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Valuation of Indian Real Estate Stocks.

November 22, 2006

I have had investors coming to me and asking about How to value Indian real estate stocks ? I decided to sit and study the sector and went through the following material.

1. Red Herring prospectus of DLF
2. Macquire Research Equity – India property – Nov 14th-2006
3. ShareKhan Sector Special – Nove-6th-2006
4. Sobha Developers Ltd – Final RHP Dated Nov-6th 2006.

In India, Real Estate Stocks can be valued by two methods – Value of the Land Bank or Sum of Parts Valuation [NAV] or by the routine cash flow discounting model.

Macquaire in its Research report dated 14-NOV-06, says, real estate stocks in India should not trade above their NAV premium. The real estate sector is expected to grow at CAGR of 60% betwen 2006-09. Macquaire’s model involves giving 40% weightage to Land Bank, 15% to debt, Equity and Interest costs, 25% for Management of projects and 20% for ROA and ROE. The report further states that, most Asian real estate stocks are valued on NAV. The model sounds reasonable.

Based on this model, Macquaire has arrived at NAV price of Rs 501 per share for Unitech Ltd and it is also the target price for the stock. The NAV for Mahindra Gesco developers Ltd is Rs1110 and the target price for the stock is Rs 945.

Also read Cushman & Wakefield reports about Land Value certifications of DLF and Sobha Developers.

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