Fund manager J. Venkatesan consults analyst reports before making decisions about the stocks included in the fund he manages, Sundaram BNP Paribas Rural India Fund. When it comes to shares of real-estate companies, though, his company is pretty much on its own. Analyst coverage of listed development companies is spotty, he noted. Venkatesan’s fund includes shares of Delhi-based developer Ansal Properties & Infrastructure Ltd.
“With real estate, as a sector, you need to have a lot of information about where the projects are coming up,” Venkatesan said. “We visit companies and go to their projects … It’s a tough job we do. But we have to do (it) because there is not enough coverage.”
Investors count on information to make decisions and, for now, those who are interested in real-estate stocks don’t have much of it. But as the sector grows, analysts say they’ll be paying more attention.
The real-estate boom that began a couple of years ago caught many brokerage firms by surprise. Few of them had analysts assigned to cover development companies whose share prices were growing by multiples. The sector is still relatively undercovered despite growing interest from foreign investors and a flurry of initial public offers floated during the three-year-old housing boom. Brokerage firms have started tracking builders only in the last couple of years and few even generate quarterly earnings projections.
“It (more analyst coverage) would make a big difference for everybody,” said Dipan Mehta, director of Dipan Mehta Share and Stock Brokers Pvt. Ltd.
“The analysts depend on the independent director and the auditor to do due diligence. At the same time the investor depends on due diligence being done by the analyst.”
There are now about 15 developers listed on Indian exchanges, including the largest listed company, Unitech Ltd, and big names such as Parsvnath Developers, Sobha Developers, Ansal Properties & Infrastructure, Mahindra Gesco, Akruti Nirman Ltd and D.S. Kulkarni Developers Ltd. A handful of other companies, including Hiranandani Developers Pvt. Ltd, have sponsored listings on foreign exchanges. And at least seven developers are awaiting approval from Sebi for new public issues, including real-estate giant DLF Ltd.
Real-estate stocks have been hit hard in recent months by interest rate hikes, but experts say they will bounce back in the long run and the need for analysts will grow. In the past six months, 10 of India’s top builders (that are listed on the stock exchange) have seen their share prices drop by around 12%.
Despite the number of companies that are listed, analyst coverage is irregular, in part, because India’s real-estate companies—even though they’ve grabbed the world’s attention with their meteoric growth—are small compared to companies in other sectors. The sector also is new and analysts are just learning how to value builders whose sales fluctuate from quarter to quarter and are largely judged by the land they have available for development. Analysts say it’s difficult to evaluate the companies because the management typically isn’t forthcoming with details about projects, land holdings, sales, purchases, litigation and ownership status.
Projections are based on how long a company would take to exhaust its land reserves even though the construction timetable could expand significantly if the real-estate market slows, said Ashutosh Narkar, real-estate equities analyst for India Infoline Ltd. Quarterly results don’t necessarily provide a current snapshot of a developer’s finances because sales revenue booked in quarterly earnings for completed projects were sometimes collected months earlier, he said.
Narkar said companies provide information when analysts call them, but much more information is needed and it should not be given out sporadically, he said.
“How do you calculate uncertainties?” Narkar said. “With transparency, the analysts community will get a feel of what’s happening.”
There are signs that things could change. The Securities and Exchange Board of India (Sebi), the stock market regulator, plans to tighten disclosure requirements for realty companies floating initial public offerings. Companies will have to provide more details about their land holdings and would not calculate their value using future price projections.
Once investors have access to frequent and reliable analyst reports, the sector will see rapid growth, Mehta said. But analysts will be reluctant to step up coverage until real-estate companies are more professionally run, credible and transparent, he said.
Credibility is an issue because of the perception that developers deal in unaccounted money and bribes and have had ties to the underworld, Mehta said, adding that he doesn’t want to recommend a stock only to be embarrassed later by a scandal.
Ashim Gandhi, chief operating officer for Parsvnath Developers in Delhi, said his company would welcome more coverage. But he said investors get plenty of information on which to base their decisions from media coverage and quarterly results. Analysts would provide quarter-by-quarter coverage of developers if investors demanded it, he said. “It is a matter of what is the interest level of investors,” Gandhi said. “Some industries have a huge amount of interest.”
Unitech managing director Sanjay Chandra said his company gets quite a bit of coverage from UBS, Macquarie Research and CLSA Asia-Pacific Markets. But that’s because Unitech has a market cap of about Rs28,000 crore, at least four times the size of every other listed developer.
“The broking houses only deploy resources where they get enough revenue out (of it),” Chandra said. “Once the sector is larger, you’ll have more analysts and better quality research coming out of our sector.”
Brokerage firms typically provide real-estate stock recommendations for foreign institutional investors and wealthy individuals. Akash Deep Jyoti, head corporate and infrastructure ratings CRISIL, said the pool of domestic investors will grow once Sebi allows for the launch of real-estate mutual funds. More investors will bring more analysts into the sector, he said.
“There will be a wide diversity of opinions in the market,” Deep Jyoti said. “Instead of a few opinions, if there are more opinions in the market, then the investor can always make use of a consensus opinion and can always choose the most conservative opinion.”
Mukesh Agarwal of HDFC Securities, who started covering Ansal Housing eight months ago, said companies are becoming more ethical and are providing more information than in the past. But it will take time for analysts to feel comfortable with the industry. “There can be more coverage if the industry becomes completely transparent,” said Agarwal. “People still haven’t got the feel of the industry. It’s a new thing for most of the fund managers and analysts. They’re still trying to get a hang of it,” he added.
Sujit Jain, who was covering agriculture and fertilizer companies earlier, began tracking real estate about a year ago for Mumbai-based PINC Research. He is now tracking Chennai-based Arihant Foundations & Housing Ltd and said he might initiate coverage on a handful of other companies. Real-estate stocks, some analysts say, are more attractively priced after their recent declines. “Even though we’re going through a lean patch,” Jain said. “The sector is poised for a quantum leap.”