The Hindu Business Line : DSP Merrill bullish on Indian realty sector

With realty IPOs doing well in the market, Mr Munesh Khanna, Head-Investment Banking at DSP Merrill Lynch, explains why this interest is building up, and puts the real estate sector in perspective.

He says the scarcity of large realty stocks is adding to the premium of these recent realty IPOs. He added that real estate as a sector of the Indian economy has to have a much larger representation in the capital markets.

Excerpts from CNBC-TV18's exclusive interview:

It was a big listing for Parsvnath. Could you give us some sense of the kind of appetite you are seeing for these real estate plays now and the valuation of these companies?

What we are seeing is a lot of pent up demand. There are a whole set of new investors coming in, people who are looking at India for the first time. There is a general expectancy of the kind of growth; if one looks at the valuations, all of them are primarily based on expected growth going into the future.

Are the valuations based on expected cash flows after development or are the investors valuing the land bank and trying to ascribe a value to these companies?

If we try and put the valuation matrixes to the valuations that one is seeing and in terms of the over subscription, this is the net asset value of expected cash flows plus building-in growth rates. I think this is really looking at what the current land bank is and what could be the expected cash flows or net asset value from these land banks. Also taking into account that if they are matured, experienced promoters, managements with a good track records then there will be growth rate and there will be additions to land bank which itself would give higher profitability.

Are there any apprehensions of bubble-like valuations for this sector because it is just opening up and people don't understand it very well?

If one looks at the responses one is getting either in India or even at the Alternative Investment Market, AIM, in which the Rahejas listed and Unitech is being listed, I think there is a play in the real estate sector and people are looking at that play and coming in. At this stage the growth rates overall are sustaining the valuations.

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