Indian Real Estate: Real Boom Times

                                                                                         

The boom in the Indian real estate sector is reflecting itself in the share prices of realty companies, which have gone up anywhere from 3 to 40-times in the last one year. The per share earnings (EPS) of these companies has also improved, but not to the extent of the booming realty that is reflected in the prices of their shares.

Merchant bankers claim this growth is the result of re-rating company share prices by the market, after taking into account future cash flow, on the basis of the huge land stock acquired by them.

To merchant bankers it looks like the 1999-2000 glory days of real estate stocks are back. Managing a realty firm’s public offering, a senior merchant banker advises investors from putting money in stocks that quote huge multiple underlying earnings. Instead, they would be better of investing in these realty stocks through mutual funds.

Of all the realty firms, it is Unitech that has seen the maximum jump in share prices, a growth of over 40-times, from Rs. 10 in November, 2005 (after adjusting for bonus and share split) to Rs. 405 on Friday, last week. Today, the stock is quoting 95-times of the pro-rata 2006-07 EPS of Rs. 4.28, when the EPS was Rs. 2.14 in the first half of 2006-07.

But, the highest price to earning ratio has been witnessed by Mahindra Gesco, which at present is trading at 202 times of its EPS of Rs. 4. The company’s net profit declined in the quarter ending September 2006, against the previous quarter ending June 2006. However, year-on-year profit increased by 20%, even as, a senior merchant banker argues, this growth in net profit can not justify such a huge multiple earning price. The book value of its share stands at only Rs. 41.20. The last one-and-a-half year has seen the share prices of these companies move up, till May 2006, when the stock market fell sharply.

The market started moving up in July and the share prices also started rising. In the bull run of the last three months, except for Unitech, none of the other realty firms saw their share prices touch the pre-May 2006 crash level.

D.S. Kulkarni, which raised funds from the equity market through a follow up on public issues, is quoting Rs. 286 at a discount from its offer price of Rs. 300 in May 2006, with the stock reaching a peak of Rs. 446 on May 3, the day the issue closed. At present, the company’s share price is quoting at 15.25 times of its pro-rata 2006-07 earnings.

Similarly, quoted share prices of Ansal Buildwell and Ansal Properties are 16 to 27-times their earnings of 2006-07.

Market sources justify these prices, saying the real estate sector is very active and profitability of these companies will substantially improve in next financial year. This will bring down the price to ratio earning to a decent level of around 20. But, firms like Mahindra Gesco can only achieve this if for the next three years, their profits keep on doubling every year. But, the company’s performance in 2006-07 so far, has not been encouraging. The first six months saw its net profit rise 34% to Rs. 6.18-crore against the same period last year.

On the other hand, Unitech has posted a good growth in the first half, and saw its net profit go up 7.5 times to Rs. 174-crore. According to a senior merchant banker, the key factor is, whether the company will be able to sustain the same growth.

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