Sector issues

IPO REVIEW

Despite the warrant sweetener, investors could give the Orbit IPO a skip.

Over the past few weeks of correction in the markets, real estate figured among the sectors in taking the sharpest plunge. The fall hurts more because real estate stocks have been losing value steadily over a period longer than the time since the correction in the broader markets set in.

Interest rate hikes and rising cement prices have further built up pressures for the sector. The resulting cash crunch may also affect projects in the pipeline for a majority of players.

A number of players are therefore looking to tap primary markets to fund their future projects and keep the ball rolling. Orbit Corporation, a Mumbai-based real estate developer too, is coming up with an initial public offering (IPO) to acquire new properties to keep up its project pipeline.

Orbit Corporation identifies dilapidated structures which have low resale value in their current form but have potential of realising substantially higher value after redevelopment. It focuses mainly on properties in the island city areas of Mumbai, falling between Colaba to Mahim and Sion.

This includes areas like Napeansea Road, Altamount Road, Babulnath Road and Worli Sea Face, which have prime real estate.

Orbit has about 16 residential and commercial projects underway, expected to be finished over two years.

"Five of these projects have been pre-sold, realising a value of about Rs 624 crore by FY09," says Ramashrya Yadav, head, finance and strategies, Orbit. "Of this, we have recognised about Rs 70 crore for FY06," he adds.

The IPO comprises of 9.1 million equity shares of Rs 10 each for cash between Rs 108 and Rs 117 a share along with one detachable warrant per equity share.

Each warrant can be exercised into an equity share commencing from 18th month up to 30th month from the date of allotment of equity shares and warrants. The warrant conversion price will be calculated at a 30 per cent discount to the prevailing market price, if the market price goes below the issue price.

In case the market price is at or above the issue price, the warrants can be exercised at a 10 per cent discount to the market price. The issue is expected to aggregate between Rs 98.23 crore and Rs 106.47 crore.

This issue appears difficult to value, say analysts. The future projections appear humungous in size as compared with its numbers so far. The company has sold only 41 units measuring 48,620 sq ft over the past four financial years.

Now, the company claims to have 8 lakh sq ft of saleable area of which 4 lakh sq ft has been already sold. There has been a spike in the first nine months of FY07 as it realised a part of the Rs 624 crore.

It has recently won a bid for a 2-acre plot in Kalina, which has an access to prime commercial district Bandra-Kurla Complex. The cost works out to about Rs 20,000 per sq ft of built-up FSI (floor space index), which would necessitate a realisation of Rs 25,000-30,000 per sq ft in order to sustain profitability at current levels.

The company is vulnerable if real estate prices head south. The issue appears reasonably priced, but given the cold shoulder that real estate companies have received on the bourses, investors may be better off waiting before taking the leap.