Max value?

IPO REVIEW

Surprisingly, the Omaxe issue is priced at a discount to its net asset value and a reasonable earnings multiple.

Realty issues are the centre of attraction at the bourses these days. Especially after realty bellwether DLF made its debut in the stock market raising over Rs 9,000 crore, a slew of realty companies are knocking at the doors of the capital market to grab their share of the booty.

So much so that developers are vehemently denying talks of correction in real estate prices and venturing out confidently to raise money. The latest in the fray is North India based developer Omaxe, which plans to raise Rs 470-605 crore through its public issue comprising of 1.78 crore shares with a greenshoe option of 17.5 million shares at a price band of Rs 265-310 per share.

A large part of the issue proceeds is earmarked for making payments for land acquisitions (Rs 325 crore) while Rs 200 crore will be used to retire debt. The rest will be devoted to development and construction of projects.

Fast forward
Omaxe, which forayed in the real estate development business in 2001, has scaled up its business at a whopping pace, establishing itself among the leading developers in the northern capital region (NCR) and neighbouring states of Haryana, Punjab and Uttar Pradesh.

The company mainly focused on integrated township development so far, which is a highly profitable segment in the real estate business. Apart from this, it has carved a niche for itself in high-end luxury apartments priced upward of Rs 75 lakh-1 crore, in the NCR region.

So far, the company has developed and delivered approximately 5.13 million sq ft of built-up area, which comprised of eight residential and two commercial projects. From hereon, the company is scaling up rapidly, and it has 52 new projects planned, of which 38 are under construction.

These projects are under construction upon nearly 67 million sq ft area, which is a part of its total land reserve of nearly 150 million sq ft, or 3,255 acres. Says Rohtas Goel, chairman and managing director, Omaxe, "All our land bank has been totally paid for, and the company holds a clear title," talking about the company's land reserve.

Since the company is developing projects on a large part of its current land reserves simultaneously, the reserves would deplete faster, as compared to its peers. This creates the need to replenish the land bank faster. On the flipside, a large number of ongoing projects provides a visible earnings stream over the forthcoming years.

"Even though we delivered just 5.13 million sq ft till FY06, we have completed construction (not sold) of 20 million sq ft in FY07, and and plan to carry out construction on about 30 million sq ft in FY08 and FY09 each," claims a confident Arvind Parakh, chief executive officer "� corporate strategy and finance, Omaxe.

Slick numbers
Considering the fact that Omaxe has been in the business for just over six years, it has grown at a phenomenal pace. The company's revenue has grown at a compounded rate of around 72 per cent over FY04-FY07 annually.

As the business mix moved from construction contracting to real estate development, the profitability witnessed dramatic improvements. Its operating margins, which were as low as 7-7.5 per cent in FY04-FY05, bolstered to over 24 per cent in FY07, thus growing at a compounded rate of 163 per cent over the same period.

The trend is reflected in the net profit margins too. "With the issue funding, we are planning to retire debt of around Rs 200 crore, which would bring down the cost of finance, thus improving profitability further," says Parakh.

So far, the company followed the build-and-sell model even for its commercial projects. Going forward, Omaxe plans to increase the proportion of commercial properties (around 7 per cent of total revenues) in its project mix, and adopt the build-and-lease model, which would ensure regular cash flows in the form of rental income.

There is, however, a risk of slower revenue growth owing to a lease model from the commercial property segment. Going further, this segment is likely to account for about 20-25 per cent contribution to the company's topline.

In September 2006, real estate consultancy Trammel Crow Meghraj had carried out a valuation of all the 47 projects of Omaxe aggregating about 140 million sq ft (2,837 acres), and had arrived at a net asset value (NAV) of Rs 19,700 crore. Post-issue, the company will have market capitalisation in the range of Rs 4,214- Rs 5859 crore, which amounts to a meagre 22-30 per cent of the estimated NAV.

"This valuation has not been mentioned in the red herring prospectus following SEBI guidelines which bar real estate players from providing valuations," said Rohtas Goel, chairman.

Valuation
Looking at the past growth trend of the company and the robust ongoing project pipeline, Omaxe appears to promise a steady flow of earnings in the coming years. 

BIG LEAPS
Rs crore	FY06	FY07	FY08E
Revenue	819.90	1439.70	2879.00
Operating profit	152.60	322.30	748.50
OPM (%)	18.60	22.40	26.00
Net profit	118.80	257.30	575.80
NPM (%)	14.50	18.00	20.00
EPS (Rs)*^	-	16.20	36.20
EPS (Rs)**^	-	13.60	30.50
P/E @ Rs 265*	-	16.40	7.30
P/E @ Rs 310*	-	19.10	8.60
P/E @ Rs 265**	-	19.50	8.70
P/E @ Rs 310**	-	22.80	10.20
* Without the greenshoe option ** With the greenshoe option ^ EPS estimates on post-issue capital

At its estimated FY08 earnings, the price-earnings multiple for the offer works out in the range of 7-10 times, which appears reasonable considering the underlying execution risks arising out of the massive scale-up plans.

Parakh counters this risk: "Before entering real estate development, we have been in the construction contracting business since 1987, and have a track record of delivering nearly 30 million sq ft of built-up area to various clients." 

PEER COMPARISON
FY07	P/E(x)*
Omaxe*	16-23
HDIL*	16-23
Ansal Properties Parsvnath Developers	26.10
Sobha Developers	43.10
Unitech	44.70
* Based on IPO price bands and greenshoe option

In addition, the issue is priced at a significant discount to its listed peers. Summing up the project pipeline, the company's NAV and the recent revival of real estate stock, the issue appears worth subscribing, as there are factors supporting potential upside.

Issue opens: July 17
Issue closes: July 20