Realty stocks get re-rated after DLF bags mega project

The announcement regarding awarding of a project worth Rs. 60,000 crore to a DLF joint venture to develop an integrated township containing offices, housing and recreation facilities for about 750,000 people in Bidadi near Bangalore on the Bangalore-Mysore highway had a significant effect on the stock. DLF gained a superb 17% to close at Rs. 892.8 on October 3, 2007, the first trading day after the announcement was made on October 1st, since October 2nd was a holiday on account of Gandhi Jayanti. This took DLF's market capitalisation to over Rs.150,000 crore or about $37.5 billion (at $1=Rs. 40 exchange rate). That's a gain of over Rs.21,000 crore in terms of market cap. just for this one particular news. Theoretically, this kind of pricing can only be justified if DLF earns a net income which is over this figure, and that too after considering the time value of money since the project will be executed over several years. This looks highly improbable since accruals to DLF will be only half of what the project earns since it is a 50-50 joint venture with a foreign partner (Limitless Group, Dubai). It'll be interesting to see how the sector analysts read into this development. Now, is this price appreciation a re-rating of the stock or plain irrational exuberance?. Only the coming days will tell that. By the way, the stock lost about 3.3% today. It may be noted that it was around this price band of Rs. 850 to 900 that DLF was planning to launch its IPO initially. But, due to adverse market conditions, they were forced to lower the band to 500 - 550, and finally priced it at Rs. 525 instead. The stock listed at Rs.575 and has since moved more than 50% to reach the current levels.

The news also had a rub-off on other select stocks too...Unitech gained 12%, Orbit Corp 7%, Akruti 13%, HDIL 9%, since that news broke. See the chart below (click on it to see an enlarged view) ...

Related Post on Santastic: DLF to develop New Bangalore

My first post

Hello world! This blog will contain my posts on finance, valuation, markets, and related topics of interest to me. Apart from that, if I find anything interesting on the web and worth sharing, I'll post those links as well. The site design is the default plain vanilla, as provided by Blogger. I'll change it later according to my convenience. I am open to different viewpoints and healthy criticism if you find something is misrepresented or you don't agree with my point of view. But, if the comments go over the top, are irrelevant to the topic being discussed, or are personal in nature, then I'll be forced to expunge them. Thanks for reading this patiently.