The Bombay Stock Exchange (BSE) Realty index, which consists of 14 real estate stocks, has risen a whopping 207% since touching a low on March 9,2009.
During the same period, the 30-share BSE Sensex has given a return of 108%, which seems rather low in comparison. The interesting point is the way the price to earnings (PE) ratio has shot Up, from 6.6 on March 9 to over 60 at present. In comparison, the Sensex PE is at 21.62.
PE ratio is calculated by dividing the share price of a stock by the earnings per share of the company over the last one year. The high PE of the Realty index tells us that the stock prices of real estate companies have gone up much faster than their earnings over the last one year.
The total net profit of the 14 companies that constitute the index stood at Rs 669.22 crore for the quarter ended September 30, down around 65% year on year.So, more than fundamentals, it is the spurt of liquidity that has hit the market since March, which is driving the stock prices.
It is also likely that the market expects sales and profits of these companies to pick up soon. News reports and company officials seem to suggest that new sales have been happening;
Some analysts, however, maintain that even though new sales in the bigger markets have picked up, nearly 50% of these sales have been made to investors and brokers who are hoping to make a quick buck. These investors and brokers have paid token amounts of 5-10% to book these flats.
“In volume terms, the NCR (National Capital Region) market has registered the biggest recovery in India with over 15,000 units (-13 million sq ft) sold in H1FY10. Though prices are still 20-25% below their peak levels, about 50% of new sales have been to investors/ brokers for token booking amounts of just 5-10%,” Adhidev Chattopadhyay of Centrum Broking wrote in note to clients dated October 14.
Real estate companies have used this so-called pick-up in sales to jack up prices in the recent past. Also, to the realtors’ advantage, banks have been on a lending spree to real estate companies. Between April and August, lending to real estate companies rose 41.5% or Rs 28,353 crore. This has helped real estate companies get through difficult times without having to cut prices in their desperation to raise cash for servicing debt.
Worryingly, however, these companies still have a lot of debt to pay off. Also, one way they are raising cash is by launching new projects. But most of these new projects have seen minimum construction.As Chattopadhyay wrote, “We visited 16 new project launches by developers such as Unitech, Jaypee and DLE We observed that construction activity has not started for most projects, even 6 months after launch. Reasons cited for the delay were lack of approvals and waiting periods of 4-5 months where investors are given time to pay up the balance booking amount.”
Some of the older projects have also been delayed. What’s more, some real estate companies, such as DLF, continue to follow an accelerated revenue recognition policy The bottomline is that things are not looking good for real estate companies. And if and when the crash comes, this sector will take the biggest beating.
Source: DNA
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