There seems to be some factual errors in your numbers. DLF is trading at FY07 P/E of 68 while Unitech is trading at 48. And DLF land bank is more than twice that of Unitech.
Which is a better buy? Chinese real estate companies are valued on P/E basis. So if you want to adopt the P/E model, Unitech is trading at 20 times FY09E numbers while DLF is trading at 19 times (Source: Motilal Oswal Report).
But most brokerages are looking at NAV values of the real estate companies, and assigning a premium or a discount to the NAV value, going by the size and execution capabilities of the companies. Both Unitech and DLF are top quality companies - so they can trade at 20% premium to the NAV.
Things to remember before investing in real estate companies like DLF or Unitech -
- It is impossible for you and me to value these companies. To value it, you need to know where these companies hold land and what is the current market price of that land. This is a job best done by the brokerages, who have access to the management.
- Invest in DLF/Unitech based on the presumption that land values will appreciate continuously over a period of time. The stock price will reflect the average appreciation rates.
- Investing in Unitech will not give you better returns than DLF just because it has a smaller market cap. Land is land, whether it is 10,000 acres or 20,000 acres, and the average land value appreciation of a smaller company will be the same as that of large cap company.
- The above statement does not hold true in cases of a few companies like Indiabulls, which holds land mostly in Mumbai. So the stock price appreciation of Indiabulls might depend on how Mumbai real estate market is. Also, some midcap developers like Parsvanath have land mostly in tier II cities - so its stock price appreciation might be slower but steadier than the rest.
- DLF seems to concentrate only on generating revenues from development and sale of projects + sale of land. Unitech does the same, but it has a third source of revenue which rental/lease income through developed properties. DLF has another promoter group company called DLF Assets which does this. That's why Unitech has more diverse revenue sources than DLF.
Edited by smartcat - 23/Nov/2007 at 5:12pm
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