Ramneek Sethi, an IT professional wanted to invest in the stock market. He was keen on real estate stocks keeping in mind its growth potential and India’s increasing urbanisation. However, a meeting with the financial planner changed his mind. The financial planner categorically asked him to stay away from volatile real estate stocks and instead get into the power play through proxies in cement, steel, and other ancillary businesses. Reason: Real estate stocks are not just volatile, but more often than not even defy the principles of fundamental analysis and technical analysis.
The financial analyst has not been argumentative without a sound logic. No one has been able to decode what drives a real estate stock. Though it has always been debatable what determines the market price of a given stock in any business, but in real estate the logic goes for a toss when one finds two identical companies with similar financials having different fortunes at the bourses.
There is no denying that the real estate stocks have always been high in demand for investors. After all, in a housing deficient country like India it has to constantly grow. Isn’t it? However, what is often intriguing is that some of the real estate stocks have much higher price point, compared to the industry peers with similar fundamentals, including the EPS and PE ratio. This raises a fundamental question as to what determines the price of the real estate stocks.
Why are certain real estate stocks under-valued? Is there any rationale behind the over-valued real estate stocks? Every over-valued stock has a moral high ground that investors believe in the given company. In contrast, every under-valued stock has an alibi that the market has failed to assess its intrinsic value. It is yet to be defined as to what is intrinsic value of a realty stock. Is it EPS, PE, Market Price, land bank, or company’s future earnings?
Market perception of the given brand plays greater role than any other fundamentals when it comes to its stock performance. Take the case of Godrej Properties for instance. The stock performance of Godrej Properties was at its peak level of Rs 2502.75 on 14th Oct 2021 and it fell to Rs 1259.90 by 5th Nov 2022. Since then it has been witness to a downwards curve only. What changed the fortunes of Godrej Properties in less than three month?
Godrej Properties as a company has been growing; its balance sheet & sales figure also going northward and new launches are more than the industry average. Still, the company’s stock had a face loss at the bourses. The reason had been negative market sentiment due to its alliance with the tainted DB Realty.
In the end Godrej Properties management had to eat the humble pie and retract from its proposed alliance with DB Realty. The stock price could still not recover. There is a section of analysts to believe that the very nature of real estate is not meant for getting listed, since there is hardly any price movement and/or sale momentum quarter on quarter. The new accounting norms, IND AS 115, also prohibits to factor in sales realisation into the books till the project is completed. That any way is a lame excuse to avoid the corporate governance and transparency that a listed entity brings on the table.
A section of analysts believe that earnings of a real estate enterprise is dependent on quantum of delivery. Therefore, real estate companies with diversified portfolio, like residential, commercial, contractual etc, have an edge over a financially sound and well earning companies. So, this section of industry experts don’t believe PE is the right way of evaluating the realty stocks.
Break-up of the stock holding is also one of the indicators of how the stock is being perceived in the market. If institutions with better access to information and sound analysis are holding more percentage of stocks then it is an indicator of institutional trust over the company.
If we compare the PE of some of the leading developers trading on the stock exchange, then PE for Puravankara is 82.03; Sobha is at 49.82; Prestige is at 13.78; Godrej is at 92.11 and Brigade is at 54.57 (all the figure at the time of filing this analysis). Does it mean that the fundamental and portfolio of Puravankara and Godrej is at par? Has Godrej Properties that much of an edge as reflected in its PE ratio?
Abhishek Kapoor, CEO of Puravankara has a caveat here when he questions what is a healthy way to evaluate the performance of a company? According to him, first one is how is your sales figure; second and most important is how is your cash flows; and how much are you burning into the projects. How much are you burning, how much are you collecting and how much are you selling, and then what is your launch pipeline.
“A couple of years back we were selling Ready to Move inventory where we were collecting 100% in a span of three months of time. So, our cash flows were strong because we were selling the Ready to Move inventory. What happened last year is that our cash flows were strong and our Ready to Move was down by 67 per cent. So, how do you interpret it? What it means is our sales were definitely good, and what it definitely means is we were burning a lot more money in operations and it means we were delivering. Therefore, we could get collection milestone from our old sales. So, it is more about the perception issue where people have to understand and identify the actual numbers,” says Kapoor.
Requesting anonymity, a merchant banker who handles some of these listed players agrees, “PE value can never be the benchmark of evaluating a realty stock. It is just one of the indicators that is momentary and subject to many variables.”
Perception issue might be a logical answer to the complex behaviour of real estate stocks otherwise, but then what defines the perception is also a subject of debate. Many of the real estate companies with heavy debt and standing inventory twist the narrative by saying that the gross debt may sound high but net debt is low since they have saleable inventory. The narrative is flawed since it is subject to interpretation that there are ready buyers in the market and developer doesn’t have a holding cost of the inventory.
Does it affect the common man? Well, for a common home buyer the only equity is his house. He is not even bothered whether the builder is a listed entity or not. But for the stock savvy Indians real estate stocks are definitely a subject of interest, given the volatile but high probability of handsome returns.
Ravi Sinha
#RaviTrack2Media
Track2Realty is an independent media group managed by a consortium of journalists. Starting as the first e-newspaper in the Indian real estate sector in 2011, the group has today evolved as a think-tank on the sector with specialized research reports and rating & ranking. We are editorially independent and free from commercial bias and/or influenced by investors or shareholders. Our editorial team has no clash of interest in practicing high quality journalism that is free, frank & fearless.
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