How RBI Repo Rate Hikes Will Impact Real Estate Stocks, According To Morgan Stanley

The recent repo rate hikes by the Reserve Bank of India will have a “muted” impact on the real estate stocks as the valuations are now "closer to the mean", according to Morgan Stanley's Sameer Baisiwala.

“On valuations, I would say these stocks have all corrected 30-35% already through the course of this year...,” Baisiwala, India pharma and property analyst at Morgan Stanley, told BQ Prime's Niraj Shah in an interview. “When the interest rate upcycle begins, I think our starting point is not too bad," he said. "It just tells us putting the two together that the impact should be fairly muted.”

India's central bank has already hiked rates by 90 basis points in the latest cycle, ending record-low borrowing costs to cool inflation. Banks and mortgage lenders have started increasing lending rates.

While the home loan rates have come down from 11% to 7% over the last four years, Baisiwala said even if they go up to 8-8.5%, that wouldn't make “much of an impact". “If it goes beyond that, that's when we should start to worry.”

As Covid-19 induced restrictions lift, Baisiwala said the country is “probably three quarters into the demand recovery". “We are not at the peak of any cycle neither valuations nor fundamentals. We [have] got enough and more leg room to grow."

In the long run, Baisiwala said, two factors will push the real estate upcycle--per capita income and the median population age.

As the per capita income in India grows to $4,000 to $8,000 from $2,500 at present, demand will shoot up in the next 8-10 years, Baiswala said.

And when India hits the 35-year median age, which he calls the “new buying age", that will propel housing demand. “Every five years, we'll be moving to a higher trajectory.”

In the next two-four years, he said, demand is expected to grow due to higher affordability and home upgrades driven by Covid-19, among other factors.

Pharma & Diagnostics

India's pharmaceutical industry, like other sectors, grapples with rising input costs.

Yet, according to Baiswala, they have been able to maintain stable margins. “The reason for that is they have been able to pass a fair bit of this [higher costs] onwards to their end customer.”

The first half of FY23, Baiswala said, is going to be “okayish” and second half will entail “high-margin launches” in the U.S.

The pandemic has driven expansion, competition and consolidation in India's diagnostics industry as companies bet on growing health awareness.

The diagnostic industry will double every six years even though “the competitive intensity is very strong”, Baiswala said.

“It is going through a very difficult times in that sense and I think companies will have to fight their way out. And in this period, you will see some volume chip off, pricing pressure and margin pressure," he said. "Companies will have to bear this but looking beyond two years, it's going to be a very very good area."

Watch the full interview here: