A sound track record of profitability, geographical and business diversification, and strong demand scenario in the real-estate sector lend optimism to the earnings growth of Parsvnath Developers. An established player in residential projects, Parsvnath recently entered the integrated township segment and is ramping up activity in the malls and commercial space segment. The company is entering new business segments, such as hotels and special economic zones (SEZs), across the country. Uncertainties involved in entering new business segments do add to the risk profile of the company.
Investors willing to take the risk that come with an early entry in this fast emerging space may invest in Parsvnath with a three-four year perspective. With improved industry practices, the interest evinced by private equity funds and the clearance given for real-estate mutual funds, the stage is set for big unlisted players in the sector to make an entry.
At the price band of Rs 250-300 the price earnings multiple (P/E) will be 16-20 times the likely earnings for FY-08 (subject to projects being completed on schedule) on a diluted basis. The valuation is expected to become more attractive by 2009-10 as a number of the current projects are likely to be completed and sold/occupied by then.
At the offer price, the P/E multiple based on FY-06 earnings is at a discount to peers such as Unitech and Mahindra Gesco Developers but at a premium to smaller players such as Ansal Properties and Infrastructure, and D. S. Kulkarni Developers. The premium appears justified given the diversified business model and size.
Object of the issue
Parsvnath develops residential buildings, commercial complexes, including malls and multiplexes, and integrated townships. The company also plans to develop hotels, SEZs and information technology parks. It is seeking to raise Rs 830-1000 crore through this initial public offer and planning to use the funds towards development and construction of some of the projects on hand.
Healthy project mix
Parsvnath has completed 17 projects and acquired land or development rights for 72 projects spanning segments such as residential buildings, townships and commercial properties. The company has already deployed some funds in most of these projects, revenues from which are likely to start flowing from FY-08. The company has also got in-principle approval for the development of nine SEZs.
Further, the company is involved in ventures with the Delhi Metro Rail Corporation (DMRC) for the development of properties around railway stations and depots. The lease from DMRC for varying periods, of 12-30 years, allows Parsvnath to let out the premises for retail shops, offices and exhibitions. Of the 11 projects, two are complete and fully let-out. The initial earnings from this segments point to a high-margin business, providing regular revenue flows. This also differentiates the company's business model from its peers.
Parsvnath's FY-06 revenues came equally from residential projects and integrated townships. Going forward, we expect increasing activity of the company in the commercial space and lease with DMRC to contribute to revenues.
Early mover to non-metro cities
Parsvnath appear to have a planned strategy of entering early the smaller cities. Eighty eight per cent of the revenue for the quarter-ended June 2006 was derived from non-metro cities. This is reflected in its completed projects being spread over Greater Noida, Ghaziabad, Noida and Gurgaon among others. The current projects are also located in cities such as Chandigarh, Mysore, Pune and Indore.
In their search for more office space and their bid to save costs, a number of IT companies have been shifting work to Tier III cities. With a well-diversified geographical presence and relatively low-cost land in non-metro cities, Parsvnath appears well placed to capitalise on this expansion in office-space demand and consequent residential space requirement. Further, very few players in the listed category, except for Unitech, have projects with a pan-India presence. This gives Parsvanth the advantage of early brand recognition.
Strong financials
Parsvnath's revenue and profits have grown at a scorching 131 per cent and 141 per cent annually over the past five years, largely due to increased activity since 2003. The projects on hand are likely to keep the momentum going although the growth over the next one year may be subdued due to work-in-progress. The company's return on equity (ROE) at 53 per cent is superior to similar-size peers. This may, however, see a dent in the near term as a result of increased equity through the offer and lack of commensurate near-term earnings accretion. The ROE is, however, likely to remain at par with the listed peers. Although it operates in a working capital-intensive industry, the company's ability to comfortably cover interest costs lends confidence on its leveraging capability.
Risks
While Parsvnath's presence in non-metro cities is an advantage, the ability of Tier III cities to offer increased scalability in terms of physical infrastructure, intellectual capital and quality real- estate will determine the company's success in these cities. On this account, Parsvnath will remain a risky option to companies with presence only in Tier I cities.
Parsvnath's venture into SEZs may require dealing with a lot of policy related issues. The SEZ policy is evolving still. There have nevertheless been concerns raised on the revenue loss to the Government through tax exemptions and other concessions.
Further, SEZs have long gestation periods, with possible negative cash flows in the first couple of years. The funding process for these projects and the lag in earnings are risks that an investor should watch out for. Revenues from SEZs, hotels and forthcoming townships in Bangalore and Hyderabad have not been considered in our estimation.
The mounting number of projects adds to the risk of company's ability to execute them. The ramp-up in the asset base over the last couple of years, however, indicates that the company has been equipping itself to face the mounting number of projects.
Offer details: The offer is open from November 6 to 10. Enam, Financial, JM Morgan Stanley and DSP Merrill Lynch are book-running lead managers. At the lower end of the price band the market capitalisation on listing will be Rs 4600 crore.