Nitesh Estates IPO Analysis

Nitesh Estates was incorporated in the year 2004 and is a ISO 9001:2008 certified company, with prime interest in the development of residential projects in Bengaluru. The company is also developing a hospitality project in Bengaluru and a residential and an office project in Kochi. The company plans to diversify into the development of shopping malls and is expanding its geographic reach beyond its primary market of Bengaluru to Chennai, Goa and Hyderabad. Its residential projects include multi-unit apartment buildings targeted at high-income and middle-income customers. It is currently developing its first hospitality project, the first ‘Ritz-Carlton' brand hotel in India, on Residency Road in the central business district of Bengaluru.

Since its incorporation the company has developed three residential projects in Bengaluru with a combined saleable area of 0.55 million square feet. The completed projects are the Nitesh Long Island (a built-to-suit premium corporate residential project) that was developed for ITC near Bellary Road, Nitesh Wimbledon Park (a premium residential project, located on Race Course Road) and Nitesh Mayfair (a premium residential project, located on Lavelle Road) Most of the projects of the company are developed through the joint-development model with the land owners as a result of which the upfront cost of land acquisition and project financing costs are lower unlike other real estate companies where the upfront land acquisition cost is high owing to acquisition of freehold or leasehold interest in the land. This model also enables the company to efficiently deploy its capital in development expenses as well as other expansions.

The company is currently developing 7 projects (5 projects in Bengaluru and 2 projects in Kochi) with a developable area of 5.31 million square feet and a total saleable area of 2.09 million square feet. The company has 4 more projects in the pipeline with a total saleable area of 1.55 million square feet. The projects currently under development are the Nitesh Hyde Park (a residential project in the middle-income segment with 537 residential units, located at Bannerghatta road, Bengaluru), Nitesh Forest Hills (a residential project in the middle-income segment with 284 residential units, located in Whitefield, Bengaluru), Nitesh Flushing Meadows (a residential project in the middle-income segment with 200 residential units, located in Whitefield, Bengaluru), Nitesh Columbus Square (a residential project in the middle-income segment with 390 residential units, located near Bellary Road, Bengaluru), Nitesh Wimbledon Gardens (a residential project in the middle-income segment with 672 residential units, located at Airport-Seaport road in Kochi), Nitesh Wimbledon Gardens (an office project, located at Airport-Seaport road in Kochi) and the ‘Ritz-Carlton' brand hotel with 281 keys. Further the company also has nearly 132.62 acres of land parcel in Bengaluru, Kochi and Hyderabad available for future development on which various residential, office and mixed use utilities would be developed.

The company's financial investors include among others AMIF (ADCB Macquarie Infrastructure Fund), which holds 14.4% of the pre-Issue equity share capital of the company. Citi Property Investors holds 74.0% of the equity share capital of Nitesh Residency, the SPV developing the ‘Ritz-Carlton' brand hotel in Bengaluru. HDFC AMC, through its portfolio management services division, recently subscribed to 10.1% of the equity share capital of the subsidiary, Nitesh Housing, whose current portfolio includes four of the company's ongoing projects, one of the forthcoming projects and two of the land parcels available for future development.

The company plans to tap the capital market in order to raise Rs 405 crore with an issue of equity shares of face value of Rs 10 at a price band of Rs 54 to Rs 56. About 30% of QIB Portion of the issue will be allocated to Anchor Investors on a discretionary basis before the issue opens. The proceeds form the issue would be utilized to acquire further joint development rights, fund the company's subsidiaries and the associate companies for repayment/prepayment of their loans, redemption of debentures, finance ongoing projects and repay certain loans of the company.

Strengths

The company's major strength is the development of the project through joint-development (JDA) mode. The company need not have to purchase the land outright for development. The company enters in JDA with the landowners where only a small upfront is paid besides the sharing of future revenue from such joint-developments or a portion of the developed area with the landowners. Such arrangement will allow the company to be asset light at the same time will provide financial leverage to deploy available capital efficiently there reducing project financing.

The company's major focus now is the residential segment of the real estate, especially the middle income housing segment, where the impact of real estate slowdown has been benign compared to the other segments like commercial and retail. Besides the residential segment has seen improvement during the recent past especially in the mid income group. This bodes well for the company as there is a shortage of supply to cater to the middle-income housing niche.

The company has a strong brand name in its primary market of Bengaluru and has already exhibited strong execution capabilities through the projects that it has completed. Also most of the under going projects are at city centers where there is a shortage and the price risk is limited.

Weaknesses

The JDA, through which the company undertakes its projects, may prove to be detrimental in case the counterparties violate such arrangements. There is strong incentive for them to violate the agreement in an inflationary scenario where the land price appreciates significantly. This may result in expensive disputes for the company. Also, the failure on the part of the company to sign JDA for its upcoming projects may delay its future growth.

The company has experienced negative cash flows during the past 3 financial years as well as the 9 month period ended December 2009. Also for the nine-month period ended December 2009 the company had negative operating margins. The company did not make any income from property development during the nine-month period ended December 2009 as well as the financial year ended March 2009 and March 2008. The income during this period is the income from contractual activity from Nitesh Garden Enclave project.

The consolidated debt in the company's book as on December 2009 is Rs 194 crore and the pre issue debt-equity ratio is 2.8, which is significantly higher in a scenario where the company follows an asset light model. In the absence of seamless cash flow the servicing of debt will be difficult.

Valuation

Un-consolidated sales for the nine-month period ended December 2009 stood at Rs 47.84 crore while the net profit during this period was Rs 7.21 crore. The profit is mainly due to Rs 18 crore profits on sale of stake in one of the subsidiaries to HDFC AMC. The consolidated income from operation during the nine-month period ended December 2009 stood at Rs 48.46 crore, while the total income including the other income of Rs 18.11 crore stood at Rs 66.57 crore. Higher tax expenses resulted in the company posting a consolidated net loss of Rs 1.33 crore during the nine-month period ended December 2009.

The annualized unconsolidated EPS during this period stands at Rs 0.7 on post-issue likely equity on the offer price band of Rs 54 at the lower level and Rs 56 at the upper level. The P/E works out to 82-83.4 times at the offer price band. The company is not directly comparable to any of the listed real estate players due to its unique model. The company's enterprise value per million sq ft on the saleable area under construction and forthcoming/ pipeline is Rs 266 crore to Rs 270 crore. On the other hand, the enterprise value per million sq ft of HDIL and DB Realty is Rs 340 crore and Rs 395 respectively, but they have significant amount of land bank with them.