Listed Real Estate Companies of India Analysis

The Pricing Manipulation

India’s Listed Real Estate Companies Performance Analysis

Dream gone

If we look at performance of India’s BSE Realty Index and companies listed in it, it has wiped out investors’ money; there must be someone who has made money. I have wrote about their performance in previous hub and promised to write a second hub on why it is so. Many people thinking that India’s Realty Market is like that, no it is one of the best performing and will continue to do so, the growth may be little bit down but yes, realty in India is good and will continue to do good in future.

Before I start putting down my thought on listed realty companies, I would like to give you little bit background information on how Indian Real-estate market works. The second important issue is background information of these companies, before listing or before burst of their dream.

All of these companies are small to medium family owned companies with reputation and good connection in corridor of power. They have big dreams; market was flying, with all connection and recipe ready to make money. The shortest way to reach the dream destination of big league companies, make a big IPO. With investment banker ready to advice, place your money and get cut on whole process. The deal is done. Working has started at least one and half to two years before IPO or new share offer. The first thing is to get few big transactions, (big land and new projects) show artificial profit, manages the balance sheet. (I wrote on art of managing balance sheet and also wrote on how to read bank balance sheet, I will promise to write a hub on Real Estate Companies Balance Sheet). The market is on uptrend and multiples are high, so the lead managers valued these companies at pick, and sold to investors. India is country of agents and brokers, if you have good network and brokers ready to sell then India is big country. You can pack garbage in silver, make deal with agents and brokers, if they sell it they will get part of booty, and agents/brokers are more than willing to convince the uneducated investors to put their money in it. This packaged garbage is sold at gold prices. The poor investors think they are buying gold, unfortunately when they see it after some time, it was too late and everything was lost.

What Went Wrong

There are three basic problems with share price of India’s realty companies and companies itself.

· The pricing

· The business model

· The leverage

These are the three areas where the companies gone wrong.

The Pricing

This is starting point when the process started and the lead manager used standard method to calculate the IPO price. The valuation based on PEER analysis for EPS and RoNW are used. In all of these cases I will show how they manipulated the method.

1. AKRUTI NIRMAN LIMITED- EPS for 2004 is just 2.1, for 2005 is 3.23 and 2006 is 14.12 this is sudden increase of 400% on EPS and over that the 2006 has weight of 3 so average become 8.49. PAT has also increased 500% in the 2006. In fact this should be just 5 or less because the way income statement is showing sudden increase in profit. The net worth has same gimmick played, net worth of company suddenly doubled in 2006. The market was going up and was at its pick so P/E of PEER group was 75, by any standard in the world this is very high pricing. On this basis the issue was priced. The promoter diluted their stake by less than 12% in this offer. The only beneficial is the promoter who got cash to increase the business without losing anything.

2. D B REALTY LIMITED – Therewere no company existed, the company was making loses in 2007, and 2008. Suddenly the promoter wanted to make big, they made big profits in 2009. These profits are dubious. They used weighted average to get best valuation giving weight of 3 to preceding year which made profit. There were negative net worth. This was clear case how market conditions can be manipulated to gain the profits by promoters. Here owner diluted their stake, taken the investor money and ready to enjoy. A loss making company selling at huge multiples. In this case the key role is played by the lead manager and underwriter of the issue.

3. DLF LIMITED – In 2007 the preceding year before the issue suddenly companies profit after tax increased 10 times, 100%. The net worth increased three time, they got weight of 3 in weighted average calculation, means the lead manager used this number to value the share, this is compared to the market leader and all of them are down and out. The company diluted its equity by 10% still promoter has almost 88% of the stake of the company.

4. KOLTE-PATIL DEVELOPERS LIMITED - The story is nothing different and new. The company made EPS of .80 in 2005, 1.02 in 2006 and suddenly it got gold and EPS was increased to 22.95 in 2007. Profit after tax increased from 28.02 to 835.67 almost 300% and net worth of the company increased to 1813 from 185, this is 10 times or 100%. This sudden jump is beyond my imagination and understanding in real estate business. This is just to make IPO so people’s money, this is fraud and cheating. The company diluted its ownership by 25% in this issue. They have got very good money.

5. MAHINDRA HOLIDAYS & RESORTS INDIA LIMITED – Not much irregularity is there in this valuation and also company balance sheet, but there is no peer comparison, in this case. The company has lost most of its share value.

6. ORBIT CORPORATION LIMITED – The Company has very good history and was doing fine. The performance of the company in preceding year was not good. It was in need of funds, to get this need fulfilled they issued 40% new share at very good premium.

7. Puravankara Projects Limited – This was not bad company. They have history but Small Time Company. When they saw opportunity to dilute the stake to grow fast. They increased the share capital, came with IPO. The market was good and receptive, they made money. The investors lost their everything.

8. OBEROI REALTY LIMITED – Oberoi diluted their stake by another 10% in this issue. Market was good, multiples were high and investors are willing to pay. So promoters sold small stakes to make money.

Who is blame?

Investors lost their money, some of these are trading below 80% of their listing price/ offer price.

1. Auditors – Who approved made up numbers.

2. SEBI – Who approved the issue?

3. Banker – The lead managers who sold the issue.

4. The brokers and agents – They are the ones who really convinced the investors to put the money.

5. Investors- Partly investors should also be blamed because they invested in it to make quick money without understanding what is in it.

 

The Business Model

 

The Business Model of Real Estate Projects

SMALL IS BEAUTIFUL

Small Project – These are typical projects of small to medium scale real estate developer companies. They go into development contract with land owner by paying very small amount as commitment charges, 5 to 10 percent of land value. They agree on mile stones and time line. The development is shared between land owner and developer. Depending upon upfront payment, the location and demand the sharing will change.

In such projects, the developer saves money on registration charges and transfer cost of the land (Taxation on land purchase and development).  Initial cost of commitment charges to land owner, the developer pays small amount to architect and designer. Usually soft cost is 10% of total project cost, but designing is get done in 0.5% and then as project moves on, milestone to mile stone payment is made. The sale document and promotion is ready another 5% initially, and it is done. No more money payment for developer may need some bridge finance or short term shortages otherwise nothing more. At the same time legal procedure is started. This takes 6 to 12 months minimum. The sale has already started and developer is interested selling only up to 20% of project so it can go on. First installment comes 20% as upfront payment and also legally project gets going. Now another 15% is paid by the first buyer, the new sell is almost at 20% up the initial price and upfront is 35%. When the project is at plinth level almost 50% of the payment is in the pocket and builder is ready to start another project. 90% of the payment is received even before the full structure is ready and only 10% is on possession.

This is very simple math; I have seen many good projects going badly in this structure. What goes wrong, the developer do not have enough money and if project get delayed because of any reason or market burst or slowed down, he do have money to complete the project. The liquidity is squeezed and project stalled, unless and until someone comes with money the project cannot go on. These projects on developer side are not bankable is second problem.  

MEDIUM SCALE PROJECT

In medium scale projects the style will remain the same the only difference is the developer buys the land and goes for soft launch of the project. At the same legal procedures and permissions are acquired and the projects completes the basic hurdle of level one. When project get approved the developer ask for project loan from the bank. This is second major difference between two types of projects. Bank approves the loan and as work progresses bank pays milestone basis. As soon as project starts on ground the developer goes all out to sell the project and big campaign is launched and goes the story. The developer remains low in liquidity and many times faces the problem. There are many companies who really done badly because of this model. One of the such company is Lok Group Mumbai.

BIG or MEGA PROJECT

The first step is land, the developer buys the land. This is specifically very much true for SEZ, IT Cities, and KPO, BPO townships and mega development and cities. Usually these projects are long, 36 months minimum to 60 months to 72 months. Because these projects needs lot of cash, and moves slowly, the developer needs to be having good cash position. Unitech has sold land and cancelled many mega projects including SEZ.

These are bankable projects; usually bank gives the loan for these projects based on the developer’s credit worthiness that may not be enough, developer need good investor partner who can wait patiently for the project to complete. These projects give very good returns but possess high risk.  Many SEZ are cancelled and stalled. There are other projects which are facing other difficulties. When project slowed down and interest payment goes up the project become unviable, because of time and cost of construction.

LEVERAGING

Unitech is classic example of high leveraged company.  In 2005 the debt was twice the equity, it become three times equity in march 2006, remain same in 2007 but increased to 4 times of equity. This high leverage and then slowing down of market along with cancellation had share prices going down.

Unitech has another classic case of high and low. Before the split and bonus in 2006 the share prices are gone very-very high. Just before this in 2005, company allocated promoter 10% preference share, the stake of the promoter was 58% in 2005, after split and bonus it has not changed much but after second bonus share of 1:1 when these share become regular the holding of the promoter group has gone up by 10 percent. The promoter group almost held 70% in the company.

Purvankara – Just a year before the issue company took huge loan and debt was seven times of equity. This is show the company is having big projects in hand.

DLF – The debt on march 2005 was twice the equity, it become 5 times equity in march 2006.  By the March 2007 debt become 10 times of equity. This is just before the IPO.

The modus operando was very much same. Start big project, get loan, show the people company has very good pipeline projects, even though they are not good enough and go IPO. There are lead manager banker and their agents brokers who can sell the dream. The cheating is very easy.

Real Estate Business Model

Project Structure of Big Project
Project Structure of Big Project
Project Structure of Medium Scale Project
Project Structure of Medium Scale Project
Project Structure of Small Scale Project
Project Structure of Small Scale Project

Issue Managers and Rating

S.No.
Issue
Lead Manager
Co Manager
Rating Agency
Rating
1
AKRUTI NIRMAN LIMITED
J.P. Morgan India Private Limited
Enam Financial Consultants Private Limited
 
 
2
D B REALTY LIMITED
Enam Securities Private Limited
Kotak Mahindra Capital Company Limited
CRISIL
2
3
DLF LIMITED
Kotak Mahindra Capital Co. Ltd.
Lehman Brothers Securities Private Limited
 
 
 
 
DSP Merrill Lynch Limited
Citigroup Global Markets India
 
 
 
 
 
Deutsche Equities India Private Limited
 
 
 
 
 
ICICI Securities Primary
 
 
 
 
 
UBS Securities India Private Limited
 
 
 
 
 
SBI Capital Market Limited
 
 
4
KOLTE-PATIL DEVELOPERS LIMITED
DSP Merrill Lynch Limited
Edelweiss Capital Limited
 
 
5
MAHINDRA HOLIDAYS & RESORTS INDIA LIMITED
Kotak Mahindra Capital Company Limited
HSBC Securities and Capital Markets (India) Private Limited
Fitch
4
6
OBEROI REALTY LIMITED
Kotak Mahindra Capital Co. Ltd.
ENAM SECURITIES
CRISIL
4
 
 
J.P. MORGAN INDIA
MORGAN STANLEY INDIA
 
1
7
ORBIT CORPORATION LIMITED
EDELWEISS CAPITAL LIMITED
 
CARE
 
8
Puravankara Projects Limited
DSP MERRILL LYNCH
CITIGROUP GLOBAL
 
 
 
 
 
Kotak Mahindra Capital Co. Ltd.
 
 
The Global Investment Bank Made Indian Investors Fools

Valuation

Akruti
EPS Calulations
Manupulations
 
 
Peer group P/E
 
Return on Net Worth Calculations
 
 
 
 
 
PEER Grtoup
RoNW (%)
 
 
 
 
Financial Period
Adjusted EPS
Consolidated
Weight
 
A) Highest 268.6
 
Financial Period
PAT (In millions)
Networth (Rs. In millions)
RoNW
Weight
 
Company Name
EPS
P/E
RoNW (%)
NAV/ Book
Sales (Rs. In
Year ended March 31, 2004
2.11
2.05
1
 
B) Lowest 17.0
 
Year ended March 31, 2004
81.83
422.84
0.1935
1
 
Ansal Housing
19
147
24.3
58.5
1175
Year ended March 31, 2005
3.23
3.3
2
 
C) Peer group average 103.30
 
Year ended March 31, 2005
131.9
512.25
0.2575
2
 
Ansal Properties
14.5
60.1
42.8
143.5
3207
Year ended March 31, 2006
14.12
14.18
3
 
D) Peer group median 75.5
 
Year ended March 31, 2006
633.09
1072.81
0.5901
3
 
?D S Kulkarni
12.9
31.1
62.5
86.9
166
Weighted Average
8.49
8.53
 
 
Average Return on Net Worth on a consolidated basis
 
Weighted Average
 
 
0.4131
 
 
Mahindra GESCO
3.3
268.6
2.1
164.1
1211
 
 
 
 
 
 
 
 
 
 
 
 
 
Unitech
2.5
186.2
35
2.8
6531
D B Realty
 
 
 
 
Industry P/E*
 
 
 
 
 
 
 
Shobha Developers Ltd
11.9
84.7
96.2
96.5
5966
Financial Period
Standalone
Consolidated
Weight
 
Highest – Sunteck Realty 349.3
 
Financial Period
Period RoNW (%)
Period RoNW (%)
Weight
 
 
Parsvnath Developers Ltd
5.8
75.5
70
66
6438
Period ending March 31 2007
-30.47
-32.09
1
 
Lowest – Simplex Realty 0.8
 
Period ending March 31, 2007
-1.65
-1.51
1
 
 
 
 
 
 
 
 
Year ending March 31 2008
-0.47
-1.18
2
 
Industry Composite 36.4
 
Year ending March 31, 2008
-1.5
-3.4
2
 
 
Company Name
EPS
P/E
RoNW (%)
NAV
 
Year ending March 31 2009
12.85
6.96
3
 
* P/E based on trailing twelve months earnings
 
Year ending March 31, 2009
29.07
17.99
3
 
 
DLF
2
177.4
13.1
72.9
 
Weighted Average
1.19
-2.26
 
 
 
 
Weighted Average
 
13.76
7.61
 
 
Unitech
1.2
68
29.6
30.4
 
Period ending September 30, 2009
2.98
2.78
 
 
 
 
Period ending September 30,2009
 
4.15
4.13
 
 
Ackruti
-
-
29.1
183.7
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DLF
 
 
 
 
Peer group P/E*
 
 
 
 
 
 
 
Company Name
?EPS (Rs)
P/E
RoNW (%)
NAV (Rs.)
Sales.Cr.
?Financial Period
Adjusted EPS
Adjusted EPS Split
Weight
 
(i) Highest 174.0
 
?Financial Period
Adjusted PAT ( Cr.)
Average Net Worth (Cr.)
RoANW(%)
Weight
 
DLF*
12.8
-
48.82
26.22
4,034.10
Year ended March 31, 2005
246.58
6.16
1
 
(ii) Lowest 13.6
 
Year ended March 31, 2005
86.5
711.6
12.16
1
 
Ansal Housing
10.7
13.6
24.3
55.2
117.5
Year ended March 31, 2006
493.64
12.34
2
 
(iii) Peer group Average 57.5
 
Year ended March 31, 2006
191.7
853.5
22.46
2
 
Ansal Properties
4.4
31.6
42.8
71.7
320.7
Year ended March 31, 2007
12.8
12.8
3
 
* P/E based on trailing twelve month earnings
 
Year ended March 31, 2007
1941.3
2466
78.72
3
 
D.S. Kulkarni
7.7
14.5
62.5
86.9
16.6
Weighted Average
 
11.54
 
 
 
 
Weighted Average
1049
1636.1
48.87
 
 
Mahindra Gesco*
3.5
174
2.1
189.3
155.5
 
 
 
 
 
 
 
 
 
 
 
 
 
Parsvnath
5.7
-
70
69.9
643.8
 
 
 
 
 
 
 
 
 
 
 
 
 
Developers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sobha Developers
11.8
-
95
96.5
596.6
 
 
 
 
 
 
 
 
 
 
 
 
 
Unitech
0.8
53.8
35
2.8
653.1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Kolte Patil
 
 
 
 
Peer group P/E*
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Period
EPS Annualised (Rs.)
Weight
 
 
c) Industry P/E*
 
?Year Ended
Adjusted PAT
Net Worth
RoNW (%)
Weight
 
Name of the Company
EPS(1) (Rs.)
P/E
RoNW (%)
Book Value
Sales (Rs. Mn)
Year ended March 31, 2005
0.89
1
 
 
i. Highest : 140.0
 
Year ended March 31, 2005
24.25
160.4
0.1512
1
 
Kolte-Patil Developers
22.95(2)
NA
0.4609
49.81
2,524.43
Year ended March 31, 2006
1.02
2
 
 
ii. Lowest : 2.8
 
Year ended March 31, 2006
28.02
185.3
0.1512
2
 
Akruti Nirman
NA
NA
0.249
75.2
1779
Year ended March 31, 2007
22.95
3
 
 
iii. Industry Composite : 34.8
 
Year ended March 31, 2007
835.61
1813.18
0.4609
3
 
Ansal Housing
29
6.9
0.368
86.8
1992
Weighted Average
11.96
 
 
 
* P/E based on trailing twelve month
 
Weighted Average
 
 
0.306
 
 
IVR Prime Urban
NA
NA
0.313
134
1478
 
 
 
 
 
 
 
 
 
 
 
 
 
Mahindra Gesco
4.7
131.3
0.03
189.3
1555
Mahindra Resorts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Period
EPS (Rs.)
Weight
 
 
 
 
Financial Period
RoNW (%)
Weight
 
 
 
 
 
 
 
 
 
Year ended March 31, 2007
5.5
1
 
 
 
 
Year ended March 31, 2007
56.21
1
 
 
 
 
 
 
 
 
 
Year ended March 31, 2008
10.77
2
 
 
 
 
Year ended March 31, 2008
58.77
2
 
 
 
 
 
 
 
 
 
Year ended March 31, 2009
10.19
3
 
 
 
 
Year ended March 31, 2009
40.78
3
 
 
 
 
 
 
 
 
 
Weighted Average
9.6
 
 
 
 
 
Weighted Average
49.35
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Orbit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Period
EPS (Rs.)
Weight
 
 
Peer group P/E*
 
Financial Period
RoNW (%)
Weight
 
 
 
Name of the Company
Face Value
EPS
P/E
RONW
NAV
Year ended March 31, 2004
8.19
1
 
 
I) Highest – Mahindra Gesco 249.1
 
Year ended March 31, 2004
45.84
1
 
 
 
Ansal Housing
10
11.5
20
24.3
58.50
Year ended March 31, 2005
4.15
2
 
 
ii) Lowest – Lok Housing 3.3
 
Year ended March 31, 2005
18.99
2
 
 
 
DS Kulkarni
10
7.7
27.5
62.5
86.9
Year ended March 31, 2006
0.08
3
 
 
iii) Average 50.4
 
Year ended March 31, 2006
0.09
3
 
 
 
Mahindra Gesco
10
0.2
249.1
2.1
164.1
9 months December 31, 2006*
0.02
 
 
 
* P/E based on trailing twelve month
 
9 months December 31, 2006*
0.04
 
 
 
 
Orbit Corporation*
10
0.08
[??] 0.09
45.6
 
Weighted Average
2.79
 
 
 
 
 
Weighted Average
14.02
 
 
 
 
Orbit Corporation** 10
10
0.02
[??] 0.04
53.17
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purvankara
 
 
 
 
Industry P/E*
 
 
 
 
 
 
 
Name of the Company
?EPS (Rs)
P/E as on
RoNW (%)
Book Value
Sales
Financial Period
EPS
Weight
 
 
i. Highest : 279.3
 
Financial Period
RoNW (%)
Weight
 
 
 
Puravankara
3.83
[?]
66
5.8
2797
Year ended March 31, 2004
0.8
1
 
 
ii. Lowest : 4.6
 
Year ended March 31, 2004
56.88
1
 
 
 
Ansal Housing
11.5
17.4
24.3
58.5
1175
Year ended March 31, 2005
1.98
2
 
 
iii. Industry Composite : 50.6
 
Year ended March 31, 2005
73.68
2
 
 
 
Ansal Properties
14.3
41.3
42.8
39.1
3207
Year ended March 31, 2006
3.83
3
 
 
* P/E based on trailing twelve month
 
Year ended March 31, 2006
65.97
3
 
 
 
D. S. Kulkarni
7.7
32.3
62.5
86.9
166
Weighted Average
2.71
 
 
 
 
 
Weighted Average
67.03
 
 
 
 
Mahindra Gesco
0.2
279.3
2.1
164.1
1211
 
 
 
 
 
 
 
 
 
 
 
 
 
Parsvnath Developers
5.8
81.6
70.7
66
6438
 
 
 
 
 
 
 
 
 
 
 
 
 
Peninsula Land
27.3
13.2
NA
41.3
2724
 
 
 
 
 
 
 
 
 
 
 
 
 
Unitech
0.8
184.6
35
2.8
6531
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Oberoi
 
 
 
 
Industry P/E*
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Period
EPS Consolidated
EPS Stand alone
Weight
 
Highest 272.4
 
Period
Consolidated
Un Consolidated
Weights
 
 
Name of the Company
Face Value
EPS
P/E
RoNW
NAV
Year ended March 31, 2008
10.22
3.17
1
 
Lowest 4.8
 
Year ended March 31, 2008
24.19
9.95
1
 
 
Oberoi Realty Limited*
10
15.61 [?]
24.55
63.32
 
Year ended March 31, 2009
8.49
1.29
2
 
Industry Composite 26.0
 
Year ended March 31, 2009
17.48
4.76
2
 
 
DLF Limited
2
5.1
65.2
6.1
75.6
Year ended March 31, 2010
15.61
0.58
3
 
* P/E based on trailing 12 months
 
Year ended March 31, 2010
24.55
2.57
3
 
 
Unitech Limited
2
2.3
36.9
9.9
33.9
Weighted Average
12.34
1.25
 
 
 
 
Weighted Average
22.13
4.53
 
 
 
Indiabulls Real Estate Limited
2
0.5
- (0.10)
159.6
 

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Atinder 18 months ago

Good post about the project . if you are searcing property with best returns you have best options in Sports City http://www.aarcitysportsrepublik.in/

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