Can Emaar pull it off, finally?

With realty companies trading at steep discounts to their net asset values, Emaar MGF will have to price its IPO attractively to succeed the 4th time around.

With the BSE Realty index down 20 per cent over the last one month on account of investor concerns related to debt, demand and corporate governance issues, realty IPOs will have a hard time raising the much-needed equity. Realty companies have lined up $2 billion worth of IPOs and are waiting for an opportune time to enter the market. Among them is Emaar MGF Land, a joint venture between Emaar Properties PJSC of Dubai and MGF Development. The company in its previous three attempts had plans to raise between Rs 3,000 and Rs 7,000 crore but decided not to go ahead due to weak investor sentiment.

In its fourth attempt, the company plans to raise Rs 1,600 crore to repay/prepay debt of Rs 614 crore, redeem preference shares (Rs 626.9 crore), and pay development charges of Rs 83.6 crore with the rest for corporate expenses. While the company is awaiting Sebi’s nod on the DRHP filed on September 30 and can launch its IPO within a period of one year, analysts such as Vivek Mahajan, head of research at Aditya Birla Money believe that given the broad market sentiment and the fact that the real estate sector is down in the dumps, it will be a surprise if any of the realty companies can come out with an IPO before March 2011.
 

TURNING AROUND
In Rs crore	FY08	FY09	FY10
Sales	997	915	2,078
Interest	45	144	169
Pre-tax profit	205	-201	197
Net profit	146	-134	125
Source: DRHP

Operations
The company has a land bank of 11,365 acres and currently has plans to develop 7,896 acres or a saleable area of about 437 million square feet. Of this, the company has so far developed 28 million square feet, with over 90 per cent in the residential segment. As of August 31, 2010, the company had 33 residential projects under development or completed across seven cities, including Gurgaon (6-7 projects), Delhi (the Commonwealth Games Village), Mohali (the three account for half of its land bank), Hyderabad and Chennai.

Concerns
Analysts say of the total land reserves, about 62 per cent comprises agricultural land the company intends to convert for commercial purposes. But, whether this can be converted and the timeline for that is not clear. Further, about 16 per cent of the company’s total land reserves are subject to litigation, some of which analysts believe are key parcels. Another issue the company is grappling with is the negative publicity surrounding its Commonwealth Games (CWG) and Hyderabad projects. The company, however, says the CWG project was delivered in accordance with the quality and other specifications required under the project development agreement with the Delhi Development Authority. While the issues may be sorted out, the series of negative publicity in the short term could hurt the company. The market perception of the sector is also a stumbling block. “This is a sector where the transparency is the lowest and the markets have severely punished stocks where the corporate governance standards are not up to the mark and realty tops the list,” says Mahajan.

Debt
Another issue could be debt, which appears manageable (debt to equity at 0.9) now but could cause problems if there are delays in project execution or if the demand remains lacklustre. While the company has been able to prune down its debt by over Rs 1,000 crore in the last one year to Rs 4,689 crore as on August 2010, it has raised Rs 250 crore in September 2010 to part-fund its expenses for two of its Gurgaon-based projects. Nevertheless, interest costs continue to be high.

Given the high interest outgo, analysts believe it would need more capital infusion or retire/rollover some of its debt to meet working capital and debt repayments. The company has to repay Rs 1,199 crore by March 2011.

Financials and valuations
While analysts believe its Gurgaon properties are seeing good demand and the prices have moved up 40 per cent over the last one year in that location, other projects across the country could face demand issues. As far as an improvement in overall demand for the sector across the country is concerned, experts believe it will depend on the softening of prices.

Says Shobhit Agarwal, Joint Managing Director - Capital Markets, Jones Lang LaSalle India, “As soon as the pricing softens, we will see a decisive return in demand. It will take at least another quarter for the situation to improve overall, since it takes the stock market at least three months to recover from the impact of negativity such as the kind that resulted from the confluence of scams we have seen in recent times.” Analysts have pegged the net asset value of the company at about $5 billion, which translates into an 18 per cent discount to comparable peers such as Unitech ($6.1 billion). While there will be a discount due to the difference in size and the execution track record, the success of the public offer will largely depend on the pricing (discount), which needs to be attractive.