Would you pay 500 times a company’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 — something like six to eight generations — for returns to accrue? Your answer would probably be, “No way, not when I can get hundreds of pedigreed stocks available at less than a 10th of this value!” 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 Universal’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 — 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 country’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) — and five of India’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 “replacement value”, 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 can’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 — the current value of yesterday’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 “no way”. But how much would investors pay for Rs 77,000-853,000 crore worth of land that international property consultants say DLF has (that’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. DLF’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. DLF’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 — 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.c@expressindia.com
