Real-estate developer Unitech Ltd had a blockbuster year last fiscal, with sales jumping by four times to Rs2,504 crore. What’s more, operating profit leaped by nearly 12 times to Rs1,412 crore. The picture was no different with the company’s consolidated results. Unitech’s consolidated EPS (earnings per share) now stands at Rs16.10, based on which it trades at 35 times trailing earnings. Last year, the stock traded at 200 times earnings.

Part of the reason for the firm beating all expectations is because of the sale of its stake in IT parks to Unitech Corporate Parks. That’s a one-time boost, and nobody expects the same kind of growth next year. Nevertheless, on the basis of Macquarie Research’s estimates released in February this year, its EPS is estimated to be Rs25 in FY08. Based on these estimates, Unitech’s valuation works out to a reasonable 22 times earnings.

But earnings may not be the right way to value a company’s stock. As the DLF management has pointed out, the reason they chose to sell a portion of their commercial assets to a group company, in spite of normally leasing such assets, was to show the earnings potential in the asset. Earnings in a year depend, therefore, on whether an asset is sold or leased out. That’s the reason analysts prefer net asset value (NAV) as the key driver of real estate stocks. In fact, the company’s stock has risen by less than 4% since its excellent results were announced. The problem is, in Unitech’s case, estimates of its NAV range from under Rs400 to more than Rs600. Also, one has to compute the potential unlocking of value from selling off stakes in other activities, such as the hotel business.

Whatever the NAV, it’s important to note that the Unitech stock has moved sharply ever since DLF got approval for its IPO (initial public offering) on 7 May. Since then, the stock has risen by 34%, from Rs424 to Rs567. Market experts say the DLF issue has improved the sentiment for real-estate stocks. But in an interesting twist, bankers to the DLF issue now point to Unitech’s share price and the fact that it is trading at a premium to its NAV to justify DLF’s IPO pricing. With each company propping up each other’s valuations, it’s evident that the markets still have a long way to go in learning how to value real-estate stocks.