There is an X-factor moving real estate, infrastructure and metal scrips. Calendar year 2010 saw the Sensex end 17.43% higher but major real estate, infrastructure, and metal firms underperformed losing up to 48% during the year. A closer scrutiny suggests that many stocks underperformed the Sensex partly because of their link with political factors and lack of transparency providing little comfort to institutional investors. Market analysts have also categorised most of these firms as potential risk because their prospects are linked with policy uncertainties or some form of policy arbitrage related to land and other natural resources. Non-transparent government policy on land use or other resources makes these stocks more vulnerable than the others (see table).
While the realty index was down 25.92% during the year, DLF, Unitech, HDIL and IndiaBulls declined by 20%, 21%, 48% and 41% respectively.
?I am not at all positive on real estate firms. These companies will face problems in getting fresh loans from banks. This can be seen from the fact that some of them have already started borrowing at 24%. Consequently, they will have to sell their projects at lower rates,? market analyst SP Tulsian said.
Highlighting that the 2007 Sensex rally was broad-based compared to the 2010 when it was mainly banking and auto stocks which rallied, SMC Capital’s Jagannathan Thunuguntla said, ?There?s no comfort for institutional investors in real estate firms due to a host of factors like lack of transparency and the recent loan scam.?
Real estate firm Unitech got mired in the Rs 1.76-lakh crore 2G spectrum scam which led to the resignation of the then telecom minister A Raja. Unitech?s telecom arm, Unitech Wireless (now Uninor), which acquired licences in all the 22 circles, is facing investigations both by the CBI as well as by the department of telecommunications.
Similarly, policy risks are also associated with infrastructure firms such GMR, GVK and Jaiprakash Group since it is perceived that these firms have often bagged projects in a certain state or a sector where policy arbitrage is high.
?One of the main reasons for the negative returns by these companies is the risk associated with them. A change in government could see change in policies, affecting the fortunes of these companies,? an analyst said.
Metal firms such as Anil Agarwal?s Sterlite and Sesa Goa were down 13% and 21%, respectively. This when the BSE metal index was up, though just 1.13%. Problems relating to land acquisitions and environmental clearances weigh against such firms. Group firm Vedanta?s bauxite refinery at Niyamgiri was spiked by the environment ministry for alleged violations of environmental laws.
The group has also ran into problems with the government over its deal with Cairn.
Explains Thunuguntla, “The metal index has performed but Sterlite or Sesa Goa underperformed mainly because of the Cairn issue where regulatory issues concerning government policy came into play”.
Even a firm like Reliance Industries shed 4% during the year when the oil and gas index was up 1.25%. This reflects the regulatory uncertainty in the area of oil and gas where government has a big role to play in allocation of resources.
In the telecom sector, while Bharti gave a 6% return and Idea Cellular 22%, Reliance Communications was down 20%.
? If the overall index is up for a sector and still one company underperforms then surely something is wrong,? said Tulsian.
? Lack of transparency in policy leads to wealth erosion by making companies dependent on politicians in positions of authority. Arbitrary land use policies impact real estate companies, who end up cosying up with politicians to survive,? said an analyst.
