On one hand the rush of initial public offerings (IPOs) in the Indian real estate sector will not dent the value of existing large stocks in the sector, according to analysts’ estimates.
On the other hand, large Indian developers are poised for better financial growth than their peers in the Asia-Pacific region for the next few years.
A study of top real estate companies in the Asia-Pacific region by JPMorgan, released in the first week of August, says that the top Indian realty stocks such as DLF Ltd, Unitech Ltd, Parsvnath Developers Ltd, Sobha Developers Ltd, Anant Raj Industries Ltd, and Ansal Properties Ltd are slated to grow faster than those in other major Asian markets such as China, Hong Kong, Malaysia and Singapore.
The average of return on equity (RoE) of the top six Indian real estate stocks is pegged at 42% in the calendar year 2007. This is substantially higher than the 18% RoE expected on the Top 3 realty stocks in China. The average RoE of the Top 3 players in Malaysia and Singapore are at 10% and 7%, respectively.
In Hong Kong, the comparative figure is much lower at 7%.
In 2008, the average RoE expectation of top Indian companies is about 39% against 22% of Chinese companies and 10%, 7% and 8% of top realty stocks in Malaysia, Hong Kong and Singapore, respectively.
The Top 3 Indian developers have a combined market capitalization of about $37.3 billion (Rs1.51 trillion), while the Top 3 developers in China are capitalized at more than $45.3 billion on the Shanghai StockExchange.
The JPMorgan study comes at a time when the Indian market is flooded with IPOs from real estate firms.
A CLSA report, dated 6 August, says that over the past 12 months, 23 real estate companies have raised more than $4.4 billion through public equity offerings in the Indian market and an additional $2.6 billion from overseas bourses such as London’s alternative investment market (AIM).
However, the rush of real estate companies is not a matter of concern, says Kaustubh Kulkarni, executive director of real estate investment banking at JPMorgan India Pvt. Ltd. Good quality stocks are unlikely to see value erosion, due to an oversupply of paper in this sector, he says.
The average growth estimated on the earnings before interest and tax (Ebit) margin of large Indian companies is around 64% in 2007, while their net sales is expected to grow more than 246% during this period.
The Top 3 developers in Hong Kong—Hang Lung Properties Ltd, Henderson Land Development Co. Ltd and Cheung Kong Hdg—are expected to report average growth of 43% in Ebit margin and 112% in sales growth.
In the year 2008, top Indian companies could grow by 62% in their Ebit margin and 70% in their sales.
These estimates for both the years pegs Indian companies much higher than those in the surrounding markets.
In the current market, more than 35 listed Indian real estate companies command more than $70 billion in market capitalization. Among these, more than 11 comp-anies are capitalized at above $1 billion.
Emaar-MGF, preparing for a public offering in the future, is also expected to raise close to $1 billion from the market.