Search Now

Recommendations

Monday, January 15, 2007

IPO - Akruti Nirman


Akruti Nirman, part of the Akruti group founded by Hemant M. Shah and Vyomesh M. Shah, is primarily a developer of commercial and residential properties. Its key focus area has been real estate development on slum rehabilitation land in Mumbai. Since 1989, it has developed nearly five million sq ft of building area, of which approximately 4.8 million sq ft have been developed on land made available for development through participation in slum rehabilitation projects. As part of its growth strategy, the company is planning to expand into Pune and Bangalore, and intends to expand its business into other cities, particularly where it sees future potential for slum rehabilitation.

To financing its existing projects; land acquisition, repayment of loans and meeting general corporate expenses, Akruti Nirma is coming out with an IPO.

Strengths

  • End November 2006, Akruti Nirman had development rights of over 1,17,63,000 sq ft of land area, primarily located in Mumbai. Of this, 80,26,000 sq ft represents slum-rehabilitation land owned by the applicable slum rehabilitation authorities and 37,37,000 sq ft acquired or leased from third parties. The company says it will be able to develop approximately 1,32,56,000 sq ft of saleable or lettable building area on these lands, in addition to generating 2,93,000 sq ft of transferable development rights (TDRs). There is very good potential for slum-rehabilitation projects in Mumbai (like Dharavi slums) and other cities.
  • Steps have been initiated to acquire development rights of over a further 16,54,000 sq ft of land area, primarily located in Mumbai. Of this, the company says it will be able to develop approximately 31,22,000 sq ft of saleable or lettable building area and generate 4,51,000 sq ft of TDRs. In addition, it has entered into an agreement with a third party to acquire TDRs representing approximately 26,13,000 sq ft of area, if such TDRs are allocated to the third party by the government of Maharashtra.
  • Knight Frank, CB Richard Ellis and Trammell Crow Meghraj had performed a property valuation on 15 September 2006 of the company’s projects under development and projects for which it has taken steps to acquire development rights. The valuation puts the net present value of the share of 35 projects being undertaken at Rs 3742.7 crore.
  • The land bank and valuation do not include DLF Akruti Info Park project in Pune scheduled for completion in June 2012. This consists of eight buildings, aggregating approximately 50,00,000 sq ft of saleable/lettable commercial space in the prime location of Hinjewadi, Pune. The company has a 33% share in this project.
  • The principal financial advantage to the company as part of the slum rehabilitation schemes is that it is not required to pay substantial, one-off land purchase costs at the beginning of each project to acquire the use of such land.

Weaknesses

  • Slum rehabilitation projects generally have long gestation and other associated risks.
  • Taking into account the cost of constructing an additional building to house slum dwellers and other rehabilitation expenses, the average cost of construction works out to about Rs 2200-2500 per sq ft for the company as compared with about Rs 1500 per sq ft for other players.
  • A number of steps still need to be taken for certain projects to finalise the relevant documentation. The right to develop remains subject to a number of conditions, and their satisfaction may be outside the company’s control. In addition, some projects also require the company to acquire TDRs, which it does not yet own, to develop fully the relevant project to the extent assumed in the valuation reports.

Valuation

On the basis of FY 2006 earning, EPS works out to Rs 9.5. Annualised EPS based on eight months ended November 2006 is Rs 3.3. The sharp fall in profit in the current financial year was mainly because some of the projects scheduled to be completed in FY 2007 had been delayed due to recently introduced environmental clearance norms.

Also, up to FY 2006 Akruti Nirman was following the completed building project method of revenue recognition. Income was recognised of buildings intended for sale only when construction was completed and occupation certificate for the building issued by the relevant governmental authority. From the current financial year, the company has adopted the percentage of completion method of revenue recognition. Thus, its financials for the eight-month period ended November 2006 are not comparable to the financial statements for the previous five years. On a comparative basis, revenue and profit in the latest eight months would have been significantly lower than the reported figures.

Akruti Nirman is offering shares at Rs 475-Rs 540. On the basis of valuations of 35 projects given in the prospectus, the NAV per share of the company works out to Rs 604. On the basis of FY 2006 earning, the PE will be in the range of 49.8-56.6 at the offer price. The medium/small real-estate construction sector is currently enjoying PE of 34 times FY 2006 earning. While other real-estate companies are likely to see a big jump in profit in the current year, going by the trends in the first eight months, Akruti Nirman can see a fall