Expanding its footprint
The first among the many real-estate developers presently waiting to tap the capital markets
Pune-based D S Kulkarni Developers (DSKDL) constructs residential (accounting for 90% of the revenues) and commercial complexes since its inception in 1991. The company has till now completed 23 projects. Its major focus has been Pune (21 projects) and Mumbai (two projects). DSKDL has completed over 12.5-million sq ft of construction in Mumbai and Pune together.
DSKDL follows Accounting Standard 9 for recognition of revenue. Revenue is recognised after the construction of the project is completed in every respect. Inventories under work-in-progress are valued in accordance with the proportionate completion method: at the estimated cost incurred on the project at the time of finalising the accounts and the proportion of estimated profit earned on it.
In the nine months ended December 2005, sales revenue amounted to Rs 14.22 crore and the increase in inventories of complete tenements/work-in-progress was Rs 52.05 crore. As profit accrued from ongoing projects are accounted even though sales is accounted at a later date, the operating profit margin shows wild swings.
The DSK group claims to have a good land bank, which is a big asset for any developer. The group has been collecting land at low prices over the years. Group companies buy the land and then transfer it to DSKDL for development. The company has not disclosed the value of the land held by the group.
DSKDL is coming out with a composite rights issue (0.55 crore shares)-cum-public offer (0.55 crore shares) of 1.10 crore shares. Shares on rights basis will be issued to the existing shareholders at a fixed price of Rs 110. Post the composite rights issue and public offer issue, the company's share capital will double to Rs22 crore.
DSKDL plans to invest the proceeds of the composite issue for the development of nine new properties: seven in Pune, one in Mumbai, and one in Bangalore. The estimated cost by the company for development of these projects is Rs 550 crore. The nine projects and their locations are: Vishwa IT Park, DSK Garden Enclave, DSK Vishwa Saptapur, DSK Sayantara, DSK Sundarban, DSK Roshan, and DSK Vishwa V, VI, VII in Pune; DSK Madhuban in Mumbai; and DSK Bangalore Project in Bangalore
Strengths
* With increasing earning population, rising disposable income, expansion of retail and IT/ITES sectors in Pune, Mumbai and Bangalore, housing demand in these cities is growing.
* DSKDL claims to have delivered on time possessions for all its projects undertaken till date.
* DSKDL has been making profit since incorporation and paying dividend since FY 2003.
Negatives
* Land bank is an important parameter to evaluate a real-estate developer. However DSKDL does not own any land bank. Out of the issue proceeds (rights and public), the company is investing Rs 110.99 crore (Rs 12 crore for transfer of development rights) for purchase of land from its group companies, which are holding the land.
* Two non-resident Indians (Chandar T Bhatia and Asha C Bhatia, with a shareholding of 18.18% and 17.73%, respectively) have a stake of 35.91%, i.e., more than that of the promoter group's 24%.
* DSKDL had a negative net cash from operations in FY 2004 and FY 2005 of Rs 17.62 crore and Rs 22.75 crore, respectively, mainly due to the projects in progress.
Valuation
The 52-week high/low of DSKDL has been Rs 434.45 (12 April 2006) and Rs 60.67 (13 April 2005). The current market price of the stock is Rs 392 (ex- rights).
At the offer price band of Rs 250-275, DSK's PE works out to 149.5- 164.4 x FY 2005 EPS on a post-issue equity and 34.7 – 38.1 x 9-month FY 2006 annualised earning on the post-issue equity of Rs 22 crore. TTM PE for the construction sector is abnormally high at 42.7. Delhi-based Ansal Housing with an equity of Rs 14.60 crore and a net sales for FY05 of Rs 79.80 crore trades at a TTM PE of Rs 32.7