Parsvnath Developers IPO Analysis

Parsvnath Developers currently derives most of its revenue from residential and integrated township projects in Harayana and Uttar Pradesh (UP). However, the company, promoted by Pradeep Kumar Jain, has taken steps to diversify its revenue in terms of locations as well as projects.

Presently Parsvnath Developers has acquired land/ development rights to develop 20 integrated townships, 27 commercial complexes including shopping malls, multiplexes, office space and a complete metro station and 25 residential projects. The company intends to construct 14 hotels and four information technology parks on commercial land acquired by it or on which it has development rights. It has obtained in principle approvals from the government of India for the development of 9 SEZ projects.

The track record of Parsvnath Developers includes 17 projects comprising nine housing projects and eight commercial complexes. To finance 11 of the 90 projects in hand, the company is coming out with public issue

Strengths

* The growth of the Indian economy and its middle class has resulted in increased demand for housing units. Further, it has also resulted in increased consumerism, which in turn has created higher demand for shopping malls and multiplexes. Thus, the growth of the Indian economy has been acting as the growth driver for the real-estate sector in India. As per industry estimates, Rs 5500-crore of mall development is expected to take place in India over the next five years. The IT/ITES sector will make real estate investments of Rs 2500 crore by FY 2008, while the housing sector will require investment of $ 33 billion to $ 44 billion per year. As one of the leading players with presence across most verticals, Parsvnath Developers is likely to benefit from the growth of the real-estate sector in India.

* Though subjected to a penalty clause under the construction agreements entered into with its customers for any delay in the completion of the project, Parsvanth Developers has not paid even a single rupee as penalty.

* As of 15 October 2006, Parsvanth Developers directly owned or held development rights for an estimated 108.64 million square feet of saleable area.

* Parsvanth Developers is planning to develop SEZ in various parts of the country. As per the provisions of sec 80-IAB of the Income-Tax Act, 1961, the company is eligible for 100% deduction of profit derived from developing an SEZ notified on or after 1 April 2005 under the Special Economic Zones Act, 2005, for 10 consecutive assessment years.

Weaknesses

* Parsvanth Developers’s financial performance is vulnerable to fluctuations in the market value of land and constructed inventories as a result of changing economic and market conditions due to lag between the acquisition of land / development rights and construction and development of the project. Also, prices of steel and cement, which comprise a major portion of the construction cost, are expected to rise in the coming couple of years, which may adversely affect margin.

* Hardening of the interest rate and/or withdrawal of tax incentives available for housing loans (recommendations of various committees/panels) may dampen the growth of demand for housing units, which could adversely affect the growth of Parsvanth Developers.

* Parsvanth Developers had negative operating cash flow in the last two financial years. In the quarter ended June 2006, too, the operating cash flow was negative.

* There is a civil suit pending against Parsvanth Developers for the use of the trading name, Parsvnath Developers. If the judgement is adverse, the company will not be able to use or advertise the name, Parsvnath Developers, for its business. The plaintiff, who is also engaged in the construction business, has staked claimed to the name, Parshwanath. As brand name plays an important role in the real-estate industry, the business of a company, deprived of the use of the brand name by which it is known, could be adversely affected.

Valuation

In last five financial years, Parsvnath Developers’s revenue has grown at a CAGR of 121% and net profit at a CAGR of 139%. EPS on FY 2006 earning (assuming green-shoe option is exercised in full) works out to Rs 5.8. At the offer price band of Rs 250-Rs 300, the PE range will be 43.2 to 51.8, respectively. The company’s current profile compares well with Ansals and D S Kulkarni Developers, which command a PE of around 20-30. However, its future projects and plans are to get into the league of Unitech and Mahindra Gesco, which command a stratospheric PE of over 100. The financial performances and stock prices of real-estate stocks are highly volatile and currently their PEs are very high and, hence, highly vulnerable to fluctuations depending on the overall economic as well as stock market trends.