Track2Realty Exclusive: More holistic approach is required while conducting a research on any real estate entity. The scientific research should undertake a detailed analysis on the accounting policy, business model, geographical presence, sales & execution strategy, project portfolio of the company. It should also take into consideration the company’s initiatives to monitor its operations for timely delivery of the project without cost overruns & sustaining margins.
This anomaly may be the reason why RICS maintains a stand to not comment specifically on any company’s stock movements or market performance or sale figures. In addition, it does not support or favour any particular company’s stock.
“Stock movements on various exchanges could be just one parameter to judge a company’s performance. However, there are a number of other factors that forms the basis of evaluating a company’s strengths and weaknesses. These include: location of its projects, debt on its books (if reported), debt-equity ratio, surrounding infrastructure, demand within the region for its projects and various other local factors that may impact the overall performance of the company from the construction side,” says Sachin Sandhir, MD, RICS, South Asia.
How come some companies with limited geographical presence are doing so better on stock market? In India, the real estate sector is regional in nature and each region is broken into micro-markets which in turn have different dynamics. Being a local player it is relatively easier for a real estate company to focus on set of micro markets & timely deliver projects.
Ideally, a company with a pan-India presence will be able to lower geographical risk compared to a regional company with similar characteristics. However, having a pan-India presence requires a company to have a strong understanding of the local markets (customer preferences, regulatory requirements and resource capabilities).
With the current model real estate companies have been able to perform in a region & very few companies have gone on national level for development. The regional company with focus on few micro-markets has meant benefits of higher promoter involvement (with past and localized experience) & higher returns for the investors, this in turn helps the regional players to outperform against the national players in real estate market.
However, this does not hold true in all cases. Companies that boast of a pan India presence certainly rake the benefits of higher visibility. But real estate has become a more of a regional play as against owning a national footprint. Thus, it will still be the financial strength, operational excellence, timely delivery, quality consciousness that shall hold more relevance for fair performance on the exchanges.
A stock price estimate of a company is primarily driven by financial analyst’s outlook of the expected earnings growth of a company & financial health. The share price reflects the anticipated growth or decline of the company in short to medium term future. This might not be a true picture for a real estate company which has an average project cycle of 3-5 years. If the company is able to sell the inventory of a project then the company will be able to safely accrue revenue for next 3-4 years.
It is only the companies’ strategy that would be crucial in deciding on the long term performance of the company, where stock price is just one of the indicators.
