DB Realty IPO Analysis

Investors can avoid the initial public offer of the Mumbai-based real-estate developer, DB Realty, for now. Presence in the Mumbai market, which is perennially in short supply of usable land, besides the company's participation in lucrative Transferable Development Right (TDR) projects, no doubt provide scope for ramping up earnings.
However, lack of an operational track record and a high asking price act as dampeners to this offer. The company's annualised earnings for FY-10, on a post issue equity base, works out to about Rs 5. At the offer price of Rs 468-486, the price earnings multiple is way above larger peers such as Ackruti City, HDIL and Orbit Corporation.
If the company is able to complete its ongoing projects for the next couple of years and generate TDRs from some of these projects, the offer price (at the higher end) would work out to about 15 times its expected consolidated per share earnings for FY-12.
Investors may bide their time and consider picking the stock after the company demonstrates its execution capabilities. Paying a marginal premium, then, may still be worth it for a Mumbai play.
The company and offer
DB Realty develops residential, commercial and retail properties besides undertaking mass housing and cluster redevelopment projects, in and around Mumbai. The last-mentioned category provides alternative land to developers; called TDRs, such land can either be developed or sold as such to third-parties.
The company plans to raise Rs 1500 crore through this offer primarily for construction and development of projects. At the offer price, the company's full market-cap would be about Rs 11,000 crore.
Quick ramp-up
DB Realty is now developing 19.5 million sq. ft of projects. Apart from ongoing projects, 19.3 million sq. ft of projects are in the pipeline and another 22.2 million sq. ft of forthcoming projects for which the company is yet to seek approvals for development.
Though the promoters have a background in real estate, DB Realty, as a company, is yet to make a mark in the property development business and does not have any completed projects to its credit since its inception in 2007.
While it incurred losses in the first two years, it turned in profits of Rs 146 crore (sales Rs 464 crore) by FY-09. However, close to half the revenues in FY-09 and the first half of FY-10 came from sale of TDRs, while the rest from partly booking revenues on ongoing projects.
While a quick ramp up by a company at a nascent stage of operation may appear impressive, it is not unusual for Mumbai realty players to quickly convert the lucrative TDRs in to cash.
Given its less-established operational background, the above project pipeline would warrant a close look on the execution and marketing front.
From the 11 ongoing projects of 19.5 million sq. ft, the company would generate TDRs of 10.9 million sq.ft. from mass housing projects. TDRs on forthcoming projects are negligible. While the market for TDRs has traditionally been lucrative, this market too nose-dived on changed regulations in September 2008 (which qualified more buildings for redevelopment), which ensured higher supply of TDRs.
This stream of revenue could, therefore, witness volatility, the reason why stocks of TDR-focussed players such as HDIL trade at a discount to peers such as DLF and Unitech.
Of the 11 ongoing projects with saleable area of 19.5 million sq. ft, only 50 per cent (coming from 3 projects) would be completed by FY-12. Ramp-up in revenues on timely sale of residential projects, could nevertheless be significant with about Rs 2000 crore of estimated revenues accruing over the next two years.
The high operating profit margins of over 50 per cent in FY-09 could, however, taper down to more normal 30-35 per cent, similar to peers, as the company's generation of TDRs decline.
Related transactions
Some of DB Realty's related party transactions also add other grey areas to the IPO. The company, for instance, has over Rs 200 crore of interest-free loans and advances granted to group and associate companies, including the group's hospitality ventures.
This amount was around Rs 400 crore as of March 2009, as much as 50 per cent of the company's net worth then.
Similarly, significant corporate guarantees for credit facilities extended to other companies under the same managements and in unrelated businesses such as telecom are risks for a sector that is working-capital intensive and in the early stages of growth.
The offer is open from January 29 to February 02.
via BL