Turning Property Into Profits

After productivity jumps in operations, finance and people it8217;s now time for property to follow

Would you pay 500 times a company8217;s earnings to buy its stock? That is, for every rupee the company makes, would you pay Rs 500? To put it in yet another manner, if the company continues to make Re 1 of Earnings Per Share EPS every year till perpetuity, would you be willing to wait for 500 years 8212; something like six to eight generations 8212; for returns to accrue? Your answer would probably be, 8220;No way, not when I can get hundreds of pedigreed stocks available at less than a 10th of this value!8221; You would, therefore, not buy Unitech PE: 353, you would not touch Mahindra Gesco 305, you would not go near Ansal Properties 113. You would ignore all realty stocks, including DLF Universal8217;s forthcoming 500 PE IPO.

You could be wrong. While past growth is no indication of future prospects in fact, if a share has risen too much, too fast, the multiple returns have been creamed off and your best bet is a long-term 15 per cent, compounded, by steering clear of high PE stocks or loss making companies, you would also not be able to identify turnarounds. Or, as in this case, the re-rating of the realty sector and textile companies with large tracts of land, largely in Mumbai but now expanding to fill other cities as well, both of which have seen quantum jumps in share prices.

Ansal Properties, at close to Rs 1,000, has reached here after jumping 300 times over the past three years, as its PE expanded 100-fold, from 1.1 in May 2003 to 112.6, today. To put this in perspective, then you could buy the whole company for Rs 11.67 crore; today you need to pay Rs 3,458 crore. The case of Unitech is similar 8212; at close to Rs 10,000 per share, the company has seen its value jump by 234 times over the past three years, as its PE moved from 4.9 to well over 300, making it the country8217;s third largest wealth creator in the past three years. Add the lesser known Peninsula Land price: Rs 798; PE: 40.9; market capitalisation: Rs 3,155 crore, Simplex Infrastructures Rs 2,380; 45.8; Rs 2,041 crore and Nagarjuna Construction Rs 378; 43.1; Rs 3,903 crore 8212; and five of India8217;s top eight biggest three-year wealth creators are from the realty or construction sectors.

During these three years, I have dismissed these movements as yet another fad that the market will forget and reverse over the next six to 18 months. For, every few years, we see such jumps in share prices, valuations and market capitalisations of companies and sectors. In 1991, following their opening up, we saw companies in the cement and mini steel plant sectors skyrocket. In 1992, Harshad Mehta introduced something called 8220;replacement value8221;, that is, the cost of creating an enterprise, with the primary focus being its assets, pushing commodity companies higher. Between 1992 and 1994, it was companies in the ceramics, granites, floriculture, aquaculture and financial services come, collect money and disappear. In 2000, physical assets gave way to knowledge assets and the new tool was the premium on technology and internet stocks you can8217;t value them by any traditional yardstick, we illiterates were told by the smart suits, which were being likened to the invention of electricity or railways.

The current onslaught of property re-rating seems to be backed by a productive shift in corporate gears. The market is valuing an asset that no balance sheet can capture 8212; the current value of yesterday8217;s purchase of land. DLF, as it readies to hit the market next month, is banking on the same value driver. At a PE of 500, the DLF share would be a 8220;no way8221;. But how much would investors pay for Rs 77,000-853,000 crore worth of land that international property consultants say DLF has that8217;s about Rs 450-500 per share? The answer lies in its monetisation, that is, how this high-value but illiquid asset can help the company grow its EPS. DLF8217;s Rs 200 crore bottomline shows up a piffling return of 0.25 per cent on these assets. So, either they have to become more productive or have to be sold and the money distributed to shareholders.

DLF8217;s pricing and realty re-rating is the climax of a story begun a decade ago. The high interest rate regime of the past combined with an opening up of the economy has forced Indian companies to become more productive on the operational, financial and manpower fronts. The one lag: productivity of property 8212; land bought a generation or two ago that has appreciated beyond expectations and servicing, which has become a liability. The next 12 to 36 months should see many land sales by companies that own prime properties in city centres, as they move towards cheaper suburbs and generate cash with which to retire debt, reinvest into new lines of business or just deliver fat dividends.

gautam.cexpressindia.com