India’s top five real estate stocks have dipped this week, and as the market retains its nervousness, analysts say shares of New Delhi-based developer Omaxe Ltd—which will list next week—may have limited upside even though the stock is priced cheap relative to the cash flows of the firm.
“Realty stocks are down by 5-7%. In this kind of situation, you never know Omaxe could even list at below its issue price,” said Nitin Gupta, an analyst with PricewaterhouseCoopers.
Following the completion of its initial public offering (IPO) of 17.8 million equity shares, Omaxe has fixed the issue price at Rs310 per equity share at the upper end of the price band. The company is expected to list on 9 August.
At least five other real estate developers, including the largest listed one, DLF Ltd, have tapped the market for funds in the last two months, to finance their expansion plans in anaggressively growing property market. DLF alone mopped up nearly Rs10,000 crore fromthe market.
To top that, the stock market has been volatile recently, reflecting the weak trend in the global bourses.
On 1 August, the Sensex, the Bombay Stock Exchange’s benchmark index, ended with a sharp decline of nearly 4%, among its worst. The Sensex picked up marginally on 2 August, closing at 14,985.70 points, up 49.93. Realty stocks also took a heavy beating. Industry heavyweights such as DLF, Unitech Ltd, Parsvnath Developers Ltd, saw their share prices slide by 5-7% in a two-day roller coaster .
“There have been too many IPOs recently,” Manish Gunwani, vice-president of Brics Securities, said.
The country needs about 10 million homes by 2030, and more and more young Indians are opting to buy homes both for personal use and as an investment. That has spawned the most number of developers the country has seen, and in turn forced the central bank to be cautious against excessive lending to the sector.
So developers are turning to the equity market to fund some of this expansion.
Nitin A. Khandkar, senior vice-president (research), Keynote Capitals Ltd, however, feels that Omaxe should list at a premium of at least 10% of its issue price because it is attractively priced.
“I believe Omaxe should list at a premium to the issue price,” he said.
“The net present value (NPV) of Omaxe is at Rs325-400, which is higher than the issue price of Rs310. Since the issue price is at a discount to the NPV, we believe the shares should list at apremium.” NPV is the present value of the net cash flows of the company.
Khandkar, however, feels that the current market conditions could damp the level of premium Omaxe will command. “Given the market condition, the premium may not be very high. But it will not be less than 10%,” he said.