Kolte-Patil Developers: Invest

Investors with a high-risk appetite can subscribe to the initial public offering of real-estate company Kolte-Patil Developers. Attractive pricing, reasonable track record of execution and tie-ups with prominent real-estate funds are postives for this company.

However, as the industry matures, mid-sized players such as Kolte-Patil, with a decent execution record may be attractive candidates for takeover by bigger players. Finding sustained financing options may also pose a challenge to small companies. Investors can, therefore, consider exposure with a one-two/year investment horizon.

At the offer price of Rs 125-145, the company’s share is valued at 8-9.7 times its per share earnings for FY-07 on the existing equity base. The present issue will expand the equity base by 34 per cent. Post-issue, the company’s market capitalisation (based on the offer price) would be about Rs 1,000 crore.
Business and objectives

Kolte-Patil is a real-estate developer with predominant presence in Pune. The company has so far developed 25 projects covering residential and commercial buildings and IT parks in Pune and Bangalore. It now plans to raise Rs 237-275 crore for acquisition of land development rights for new projects and to meet the construction costs of existing projects.
Positives

Kolte-Patil’s execution capabilities have been well-tested, given that the company has managed to develop about four million square feet of projects so far. This is much larger than the executed area of some of the mid-sized realty companies that have tapped the capital market over the past one year.

The company’s present projects are expected to generate 17.8 million square feet of saleable area — about four times its executed projects till date. On a comparison with peers, this target does not appear too ambitious, given the company’s track record and experience. Additionally, 19 of the 28 projects are in the construction stage providing visibility to revenues over the next couple of years.

Kolte-Patil’s revenue for 2007 and the current projects are tilted in favour of commercial buildings and IT parks. A majority of these are located in Pune, a fast-growing hub for the software industry. Further, with the Government of Maharashtra’s plans to develop the Mumbai-Pune connection as an IT corridor, Kolte-Patil’s current focus on IT parks and commercial space appears to be well-timed.

However, given the company’s established presence in Pune in the residential segment, this line of business may be a better bet for the company. The company’s proposed land/development acquisitions also reflect that its plans over the long term are tilted toward the residential segment.

Another positive for this company is its ability to attract real-estate funds such as ICICI Venture and K2 Property (a subsidiary of Yatra Capital) for specific projects. Such ventures will not only enable the company to ensure smooth finance for its projects but also enable it to foray into new and larger projects. For instance, the company is foraying into townships through a joint venture with ICICI Venture. These tie-ups provide better earnings visibility to the projects as smooth flow of funds and the rich experience of the private equity players could reduce project delays/disruptions.
share of owned land

Of the 40 million square feet of saleable area of land reserve, only 3 per cent is directly owned by Kolte-Patil. A high proportion (55 per cent) is land for which the company and its other entities hold development rights. We view this as a risk, as the possibility of legal complications (such as revocation of rights or change in agreement clauses) that lead to execution delays are high in case of such models.

However, it appears that the company has so far managed well, given its established presence in Pune. That most of the land owned through this model is also fully paid for, provides some comfort, although this does not completely eliminate the risks mentioned above.

For a mid-sized player such as Kolte-Patil, the lack of geographical diversification need not necessarily be viewed as a risk. The dynamics and regulatory aspects of real-estate markets vary across states in the country allowing only big players to understand and enter new markets, sometimes through local tie-ups.

Given the company’s well-entrenched position in the Pune market which has significant potential, Kolte-Patil’s focus on this region may in fact be a strategy that contains risk.
Financials

Kolte-Patil’s sales grew at a CAGR of 119 per cent over the last three years to Rs 229 crore in FY-07. Similar growth in net profits grew at 154 per cent. A chunk of this growth can be attributed to surge in volumes in 2007 as a result of completion of some IT parks. As revenues tend to be lumpy after lean periods, one cannot expect this growth to be repeated.

DSP Merrill Lynch and Edelweiss Capital are the book-running lead managers to this offer, which is open from November 19-22.