The market is excited about the NDA government’s plan to develop 100 new smart cities as it could boost demand for several other industries. For instance, Assuming a population of two lakh in each of the 100 cities and four people in each house, the smart city plan would generate demand for 50 lakh new homes.
ETIG has identified 10 stocks that will likely be among those benefiting the most from a construction boom.
Asian Paints and Berger Paints
Asian Paints and Berger Paints together control close to 75% of India’s organised retail paint market. The Indian paint industry, which was growing 1.6-1.8 times the pace of gross domestic product until a few years ago, now expands at twice the speed of GDP as consumers shift to branded products.
And, both Asian Paints and Berger Paints have posted a compounded annual growth rate of more than 15% over the last three years. With new cities coming up, the growth of these companies could pick up and there could be a rise in their earnings multiples. Both also pay high dividends.
UltraTech and Ramco Cement
Construction of new houses for the smart cities will improve cement demand. The slowdown has resulted in subdued demand over the past two years. But the likely increase in demand will not only give volume growth, but should give pricing power, which would result in higher profitability.
UltraTech remains the safest bet, given its presence across the country. Ramco Cements is the most efficient among peers. The southern region has seen the lowest cement demand, which has resulted in lower valuations. However, this could change if demand picks up.
Indiabulls Housing Finance and LIC Housing Finance
With the new houses, demand for housing finance is also expected to improve. The industry expects housing finance companies to show more than 20% growth in net profits in this fiscal year.
Indiabulls Housing Finance, due to its small base and tie-up with major banks, may continue to grow at a higher pace. In fiscal 2014, its loan book grew 20% year-on-year. In addition, post its reverse merger in 2013, the company became a housing finance company, which will result in lower cost of funds. What makes LIC Housing Finance a likely winner is strong brand recognition.
The shares of Indiabulls Housing Finance and LIC Housing Finance are trading at a price-to-book value of 2.2 and 2.1, respectively. Considering the expected growth, these stocks look attractive at this level.
HSIL and Kajaria Ceramics
Despite the slowdown over the past few years, the sanitary-ware and ceramics businesses of these companies have grown at more than 20% and that too without compromising on the profitability or operating margins. HSIL manufactures bathroom products while Kajaria is mainly into tiles manufacturing.
Both have strong dealer networks across India. They have both added new capacities recently and have plans to expand further to cater to rising demand. Shares of HSIL have given a return of 159% year-to-date and Kajaria Ceramics 70%. Analysts continue to be bullish on these stocks.
Havells India and Orient Paper
Construction of new cities will result in huge demand for cables, switchgear, lights, bulbs and fans. While Havells has all these in its portfolio, Orient Pa-per (Orient Electrical) is one of the oldest fan manufacturing companies and its other product categories include lighting, water heaters and kitchen appliances.
Both companies have shown a strong growth pattern over the past few quarters. In FY14, Havells’ sales grew 13% and Orient Paper’s 21%. Havells’ stock is trading at FY15 P/E of 32 and Orient at FY15 P/E of 12.
| CMP | Market Cap |
PE Ratio | |
| Asian Paints | 567 | 54352 | 46.48 |
| Berger Paints | 272 | 9438 | 40.3 |
| Ultratech Cement | 2721 | 74642 | 34.8 |
| Ramco Cement | 272 | 6465 | 46.93 |
| Indiabulls Housing Finance | 354 | 11836 | 7.84 |
| LIC Housing Finance | 319 | 16121 | 12.24 |
| HSIL | 276 | 1819 | 32.37 |
| Kajaria Ceramics | 505 | 3815 | 32.68 |
| Havells India | 1103 | 13772 | 28.76 |
| Orient Paper | 31.55 | 646 | 150.24 |