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Real estate sector valuations still high

Real estate sector valuations still high
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First Published: Thu, Jun 10 2010. 12 12 AM IST

Graphic: Ahmed Raza Khan/Mint
Graphic: Ahmed Raza Khan/Mint
Updated: Thu, Jun 10 2010. 12 12 AM IST
Market regulator Securities and Exchange Board of India’s new ruling requiring listed companies to have a free-float of 25% could hit realty stocks.
Several big companies such as DLF Ltd and Puravankara Projects and Constructions Ltd have a public shareholding of less than 25%.
Graphic: Ahmed Raza Khan/Mint
Realty firms also need large doses of capital, and, hence, access capital markets frequently.
For example, Purvankara, which has a promoter holding of around 89.96%, is expected to raise money to fund its new projects.
DLF, which had raised funds through institutional placement, like many of its peers, might see the need for raising equity, as debt on its books increases in the coming quarters, although company officials say there is no immediate need to access markets for compliance purpose as the free float is just 3.5% below the specified threshold.
Analysts believe companies may wait for appropriate valuations because realty shares have been battered since January.
The outlook for the sector has improved. Firms are reporting higher sales volumes and property prices. Monthly sales volumes across major cities such as New Delhi, Mumbai, Bangalore, Chennai, Kolkata and Hyderabad are around two-three times from their troughs. Property prices in key markets such as Mumbai metropolitan region and the National Capital Region are close to the peak rates.
More importantly, rising sales have helped lower inventories. A report by Credit Suisse says, “Real estate inventory levels at 7-14 months of sales in March 2010 are now at a three-year low, or at nearly half the peak levels of 18-30 months” the second quarter of fiscal 2009.
In fact, fiscal 2011 and fiscal 2012 are expected to post positive double-digit growth rates in operating profit for most realty firms, compared with a contraction in fiscal 2010.
The question then is: Will the improving fundamentals give realty firms an advantage to price the shares at a premium to current rates, in the event of having to increase its public holding? Perhaps not.
Analysts say any drop in sales volumes and delay in deliveries might put pressure on the balance sheet of realty companies, which have just been cleaned of the huge debt accumulated on their books during the economic slowdown. Also, they are sensitive to changes in interest rates. Concerns over higher interest rates have kept the stocks subdued.
All this, along with the anticipated magnitude of paper in the markets to fall in line with the new regulation, will keep valuations in realty low. Even at the battered down market price levels, shares are quoting in a region of 17-20 times estimated fiscal 2011 earnings.
We welcome your comments at marktomarket@livemint.com
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First Published: Thu, Jun 10 2010. 12 12 AM IST
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