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Saturday, November 17, 2007

Kolte-Patil Developers IPO


Good financials sprout ahead of IPO

Promoted by Rajesh Patil and Milind Kolte, Kolte-Patil Developers is one of the leading Pune- based realty player. The company has also developed couple of projects in Bangalore. Apart from these two cities, it plans to expand operations to Chennai and Hyderabad and locations such as Nasik, Goa, Nagpur, Aurangabad and Mysore in due course.

Kolte-Patil Developers has entered into joint venture (JV) with ICICI Venture Fund Management (ICICI Venture), a real-estate private equity fund in India, for three of its larger projects. For these projects, the company has identified and acquired land, designed and conceptualised the project, and developed and managed the project apart from contributing to the equity capital. ICICI Venture has provided equity and equity-linked financing.

Similarly, Kolte-Patil Developers has entered into a JV agreement with K2 Property (a subsidiary of Yatra Capital, a Jersey-based real-estate fund) for the development of some of its properties. The company plans to enter into the hospitality sector through a JV with Arora International Hotels, a UK-based hotelier, for development of at least two hotel properties. It has signed a term sheet outlining development of one hotel each in Pune and Bangalore.

To finance the acquisition of development rights, for construction and development of current and forthcoming projects, and to meet general corporate expenses, Kolte-Patil Developers is coming out with an IPO.

Strengths

Good reputation and credibility for quality and timely delivery built over 16 years of operation in the Pune realty market.

Developed and constructed 25 projects (22 in Pune and three in Bangalore) covering approximately 4.01 million square feet of saleable area end September 2007. Of these, completed 16 residential and four commercial complexes, two IT parks and three mixed-use (residential and commercial) properties.

Also, owned, held development rights for or had signed memoranda of understanding to acquire or develop 21.58 million square feet of saleable area on 32.88 million square feet of land area. end September 2007. Had 28 projects in different stages of development including 24 in Pune and four in Bangalore. Of these, 19 got construction commencement certificates from local government agencies and are in various stages of construction covering an aggregate saleable area of 5.48 million square feet. This includes three IT parks, eight commercial complexes, seven residential complexes and one service apartment. Commencement certificate is pending for nine projects including two IT parks, and three commercial, three residential as well as one integrated township projects. The saleable area of these nine projects amounts to 12.32 million square feet.

Weaknesses

Of the land parcels aggregating 54.50 million square feet in Pune and Bangalore, just about 0.51 million square feet of land is owned. This translates into just around 1% of the total land reserves. Sole development rights vested on approximately 27.39 million square feet or approximately 50% of the total land reserves. Around 26.34 million square feet or about 48%, of total land reserves consists of land subject to memoranda of understanding, agreements to acquire or letters of acceptance and also involve subsidiaries and/or group companies.

Geographically, operation is strong in and around the Pune realty market with marginal presence in Bangalore and thus vulnerable to supply glut and downturn in the Pune realty market.

Follows project completed contract method of accounting. This method is susceptible to wide swings in reported profit, not only quarterly but even on a yearly basis as projects typically take more than a year to complete. Under this method revenue and expenses on long-term project are recognised in the period in which the project is completed. The loss, however, is recognised in the year of occurrence. When the project runs over a number of accounting periods, revenue earned in a given period is recognised on the basis of possession given to the buyer.

The year ending March 2007 (FY 2007) seems to be an exceptional year, with impressive surge in revenue, margin and profit: Rs 106.40 crore were realised from sale of IT space at Giga Space IT Park and Rs 61.77 crore from sale of land to the special purpose vehicle (SPV) formed for the JV with Yatra Capital. Ability to sustain such high growth in view of changing market dynamics in select micro markets is a constraint.

Only two projects are eligible for benefits under Section 80IB of Income-Tax Act, 1961, which provides tax benefits for projects approved before March 2007. But eligible for Section 80 IA benefits for IT parks developed. Nevertheless, tax incidence can go up.

Valuation

The offer price of the issue is Rs 125-Rs 145. On the basis of FY 2007 earning on diluted equity (Rs 9.1), P/E works out to 13.7-15.9 at the lower and upper price band. Pune-based D.S. Kulkarni Developers trades at FY 2009 P/E of 16.5.