helped the company keep debt on the balance sheet at low levels. Again, a rare quality in this industry.

You must have heard of the gospel of real estate - Location, Location, Location.

Well, this company swears by it.

While most real state players focus on metros, this firm has completely avoided them. Its focus has always been on tier-II and tier-III cities. Even then, it chooses to enter only those cities which are growing industrial hubs.

This approach has meant less competition and has allowed the company to dominate local markets for long periods.

Amid a strong demand revival, the company has reported strong operating leveraging in the latest quarter and is all set for a great run.

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Now do note that the boom in housing boom will benefit companies beyond the real estate industry.

It is likely to feed into a virtuous cycle for construction, pipe companies, housing finance, furniture, paints, ceramic tiles, steel, sanitaryware to name a few.

I will be keenly tracking the small-cap stocks in the segment that could create fortunes for investors.

Watch this space to stay tuned.

Warm regards,

Richa Agarwal
Richa Agarwal
Editor and Research Analyst, Hidden Treasure

PS: Today is the last day to get access to my best smallcap stock recommendations that could create fortunes for investors. Don't miss this opportunity, dear reader. Get access to my recommendations here.

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1 Responses to "Ride the Indian Real Estate Revival with this 'Different' Smallcap Stock"

Kirandeep Singh Atwal

Mar 23, 2021

There will be no real estate revival. The major consumer of real estate was middle class that is shrinking according to pew research. Invest in companies making bare essentials. Moreover, the major premise of doing business in India due to huge middle class is also in question. -KD

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