Developing story

IPO REVIEW

Though the Parsvnath Developers IPO is aggressively priced, it could bring listing gains and can also be a rewarding long-term story.

As the speedy pace of new construction continues in towns and cities across the country, real estate stocks are attracting a lot of investor interest.

Improved living standards and rising consumerism of middle classes is driving demand for housing projects as well as commercial complexes like shopping malls and multiplexes.

The demand for office space, especially for the IT and the BPO industries, is growing at a fast clip. And with mega real estate projects and high property prices, real estate players are sure to see good times.

One such company is Parsvnath Developers, which has operations across 41 cities and 14 states of India, and has built nine housing projects and eight commercial complexes. With huge demand for real estate as well as real estate stocks, Parsvnath Developers is tapping the capital market to fund its future construction plans.

The offer
Parsvnath Developers is entering the stock markets with an offering of 3.30 crore shares, priced within a band of Rs 250 to 300 each.

The real estate developer plans to raise funds in the range of Rs 826 crore to Rs 991 to fund its eleven residential and commercial projects spread over the next four years.

While money raised through the issue will fund a large part of the total requirement of Rs 1,428.5 crore, the rest will be financed by borrowings and customer advances.

Big opportunity
At present, around 77 per cent of its revenues come from residential projects, while the rest are chipped in by commercial complexes, Delhi Metro Rail Corporation (DMRC) projects and integrated townships.

However, the revenue mix is soon to tilt in favour of township projects as states like Gujarat and Andhra Pradesh are emphasizing on these projects for better urban area management.

The company also plans to diversify into development of hotels, technology parks and special economic zones (SEZs) to capitalise on growth opportunities across tourism and IT sectors.

At present, Parsvnath holds or owns development rights to 108.64 million square feet saleable area, on which it has envisaged projects costing around Rs 13,300 crore over the next three to five years. The company aims to accelerate business earnings through over 90 development projects. It has planned 20 integrated townships, 27 commercial complexes, 25 residential projects, a metro rail station and BOT projects with DMRC.

While this diversified real estate player wants to add 14 hotels and 4 information technology parks to its portfolio, it has also received government approvals for the development of nine SEZs with total area of 14.8 million sq. ft.

Parsvnath has also entered into ten concession agreements with DMRC and acquired rights to develop commercial properties, wherein it can sub-license the developed areas for periods ranging from 12 to 30 years.

Foresight benefits
When most developers were trying to grab a share of property projects in the prime metro cities, Parsvnath focused on non-metro cities that offered quality real estate projects at reasonable prices.

Thanks to its potential to spot demographic trends, Parsvnath was an early entrant in areas like Moradabad, Sonepat, Rajpura, Dehradun, Rohtak, Amritsar and Jodhpur.

The company today enjoys an early mover advantage in these fast growing non-metro markets and makes 88 per cent of its revenues from here. It is not that the company is not present in the larger cities. It has taken up property development projects in Delhi, Noida, Gurgaon and Pune.

Continued economic growth will further fuel demand for real estate development across India. Earlier Parsvnath's projects were concentrated in the northern states, but now it is also taking up projects in the west and south to emerge as a pan-Indian player.

Parsvnath faces stiff competition from regional players as well as larger better placed private real estate makers like DLF, Hiranandanis and Rahejas. Acquiring new land on strategic locations at reasonable prices may be difficult in the coming times and may adversely impact margins.

Other positives
So far, Parsvnath Developers has handled construction activities for most of its projects, except for some critical designing and architectural activities, which are outsourced. With increasing business scale the company plans to outsource construction activities, to reduce capital investment and overhead expenses.

Its ongoing Rs 508-crore premium residential project, Parsvnath Exotica at Gurgaon, Haryana, with 663 residential units will be partly funded through the issue proceeds and will be completed by FY09.

The company plans to take up 100-screen projects in cinemas and multiplexes, which will be leased to Movietime Cineplex for a minimum of nine years.

Also, Rs 1,484 crore Rajiv Gandhi Technology Park, Chandigarh is a major township project with a saleable area of 4.06 million sq ft, expected to complete by calendar FY09.

In FY06, the company's revenues increased by a stunning 112 per cent to Rs 644 crore, and its net profit jumped by 63 per cent to Rs 107 crore.

The rising scale of Parsvnath's business is quite evident from its revenues growth numbers, which suggest a CAGR of 121 per cent through FY02-06. During the same period, operating and net profit have also grown at CAGRs of 149 per cent and 139 per cent respectively.

Valuations
The Parsvnath stock is valued at 41.6 times its pre issue FY06 earnings per share at the cap price and 34.6 times at the floor price. The price multiples of comparable players like Ansal Housing and Unitech stand at 19.3 times and 391 times their FY06 earnings. 
 

BUILDING SIZE
(Rs crore)	June-06	FY06	FY05	FY04	FY03
Net Sales	246.87	643.83	303.21	112.15	68.80
Y-o-Y growth (%)	67.08	112.34	170.37	63.01	152.69
Operating Profit	55.85	144.00	72.44	20.77	12.56
Y-o-Y growth (%)	151.48	98.78	248.79	65.41	220.33
OPM (%)	22.62	22.37	23.89	18.52	18.25
Net Profit	36.54	106.99	65.67	18.41	11.46
Y-o-Y growth (%)	126.67	62.93	256.68	60.59	247.71
NPM (%)	14.80	16.62	21.66	16.42	16.66

According to analysts, the stocks seems to be aggressively priced, however they advise investors to subscribe to the issue as Parsvnath Developers is likely to bring substantial returns in the long term.

Though going by the historical earnings, the issue looks to be dearly priced; land bank value and future earnings visibility do make Parsvnath a good investment opportunity.

Says Arun Kejriwal, director, Kejriwal Research and Investment Services, "The stock looks fairly priced, but considering the revenue prospects and potential value of Parsvnath's assets, the stock promises to be a good investment option. We think investors should subscribe to the issue."

"The valuations are justified if we look at future earnings potential. We recommend the stock as a good long term bet," says Surya Narayan Nayak, analyst, Networth Stock Broking.

Issue opens: November 6
Issue closes: November 10