Promoted by Ravi Kiran Aggarwal and Pujit Aggarwal, Orbit Corporation primarily redevelops projects in Mumbai. The company was initially incorporated to carry out e-commerce business and was called Orbit Cybertech.
Orbit Corporation is currently implementing 16 up-market projects at premium locations. The estimated free sale area for these projects is 6,85,327 sq. ft. Besides, it has successfully bid, at Rs 333 crore, for Gujarat Ambuja Cements’s approximately 8,763.7 square meters of land at Kalina, Santacruz in Mumbai.
The IPO is to finance advances for acquisition of new projects and development of existing projects as well as to invest in wholly owned subsidiaries. The public issue is of 91 lakh shares with one detachable warrant per equity share. The price band has been fixed at Rs 108 to Rs 117. The issue opens on 20 March and closes on 23 March 2007. Warrants are convertible into shares (between 18 to 30 months from the date of allotment at 10% or 30% discount to the average market price depending on whether the market price is higher or lower than the current IPO price).
Orbit Corporation has voluntarily opted for IPO grading from Credit Rating Information Services of India Limited (CARE). It has received IPO Grade 1, indicating poor fundamentals. The low grade was primarily due to the short track record and low corporate governance
Strengths
- Out of 16 projects, Orbit Corporation’s sales process commenced from 31 December 2006 for five projects involving an area of 5,26,200 sq. ft. Of this, 3,84,706 sq. ft. have been sold for Rs 624.37 crore, and Rs 70.1 crore recognised. The balance 1,41,494 sq. ft. remains unsold.
- According to available estimates, the current potential for redevelopment in Mumbai is about 60 million sq ft. The company is likely to be a key beneficiary as one of the major players in redevelopment of properties.
Weaknesses
- Gestation period for redevelopment projects is long, and involves higher scope for delays and litigation.
- Development Control Regulations for redeveloping properties are being reviewed under court orders.
- The Income-Tax department had conducted a search and seizure on the company, its subsidiaries and its promoters. The company has undertaken to pay an advance tax of Rs 10 crore. For the nine months ended December 2006, the company had made a tax provision of Rs 2.54 core on profit before tax (PBT) of Rs 15.37 crore. Also, a promoter of the company, Pujit Aggarwal, has declared an additional personal income of Rs 15 crore (an amount higher than the net profit of Orbit Corporation!) including cash seized of Rs. 3.07 crore.
- The aggressive bidding for Gujarat Ambuja Cements’s plot is likely to make the company vulnerable to softening of real-estate prices as compared with companies with bank of land. It had put in a bid of Rs 333 crore, whereas its consolidated net worth was Rs 162.98 crore end 31 December 2006. However, the second highest bid was for Rs 331 crore.
- Since the beginning of 2006, banks have increased the lending rates on housing loans by about 300-500 basis points. This is bound to slow down the growth in housing demand.
Valuation
Between FY 2004 – FY 2006, net profit shot up from Rs 1.23 crore to Rs 5.95 crore. In the nine months ended December 2006, net profit further increased to Rs 12.83 crore. Interestingly, Orbit Corporation changed its revenue recognition policy since 1 April 2006, from Completion of Project Method to Percentage Completion Method. This has led to increase in cumulative profit by 11.19 crore.
On the basis of annualised nine months earnings, EPS works out to Rs 3.8 (post-issue and post-warrant exercise). At the price band of Rs 108-Rs117, PE works out to 28.7 and 31, respectively. Comparable companies are currently traded at half these PEs.