Property developers need cash to reduce large debts.
Real estate developers are back in the primary markets after a lull of six months, as stock indices have touched new highs and property prices have crossed their earlier peaks in major cities.
Oberoi Realty and Prestige Estates are planning their initial public offers (IPOs) next month. Kalpataru and Lavasa Corporation have filed their draft red herring prospectuses (DHRPs) in the past fortnight. Between the four of them, they are planning to raise over Rs 5,000 crore from the primary market.
Nitesh Estates was the last developer to launch an IPO, in April this year. Though at least a dozen real estate developers filed DRHPs to raise over Rs 12,000 crore and about half of them got the market regulator’s nod, volatility in the markets forced most of them to postpone their plans.
Factors such as poor retail participation in recent issues – Nitesh Estates and DB Realty are two examples – and these stocks trading below their listed price added to the nervousness of IPO aspirants, analysts tracking the sector said.
However, things have changed after the recent exuberance in stock and property markets.
“Equity markets are doing well and the property sector is showing growth. Developers want to use this opportunity to raise capital. This allows developers to improve balance sheets and improve their debt to equity ratio,” says Tarun Bhatia, director, capital markets, Crisil Research.
In the current month itself, the BSE Sensex has gained 12 per cent and crossed the psychological 20,000-mark. On the property front, prices in areas such as South Mumbai have crossed the 2007 peak.
According to central bank estimates, realty developers have piled up Rs 75,000 crore debt and need to pay around Rs 25,000 crore in interest and principal this financial year. Hence, successful IPOs are critical for developers such as Emaar MGF, BPTP and Lodha, among others, who want to use part of the IPO proceeds to pay off their debts.
The IPO aspirants are more than hopeful. “We would like to undertake the journey when the weather is good. We are a zero-debt company and have marquee investors (Morgan Stanley). Hence, we see a successful IPO,” says Vikas Oberoi, managing director, Oberoi Realty, which plans to raise Rs 1,100 crore through an IPO.
How does the market see the prospects of realty IPOs, given that a dozen are in the queue and a similar number of companies from different sectors have hit the market this month?
“The first few (real estate) issues will go through smoothly, before investors again start focusing on valuations,” says Sanjay Sakhuja, chief executive officer, Ambit Corporate Finance. “While domestic investors are a bit cautious, FIIs have a very strong positive view on emerging markets.''
Amit Goenka, national director, capital transactions, Knight Frank, believes only two-three IPOs will hit the markets this year. He feels another half a dozen will join the queue.
“IPOs will happen only if 30-40 per cent of the issue is sold in pre-IPO placements,” says Goenka. “If the project pipeline of a developer is not robust and is highly dependent on future cash flows, the issue may face some problems.”
Valuations
Valuation will be a key issue for the success of real estate IPOs, apart from the track record, cash flows, transparency and management depth of developers, among others, say analysts tracking the sector.
“In the real estate sector, there is still some disconnect between investors and developers in terms of valuations. Investors will look for more clarity on sustainability of sales and the delivery front,” said Rajiv Sahni, partner (real estate practice), Ernst & Young.
Investors will look for more clarity on the sustainability of sales and the delivery front,” said Rajiv Sahni, partner (real estate practice), Ernst & Young.
“A developer whose perception has changed in the mind of the investor will perhaps manage to do a successful IPO.”.
In early 2008, Delhi-based Emaar MGF had to reduce the price band twice and push back the closing date by five days before withdrawing the IPO, due to poor subscriptions to the issue. Though there were reports about Emaar MGF cutting its IPO size by half before hitting the market again, the company has not announced anything so far. So, too, with other IPO aspirants such as Sahara, Neptune and others.
Knight Frank’s Goenka believes that if the IPO valuation is 50-55 times the company’s 12-month trailing earnings, it is acceptable. “But most of them are still at 70-75 times their trailing earnings,’’ he says. “Though developers have learnt their lessons and valuations are much more reasonable than two years ago, the greed has not completely gone out.’’
But developers say valuations are not a problem.”We were planning to raise Rs 1,000 crore when the market was at 14,000; now they are at 20,000,’’ says Oberoi.
Developers such as Lodha say they will watch the performance of the IPOs of Oberoi and Prestige before taking a call on its public issue.
“Healthy internal cash flows give us liberty of time. We want to see if investors make money in two of these issues before deciding our timing,’’ says Abhisheck Lodha, managing director of Lodha Developers.
