D B Realty IPO

While prospects and track record of D B Realty appear sound, the IPO pricing seems to be stiff

Land acquisition strategy

 

The company which is currently developing 19.42 million square feet (see chart: Project Pipeline) acquires land and property development rights through redevelopment, transfer of development rights (TDR), joint ventures and public private partnership routes. While TDRs are generated when the company puts up mass housing projects (on behalf of government bodies) and has the option of either using it or selling them, redevelopment of dilapidated structure involves the rehabilitation of existing tenants. About 59 per cent of the company's ongoing projects, such as the mass housing project it is developing in Mahul, Chembur, fall into the TDR category. To reduce its cost of acquisition in prime areas as the company has done in Dadar as well as suburbs (Dahisar), D B Realty ties up with land owners to jointly develop land parcels. Margins on these projects are, however, lower when compared to those it develops on its own as the company has to share profits with the JV partners. The company also generates development rights by participating in public projects in lieu of which they get land such as the 100 acres of land it has in PimpriChinchwad area, in Pune.

Valuations

With the easing of liquidity, credit situation and demand slowly coming back, the prospects for a company like D B Realty look bright going ahead. Vis-a-vis competition, what acts in favour of D B Realty is the fact that the company's debt-equity levels are relatively lower (current debt-equity is at 0.49 and will fall further post the IPO) and hence, funding might not be an issue. While there are a number of positives going for the company, analysts believe that the issue is stiffly priced.

At its estimated EPS of Rs 11 for 2010-11, the IPO is priced at 42 times earnings at the lower end of price band which is much higher than Mumbai-centric listed players such as HDIL which are trading at about 15 times its 2010-11 estimated fully diluted earnings. Even if one were to assume a 50 per cent rise in earnings in 2011-12, the PE works out to over 28 times at the lower end of the price-band, which is not cheap.

Analysts at Angel Broking estimate that the NAV per share of the company, taking into account all the 60.9 million square feet and to be developed over seven years, would be about Rs 415, which indicates that the offer is priced at an 11 per cent premium to its NAV.

DB Realty IPO OR REEVVIIEEW

Mumbai-based D B Realty aims to raise Rs 1,500 crore from its IPO to fund its realty projects and repay debt. The company will use about Rs 1,000 crore of its IPO proceeds to develop four ongoing commercial and residential projects coming up in Mumbai and Pune. The total cost of the projects which are to be completed by the second half of 2012 is pegged at Rs 1,387.9 crore. The company has so far invested Rs 343 crore in the projects and intends to fund the balance through the IPO. In addition to this, the company will be utilising Rs 80 crore from the IPO proceeds to repay its loan taken from IDFC.

Mumbai-centric While D B Realty, which started operations in 2007, has not yet developed a single project so far, (the first one is due in a year from now) the promoters have extensive track record in the realty business having completed projects in the commercial, hospitality, retail and residential space aggregating to 14.4 million square feet. D B Realty has plans to develop an area of 60.9 million square feet, 85 per cent of which is in the Mumbai area. About two-thirds of its projects are in the residential space. The company has acquired large parcels of land in and around Mumbai as it expects demand in the city to grow on the back of infrastructure projects, limited availability of land and increasing incomes in India's financial hub.

Of the total developable area, the company has 4 million square feet of area (equivalent to 6.6 per cent of total area) which it is developing in the lucrative South Mumbai area and about 2.3 million square feet of land in Central Mumbai. While it plays the high-value strategy for the properties within the city, it will be banking on higher volumes (such as its 325 acres land parcel at Mira Road) to improve its sales. The downside for the company, however, is that with 65 per cent of its total land parcel in the outskirts of Mumbai and Pune, where supply is high, any correction in real estate prices could have a negative impact. However, the company believes that there will be no problem in selling its units as Mumbai has been more resilient than rest of the realty markets across the country during the recent downturn, and its policy of selling its units at market price rather than a fixed price would mean that it will be able to offload its inventory quickly.