Six affordable housing plays
Stocks such as Kajaria Ceramics, Astral Poly, and Symphony cater to the masses
Affordable housing is among the star themes for 2018. There are two ways to explore this theme — buying real estate stocks or those in ancillary sectors such as home improvement and housing finance. While the former could help investors take a direct plunge in the sector, the latter broadbases the portfolio and insulates it if the theme doesn’t pan out as expected. The latter, to some extent, also shields investors from the risks of uneven distribution of earnings and vulnerability of knee-jerk stock market movements, which realty stocks are often exposed to. Kajaria Ceramics, Century Plyboards, and Symphony, which are market leaders in their respective segments and at the cusp of benefiting from capacity additions, could be worthy investments. A shift in preference from unorganised to organised players is yet another common thread connecting these companies. However, there are some risks too. The recent data from the Reserve Bank of India shows a surge in bad loans in the sub-~1 million housing loan segment. Similarly, any reduction in government subsidies could slow growth rates. For now, the potential gains far outweigh the risks.
Astral Poly Technik
With a six per cent market share in India’s plastic pipes business and 25 per cent share in the widely used CPVC (chlorinated polyvinyl chloride) pipes segment, Astral Poly (popularly called Astral Pipes) is among the well-managed midcap companies, focused on the housing, agriculture and industrial segments. However, as the thrust is on housing, Astral is ahead of Supreme Industries and Finolex, which dominate the agri segment in terms of earnings consistency. Continuous investment in technology, building new facilities, distribution network and marketing (actor Salman Khan as brand ambassador) have helped Astral stay ahead of the curve on volumes and profitability. Analysts at Edelweiss say Astral Poly is placed to capture the replacement demand for housing in Tier-2 and Tier-3 cities.
Century Plyboards
In an industry heavily tilted towards the unorganised segment (75 per cent of the market), the narrowing pricing gap between the two segments is Century Ply’s main advantage. Adding capacities across categories such as medium density fibreboard (MDF), laminates and particle boards could boost revenues upwards of ~8 billion in the next two years. With a market share of 25 per cent in the organised plywood industry, analysts at Angel Broking expect Century Ply to expand its share further on the back of strong brands and a wide distribution network. Kotak Securities has recently upgraded its rating on the stock to ‘buy’ on better revenue and realisation expectations due to improved capacity utilisation.
Kajaria Ceramics
Despite being the market leader in the tiles industry, overall sluggishness in the real estate sector has weighed on its volume offtake and realisations. But, this should change from the December 2017 quarter as the dust of the goods and services tax and Real Estate Regulation Act start settling. Analysts at Reliance Securities say the trend of single-digit earnings growth seen in FY17 should reverse. “All vital growth levers are in place and significant investments in manufacturing and creating a strong consumer-focused brand should help,” they affirm. Steps to cut debt is also a plus.
Kansai Nerolac
Being in both the industrial (mainly automobiles) and decorative paints (housing) sectors is the main advantage of Kansai. With both segments showing signs of better offtake, Kansai stands to benefit. While its December quarter numbers were a bit disappointing because of higher taxes and lower other income, operational performance was strong as revenues grew 14 per cent year-on-year, led by a 12 per cent volume uptick. “Kansai would continue to see market-leading growth in the decorative segment due to increased brand visibility post investments made in past years and turnaround in the southern market,” say IIFL’s analysts.
Repco Home Finance
A strong grip in South India, along with easing concerns about note ban and litigation, should help Repco regain lost ground. Peaking credit costs and improvement in disbursals are showing. Analysts at Motilal Oswal Financial Services point out that despite times being tough for Repco, its yield on loans at 12 per cent is higher than competitors such as CanFin Homes and Gruh Finance. They expect loan growth to regain the 18 per cent-plus territory by FY19, driven by demand for low-cost housing.
Symphony
In a highly price-sensitive industry, Symphony holds market leadership (50 per cent) in the air-coolers space and has ensured over time that it maintains its strong grip in the Tier-2 and Tier-3 cities. Constant innovation and introduction of new products has helped it stay ahead of peers and pass on cost escalation effectively. Analysts at Edelweiss say Symphony’s improved channel stocking and asset-light model should propel earnings by 34 per cent annually in FY17-19. Operating profit margin, too, should climb up to 35–38 per cent (from the current 30 per cent) as new products find acceptance in the market.