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Infra-realty – an emerging theme for investment, say market experts

The infra-realty theme offers an upside while mitigating challenges faced by standalone realty and infrastructure companies, experts said.

November 07, 2022 / 05:23 PM IST

A theme that seems to have gone utterly unnoticed by the market is infra-realty.

With the domestic economy growing, the government’s infrastructure push, and realty companies performing well, investors are betting on companies that are a play on both infrastructure and realty.

Infra-realty is one way to play the uptrend in the realty space and the optimism in the infrastructure space, market participants said.

There is a greater inclination towards warehousing companies that not only build such facilities but also lease them. Welspun One Logistics Parks, a part of the Welspun Group, has agreed to Rs 2,000 crore to set up warehousing facilities and logistics parks in Karnataka.

The Welspun Group company has said it will expand its footprint in north India by exploring government land available for building Grade A warehousing facilities across key micro-markets. In April, it said that it has handed over a warehousing facility spread across 370,000 square feet (bigger than six football fields) in Bhiwandi to third-party logistics company FM Logistic.

“This industry is going through a major transformation as more emerging sectors and other businesses create increasing demand,” said Balkrishan Goenka, chairman of the Welspun Group.

Apart from warehousing, infra-realty would include cold storages, specialised goods transportation, and freight and logistics services, said Nirav Karkera, head of research at Fisdom, an investment and finance platform.

The infra-realty theme offers an upside while mitigating challenges faced by pure-play realty and infrastructure. While the segment stands to benefit from structural demand, policy initiatives through production-linked incentives and the National Logistics Policy will be further accretive to the segment, he said.

Logistics company V-Trans (India) is said to be planning a fivefold expansion in its warehouse portfolio over the next three years, expecting a major boost from the government’s recent National Logistics Policy.

Companies that are involved in both sectors often increase revenue visibility as it diversifies the business, said Mohit Nigam, fund manager and head of PMS at Hem Securities.

Explaining why one would prefer a combination of both sectors instead of pure plays, Karkera said pure real estate, which is capital-intensive, suffers from relatively inefficient and opaque price discovery. Pure infrastructure plays like roadways and power grids are greatly susceptible to economic cycles, while huge project costs warrant large-ticket capital expenditure commitments by private players as well as the government - both of which are far from easy to raise.

Pure infrastructure projects are also typically long-gestation ones where cashflow realisations are significantly stretched over time and working capital management becomes a perpetual fire to fight, he elaborated.

An investment bet

“The pure plays are very strong investment themes from a long-term, sustainable wealth creation standpoint,” Karkera said.

Shivam Bajaj, founder of Avener Capital, is bullish on infra-realty as a theme and asset classes such as warehousing and data centres that offer investors a stable long-term yield.

Investors typically earn their returns through renting yield, which is decided prior to construction, and through potential cap rate compression, he said. Cap rate compression is when prices in a market are rising and it is considered good for investors who want to exit their property investments.

“So, effectively investors can look to earn a high double-digit return without taking too much risk,” Bajaj pointed out.

One could look at Container Corporation of IndiaVRLGati and AllCargo. A closer look at businesses like Delhivery, involved in warehouse logistics and fulfilment shipping, could help offer investors a deeper perspective into the segment, while companies like Blue Dart offer a diversified perspective into the segment, Karkera said.

One could also try understand associated businesses like Ice Make Refrigeration to understand the services ancillary to cold supply chains, he added.

Choice Equity Broking said it prefers companies that are a mix of residential and infrastructure realty.

According to Abhimanyu Kasliwal, AVP of Choice Equity Broking, large companies that focus on residential realty in a diversified de-risked manner (specifically Godrej Properties, and also Sobha) have good visibility of future demand and earnings over the next three years.

“These include Mahindra Lifespace (which has mid-range residential business, as well as a robust Integrated Cities and Industrial Clusters business) and Macrotech Developers (which has entered into a billion dollar partnership with Bain Capital and Ivanhoe Cambridge to develop a pan-India green digital infrastructure platform that includes logistics, light industrial parks and in-city fulfilment centres),” he said.

Nigam of Hem Securities likes Larsen & Toubro as it is a combination of both businesses. The company has a robust order book that provides multiyear revenue visibility and has also maintained its 12-15 percent revenue growth guidance. He expects softening commodity prices to drive margins in the upcoming quarters.

Dipti Sharma
first published: Nov 7, 2022 05:23 pm

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