Today’s market moves in certain real estate and infrastructure stocks were quite big.
Read this article from Moneycontrol which talks about HDIL, IVRCL, Sintex, IRB Infra and Unitech amongst others.
The IVRCL news was particularly disturbing. A consultant working for an National Highways Authority of India (NHAI) project that IVRCL was executing, was found murdered. The report mentions that the victim’s family is accusing IVRCL of being involved in this incident. I hope this is not the case. An investigation will surely tell us the truth. Read the article yourself.
Whatever the truth is, in general, the chickens are coming home to roost. Some of them had already come home earlier. It is just that investors have been late in opening their eyes in most cases.
Common problems plaguing the real estate and infrastructure stocks
- Business expansion which has been “too fast, too furious”
- Taking up of projects which were not viable
- High amounts of debts to execute the projects
- Weak operational cash flows, high outgoing cash flows towards liabilities and poor balance sheets
- In some cases, the company’s fortunes change if the state government changes.
I like to invest in a stock whose drivers are linked to its business. Certainly not election results and political patronage respectively.
Most market participants have a short memory though. If the economy turns around eventually, the cycle will repeat. We will have “secular bull runs” (whatever it means) and “growth stories” all over again. Again, retail investors will get sucked in and make mistakes.
My advice to investors
- Stay away from cyclical stocks unless you are able to understand interest rate cycles and / or business cycles, to which they are highly coupled.
- “Clean management” and “clean promoters” in India is a relative term. Search for as clean a management team and promoters as you can, is all I can say.
- Stocks of debt-addicted companies will never serve you well in the long-term.
- This is not to say that you cannot make money in such stocks in the short-term. If you can achieve proper timing, great for you. But, do remember that most participants do not consistently time stocks and the market.
- Like Warren Buffett said, all it takes is for the tide to go out and then you understand who was swimming naked!
Do your checks before you buy. Don’t buy stocks of companies that don’t have their clothes on and you will be spared the problem of getting caught swimming naked.