Updated date:

Listed Real Estate Companies of India Analysis

Author:

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.

 

Financial Statement

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.

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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

The Global Investment Bank Made Indian Investors Fools

S.No.IssueLead ManagerCo ManagerRating AgencyRating

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.

 

 

Valuation

AkrutiEPS CalulationsManupulations  Peer group P/E Return on Net Worth Calculations     PEER GrtoupRoNW (%)    

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

 

Comments

Atinder on March 30, 2015:

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