Investors can give the initial public offer of Orbit Corporation (Orbit) a miss for now. While the company's business of redevelopment of real-estate properties holds potential in Mumbai, where it operates, the lack of track record and the complex nature of transactions can be negatives. Further, the lack of diversification, with the business largely related to redevelopment projects that are governed by regulations, adds to the company's risk profile.
At the offer price of Rs 108-117, the price-earnings multiple works out to 17-18.5 times its consolidated annualised earnings for FY-07 on the existing share capital. The valuation appears steep given the risks involved. Further, a number of listed peers have seen a sharp correction in the past couple of months and trade at a discount to Orbit.
Profile and Objective
Orbit Corporation is a real-estate developer with focus on redevelopment of residential properties in the island city of Mumbai. The company plans to raise Rs 98-106 crore in the price-band offered. Majority of the fund requirement is for investment in wholly-owned subsidiaries which are likely to execute a number of the current planned projects. The company also needs funds to acquire new projects and develop the current ones.
Uncertainties writ large
Orbit primarily operates in Mumbai, where there is scope for redevelopment work, given the large number of dilapidated buildings (classified by the Mumbai Housing and Area Development Authority or MHADA), in this location. These projects are also different from slum clearance projects undertaken by players such as Akruti Nirman.
However, redevelopment projects can not only be long-drawn ones but are typically riddled with uncertainties. For one, the company has too many parties such as clients, owners/co-developers, tenants and regulatory authorities to liase with. This involves identifying properties, getting the owner to sell or co-develop them, obtaining the consent of at least 70 per cent of the tenants, providing suitable rehabilitation packages as per the regulations, securing the approval of various authorities, including the Development Control Regulation (DCR), and so on. While the company states that the project completion time is about three-four years, the complexities involved can delay the projects, thus making the revenue flow cyclical to other real-estate developers.
Further, one of the regulations under the DCR (under which the company redevelops property) is a subject matter of review under a court order. The near-term prospects for new projects under the said regulation, therefore, appear none too bright.
Execution capabilities
Orbit Corporation has so far executed and sold only one project. The company now has 16 projects on hand with 11 in the preliminary stages. For a company with such a limited track record, the capability to undertake a large number of projects is a risk factor.
However, the positive feature is that the company has, by and large, cleared the regulatory aspects in most of the above projects. This also reflects its experience in such procedures.
The company may also face cash crunch, given that many of the projects signed in 2006, are slated for completion only after three-four years.
The company has had negative cash flow from operations in all fiscals from 2003, except in 2005. This clearly reflects the cyclical nature of the business.
Orbit's consolidated revenue for the nine-months ended December 2006 stood at Rs 54 crore against Rs 17 crore in FY-06.
While the revenue growth appears encouraging, real-estate developers with a lower equity base have delivered higher revenues. Orbit's return on equity is also lower than some peers.
Conversion of warrants tagged to this offer may see equity dilution, if earnings growth does not keep pace.
Offer details: The IPO is open from March 20 to 23. Each share comes with one detachable warrant, which can be converted after 18 months but before 30 months from the date of allotment of equity shares and warrants.
The holder will receive one equity share for every warrant conversion exercised. The warrant exercise price will be calculated as stated in the prospectus. Edelweiss Capital is the lead manager.