DLF: Ground reality

Realty stocks are expected to trade at 10-20% discount to current values on concerns of peaking real estate prices.

DLF's listing at a premium to its issue price will put to rest concerns that the issue was aggressively priced. Priced at Rs 525, exactly at the middle of the Rs 500-550 price band, the stock traded at a weighted average of Rs 556.66 on the BSE on Thursday. Trading volumes in new listings are high and that was the same case in DLF's debut.

Most analysts had found the DLF IPO pricing expensive with some of them recommending investors to subscribe at the lower end of the price band or only if they had a long-term view.

That was one reason why the retail portion of the issue saw a subscription of 0.9 times and even the non-institutional bids were at 0.92 times.

The institutional investor segment was the only one where the issue was oversubscribed 4.93 times. This category has many long-term investors who understand the real estate business better as they have seen it elsewhere in the world.

With DLF trading at a premium, real estate developers who are planning on listing will gain confidence. There has been a similar impact on the listed stocks too since the time DLF announced its IPO. No doubt these stocks had gone up too much till December and went through a correction after the Budget.

This was because there were concerns of a slowdown in consumption due to rising interest rates and a subsequent decline in real estate prices. With the largest player getting listed, most other real estate stocks pulled back.

At a close of Rs 570, DLF gained over 8.5 per cent on the first day of listing, investors should not be complaining. Yes, it is not a Vishal Retail, which appreciated 178.5 per cent on its debut on Wednesday, but nor is it a Cairn Energy which lost 14 per cent on its first day, and still trades at a discount.

Analysts estimate DLF's net present value, which are its future cash flows discounted to today's value less debt, between Rs 70,000 crore and Rs 95,000 crore.

At its current market cap of about Rs 97,000 crore, this would be an 18 per cent premium to the average net present value estimate and between 2 and 38 per cent at the two ends.

Analysts expect domestic real estate stocks to trade at 10-20 per cent discount to the net present value due to concerns on peaking real estate prices, a high interest rate scenario and execution challenges.

By this metric, it may be difficult for DLF to go up too much in the short term.

Two- wheelers: Running out of gas

Two- wheeler sales of the top three players (Bajaj Auto, Hero Honda and TVS Motors) fell 11.1 per cent y-o-y to 549,941 units in the month of June 2007. The weak performance in the previous month also resulted in two-wheeler sales in the June 2007 quarter declining 8.7 per cent y-o-y to 1.69 million units.

Apart from higher auto finance costs affecting demand conditions, analysts also point out to sluggish offtake for entry level motorcycles made by Bajaj Auto and TVS Motors.

The street has been cautious about two-wheeler stocks, given sluggish sales in the last quarter - Hero Honda has gained 9 per cent over the past three months as compared to 15.6 per cent rise in the Sensex. Bajaj Auto has declined 9.4 per cent during this period.

In contrast, in the March 2007 quarter, total sales of two-wheeler companies grew 6.4 per cent y-o-y to 1.85 million units.

Meanwhile, two-wheeler companies are expected to once again grapple with higher steel and non-ferrous metal costs in the June 2007 quarter.

Higher metal costs had led to Hero Honda's operating profit margins declining a whopping 590 basis points y-o-y to 10.2 per cent in Q4 FY07, which was its lowest margin in the last 28 quarters, point out analysts. Hero Honda trades at 19.5 times estimated FY08 earnings, while Bajaj Auto's stock price is at it is 25.6 times.