Parsvnath IPO - Build the framework

Parsvnath Developers is one of the leading real estate developers in the National Capital Region (NCR), and has a presence in various other markets as well. The company is tapping the market with an issue of 33.24 million shares at a price band of Rs 250-300. The issue will add up to Rs 997 crore at the higher end of the band.

The company intends to use the proceeds of this issue to fund various ongoing residential and commercial projects. Parsvnath hopes to ramp up its scale of operations sharply over the next few years, based on the development rights it holds currently. Investors with a three-year horizon can consider subscribing to the issue.

Profile: The company has, so far, completed nine residential and eight commercial projects, adding up to 3.5 million sq ft. The company has seen very sharp growth over the past five years. Its turnover surged from Rs 27.3 crore in FY02, to Rs 112.9 crore in FY04 and Rs 653.8 crore in FY06. The company’s net profit stood at Rs 107 crore in FY06, against Rs 65.7 crore in FY05 and Rs 18.4 crore in FY04.

Prospects: The company is currently executing projects with total development rights of 108.6 million sq ft. This includes 25 residential projects, 27 commercial complexes and 20 integrated townships. Parsvnath is also building 14 hotels.

In addition, the company has in-principle approvals for setting up nine special economic zones (SEZs) — one of these is spread over 2,500 acres, while the others are all less than 250 acres. Land acquisition for SEZs is at a very preliminary stage.

Outlook & Recommendation: Parsvnath’s FY06 valuation works out to Rs 5,400 crore at the higher end of the price band, giving the company a price-earnings (P/E) multiple of 50. Clearly, the valuation is not based on past financials.

It is based on the developmental rights that the company holds — at 108.6 million sq ft, against 3.5 million sq ft that the company has so far. Approximately half of this is in the NCR area, while the remainder is spread across the country, mostly in tier-2 cities.

The SEZ agreements are at a very preliminary stage to be factored into the valuation. The company expects to complete this development over the next five years. In addition, Parsvnath is also building 11 malls for Delhi Metro Rail Corporation (DMRC).

Once these are completed, they may contribute Rs 150-200 crore to the operating profit. Part of the developable area with the company is in the form of hotels, which will continue to be owned by the company. The hotels and DMRC malls will provide the company with stable cash flows in future.

However, the company faces two major risks. A slowdown in the real estate market could hit margins. Secondly, the company is scaling up almost exponentially — from 17 projects executed so far, it now has over 70 projects at hand to be completed over the next five years. Hence, timely execution could become an issue. Investors willing to take this call can invest in the issue.