Ashok Kumar, theIPOguru, is a man of few words. So, when he speaks, investors and particularly those chasing the IPO Rainbow with
the proverbial 'pot of gold' at the end of it, listen carefully.
Issue Price:Rs 468– Rs. 486 No of Shares(FV Rs.10) : 31,864,198 Shares Issue Size: Rs.15,000 million Issue opens-closes:29th January 2010 – 2nd February 2010 Listing: BSE and NSE
Post Listing Details
Pre-Issue Promoter Holding : 74 per cent Post Issue Promoter Holding : 53 per cent Post Issue Equity Capital: Rs2421 million Post Issue Equity Shares (nos) :242 million shares Market Cap: Rs1,13,256 million - Rs 1,17,612 million EPS (Annualized FY10): Rs 6 P/E Ratio: 80
Business Model
A Real estate development company, DB Realty is focused on residential, commercial, retail and other projects, such as mass housing and cluster redevelopment, in and around Mumbai. As of December 31, 2009, DB has 11 Ongoing Projects, aggregating approximately 19.51 million square feet of Saleable Area, 8 Forthcoming Projects, aggregating approximately 19.28 million square feet of Saleable Area and 6 Upcoming Projects, aggregating approximately 22.24 million square feet of Saleable Area.
The company’s residential portfolio encompasses all income groups. In DBs commercial portfolio, it builds and sells customised office space as per the requirements of buyers. Its retail portfolio includes development of shops in select locations. Its other projects currently include (a) development of mass housing for the Mumbai local authority and generating transferable development rights, which are rights to develop additional built-up area in parts of Mumbai, generally north of the relevant development, and (b) cluster redevelopment of old and dilapidated structures in Mumbai, which grants it additional floor space indices.
Financial Scan & Analysts’ Notes :
Particulars
H1 FY 2010
FY 2009
FY 2008
FY 2007
Income
3,992
4,712
63
0
Expenditure
2,476
2,386
128
-36
EBITDA
1,516
2,326
-64
36
Insterest & Finance Charges
700
747
154
36
Depreciation
46
74
16
0
PBT
770
1,505
-235
0
Tax
129
67
1
0
PAT before Minority Interest & Re-adjustments
641
1438
-236
0
Net Profit
583
1458
-248
-6
Net Worth
14,115.54
8,105.74
7,279.94
419.75
EBITDA Margins
38
49
-
-
Net Profit Margins
15%
31%
-
-
For the six month period ended September 30, 2009 and the fiscal year 2009, the interest and finance charges represented 17% and 16% of the company’s total income while the debt equity ratio is as high as 4.
DBRL has also provided guarantees for certain debt facilities provided by various financial institutions to entities related to the Company aggregating approximately Rs.25,189 million as of September 30, 2009. Out of the total corporate guarantees provided, Rs. 17,693 million has been provided to entities engaged in unrelated businesses and the balance of Rs. 7.496 million has been provided to entities engaged in related business.
DBRL has extended interest-free loans to various Group Companies, amounting to Rs. 5,536 million as of September 30, 2009. Moreover, some of these entities are either incurring losses or have negative net worth.
Further it has unsecured loans from Group Companies and as on September 30, 2009, unsecured loans amounting to Rs. 1,565.85 million are repayable on demand. Multiple Transactions with Group companies raises concerns in terms of visibility of usage of funds.
DBRL books its revenues on the basis of percentage completion method.
IPO Positives
Balanced Business Model : Of the total reserves of 30.2% of land holdings, the company owns only 38%. For the balance land, the company has either sole development rights or has entered into Joint Agreements for development.
While this de-risks its business model and makes it less capital intensive, the returns are capped on the upside as profits from sole development rights and joint agreements are shared.
Majority Revenues from TDR & Re-Development Projects : DBRL derives revenues from sales of residential & commercial property and development of hospitality projects. Since the company participates in mass housing and cluster redevelopment Schemes in Mumbai it is entitled to transfer of development rights and this helps it to ramp up its revenue stream.
IPO Concerns
Time lag for execution and project delivery : Majority of the ongoing and forthcoming residential and commercial projects are slated to be completed in 2012. Hence, there would be a significant time lag. While revenues are booked on percentage completion basis, lower execution would impact the revenues of the company.
Geographical Concentration : Most of the company’s development projects are located in and around the city of Mumbai. Of the total Ongoing, Forthcoming and Upcoming Projects comprising 61.02 million square feet of Saleable Area, 85.5% is located in and around Mumbai. However, barring a limited number of projects in and around the prime location of South Mumbai, its projects are concentrated on the outskirts of the city, where price volatility cannot be ruled out.
Limited Operating Background: While DBRL has not undertaken execution of any projects, as of December 31, 2009, its Promoters and Promoter Group companies have collectively developed approximately 15.90 million square feet of real estate development over the last two decades.
CONCLUDING NOTES
Even assuming an average square foot rate of around Rs.5,750 for its projects, one arrives at a NAV of less than Rs.400, which suggests that the investment bankers and the promoters are demanding a hefty premium for their hitherto unproven quality.
At the upper end of the price band, the company is demanding a P/E of over 80 times its FY 2010 earnings and Market Cap to Sales Ratio (FY 2009) of 24. This makes it an expensive proposition compared to its Mumbai based peers.
HDIL which is again a Mumbai based realty company, but significantly larger in terms of size of operations trades at a FY10 PE of less than 25 times and a market cap to sales ratio of less than 7 times.
Orbit Corporation that primarily redevelops projects in Mumbai has developed over 2 million sq. ft and currently has projects with a saleable area of 1.7 million sq. ft. under development. The company with a market cap of over Rs 15,000 million and market cap to sales ratio of over 6 times trades at a Price to Earning (P/E) of over 15 times based on estimated FY 2010 numbers.
Clearly then, the valuations of DBRL are stretched to an extent that borders on the unbelievable . Given the volatile sentiment at real estate counters, coupled with its premium pricing, listing gains appear unlikely. Even if for some inexplicable reason, it materializes, its sustenance will be a tough ask.
What about its long term prospects ?
One needs to even start thinking on those lines only after a price haircut in the secondary market reduces its valuations to more credible levels.
