Middle class story

FPO REVIEW

The DS Kulkarni issue is a play on the rising real estate prices in cities like Pune, Bangalore and Mumbai.

Real estate stocks have zoomed on the stock exchanges in the past one year with companies like Ansal Housing and Arihant Foundations appreciating around 600 per cent each. Pune-based DS Kulkarni Developers (DSKDL) too has gone up almost 500 per cent.

With the real estate industry booming, DSKDL is raising money by way of rights before other large real estate developers like Parsvnath Development and DLF come out with their IPOs.

The company will issue 55 lakh shares by way of rights and 55 lakh for the public. While existing shareholders will get one share for every two shares held at a price of Rs 110, the public issue price has not yet been announced.

DSKDL is developing eight residential real estate projects at Pune, Mumbai and Bangalore and one IT park at Pune.

"The selling price of the property developed by the company in Pune is between Rs 1,500 and Rs 4,500, in Banglore it starts from Rs 2,600 up to Rs 6,000," says DS Kulkarni.

While some of these projects will be ready at year end, the rest of the projects are expected to be completed between 2007 and 2009. The total estimated cost of these projects is Rs 555.23 crore and at the end of February 2006, Rs 115.79 crore had already been deployed.

Rising income levels of individuals, relatively low interest rates and a demand for quality housing have led to a boom in the real estate business. Real estate prices have risen between 20 and 70 per cent in the past year in several cities across the country.

The Indian government envisages that by year 2012, the housing shortage should be removed and everybody should have a house of his own. To meet this target, the estimated investment involved is about Rs 4 lakh crore.

DSKDL mainly targets middle class consumers, though it has built high-end apartments in Mumbai earlier. So far, it has completed 23 residential projects, of which 21 are in Pune and two in Mumbai. A large number of software companies are based in Pune, so DSKDL's IT park is likely to find enough takers.

The business of a real estate company starts with land bank (the real estate the company owns), where it constructs residential or commercial property and the realisation on sale of these units. DS Kulkarni is estimated to have a land bank of about Rs 500 crore, where it will construct over 33 lakh sq ft of residential units and about 5.6 lakh sq ft of commercial area in the IT park.

The company has been able to benefit from the current real estate boom, and its operating profit margin has consistently increased from 7 per cent in FY04 to 21.65 per cent in the nine months ended December 2005.
 

HOME SWEET HOME
D S Kulkarni Developers
In crore	FY2005	FY2004	9-mnths ended Dec-2005
Sales of Tenements	35.06	29.65	18.25	14.22
Increase in Inventories of
Complete Tenements	18.33	21.44	-14.51	52.05
Operating Profit	6.89	3.57	93.00	14.35
Operating Profit Margin (%)	12.91	6.99	592 bps	21.65
Net Profit	3.68	1.48	148.65	11.90
Net Profit Margin (%)	6.89	2.90	399 bps	17.96

If the issue is priced 10 per cent lower than the current market price of Rs 400, then the issue price for new shareholders will discount the FY07 estimated EPS (after the dilution) about 23 times.

Considering that the stock price has doubled in the past three months, gains from here may not be significant unless the discount to market price is around 20 per cent.