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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Property Sector------------------------------------------------------------------------------------------
Book value scanner: Are stocks really trading that cheap?
● Property stocks might appear cheap at current valuations given
the argument that book values do not reflect the current market
price of the land, however, we believe that when seen on adjusted
price-to-book valuation, these stocks are no longer that attractive.
● Book values of developers are overstated owing to certain items
such as capitalised interest which have continued to accumulate
on the balance sheet. In some cases, assets/investments are
recorded at higher than fair values which should be adjusted.
● DLF and HDIL’s book values decline by 40% and 36%,
respectively, post these adjustments. On an average, adjusted
book value for developers under our coverage stands lower by
23% compared to their nominal values.
● On an adjusted basis, DLF is still trading at 2.6x FY11E P/B with
ROE of 7%, which implies the market is factoring that the market
value of DLF’s land as of Mar-11 should grow to 2.5x its recorded
cost, which is highly unlikely given that majority of its land was
acquired between FY07 and FY09. DLF remains our top
UNDERPERFORM.
Stocks not actually cheap on adjusted book valuations
On a Price-to-nominal book basis, stocks might appear cheap given
the book is at historical cost and not reflective of the current market
price of land. However, reported book also needs adjustments for
items which are presently leading to an overstatement of the actual
book and after making these adjustments the stocks do not appear
that attractive anymore.
Adjusted book values lower by average 23% for developers
Developers capitalise a part of their interest expense on a ‘matching’
concept basis which, given their low asset turnover, has continued to
accumulate on balance sheet and has now become a significant part
of the book value. Also in some cases, there are assets/investments
which are being recorded at higher than fair values. For DLF, these
adjustments form 40% of the nominal book value and for HDIL and
IBREL they form 36% and 30% of the book value, respectively. On an
average, adjusted book value for developers under our coverage
stands lower by 23% compared to nominal values.
Maintain UNDERPERFORM on DLF
On an adjusted basis, average FY11 ROE for the sector stands at
9.4% compared to 11.1% otherwise. Also, stocks are trading at
average 2.0x FY11E adjusted BV compared to 1.5x nominal BV. DLF
is still trading at 2.6x FY11E P/B with ROE of 7% on an adjusted basis,
which implies that market is factoring that the market value of DLF’s
land as of Mar-11 should grow to 2.5x its recorded cost, which is
unlikely given that a majority of its land was acquired between FY07
and FY09. DLF remains our top UNDERPERFORM in the sector.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Property Sector------------------------------------------------------------------------------------------
Book value scanner: Are stocks really trading that cheap?
● Property stocks might appear cheap at current valuations given
the argument that book values do not reflect the current market
price of the land, however, we believe that when seen on adjusted
price-to-book valuation, these stocks are no longer that attractive.
● Book values of developers are overstated owing to certain items
such as capitalised interest which have continued to accumulate
on the balance sheet. In some cases, assets/investments are
recorded at higher than fair values which should be adjusted.
● DLF and HDIL’s book values decline by 40% and 36%,
respectively, post these adjustments. On an average, adjusted
book value for developers under our coverage stands lower by
23% compared to their nominal values.
● On an adjusted basis, DLF is still trading at 2.6x FY11E P/B with
ROE of 7%, which implies the market is factoring that the market
value of DLF’s land as of Mar-11 should grow to 2.5x its recorded
cost, which is highly unlikely given that majority of its land was
acquired between FY07 and FY09. DLF remains our top
UNDERPERFORM.
Stocks not actually cheap on adjusted book valuations
On a Price-to-nominal book basis, stocks might appear cheap given
the book is at historical cost and not reflective of the current market
price of land. However, reported book also needs adjustments for
items which are presently leading to an overstatement of the actual
book and after making these adjustments the stocks do not appear
that attractive anymore.
Adjusted book values lower by average 23% for developers
Developers capitalise a part of their interest expense on a ‘matching’
concept basis which, given their low asset turnover, has continued to
accumulate on balance sheet and has now become a significant part
of the book value. Also in some cases, there are assets/investments
which are being recorded at higher than fair values. For DLF, these
adjustments form 40% of the nominal book value and for HDIL and
IBREL they form 36% and 30% of the book value, respectively. On an
average, adjusted book value for developers under our coverage
stands lower by 23% compared to nominal values.
Maintain UNDERPERFORM on DLF
On an adjusted basis, average FY11 ROE for the sector stands at
9.4% compared to 11.1% otherwise. Also, stocks are trading at
average 2.0x FY11E adjusted BV compared to 1.5x nominal BV. DLF
is still trading at 2.6x FY11E P/B with ROE of 7% on an adjusted basis,
which implies that market is factoring that the market value of DLF’s
land as of Mar-11 should grow to 2.5x its recorded cost, which is
unlikely given that a majority of its land was acquired between FY07
and FY09. DLF remains our top UNDERPERFORM in the sector.
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