DB Realty IPO Review

Bitter reality
DB group has 112 companies and 3 partnership firms in similar as well as diverse fields with many related party transactions
DB Realty (DBRL), promoted by Vinod K Goenka and Shahid U Balwa, is engaged in real estate development in and around Mumbai and Pune. The company, incorporated on January 8, 2007, is currently focused on both residential as well as commercial (including retail) realty projects. In addition, the company is also involved in mass housing projects as well as cluster redevelopment projects in Mumbai.
The company has land reserve of 30.72 million square feet (sq ft), which on development will have a saleable area of 61.02 million square feet as of December 2009. It has commenced work for eleven projects (ongoing projects) aggregating to 19.51 million sq ft of saleable area. In addition, the company has firmed up plans for eight projects (forthcoming projects) with 19.28 million sq ft of saleable area and another six projects for which the company has acquired land but has not taken any initiative yet for obtaining approval aggregating to a saleable area of 22.24 million sq ft. Of the total 61.02 million sq ft of aggregate saleable area, about 29.29% is accounted for by mass housing and cluster redevelopment. In fact, the share of mass housing and cluster redevelopment projects is as high as 56.05% (or 10.94 million sq ft) in the ongoing projects.
From the development of mass housing projects for the Mumbai local authority, DBRL generates transferable development rights (TDRs), which are rights to develop additional built-up area in parts of Mumbai, generally north of the relevant development, and can be utilized in its own projects or other developers' projects in Mumbai. Currently, the company's ongoing project is expected to generate TDRs of up to 10.94 million sq ft. Similarly, the forthcoming and upcoming projects of the company are expected to generate TDRs of up to 6.21 and 0.73 million sq ft, respectively. So the aggregate TDRs generated from ongoing, forthcoming and upcoming projects amount to approximately 17.88 million sq ft. Likewise, the cluster redevelopment of old and dilapidated structures in Mumbai grants the company additional floor space index. Depending on market/commercial conditions, the company either sells TDRs or uses it for own development projects. Revenue from sale of TDRs constituted 76% of total revenue in FY 2009, but plunged to a mere 3.4% in H1 of FY2010.
The proceeds from the initial public offer of Rs 1500 crore will be used to a) meet construction and development of Orchid Ozone (residential cum commercial project), Ascot Centre II (commercial project), and Orchid Corporate Park (commercial project) in Mumbai and Orchid Centre (residential) in Pune, amounting to Rs 1044.66 crore; b) pre-pay the loan of Rs 800 crore taken from IDFC; and c) for meeting expenses for general corporate purposes.
Strengths
The company is focused on the Mumbai market and most of its projects are in and around Mumbai city. Of the total saleable area of 61.05 million sq ft, considering its ongoing, forthcoming and upcoming projects, about 85.5% (or 52.15 million sq ft) is in and around Mumbai. Mumbai market is one of the micro markets to have quickly bounced back from the recent (mid 2008) realty slump, given the consistent short supply of good quality residential stocks. Similarly, there is always a strong demand for commercial/retail space in Mumbai City if it is rightly located and rightly priced, given the pre-eminence of the city as commercial capital of the country.
Redevelopment schemes come with challenges in the form of majority consent (70% of project residents) as well as temporary accommodation. At the same time, redevelopment schemes offer opportunity to develop projects on such land at a lower cost in prime locations.
Ongoing projects of the company are expected to generate TDRs of up to 10.94 million sq ft, providing enough liquidity as the prices of TDR in the Mumbai market are quoting at around 2500/ sq ft and are looking firm.
Weaknesses
The company's operating history is very short, having incorporated in January 2007. The company does not have a record of completion of a project and delivery. It has only projects under construction. However, its promoters have strong experience in the real estate industry, having collectively developed approximately 15.90 million sq ft of real estate spanning across verticals of residential, commercial, retail and hospitality. Though the company has clocked revenue of Rs 434.43 crore for FY 2009, its operating cash flow is negative for that fiscal. This was primarily because of the continuing land development and acquisition expenses, unmatched by revenue streams.
Both the commercial projects among the ongoing projects are to be funded through the IPO proceeds. These commercial projects are likely to be completed by end of CY 2012. Since the commercial projects involve upfront cash outgo towards land and construction, revenues are expected only when the project is leased or sold out, which will happen only at advanced stage of completion. With two long years for completion, there will not be any cash inflow from commercial realty segment.
DB group has 112 companies and 3 partnership firms, with many related party transactions. The company, as of 30 September 2009, had given corporate guarantees for certain debt facilities availed by its related entities, aggregating to nearly Rs 2518.89 crore. This is in excess of the net-worth of the company at Rs 1411.55 crore end September 2009. Out of the total corporate guarantees provided, Rs 1769.26 crore (or 70% of guarantees) has been provided to entities engaged in businesses other than real estate such as hospitality and telecom. Moreover, the company has also made an investment of Rs 705.15 crore in unlisted entities related to it. In addition, the promoters have provided personal guarantees aggregating to approximately Rs 4328.77 crore in connection with certain debt facilities availed by such entities.
DBRL has extended interest-free loans to various entities related to the promoters, amounting to more than Rs 553.56 crore end September 2009. Further, it has not signed written agreements to document the terms and conditions of such loans. Moreover, some of these entities are either incurring losses or have negative net-worth.
Valuation
Incorporated in January 2007, the company has started clocking revenue from FY 2009 from sale of TDR and booking revenue from a couple of projects under construction by way of percentage completion method. Consolidated sales for FY 2009 stood at Rs 464.43 crore and net profit at Rs 145.79 crore. The EPS for FY 2009 stands at Rs 5.8 and Rs 5.9 on post-issue likely equity on the offer price band of Rs 468 at the lower level and Rs 486 at the upper level. The P/E works out to 80.7-82.4 times the offer price band. On the other hand, HDIL quotes at 13.6 times its FY 2009 consolidated earnings.
The enterprise value per million sq ft on the saleable area under construction and forthcoming/ pipeline is Rs 312.94 crore. That of HDIL is about is Rs 345.84 crore. HDIL has a land reserve of 175 million sq ft in the Mumbai metropolitan region compared to 30.72 million sq ft of DBRL.