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Realty Runs With Hares...

Real estate firms have wriggled out of titanic troubles for now

For the realty sector the ongoing, though stalled in recent weeks, bull rally that started on March 9, 2009 was timed to perfection as otherwise it had bankruptcy written all across its constituent businesses. Since then they have powered the best performances on the stock markets, thereby once again proving that those who fall the most, climb the most and vice versa. Which also speaks volumes about investors’ proclivity of virtually gambling on the chances of realty stocks rising the most, even though they carry the maximum risk.

Checking out the reality in the realty, Wealth Insight looked at all stocks comprising the Bombay Stock Exchange (BSE) Realty Index and how they have performed, alongwith their holding pattern. Considering that realty companies have such a chequered past, there were no dearth of surprises or interesting facts revealed.

The foremost one is that they have moved fast to bring themselves nearer to the aspirations of the middle class by slashing prices, reducing the apartment/plot sizes to more affordable levels. But will this make their companies somehow more representative of an Infosys or a Tata? The jury will be out on that one for a long time.

Story of the Stocks

But these comapnies have looked to get back to their heydays. Out of the 14 companies that are listed on the BSE Realty index, Sobha Developers and Unitech have already raised huge amounts of capital through qualified institutional placements (QIPs). Their efforts and success thereof has opened QIP floodgates as 6 others have revealed their plans to raise capital by this method.

While chary house-buyers refusing to purchase any products in the over-priced market that was created, has hit realty companies hard, the countervailing steps taken by the realty companies may well herald a new dawn of introducing better working practices and perhaps even transparency, which ought to translate into better, and less volatile, returns for investors on stock markets as well as for home buyers. But remember, realty stocks may have risen by as much as 100 per cent in recent weeks, but one must remember that just recently Realty Index fell by more than 80 per cent from January to October 2008.

A Pledged Platform

Ansal Properties plans to raise Rs 1,500 crore through the QIP route. It also plans to raise the FIIs holding limit from 24 per cent to 49 per cent. Why resort to such measures? Perhaps, it is doing this as the promoters have pledged 68 per cent of their holdings. The crisis period had seen foreign institutional investors (FIIs) decrease their share in this stock on a regular basis from 15.1 per cent in March 2008 quarter to 7.78 per cent in June 2009 quarter. Mutual funds too have reduced their exposure to this stock, from 4.41 per cent holding to 0.01 per cent.

Parsvnath Developers are no different either. The promoter group owns approximately 80 per cent of their company’s shareholding. But they have pledged 69 per cent of this amount. And now the company plans to raise Rs 2,500 crore through the issue of QIPs. Here too the board of directors have given approval for raising FIIs holding limit from 24 per cent to 40 per cent. But FIIs have been exiting the stock for quite some time, from a high of 8 per cent in December 2007, they satnd at a low of 0.39 per cent as of now.

The only company that is a part of BSE Realty Index and lost nearly 50 per cent of the value in the bull run is Ackruti City. The extent of its fall can be gauged from the fact that BSE Realty saw triple digit gains during the same period. But this should not come as a surprise since its promoters have pledged 49 per cent of their holdings. And when the June first quarter results of FY10 were announced, it came to light that the company’s net profit had plunged by as much as 96 per cent on account of poor sales.

Housing Development and Infrastructure Limited (HDIL) and Peninsula Land Limited were the stocks that gained the most out of this rally, returning as 367 per cent and 366 per cent respectively between March 9, 2009-August 24, 2009.

This was despite the fact that HDIL saw FIIs reduce exposure to the stock marginally with their shareholding dropping from 11.6 per cent in December 2007 to 7.05 per cent in June 2009. To bolster its business, the company has approved a plan to issue further shares/securities up to an amount of $450 million or its equivalent in Indian rupees. It is yet to mention the route it will take.

Peninsula India too finds itself between a rock and a hard place as The promoter group has pledged only 26 per cent of their holdings. As a result, it too plans to raise Rs 750 crore, though it has not defined the instrument. 

A unique company in this set is Anant Raj Industries. It is one of two  companies that has negligible debt! In its annual result for FY09 it declared that its cash and bank balance stood at Rs 603 crore. According to reports, the company plans to use this cash reserve to buy assets in distressed businesses and push for rapid expansion — something its competitors are unable to do as they are resource-constrained. This has resulted in another positive: FIIs have not looked to exit this stock on a mass-scale. They have marginally reduced their holdings from 25.41 per cent in December 2007 to 22.38 per cent in June 2009, signaling their faith in the company’s management to continue scripting further success.

Surprisingly, some big names that are constantly in the news for some reason or the other, have managed to effect a credible recovery. There were two companies that actually gained large-scale favour with FIIs — DLF and Indiabulls Real Estate.

DLF’s rising popularity can be seen from the fact that FIIs have increased their holding, from 7.9 per cent of the company’s stock in December 2007, to 15.4 per cent in June 2009. But the promoters have reduced their holdings from 88.17 per cent in December 2007 to 78.65 per cent in June 2009. DLF was bolstered recently when it won a few big construction deals, including a Rs 9 billion Metro project as part of a consortium. 

The other company that had seen such high FII fervour is Indiabulls. This company too saw FIIs pump in huge amounts of funds into its stock. FIIs have increased their holding in the stock, which stood at 44.76 per cent in December 2007 to 61.71 per cent in June 2009. Meanwhile, promoters have decreased their holding from 27.14 per cent in December 2007 to 16.73 per cent in June 2009. Also, they have raised capital through QIPs worth Rs 2,656 crore. Mutual funds too have raised their stake in the stock from 1.05 per cent in December 2007 to 6.13 per cent in June 2009.

In Unitech, FIIs holding increased from 7.32 per cent to 22.79 per cent. The company also raised capital via the QIP route — $325 million, that led to a 21 per cent dilution in promoter holding. Overall, promoters’ have pledged over 70 per cent of their holdings. However, the likelihood of a funding gap remaining large despite the QIP, indicates the company may have to raise capital again, which augurs ill for promoters.

Conclusion

Rising global markets, exceptional domestic across-the-board economic and corporate statistics, plus strong urban/rural consumer demand have made possible greater risk-taking by investors in India and abroad and that has driven realty stocks. Efforts by these companies to wriggle out of their hugely overexposed positions may have eased liquidity problems for them, but it has come at the cost of substantial promoter-stake dilution. While the jury may still be out on what cumulative results will be in the near future, yet for stock market investors who bought-in when realty stocks were down on the floor, have reason to cheer. Now, when both stock prices as well as valuations have risen, and fundamentals of these companies still being weak, the chance of a breakout of exceptional quality ia dim. Add to that the still potent risk from cancellation of orders and a whiplash from bad debts as well as slow mortgage growth (fell from over 35 per cent in Q3FY07 to 8 per cent in Q4FY09) and the picture assumes a darker shade as cash flows are unlikely to revive.

In a world where everyone is overleveraged, from the individual, to the corporate to the government, in short, they are all too much in debt, and with inflation threatening, taking a chance on a high-beta stock like the ones in realty, is too fraught with risk.