Not Rs 25,000-cr, FM actually gave us a Rs 1,25,000-cr boost: Vishal Kampani

Normally, construction costs are 20% of sales. So if Rs 25,000 crore is the number which is going to complete these projects, you are going to release almost Rs 80,000-100,000 crore of cash flow in the system, says Vishal Kampani, Group MD, JM Financial. Excerpts from an interview with ETNOW.

The Finance Minister has announced the Rs 25,000-crore alternate investment fund for the real estate sector. Is this enough? Does it solve the liquidity problems of the sector?

The issue started off with being an issue focussed on liquidity. But now the issue has moved to asset quality as extended period of not having liquidity can result in asset quality issues. The good part is that the government has realised this. Many of the large banks have realised this and there is a lot of support coming in for NBFCs and we are seeing that on the ground. This last scheme which has been announced last night by the finance minister is a fantastic scheme giving Rs 25,000 crore of priority finance for completion of real estate projects to me and will release Rs 1 lakh crores of liquidity in the sector.

When you look at the Rs 25,000 crore of projects, these are already under construction. Normally, construction costs are 20% of sales. So if Rs 25,000 crore is the number which is going to complete these projects, you are going to release almost Rs 80,000-100,000 crore of cash flow in the system via sales and this is a big number.

Take Bangalore city for example. The average starting price in Bangalore for a unit is Rs 6,000 a square foot. The construction cost for that unit is not more than Rs 1,500. So, as long as I spend Rs 1,500 per unit and complete the unit, my receivables cycle of Rs 6,000 comes back into the real estate NBFCs and the developers and the entire supply chain of real estate whether it is steel, cement, ceramics.

The finance minister has not given us a Rs 25,000 crore boost, she has actually given us a Rs 1,25,000-crore boost but the market is not being able to see it. It is a fantastic step. She has gone and addressed the core of the issue which was a fantastic move last night.

You mean to say that the Rs 25,000 crore is potent enough to release over Rs 100,000 crore worth of liquidity into the system? This will be in six-eight months?
In a 1-2-year cycle but it is a lot of capital focussed on a single sector — below Rs 2 crore homes, which is amazing because the maximum money in this country is stuck in real estate. I go for a morning walk and I talk to a few friends. On an average, half of their capital is stuck in real estate — either in projects not completed or in projects completed where they are earning a very low yields on their investment. This is the most important sector for India and the Finance Minister has taken clear note of that and is putting steps in place to enable liquidity and given a confidence booster.

We get mixed signals so far in the second quarter earnings. Titan, has cut down its guidance but a Bajaj Finance says no need to cut outlook yet. What do you think when you meet companies across the world?
In case of Titan, it may not be an issue of demand only. The issue could be trends. Do younger people really want to buy gold jewellery or watches? Or would they want to buy smart watches, Apple watches? It is more about consumer behaviour. Bajaj Finance is a financing model. As long as the consumers want to buy something, their financing is available. A specific consumer company is about its own product. So those are two different categories.

But in the last 20 years, Indian corporates have gotten very smart about how they allocate their capital and for a long-term investor. the most important thing is how a management of a company, how a board of a company and how the CEO of that company thinks about its capital allocation and across all my conversations with all of our clients we clearly see a trend that Indian corporates have become very smart about how they allocate their capital and how they make returns on that capital and which was not necessarily true in the last two decades. This is a big fundamental shift you are going to see over the next 10 years. In the next two months, you are going to see smarter utilisation of capital that is given to private corporate sector to invest. This is a big theme which a lot of big global investors —- whether private equity, sovereign or even FIIs — are looking at. This will result in higher returns on capital over the next five to 10 years, thereby making India a very attractive investment opportunity.

We have seen a couple of quarters of around 5% GDP growth and the fear is the recovery cycle may get prolonged. What is your own thoughts on recovery? How many quarters will it take befoer nudge back towards 6.5 to 7%?
We will have to be cautious in the next four quarters. The steps the government has taken will see changes very quickly on the economy in the next one year. Things may get worse before they get better. One has to be cautious on the economy front but the government is very focussed on it. RBI as a regulator is very focussed on it and we are hearing all sort of positive noises which is a good thing.

This will not be a prolonged slowdown, I think there will be a bounce back. Having said that, there are global concerns on growth. We have talked about this in the last couple of months and there have been some drop in estimates of global growth next year from IMF and many other bodies. That of course, is a concerning factor because you have these trade headwinds and if you have less trade, it means you will have less GDP growth.

How India performs through this cycle of lower global growth, domestic liquidity challenges and warning to maintain the fiscal deficit and how India is being able to perform through this, is going to be a challenging task. I am very confident with what we have seen in the last two, three months.

Since good prices and good news would not come together in the next 12-18 months, do you think this is a good time for investors to deploy funds which they have raised and have been sitting on? Do you think this is a good time for portfolio allocation?
100%. As I said earlier, I would have a larger portfolio allocation today towards midcap stocks. Some are at attractive valuations and where we see good, robust cash flow generation on the public limited side. On the private side, you already have a slew of private equity as well as venture capital funds, funding projects and venture capital in private equity are seeing their peak historic levels of funds raised. There is a ton of capital which can fund private companies in India. So that is not an issue. On the credit side, there is an amazing opportunity to invest in maybe AA bonds over AAA bonds.

Corporate governance issues in the last 15-16 months have really come to the fore. Companies where there were question marks have been derated, companies which were above par have been assigned premium valuations. Sometimes very high quality companies also come into corporate governance glare for some whistleblower complaint etc. Do you think that this trial by fire will continue for some time till we are in a risk-off environment in India?
Yes, totally. The trial by fire will continue for a period of time and I must say that see governance is very important at the end of the day and for most foreign investors today that is the top priority. If companies are low on governance, they will take a large beating in their multiples and you are seeing that.

Infosys is a high quality company but still somehow they got caught in the crossfire?
But you have heard the statement from Mr Nilekani. He said even God will not be able to change Infosys numbers. So I am sure they will come out of it.

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