Covid won’t dampen medium-term outlook for real estate: Mahesh Patil

Where is the party?
I think the market is doing fairly well to hold on to these levels, looking at the current situation at the domestic side with the second Covid wave. I think global conditions are still fairly good. The Covid outbreak seems to have peaked globally and the global growth outlook is fairly strong. So, global financial conditions remain good and that is helping us. Having said that, I think domestically the second wave is a cause of concern from a short term perspective. The numbers are alarming at this point in time but the vaccination drive is gaining momentum and the bulk of the population above the age of 45 which has a high fatality rate have got at least one shot of vaccine. That should help the fatality rate come down dramatically.

I would say that it is a matter of a month or so when we will see the number of cases coming down. Mumbai appears to have peaked out. So, while it will have an impact on the first quarter, I do not see a lasting impact in terms of overall recovery this year and going forward.

What happens to retail dominated franchise, what happens to banks which have given large unsecured loans? Do we need to be careful of retail facing banks, and NBFCs which have unsecured lending?
It will have some impact and it will be limited to certain segments of the economy, especially the retail sector. The lockdowns will have a temporary impact in terms of revenues in this quarter. The most vulnerable segment is the self employed and the small and medium enterprises which are just coming out of the first wave. They got some support from the banking system, liquidity was made available but now again one has to wait and see if this lasts for a longer period of time. That segment could come under a bit of pressure and one needs to watch out for that but it will be only very specific.

In the broader market, some of the globally- linked companies had faced problems both domestic as well as global. Right now, sectors like IT are showing very strong growth. Pharma is steady; metals and commodities are doing well and so the pressure on the large corporates is not likely to be there at this point in time.

Therefore from a banking sector perspective, the large corporates should do fine and a lot of companies in the metals, commodities which had stress earlier are now doing well. It is only the small and medium enterprises where one needs to watch out and see how they perform in the coming quarter. We have to see what kind of help comes in from the government or the RBI in terms of dispensation. That will decide okay how this sector behaves in the coming quarters.

Do you think the uptick in pharma of 15% to 20% which has come because of the Covid rush is more like a sentimental uptick?
The pharma sector had underperformed. It geared up in the first part of the last fiscal year but in the second half, the sector was a laggard. As the cyclicals started to do well, pharma took a backseat. It went through a period of a consolidation and we see the sector rotation coming back into pharma because there the earnings impact is not likely to be adverse. Some of the companies would probably get some boost on the Covid portfolio because of a sudden surge in demand over there.

Admittedly this would be short lived and the market should look beyond that but companies which are showing steady growth have got a decent pipeline of new products which will come in and sustain the growth rate. The pharma sector looks fairly decent at this point in time. Some of the companies which have just gone up because of the positive impact of Covid led growth, It would be short lived but the overall growth we are seeing on the domestic side and new products will drive the pharma sector going forward. So, one should overlook the short term.

Also vaccination has added another dimension. It is going to be there longer term. It is not going to be a one-year phenomena. Market is adding some value to it from a longer term perspective. Given that, I would say pharma still looks okay but one needs to be careful factoring in the spurt that we have seen for a few companies only because of Covid.

What is the sentiment going forward when it comes to the real estate space? What are you looking at by way of pricing trends as well as outlook on demand in the listed players.
Last quarter, we saw a good pickup in the real estate segment. This was aided by stamp duty cuts by states like Maharashtra. We saw a good amount of bookings over there. That could moderate a bit. But by and large, the real estate sector is on the path of recovery. The overall conditions continue to remain the same.

Interest rates are not going to go up in a hurry and are likely to remain below 7%. Property prices are also stable with only mild corrections. I do not see property prices going up in a hurry. The affordability gap remains fairly good compared to what it was five years back and that will see a revival in the sector slowly and steadily. The current concern is because the lockdowns could have a temporary dampener in terms of new bookings. I do not see that altering the medium term outlook for the sector which is reviving.

Genuine demand is coming back to the market. New projects are coming into the market place targeted at particular segments. Also the funding availability to the sector has improved significantly. This sector was going through a major problem in terms of funding availability. Now the market is clearly segregated and the players are also clearly segregated. Better quality developers are getting funding, at much lower rates. Some of the AAA developers would be getting funds at around 9% or so. That is going to aid a lot in terms of revival of this sector.

We are seeing deleveraging with some of these players trying to sell off their assets especially the rental assets. The REIT market is doing fairly well. There is good interest from foreign investors. The sector is on a path of recovery and it should continue to do well. Covid will have some dampening effect in the near term but should not alter the long-term outlook.

How are you betting on the energy space?
Our view is that crude oil prices should moderate a bit over the medium term. We do not expect crude oil prices to really go up. The current level is where it might consolidate. The secular outlook for crude oil demand is going to be down because of alternate fuels and also electric vehicles will gather speed, especially in the US. That will ensure that the demand side remains fairly subdued. It is a market which is being controlled on the supply side. So crude should behave fairly okay. It should move in this band that we are seeing currently and we are not seeing any big play on the crude side in the oil and gas sector.

Structurally this sector is likely to see pressure on prices.Crude prices have gone up but fortunately they are still within manageable levels. That is structurally good for India in the current environment where we are seeing a flare up in other commodities.