$23 Billion Fund Sees More Gains in Costly Indian Developers

(Bloomberg) -- Property developers' shares have beaten every industry group in India this year, drawing criticism from some analysts who say the gains are overdone.

V. Srivatsa, a fund manager at the $23 billion UTI Asset Management Co., sees it differently. There's more juice left in real-estate stocks as steps taken by the government to aid the industry that was one of the worst hit by last year's cash ban start to take hold.

“The sector could be in an up-cycle in a year from now, and generally the up-cycle lasts for three to four years, ” he said in an interview. “I would say the best is yet to come.”

The market opportunity for developers is huge, Srivatsa said, as the government's push to bring homes to India's 1.3 billion people sparks a boom that CLSA India Pvt. estimates could reach $1.3 trillion in the next seven years. Affordable housing is “one of the most straightforward bull stories in Asian equities,” the brokerage's Chief Equity Strategist Christopher Wood said in a note Friday.

Indian real estate, historically a conduit for unaccounted cash, was hit by the move to scrap high-value notes last November. The government broadened reforms this year to boost home buying under a plan launched in June 2015, which aims to build 50 million urban and rural homes by 2022.

Builders of affordable houses have been given tax breaks and access to institutional funding; interest-rate waivers and rebates have been extended to households with incomes up to 1.8 million rupees and laws to protect home buyers were put in place on May 1.

‘In Favor'

“The new regulator and focus on black money will significantly reduce competition as many unorganized players will go out,” Srivatsa said. The consolidation will ensure that the sector “is in favor for many years,” he said.

The gauge of property stocks has soared 91 percent this year, more than three times the gain in the S&P BSE Sensex. UTI Balanced Fund, run by Srivatsa, has almost doubled the weighting to the industry to 2.6 percent in the past year, data compiled by Bloomberg show. The fund held Mahindra Lifespace Developers Ltd., Phoenix Mills Ltd. and Oberoi Realty Ltd. at the of October. The stocks have risen at least 37 percent in the past year.

The S&P BSE India Realty Index added 0.1 percent in a fourth day of gains at 9:45 a.m. in Mumbai, compared with the 0.2 percent drop in the Sensex.

Real-estate stocks “can't be a very big part of the portfolio but if you ask me purely about any recovery to be played, it will be this sector,” he said.

Srivatsa has also been buying software exporters and drugmakers, the once favorite growth stories in India. Here are some highlights from the interview:

Why do you like technology shares?

“Our conviction lies more in the mid-cap IT space. These companies are growing at 10-15 percent, generating cash flows and distributing it via buybacks or dividends.”
“Midcap IT companies are finding it easier to adapt to digital as they have more or less commoditized the bread-and-butter businesses.”
“We are among the few funds that are overweight on technology and healthcare. We have increased exposure to both by 3-4 percent in the last six months.”

What makes the healthcare sector attractive to you?

“Indian pharma companies are building a strong product portfolio for post-2020. From a 12-18 months perspective, the sector looks good.”
“We are seeing a turnaround for pharma in India. For emerging markets, the big issue was currency. With the currency stabilizing, markets are growing at 15-20 percent.”
“We will see prices decline in the U.S. but with issues gradually getting resolved, growth should start to come back.”

Are expensive stock valuations a big concern?

“Valuation will tend to be higher. We're seeing huge amount of savings coming to mutual funds and we don't see it coming down.
“I won't rule out a correction but it will be moderate.”
“I would be watching the fiscal side. There could be a tendency to overspend on the fiscal side with general elections two years away. The other worry is crude oil.”

To contact the reporter on this story: Nupur Acharya in Mumbai at nacharya7@bloomberg.net.

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Ravil Shirodkar, Rebecca Jones