Even as India prepares for an extended lockdown to fight the coronavirus (Covid-19) pandemic, construction and allied sector stares at a long and a dull period. In doldrums since early 2018, country’s building-material segment could see further compression with the real estate, its key demand driver, taking longer-than-expected to get its momentum back, analysts say.
Prime Minister Narendra Modi on April 14 extended the lockdown in India by 19 days till May 3, though construction of buildings has been allowed from April 20 wherever labour is available on-site.
“While it is difficult to accurately forecast the extent of disruption, we believe real estate, being relatively discretionary in nature, will see meaningful pain,” writes Achal Lohade, research analyst at JM Financial, in a co-authored sector report with Shrenik Bhachhawat and Koundinya Nimmagadda.
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Real estate sector has multiplier effect on a host of allied industries such as paints, cement, metals, pipes and fittings, sanitary ware, etc. According to projections by KPMG, the existing demand for commercial real estate may either get curtailed or postponed till the second half of calendar year 2020 (H2CY20) due to a possible slowdown in the US and European economies.
“Considering the ongoing scenario, the move to start at least some of the construction activity on project sites, even with limited workforce, is certainly welcome. That said, since many migrant workers had left for their villages post the earlier lockdown announcement, we will have to wait and see how many are actually left back to resume work. Migrant workers comprise at least 80 per cent share of the total 44 million workforce in the construction sector currently. That aside, it will definitely help real estate to some extent. However, the fact that Covid-19 hotspots will not be able to resume activity from April 20 is a dampener for markets such as the Mumbai Metropolitan Region (MMR), which accounts for 30 per cent of the overall 15.62 lakh under-construction stock across the top seven cities,” said Anuj Puri, Chairman – ANAROCK Property Consultants.
With the demand expected to remain tepid even after the lockdown is lifted, analysts suggest picking stocks only from long-term perspective and focus on companies with low debt levels and a healthy order book. Among paint stocks, Asian Paints will see the strongest financial strength post the lockdown, followed by Berger Paints, Pidilite and Kansai Nerolac Paints, according to IIFL Securities.
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“Asian Paints has a sturdy balance sheet with stable working capital management and debt to equity remaining lower. Moreover, the company has a strong return profile with RoE and RoCE at 22.5 per cent and 24.7 per cent, respectively. The stock is currently trading at 45.2x its FY2022E EPS and 38.5x its FY2023E EPS. APL’s leadership position in the domestic paint industry and better earnings visibility justify its premium valuation,” say analysts at Sharekhan.
As for sanitary ware and pipes, JM Financials has ‘buy’ rating on Kajaria Ceramics, Somani Ceramics, Greenlam Industries and Prince Pipes.
“After the recent sharp share-price fall for Kajaria Ceramics and Century Plyboards, these market leaders are now available at reasonably attractive valuations. We also maintain ‘hold’ on Cera Sanitaryware, Greenply and Greenpanel and await a better price for entry,” they say.
Despite the dip in demand for cement in the backdrop of full-scale resumption of economic activity, Morgan Stanley has maintained an ‘overweight’ stance on Ambuja Cement and Shree Cement; ‘equal weight’ stance on Ultra Tech Cement; and ‘underweight’ stance on ACC and Dalmia Bharat.
On the other hand, Tata Steel, JSW Steel, Jindal Steel and Power, SAIL, NMDC, Hindalco, and Vedanta are the top “buy’ recommendations of Phillip Capital in the metal pack. In the pipes segment, ICICI Securities has ‘add’ rating on Astral Poly Technik on hopes of bounce back.
“Astral operates in two key business segments: Plastic pipes (78 per cent of FY20E revenues) and adhesives (22 per cent of revenues). Increasing penetration of branded plumbing pipes in the fast growing affordable housing project segment, need-based replacement potential of plumbing pipes and increasing awareness and benefits arising from usage of adhesives and construction chemicals is likely to drive sustained demand for Astral’s product portfolio despite the challenging environment,” they said.