Tulsian advises caution while valuing the real estate firm and feels that Rs 300-350 is a fair value for it. Meanwhile, Zia states that valuations for Indiabulls' SEZ are on the conservative side and adds that its zoning and development plans are not clear which is why, there is a discrepancy.

Excerpts from CNBC-TV18's exclusive interview with SP Tulsian and Gulam Zia:

The stock (Indiabulls) is at about Rs 350, is that a fair value or would you not buy even now?

Tulsian: In fact, due to the kind of hype seen in the valuation of the company, you tend to be a little cautious when valuing such companies and when that was being done, I was taking a call of Rs 300-400; so, obviously you can't have such a high range.

So you need to bridge that gap and by doing that exercise, you read somewhere the valuation of Rs 350 being the mean of Rs 300-400. That was the call taken by me on the fundamental basis, because if you go through the information memorandum presented by the company, it doesn't specify the area available for development by them.

Just to give an example - in case of Jupiter Mill, which has an area of about 11 acres, they said that the projects would have two 14-storey towers and two 16-storey towers. It says that it will have a 3,500-car parking space, but doesn't say what is the built-up area available. I don't understand how the car park number is relevant, when the available built-up area or the super built-up or the carpet area has not been specified. So there have been some concerns on the disclosure norms.

Secondly, they have been relying too much on the Raigad SEZ, which is about 6000 acres. We do not have any information on the land acquired by them and the kind of controversies in the SEZ space; one cannot give a higher valuation to that project also.

But even if you try to make an attempt to reach a valuation, the valuation was around Rs 300-400 and then again taking a mean of that, it was Rs 350. So I think the listing or the prevailing market price is very much confirmative to the fundamental call, but still it is slightly on the higher side when compared to the other realty stocks available at a much cheaper valuation.  

You authored that report on the valuation. Your value would have been Rs 840 per share. Where do you go wrong?

Zia: First of all, the valuation report in itself - how much of it is shared in this prospectus is something that I am not very clear about. Certain sections, and not the whole report, have been presented. Frankly, I am not too clear on how much of it is a part of the prospectus that we have listed so far.

The point I am making is that the current concerns on the land bank valuations, which many are raising all across, are subject to the situation that it has to be the current land bank valuation as is value of the land.

The problem of such a method is that the exact zoning, the area calculations, the development plans that you have for the land, etc, are not very clearly understood in the whole report, due to which, there is always a difference of opinion. Unless somebody clearly explains the zoning, etc, and unless one is clear about what the development plans are, the difference in valuation is bound to come up.

There must be an intrinsic value that you have allocated to all these projects; break it up for us then, between the SEZ and the other six projects. What would you see as fair NAV for both of them?

Zia: It will be difficult for me to divulge the exact numbers, as they are not yet available to me. The point is that today, SEZs are not very clear, as far as the development policies, etc, are concerned. But having said that, the valuations for this particular asset - the Indiabulls' SEZ - are very much on the conservative side, considering today's existing land or the asset class values.

If it is housing, then definitely it is much lower than what housing values are today and so on. So overall, the valuations that we see for Indiabulls, as far as the real estate angle is concerned, are pretty much on the conservative side.

Yet, conservatively you valued Indiabulls' holding in these projects at Rs 15,000 crore (Rs 150 billion), the current market cap is Rs 6,000 crore (Rs 60 billion) or thereabouts. Was it a very lofty appreciation on hindsight and did it have a lot to do with the kind of prices at which some of the other real estate stocks were trading around the time that the valuation exercise was done?

Zia: The point we are making here is - we are not exactly equipped to get into the exact status of holdings of these properties, as the holding patterns are not clear. The valuations that we are talking about are sheer real estate valuations of the entire assets under that; how much of the properties are already under the holdings, or those that are under cross holdings, etc, are things that are not directly considered. As far as valuations go, we just assume that all these properties are under the company's possession.

Should you buy Indiabulls Real Estate at the current price levels of Rs 350-360?

Tulsian: If I am taking a fundamental call, just to add a point to Mr. Zia's submissions, take the case of Jupiter Mill - they have about 11 acres, with which, they are developing an IT park. When you are not clear about the floor space index, or FSI that you are getting it is done on assumptions - presuming that the FSI is 4, obviously the developable area will be 22-lakh sq ft roughly. So, unless you have clarity, a fair valuation is not possible.

But even by making an unsuccessful attempt on valuing this company, you reach on a fair valuation of about Rs 350. Now it is only a matter of discount, which you need to factor in, because for the other companies; the general trend in the market now is that they are all ruling at about 50-60 per cent of their net asset value.

If I adopt the same valuation parameters that I am assigning to this company too, then probably I will reach on a valuation of Rs 300-350, which is definitely not very attractive.

But the momentum play would be important in this case, because there is only 11 per cent floating stock in the market, while the rest 89 per cent is held by promoters, FII, OCB, GDRs and all those entities combined. So if I do not consider that aspect, my fair valuation would be anything around Rs 300-350, which is in conformity to the other realty stocks that are prevailing or available to the market right now.

On what basis did you value the SEZ at Rs 10,800 crore (Rs 108 billion)?

Zia: The SEZ is clearly distributed into various segments of real estate - housing, retail, hospitality and offices and so on and so forth. All these independent segments are then valued on the current market dynamics, where the demand-supply situation, etc are considered.

When I say conservative, we have a test, good amount of discounts to the values existing in the market for all these asset classes that we have considered into that SEZ. That is exactly the way the value of the SEZs would be arrived at.

What is the relationship between the valuer and the party that is getting the valuation done? Do you do it for a fee for the party, which is asking for this valuation exercise?

Zia: Yes, it is so.

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