Real estate and infrastructure stocks take a beating today

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.

Midcap that got battered 6-22% in today`s trade – Moneycontrol

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.


IVRCL baffled at over 20% stock crash; says everything okay – Moneycontrol

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!

Conclusion

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.

Join the Start Stock Investing E-Course. It's free.

15 lessons over 15 weeks. Over 500 people who have already signed up. Start off. Learn how to invest in stocks for the long-term.

Comments

  1. Anil Kumar Tulsiram says

    Thanks Kunal, another good post
    I think most of the real estate and infra stocks suffer from the problem you have listed above and retail investors better stay from unethical management. I am not sure whether I understood your this comment properly “Stay away from cyclical stocks unless you are able to understand interest rate cycles and / or business cycles, to which they are highly coupled”. Do you mean to say one should be able to forecast interest rates going ahead or how much time it will take for a cyclical company say in auto ancillary or a stock broker to return to its previous growth rates.

    • says

      Anil, I can confidently say that I cannot predict interest rates. In fact, empirical studies of predictions by economists tell you that they don’t do a good job of predicting interest rates consistently. It’s their job to put out a number and they do it. Not that it comes out right.

      What I meant was that you need to be aware of what a business cycle can do a stock. For example, looking at what happened to a stock like BHEL during 1997-2001 might be very instructive if you are considering what it is going through today. And yes, we can get a fair idea of how the company’s financials will move during a cycle. I am not saying that what happened last time will repeat again. But it gives you a flavour.

      Also, on the valuation front, stocks have typical behaviour in cycles. When you see P/E ratios going upwards from historical averages with relaxed interest rates, you can decide to take profits gradually. And in valuation troughs, you can decide to enter.

      I am ok with buying at troughs in business cycles. It needs the will to stay put even if the price goes lower as long as I know I am buying at a decent value as compared to price. But this might not be suitable for everyone. Its a personal investing choice.

      In all this discussion, I do not advocate buying into stocks of fundamentally bad companies. There are good cyclical businesses too. I wrote that comment with respect to the good ones.

      I do agree with you that most companies in the real estate and infrastructure sector have a credibility issue. Better to avoid the sectors if you don’t have a good grip on what’s happening!

  2. Anil Kumar Tulsiram says

    Thanks

    I had a feeling that I misunderstood your comment in original post. Fully agree with you that one should be aware of cycles and during downcycle buy fundamentally strong companies and sell it during euphoria.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>