Realty cos eye Rs 15,000-crore mop-up

Realty cos eye Rs 15,000-crore mop-up
The Economic Times, November 13, 2009, Page 14

But These Market-Bound Cos May Hit Valuation Wall Given Investors’ IPO Aversion

Deeptha Rajkumar MUMBAI

CASH-STRAPPED real estate companies looking for succour from the capital market are likely to run into headwinds on the pricing front. Market watchers say unless the promoters price their issues a bit more realistically, they are likely to see a tepid response from investors. Some of the high-profile new issues over the past few months were felt to have been priced expensively, resulting in the stocks faring poorly on listing.

Nearly a dozen real estate companies are looking to mop up over Rs 15,000 crore through public offerings in the coming months. Godrej Properties, DB Realty, Emaar MGF, Lodha Developers, Sahara Prime City, Kumar Builders, Ambience, Ashoka Buildcon are among the companies which have filed their draft red herring prospectuses (DRHP) with Sebi. Those in the pipeline, but which have not yet filed their DRHPs, include Nitesh Estates, Prestige Constructions, BPTP and Oberoi Constructions .

The IPO-filings mark the second round of fund-raising in the real estate industry, which had been wracked by the global financial crisis and the resultant drop in demand. Signs of a revival in the residential segment in April-May this year, prompted many to hit the capital market to raise funds.

Merchant bankers are, however, sceptical about investor appetite given the huge overhang of paper.

“There are serious challenges on the pricing front,” says Nimesh Shah, MD, Fortune Financial. Mr Shah is of the view that there is too much paper on offer at the moment, which is dampening investor appetite.

“And with almost all of the recent quality companies quoting at a discount to the offer price, the prospects look bleak,” he added.

Industry experts point out that investors should look at the earnings model of the real estate companies rather than the landbank model because in the latter, prices tend to be volatile.

Also, there are concerns that builders are putting value to the whole piece of land where they have partial ownership.

“Investors need to do due diligence as to whether the land bank is agricultural land or non-agricultural land. Currently, valuation of land is being done arbitrarily. If it is agricultural land, one needs to factor in the cost of conversion (property tax & cost to be paid to the government etc),” said a real estate developer on condition of anonymity.

Investment bankers believe that this phenomenon is not true of India alone but is also seen in other countries like China. “Real estate companies are quoting at an almost 60% discount to their NAVs,” said a banker with interests in the region.

“Given the overall weakness in the IPO market in the recent months, pricing and quality of promoters will be paramount,” says Munesh Khanna, CEO & MD-investment banking, Centrum Capital.

However, JC Sharma, MD, Shobha Developers, believes one should look at the macro picture. “The real estate industry is still not getting proper representation in India. In a developed/developing economy, it constitutes 10% of the market cap of the country. We still have a long way to go,” he told ET.