Changing shades of stock market see realty in sunshine

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Equities tank amid approaching Lok Sabha elections

By S Jha

New Delhi, March 26: Indian equity market continues to wobble with approaching Lok Sabha elections. Nifty sank after three days of gains on Tuesday to come close to 22000 level one more time. Bank Nifty remains fragile of all the indices.

Indian equity indices are trending down despite their global peers scaling new peaks. Dow Jones was trading at almost 39400 levels in the afternoon session. The index is just a kiss away from an all time high. The world equity market will witness a truncated week with Friday being a holiday.

The underperformance of the Indian indices appears linked to the approaching Lok Sabha elections. Nifty breached the psychological 22000 level during the fag end of the trading session on Tuesday. The bulls afterwards got in the rescue acts to retrieve the index. But the bears are clearly holding their grounds to kick in the ‘sell on the rise’ theme. The strength of the bears may as per market participants keep indices in check.

But the market appears to be smelling alternative themes. The IT sector is now a laggard as per the popular views of the market participants. The new favourite on the street is the realty sector. Some of the realty scrips are commanding whopping PE valuations. They have outpaced even the IT firms who have much better earning fundamentals.

Bengaluru-based Sobha is trading at a PE valuation of 150 as per Screener.in. This realty firm has an RoE (Return on Equity) of 4.24. The return on capital employed (ROC) for Sobha is 8.32. It is currently trading at Rs 1431 a share. In the last one week, share price of Sobha has jumped by almost 20 per cent.

KPIT Tech has been the winner from the IT sector. ROCE and RoE for KPIT Tech are 30 and 25.7 respectively. It is commanding a PE valuation of 72 currently. This is way below Sobha. The wide difference is despite the fact that revenue and profit of KPIT Tech are steadily increasing.

Similar trend is seen in the case of DLF, Godrej Properties, and Brigade Enterprises. They are all realty firms. They are trading at valuations in the 90s of PE. In contrast, midcap IT scrips are trading at PE valuations of 30s. Bengaluru-based Prestige Estate has jumped by 15 per cent in the last five days.

Realty firms are known as rate sensitives on the street. Banking scrips are also rate sensitive. But the gains seen in the realty firms have not rubbed on the banking firms. The auto sector somewhat has shown life amid hopes that the rate cuts could come up sooner.

(Disclaimer: This article makes no recommendation for buy or sell of shares of any company)