DB Realty IPO

Even the high valued prime projects do not warrant the steep valuation demanded by DB Realty. Investors are advised to stay away

Incorporated in 2007, DB Realty is a real estate development company focusing on residential, commercial, retail and other projects. In the commercial segment, the company builds and sells office space rather than leasing it and taking the asset on its balance sheet. The other projects include —developing mass housing for the local authority, generating transferable development rights (TDR) and cluster redevelopment of old and dilapidated structures. It has a total saleable land bank aggregating to 61 million sq. ft. Though the company is new, its promoters and the promoters' group companies have collectively developed approximately 15.9 million sq. ft, which includes 96% of residential properties, and the remaining are in commercial, retail and hospitality. 

   The net issue represents around 13.2% of the post-issue equity capital of the company at the upper price band. Out of the Rs 1,500 crore proceeds, Rs 107 crore will be used for meeting construction cost of projects, Rs 80 crore will be for repayment of debt taken from IDFC and the remaining will be kept for meeting other general corporate purpose expenses. 

   After an analysis of the company's business and comparing it with its peers, the issue appears highly priced. Though it has a couple of prime location projects in Mumbai, investors are advised to stay away from the issue.

BUSINESS:

As of December 31, 2009, DB Realty has 11 ongoing, eight forthcoming and six upcoming projects aggregating approximately 19.51, 19.28 and 22.24 million sq. ft of saleable area. However, the company has not received any regulatory approval for its upcoming projects, hence, these projects are different from the forthcoming projects for which the company has got approval. Going ahead, the company would focus on urban renewal schemes including cluster redevelopment, society redevelopment on city centric real estate development in Tier I cities and at railway stations. Pune and Mumbai markets are going to be prime for the company. It has received anchor investors for Rs 270 crore.

FINANCIALS:

The company, established three years ago, grew its total income from Rs 6.3 crore in FY08 to Rs 471 crore in FY09. Most of its projects reached the revenue recognition stage in second half of FY09, as a result the company had reported a loss in FY08. Its net profit for the half-year ended Sept '09 was Rs 58.3 crore. Till now TDR sale was a major revenue contributor, which kept the average cost of construction of the company low. Going ahead, higher share of revenue would come from project sale which would have a bearing on margins as well.

VALUATIONS:

Post the issue, valuation of the company comes to 97x to 100x of its annualised estimated earnings of FY10. This is much higher than the current valuation of existing listed players that operate in similar space, e.g., HDIL, is trading at 22x its trailing twelve month EPS. At the higher price band the company's market capitalisation works out to be around Rs 11,673 crore. Given the fact that DB Realty is a new entrant, its valuation looks pretty steep. Even for investors with a high-risk appetite, the valuation appears expensive and not much upside will be left for retail investors once listed.

IPO details

Price Band: Rs 468-486 per share
Net issue size: up to Rs 1500 crore
Date: Jan 29-Feb 2