Omaxe

Omaxe

Omaxe

Omaxe

Omaxe

Omaxe

Omaxe

Omaxe

Omaxe

Omaxe

Omaxe

Omaxe

Today's Pick - Omaxe

We recommend a buy in Omaxe from a short-term perspective. From the charts of Omaxe, it is visible that after forming a double-bottom pattern spanning almost four months, the stock broke out of this pattern in late November 2007. Subsequently, the stock achieved the pattern target and rallied to mark its life high of Rs 613. Later, the stock began to decline. In mid of January, along with the broader market sell off, the stock tumbled and marked its life low at Rs 195. From the stock’s life low it has moved up and has retraced more than 23 per cent (fibonacci retracement) of its prior downtrend. The daily momentum indicator has recovered from the oversold zone and is on the verge of entering the neutral region. Moreover, the stock is currently trading above the significant support level of Rs 300. We are bullish on the stock for the short-term and expect its current up move to continue further to our target level of Rs 400. Short-term investors can buy the stock with stop loss at Rs 275 levels.

Via Businessline

Omaxe

Omaxe

Omaxe, United Spirits

Omaxe, United Spirits

Omaxe Subscription Details

OVERALL - 68.32 times

Qualified Institutional Buyers (QIBs) - 95.3232 times

Non Institutional Investors - 81.1579 times

Retail - 13.8 times

Employee Reservation - 1.1357 times

Neyveli Lignite, HPCL, Omaxe, Crompton Greaves

Neyveli Lignite, HPCL, Omaxe, Crompton Greaves

Omaxe Ltd IPO Note

Omaxe Ltd IPO Note

Omaxe - seems cheap!

Surprisingly, the Omaxe issue is priced at a discount to its net asset value and a reasonable earnings multiple.

Realty issues are the centre of attraction at the bourses these days. Especially after realty bellwether DLF made its debut in the stock market raising over Rs 9,000 crore, a slew of realty companies are knocking at the doors of the capital market to grab their share of the booty.

So much so that developers are vehemently denying talks of correction in real estate prices and venturing out confidently to raise money. The latest in the fray is North India based developer Omaxe, which plans to raise Rs 470-605 crore through its public issue comprising of 1.78 crore shares with a greenshoe option of 17.5 million shares at a price band of Rs 265-310 per share.

A large part of the issue proceeds is earmarked for making payments for land acquisitions (Rs 325 crore) while Rs 200 crore will be used to retire debt. The rest will be devoted to development and construction of projects.

Fast forward
Omaxe, which forayed in the real estate development business in 2001, has scaled up its business at a whopping pace, establishing itself among the leading developers in the northern capital region (NCR) and neighbouring states of Haryana, Punjab and Uttar Pradesh.

The company mainly focused on integrated township development so far, which is a highly profitable segment in the real estate business. Apart from this, it has carved a niche for itself in high-end luxury apartments priced upward of Rs 75 lakh-1 crore, in the NCR region.

So far, the company has developed and delivered approximately 5.13 million sq ft of built-up area, which comprised of eight residential and two commercial projects. From hereon, the company is scaling up rapidly, and it has 52 new projects planned, of which 38 are under construction.

These projects are under construction upon nearly 67 million sq ft area, which is a part of its total land reserve of nearly 150 million sq ft, or 3,255 acres. Says Rohtas Goel, chairman and managing director, Omaxe, “All our land bank has been totally paid for, and the company holds a clear title,” talking about the company’s land reserve.

Since the company is developing projects on a large part of its current land reserves simultaneously, the reserves would deplete faster, as compared to its peers. This creates the need to replenish the land bank faster. On the flipside, a large number of ongoing projects provides a visible earnings stream over the forthcoming years.

“Even though we delivered just 5.13 million sq ft till FY06, we have completed construction (not sold) of 20 million sq ft in FY07, and and plan to carry out construction on about 30 million sq ft in FY08 and FY09 each,” claims a confident Arvind Parakh, chief executive officer – corporate strategy and finance, Omaxe.

Slick numbers
Considering the fact that Omaxe has been in the business for just over six years, it has grown at a phenomenal pace. The company’s revenue has grown at a compounded rate of around 72 per cent over FY04-FY07 annually.

As the business mix moved from construction contracting to real estate development, the profitability witnessed dramatic improvements. Its operating margins, which were as low as 7-7.5 per cent in FY04-FY05, bolstered to over 24 per cent in FY07, thus growing at a compounded rate of 163 per cent over the same period.

The trend is reflected in the net profit margins too. “With the issue funding, we are planning to retire debt of around Rs 200 crore, which would bring down the cost of finance, thus improving profitability further,” says Parakh.

So far, the company followed the build-and-sell model even for its commercial projects. Going forward, Omaxe plans to increase the proportion of commercial properties (around 7 per cent of total revenues) in its project mix, and adopt the build-and-lease model, which would ensure regular cash flows in the form of rental income.

There is, however, a risk of slower revenue growth owing to a lease model from the commercial property segment. Going further, this segment is likely to account for about 20-25 per cent contribution to the company’s topline.

In September 2006, real estate consultancy Trammel Crow Meghraj had carried out a valuation of all the 47 projects of Omaxe aggregating about 140 million sq ft (2,837 acres), and had arrived at a net asset value (NAV) of Rs 19,700 crore. Post-issue, the company will have market capitalisation in the range of Rs 4,214- Rs 5859 crore, which amounts to a meagre 22-30 per cent of the estimated NAV.

“This valuation has not been mentioned in the red herring prospectus following SEBI guidelines which bar real estate players from providing valuations,” said Rohtas Goel, chairman.

Valuation
Looking at the past growth trend of the company and the robust ongoing project pipeline, Omaxe appears to promise a steady flow of earnings in the coming years.

At its estimated FY08 earnings, the price-earnings multiple for the offer works out in the range of 7-10 times, which appears reasonable considering the underlying execution risks arising out of the massive scale-up plans.


Parakh counters this risk: “Before entering real estate development, we have been in the construction contracting business since 1987, and have a track record of delivering nearly 30 million sq ft of built-up area to various clients.”

In addition, the issue is priced at a significant discount to its listed peers. Summing up the project pipeline, the company’s NAV and the recent revival of real estate stock, the issue appears worth subscribing, as there are factors supporting potential upside.

Omaxe IPO Report

Omaxe IPO Report

Omaxe IPO Analysis

Omaxe IPO Analysis

Omaxe IPO Analysis

Omaxe (OL) is a real-estate development and construction company promoted and founded by Rohtas Goel. Commencing operation as a construction and contracting company, it has completed 120 construction projects. Now, its focus is fully on development of residential and commercial real-estate projects ranging from integrated townships, group housing and retail and other commercial properties, hotels, information technology and bio-tech parks to special economic zones.

After entering the real-estate business in 2001, OL has completed eight residential projects consisting of seven group-housing and one integrated township projects, and two commercial projects including retail and office space, covering an aggregate built-up/ developed area of approximately 5.13 million sq. ft.

End March 2007, OL had 52 residential and commercial projects, consisting of 21 group-housing projects, 16 integrated townships, 14 shopping malls and commercial complexes and one hotel, either under development or under various stages of approvals for development. Of these 52 projects, 38 are under development and 14 in various stages of approvals for development. The company expects to commence development of these 14 projects in the current year ending March 2008 (FY 2008). The 16 integrated townships are essentially ‘mixed-use’ areas consisting of residential and commercial projects and are expected to include 10 group-housing projects, 16 commercial developments, one biotech park and one information technology park. It is also developing projects in the hospitality sector. Its hotels at Amritsar, Greater Noida and Patiala are part of commercial malls under construction. OL has applied for change of land use for its hotel project in Faridabad.

Most of OL’s residential developable space is in non-NCR locations of northern India. Just 19% of the space from the current group-housing projects that can be developed is either under development or in various stages of approval in the national capital region (NCR). All the township projects are in Tier II and III cities/ towns in north India. However, the share of NCR region in the total commercial space that can be developed is 49%.

On November 21, 2006, OL entered into a joint venture with Azorim International Holdings, a part of a leading Israeli real-estate development group. The joint venture is for the construction and development of Omaxe Forest, an ultra-luxury group-housing development in Faridabad. Under the terms of the agreement, of the total area of approximately 36.22 acres, the company will transfer approximately 20.58 acres representing approximately 1.8 million sq. ft. of saleable area to the joint venture entity in which Omaxe and Azorim International will hold an equal stake of 50%.

End July 2007, OL expects an outstanding of Rs 88.97 crore against land purchased. Part of the proceeds will be used for payment of that outstanding along with funding of about Rs 236.03 crore for future land acquisitions. Apart from land acquisition and project development cost, the company is also expected to retire in FY 2008 Rs 200-crore high-cost debts raised from financial institutions.

Strengths

*Access to land reserve of approximately 3,255 acres end March 2007. Total land reserve includes about 571 acres belonging to joint ventures and collaborations in which OL has an economic interest of approximately 74% calculated on a weighted average basis. It owns 31% of the land reserve directly or through its subsidiaries and has sole development rights on 46% of the land bank. About 6% of the land has been allotted by the government and its agencies on a long-term lease of about 90/99 years.

*Of the total land reserves, around 3096 acres (including approximately 451 acres belonging to joint ventures and collaborations) relate to projects that are currently under development or in various stages of approval for development, representing approximately 150 million sq. ft. of saleable area. Of the 150-million sq ft saleable area, about 66.6 million sq ft will be for group housing and 77.3 million sq ft developed into township and 4.89 million sq ft reserved for commercial purpose.

*One of the first developers to conceptualise and develop theme malls in north India. OL conceptualised wedding mall: the one-stop shop for wedding arrangements. Given the strong supply glut in the retail space in the NCR region, this ability to differentiate its property will hold good in attracting tenants and retaining them.

*Adoption of percentage completion method means revenue recognition starts only if the actual cost already incurred on the date of financial statement is at least 30% of the total project cost as estimated by the management. In FY 2008, OL is likely to recognise revenue for more projects out of the current 38 projects as against 23 projects in the previous year.

Weaknesses

* Ventured into realty business only in 2001 and has completed just eight projects since then. Was only a construction contractor since 1989. Despite longer track record as a construction contractor, OL decided not to take up any more construction contracts since March 2006 as the margin in the realty business is higher. As a company with limited track record in this business, it is more prone to cyclical ups and downs of the business.

* The strong rise in real-estate prices and rising interest rates are likely to impact the affordability of housing. Real-estate prices are already showing signs of softening in certain locations

* Effective tax rate stood at 20.18% in FY 2007 largely on account of benefits availed under Section 80-IB of the Income-Tax Act, 1961. For projects approved on or before March 2007 and completed within four years, OL is eligible for this benefit, subject to conditions. New projects approved after this date will not be eligible for this benefit. Hence, the company’s tax incidence is set to increase.

* Operating cash flows in recent fiscals are negative. Operating cash flow for FY 2007 is negative Rs 713.13 crore. The comparative figure is Rs 131.06 crore in FY 2006. Strong negative operating cash flow is primarily on account of a sharp rise in projects in progress. This was Rs 839.75 crore end March 2007 compared with Rs 544.30 crore end March 2006. The inventory, too, has increased to Rs 192.08 crore end March 2007, from Rs 111.52 crore end March 2006.

*Ol does not own the ‘Omaxe’ brand. It is owned by its Chairman and Managing Director. Rohtas Goel. Under a license agreement dated October 1, 2005, the company had to pay a lumpsum amount of Rs 1.2 crore and a royalty fee at the rate of 2% of its annual real-estate turnover. Accordingly it paid Rs 13.2 crore on this account in FY 2006. But from FY 2007, Goel has exercising his rights of renunciation, and has agreed to receive fixed payment of Rs 10 lakh per annum as royalty. Further, the license agreement expires end March 2008.

Valuation

Total income posted a CAGR of 77.34% to Rs 1439.67 crore in FY 2007 to Rs 145.56 crore in FY 2003. CAGR in profit after tax and minority interest was 171.04% to Rs 257.26 crore in FY 2007, from Rs 4.77 crore in FY 2003.

Consolidated FY 2007 EPS on post-issue equity, assuming the green-shoe option is fully exercised, works out to Rs 14.7. At the offer price band of Rs 265 - Rs 310, the P/E range is 18 –21.1, respectively. Parsvnath Developers, the nearest comparable listed player, trades at P/E of 24.

Grey Market Premiums - Omnitech, Zylog, Central Bank, HDIL, Omaxe

Allied Digital 190 135 to 140

Everonn Systems 125 to 140 390 to 400

Alpa Labs. 62 to 68 No premium - trading at discount

Simplex Projects 170 to 185 155 to 160

Spice Communication 46 9.50 to 10

Surychakra Power 20 2 to 3

HDIL 500 31 to 32

Celestial Labs 60 11 to 12

Omaxe Ltd. 265 to 310 55 to 60

Omnitech Info 90 to 105 160 to 165

Zylog System Ltd. 330 to 350 200 to 210

Central Bank 85 to 102 15 to 20

Omaxe IPO: Invest at cut-off

An investment can be considered in the Initial Public Offer (IPO) of Omaxe, a real-estate company with its current revenues comparable to players such as Sobha Developers and Parsvnath Developers.

The company’s previous avatar as a contractor has not only enabled it to graduate into a real-estate developer but has provided it with a reasonable track record of execution.

The above process has also accelerated the bottomline growth and profit margins.

However, the key to success for this company with substantial business in North India, may lie in establishing its brand presence amidst bigger and better-known players such DLF, Unitech and Ansal Properties.

Competition apart, the company’s ability to bring professionalism in terms of disclosure and transparency could be a vital indicator of the company’s performance.

At the offer price of Rs 265-310, the price-earnings multiple is 18-20 times the company’s consolidated earnings for 2006-07 on the expanded equity base. The offer is at a discount to peers of a similar size.

Further, based on the company’s planned projects and current projects under development, the PE (at the offer price) stands at 10-12 times its likely consolidated earnings two years from now.

The company nevertheless carries a higher risk profile than some of its peers, given the relatively concentrated geographic presence and lesser experience in the commercial/retailing space.

Background

Omaxe is a construction and real-estate development company, with predominant business in the residential segment. The company started out as a contractor and executed 120 projects in such capacity, before moving on to becoming a developer in 2001. This background is comparable to Sobha Developers, which was also in the contracting business earlier.

In its new capacity, Omaxe has developed 5.13 million sq ft, comprising group housing projects, integrated townships and commercial projects. The company plans to raise Rs 470-550 crore through this offer. The proceeds are to be utilised towards land acquisition for current and future projects, for part-repayment of loans and to meet some of the construction cost of existing projects. Post-issue, the market cap (based on the offer price band) would be Rs 4,500-5,300 crore.

Comfort from land reserve

Omaxe has declared land reserves of 3,255 acres, representing 150 million sq ft of developable area, mainly in North India, but spread across nine states. This holding can be broadly classified into four divisions.

One, land owned by itself or through subsidiaries, which is 34 per cent of the total developable area. Two, 15 per cent of the area is under joint development agreement. We view this as the next best strategy to owning land directly, since the landowner evinces interest in the completion of the project.

Three, the company has sole development rights for 42 per cent of the developable area. The company has clearly stated that such land is owned by group companies and associates, providing comfort that the strategy is unlikely to generate any risk of disruption to the development process.

Finally, a minimal 9 per cent of area is under agreement to acquire, part of which is lease-hold land given by various state authorities for a period ranging from 90-99 years. This agreement is also likely to benefit the company, as it would get to fully enjoy revenue generated from such lease-hold land.

The above mix lends a positive view on the land-holding and appears to mitigate typical risks related to owning and developing land.

Late starter

Omaxe has seen an improvement in its operating profit margins (OPMs) from 18 per cent in 2005-06 to 24 per cent in 2006-07. This is as a result of substantially scaling down operations in contracting business (with no new projects under this segment, post-March 2006) and concentrating on realty development.

The OPMs are, nevertheless, lower than other realty majors in the National Capital Region. That land cost plays a major role in determining the OPMs of realty players is a given.

Looking back, players such as DLF and Unitech enjoy superior margins as a result of sitting on a land bank accumulated perhaps over a period of 10-20 years.

However, players such as Sobha Developers and Omaxe may have been accumulating land, over the past four-five years, as they have recently slipped into the developer’s role.

The cost of brand-building may also have taken its toll on the margins. Therefore, a comparison with recent entrants reveals that the margins appear reasonable.

Further, Omaxe has so far earned a majority of its revenue from group housing. The current project mix reveals that integrated townships have taken precedence over group housing; commercial projects are also gaining a place in the business mix.

The last two mentioned segments are more lucrative; the historical price realisation of the company in these segments also reveals this.

We expect the company’s operating and net margins to improve over the next two-three years, with this changing business mix. While the term ‘group housing’ is typically associated to mass low-cost housing, Omaxe has an interesting mix of apartments and condominiums. This mix may also provide a healthy average price realisation for these projects.

Fewer the better

The company has stated that it has received an in-principle approval for a multi-product SEZ which is, however, subject to the government relaxing the 5,000 hectare (12,355 acres)-ceiling. While we have not factored in any revenue from this segment, that the company has not gone in for too many plans in this segment is a positive.

With lack of clarity on the Government’s stand in this space, the fewer the plans (that a realty player has in this segment) the better, from an earnings visibility perspective.

Risks

Omaxe operates in a region that has already cultivated larger, established players. While the company will see serious competition in the NCR, the present developable area is skewed in favour of other states, which constitute close to 63 per cent of the total acreage.

This spread, across nine States and 30 cities may still provide enough room for the company to expand in its area of expertise.

The company has declared additional income for earlier years after it was subject to a search and seizure operation by the Income-Tax Department. Any proceedings that are underway may result in the company paying interest and penalties.

While this may dent net profits in the short-term, we are more concerned about the governance issues that these proceedings raise. Lack of transparency in transactions and poor governance have for long been impediments to higher valuations for realty stocks, and these have begun to be addressed only in recent times with better practices.

The company’s debt-equity ratio is likely to remain at about two even after the repayment of loans, post-issue. However, its ability to service its finance charges lends confidence. Its working-capital requirements may also be partly met with occasional cash flow from plotted developments, which from part of integrated township projects.

The offer is open from July 17-20. JM Financial is the book-running lead manager.