Prime pricing

IPO REVIEW

Even though IVR Prime appears way too expensive going by the price-earnings multiple, it is reasonably priced for its net asset value.

The stellar performance of recent real estate public offerings like DLF and HDIL has prompted several others in the sector waiting behind the curtain to come on stage. A few months ago, real estate stocks took a beating as nervousness about rising interest rates, regulatory scrutiny and drying up of liquidity gripped the sector.

However, they have made a smart comeback after institutional buyers reaffirmed their faith in the sector by showing great interest in new issues. The QIB (qualified institutional buyers) portion of DLF and HDIL were oversubscribed 5.13 times and 10 times respectively while that of Omaxe which closed for subscription last week was oversubscribed 92 times.

As the number of real estate companies on the bourses increase, there is also more choice for investors in terms of the different business propositions.

South-based IVR Prime Urban Developers has a business centred on affordable housing and the buying power of the vast middle-income group. The issue comprises of 14.2 million equity shares in the price band of Rs 510-600, amounting to 22.06 per cent public share, aiming to mop up Rs 722-849 crore.

A large part of the issue proceeds will be used to repay loans from IVRCL (Rs 147 crore) and Karnataka Bank (Rs 42 crore). The rest of the proceeds will go towards construction and development of IVR Prime's Jigani project and construction of an IT park and a mall at Gachibowli, Hyderabad.

Perfect parentage
IVR Prime came into being in 1996 and became the real estate development arm of IVRCL Infrastructure in 2001. The infrastructure construction company made a foray into building group housing townships and has constructed and delivered 15.4 million sq ft of completed residential and commercial properties at various locations such as Bangalore, Chennai, Hyderabad, Pune and Noida so far.

It also has a track record of completing projects for Karnataka Housing Board, CIDCO, BHEL and the armed forces. IVR Prime now has a pipeline of 5.2 million sq ft of residential and 4.86 million sq ft of commercial projects, which is expected to be delivered in the coming two years.

"We are targeting the masses, by providing affordable housing with apartments costing about Rs 18 lakh in new upcoming locations which are being created near manufacturing hubs, for example at Sriperumbudur," says E Sudhir Reddy, chairman and joint managing director, IVR Prime.

"For this, we first build row-houses near these commercial hubs, on a part of our land to attract middle and senior management from various companies established in that location, and then build high-rise apartments to attract others," he adds.

IVR Prime is leveraging on the capabilities of its parent IVRCL to execute its projects. The management claims that the dealings are on arm's length basis and would help avoid cost and time overruns. It has a land reserve of about 2,479 acres (approximately 75 million sq ft), at present.

In January 2007, property consultant Cushman and Wakefield valued IVR Prime's land reserves of 56 million sq ft at that time, between approximately Rs 4,998-5,525 crore. "We have further identified about 1,000 acres of land at various places," claims Reddy.

Flat financials?
IVR Prime's top line has remained constant over the past two years of its operation. This is mainly because it recognises revenue on projects only after they are completed while cost is recognised on the basis of the percentage of work completed. Profitability has however improved significantly.

"We sold about 0.93 million sq ft in FY06, and about 0.39 million sq ft in FY07, and both fetched us almost a similar amount in revenues, which reflects both, appreciation potential of the properties, as well as improvement in our own profitability," says SV Ramkumar, executive assistant to chairman and managing director.

Both, the operating and net profit margins have expanded significantly in FY07 compared to the previous fiscal. Going further, profitability is expected to improve as a large part of debt will be retired with the issue proceeds, and projects in the pipeline get executed. 
 

PRIME NUMBERS
Rs crore	FY06	FY07	FY08E
Revenue	136.40	133.90	180.00
Operating profit	13.60	37.60	54.30
OPM (%)	10.20	28.10	30.20
Net profit	11.70	20.70	31.00
NPM (%)	8.80	15.50	17.20
EPS (Rs)*	1.80	3.20	4.80
P/E @ Rs 510	-	160.00	106.30
P/E @ Rs 600	-	188.00	125.00
* EPS estimates based on post-issue capital

Valuation
Considering the FY06 and FY07 earning per share of just about Rs 3-5, the issue appears extremely expensive on the price-earnings (P/E) multiple criteria, which ranges from 160-188 times at the two ends of the price band.

This places the company in comparison with players such as Mahindra Gesco, which has positioned itself among the premium residential developers' bracket in the western part of the country.

However, going by the net asset value of the company's land reserve, the issue appears to be priced at a discount to the present value of its reserve, as IVR Prime would have a market capitalisation of Rs 3,264-3,840 crore post-issue.

Further, in places like Gachibowli, Noida and Sriperumbudur, the potential of appreciation of property prices appears to be huge. "Our average cost of acquisition of land is approximately Rs 150 per sq ft while, our average cost of construction is about Rs 650 per sq ft," says Ramkumar.

As a result, even with lower realisations per sq ft as compared to its peers, IVR Prime should be able to report decent margins and earnings in the forthcoming years.

While the long term performance of all realty players will depend on their ability to accumulate land at lower prices and their execution capability, IVR Prime's project mix and execution capabilities make this issue an attractive proposition in spite of a high P/E pricing of the issue.

Issue opens: July 23
Issue closes: July 26