Realty sector bites into mkt valuation

From being invisible a few years ago, the real estate sector is now one of the biggest contributors to the Indian stock market. The listed companies in the sector are now more valued than their counterparts in automobiles, pharmaceuticals, FMCG and cement sectors. The only sectors bigger than realty are oil & gas, infotech, telecom, banks and capital goods.

Real estate companies such as DLF, Unitech, Parsvnath and Sobha Developers, among others, now account for 4% of the BSE capitalisation. Only a year ago, the sector's share was less than one per cent. The biggest catalyst for this turnaround has been DLF, which got listed on Thursday.

The Delhi-based real estate developer accounts for a little over half of the entire market cap of the real estate sector. At today's closing price of Rs 556, the company is now among India's top five most valuable companies, ahead of ICICI Bank, SBI and L&T. Will this change the market outlook towards the sector?

Will more real estate stocks get into the Sensex or Nifty as happened in the case of IT stocks, a few years ago? Right now, there are no real estate companies in the Sensex or in Nifty. In contrast, automobile and pharma sectors have five companies each in the Nifty, while cement and FMCG are represented by three companies each.

But why is it important for a company or sector to have a representation in Nifty? If a company gets into Nifty, all index funds will have to necessarily invest in the stock pushing up its demand and, as consequence, its market price. This also forces brokerages and investment bankers including foreign ones to actively track the stock, increasing the stock's circulation. All this has a positive rub-off effect on the stock price and ultimately helps retail investors.

Being one of the most valuable companies in India, there is a big probability of DLF making it to the Nifty and thus setting a precedent for other stocks in the sector. This is good news for investors in the sector. However there's a hitch. Though highly valued, real estate stocks are still not that liquid compared to their counterparts in other sectors. A high liquidity or greater trading volume is a crucial factor determining a stock's inclusion in the index.

The other factor is the disclosure norms in the industry. Bigger listings like DLF are likely to pave the way for better disclosure norms in the industry. It will also be a barometer for the health check of the sector. In the longer run, we may look forward to greater transparency in the sector. The real estate sector has come a long way since DLF filed its first draft prospectus in March last year. Since then there has been a rally in the stocks of this sector.

The party continued till January this year. During the period, new issues like Parsvnath, Sobha Developers, Akruti Nirman got listed at almost 80% premium to their offer price. In fact a successful listing by DLF may now induce more real estate companies to hit the capital market. IVR Prime, Omaxe and Puravankara Projects are few of the realty IPOs that are expected to hit the primary market in the near future. These companies are expected to raise up to Rs 1,500 crore. If successful, these will further push the sector's contribution to the stock market.

Source: The Economic Times