Omaxe Ltd IPO Note
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Tuesday, July 17, 2007
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.
10% Growth in 2008-09
Finance Minister P Chidambaram on Tuesday said it is possible for the country to achieve a 10 per cent economic growth in the next financial year.
"Achieving a 10 per cent growth in 2007-08 is tough, but it is possible in 2008-09. That will be a fitting finale for the UPA government's five-year tenure," Chidambaram said while addressing the India Policy Forum here.
The country's GDP grew 9.4 per cent in 2006-07 and as per the Economic Advisory Council to the Prime Minister, it is poised to achieve a 9 per cent economic growth in the current fiscal.
The Reserve Bank of India (RBI), however, in its Annual Policy statement has projected GDP growth rate of 8.5 per cent for 2007-08.
Chidambaram said it would be possible to push up the economic growth by improving the performance of agriculture, which is stagnant for the last nine years.
Commenting on the comparisons which economists make between India and China, Chidambaram said the country's 9 per cent GDP growth rate compares well with 10-10.5 per cent growth rate of China.
He said the country's growth rate vis-a-vis China was not bad in view of the fact that it had to adhere to democratic norms and generate consensus, evolve laws and endure criticism before moving forward.
Reliance Communications - Thinking Big!
Reliance Communications has grand plans. The Anil Ambani-led telecommunications major aims to have the single largest wireless network in the world by year-end, covering over 900 million Indians.
The company will invest Rs 16,000 crore (Rs 160 billion) for network expansion in FY08, said RCom chairman Anil Ambani on Tuesday in Mumbai.
RCom is looking at inorganic growth route across the world. The company will cover 23,000 towns, or every single Indian habitation with a population of over 1,000 persons, he said. The company will cover almost 100 per cent of all rail routes, all national highways, and 84 per cent of all state highways, he added.
The company has more than 1 million retail customers in the United States, the largest for any Indian company across any sector, a media release from RCom said.
RCom has launched virtual international calling and voice content services in the US, Canada, UK, Australia and New Zealand. The company is one of the leading providers of international connectivity and data services to telecom operators, content providers and Internet communities.
FLAG Telecom has turned around and delivered profits at the net level for the first time since its inception. FLAG connectivity to expand from 40 to 60 countries across the world, representing over 80 per cent of global population and 90 per cent of global GDP.
Yipes acquisition will transform RCom's position in data communications services business in the US and globally.
Yipes operations in 14 major cities of the US, from New York to Los Angeles, from Boston to Houston, from Washington to Seattle. Yipes has nearly 1,000 enterprise customers in the US.
RCom to take the Yipes franchise global, leveraging FLAG network in nearly 40 countries, including India, the Middle East, Asia and Europe. RCom enterprise business serves more than 800 of the top 1,000 companies in India.
RCom wireline network expanded to cover almost 5,00,000 buildings, located in 360 business districts in the top 40 cities of India.
RCom has secured a higher share of the IT and telecom spends of enterprise customers, with market share of more than 50 per cent in new business. RCom has also won repeat orders from premium marquee customers from banking to finance, from aviation to hotels, from IT to BPO.
RCom is already deploying broadband and wireless WiMax network in top 10 cities to serve over 4 million small and medium enterprises, RCom has equipped Bangalore and Pune to provide premier WiMax business solution on an "anyone, anywhere, anytime" basis.
Next generation DTH network is in the final stages of preparation, and services will be launched before the end of the year. RCom plans to launch premium IPTV services in the top cities of India.
Reliance multi-play IPTV platform will leverage optical fiber Ethernet network to deliver the most advanced suite of services.
RCOM undertaking 4 key initiatives for unlocking value this year.
* Unlocking of value in TowerCo through placement of minority stake to financial investors at an advanced stage.
* Expect positive surprise in TowerCo valuation compared to analyst estimates.
* Yipes acquisition to substantially enhance FLAG Telecom valuation.
* Unlocking of value in FLAG Telecom through private placement of equity and/ or international listing of shares before year-end.
Further unlocking of value through development of Special Economic Zone at Dhirubhai Ambani Knowledge Centre focused on IT and IT-enabled services.
IT/ITES SEZ project already cleared by the GOI's Board of Approvals.
BPO biz
RCom will spin out global-size and profitable BPO business leveraging in-house skills and operational capabilities. RCom in-house BPO enjoys unique competencies and demonstrated operational excellence in telecom, BFSI, utilities and entertainment verticals.
RCom BPO has over 7,800 employees providing multi-lingual support in voice and back office services from multiple locations.
Unlocking of hidden value through 4 initiatives could represent a significant proportion of RCom's current market capitalisation.
Over the next few years, RCOM will have over 100 million customers, becoming one of the top 5 global telecom players. Convergence between telecom, media, entertainment and the Internet will transform how telecom companies are viewed by all stakeholders.
Digital connectivity brings infinite possibilities of creation, consumption and proliferation of media content in all its diverse forms. RCom will provide the interface and multiple delivery platforms for digital content to be served to hundreds of millions of customers.
No stocks please, we are Indians
Indians prefer to park their savings in low-yielding bank deposits and postal schemes rather than a booming stock market, which they see as risky, a survey said this week.
Based on more than a million rural and urban households, it found about 45 percent of India's paid workers, or 144 million people, put their savings in bank deposits, and state-run banks were preferred over private ones due to government guarantees.
Commissioned by IIMS Dataworks and Invest India Economic Foundation last December and completed in June, the survey estimated India's paid workforce at 321 million.
About 105 million salary earners -- out of a population of 1.1 billion -- own a life insurance policy. About 21 million are expected to buy policies in the next 12 months, while 36 million invest in postal saving schemes, the survey said.
Over 50 percent of respondents felt investing in equities was risky and only 5.6 million had an electronic share holding account.
India's stock market hit an all-time high on Tuesday and has gained 11 percent so far in 2007, following a 47 percent rise in 2006.
The survey tracks behavioural patterns and preferences for financial products among individuals. More than 100,000 people from the sample households were polled individually. They were aged 18 to 59 and came from in 852 towns and 931 villages.
About 94 million paid workers live in urban areas. Females account for nearly 13 percent of the workforce, the survey said.
India has 4.3 million active retail equity investors, of whom 3.5 million live in urban areas. Approximately 135 billion rupees in fresh investments by workers are expected in the next 12 months, the survey said.
Mutual funds have about 5.3 million investors and 106 billion rupees of new investments are expected, it said.
India's gross domestic savings rate was 32 percent in 2005/06 -- its highest since 1950-51 and one of the highest in the Asia-Pacific region, according to central bank data.
Trading Calls
Buy Indiabulls with a stop loss of Rs 595 for a target of Rs 770.
Buy Ultratech cement with a stop loss of Rs 880 for a target of Rs 1140.
Buy Kotak Mahindra Bank with a stop loss of Rs 665 for short term target of Rs 750.
Market Close: Is this a sign of correction ?
Global cues were mixed and nothing to settle on...But buying in Index heavyweights particularly Reliace helped the indices to gain. However profit booking crept in the mid session and pared off all the gains. Reliance Industries continued to support the indices right from the start of the session on the back of Gas discovery news. Technology counter continued to bear the brunt of Rupee appreciation. Profit booking was witnessed on the Auto, Banking and Metal stocks along with small and mid caps. Celestial Labs which got listed today closed at a premium. Higher Crude continued to impact the Aviation counter along with the Oil marketing companies. Some stock specific action was seen ahead of resutls. However we believe that normally stocks run up ahead of numbers and see profit taking once the results are out. So its better to avoid buying post good numbers. Better to wait for the cool off.
Sensex closed down by 32 points at 15278.95. Weighing on the Sensex were losses in RCVL (561.15,-2 percent), BHEL (1622,-2 percent), SBI (1579.5,-2 percent), TISCO (680.25,-2 percent) and Bharti Tele (862.05,-2 percent). Losses were restricted by gains in Guj Ambuja (137.2,+3 percent), RIL (1825.95,+3 percent), TCS (1155.95,+2 percent), Dr Reddys (674,+2 percent) and Hero Honda (695.5,+2 percent).
Reliance communication ended 2% lower. Company increased its subscriber base by 1.45 million in the month of June. This makes Reliance the fastest growing CDMA service provider in the country. The talk time registered by the company is 50 crore minutes per day. Company continues to grow aggressively by lowering the price barrier. The Rs.777 plan launched by the company helped in adding a million customers in just a week. Company intends to add 100 million customers in the next few years. In order to support the increasing subscriber base Company intends to set up a network of 23,000 towers through out the country. This will involve a capex of Rs.16,000 cr. A $ 400 million contract was recently awarded by the company to expand its wireless network to over 20,000 towns and 600,000 villages in the country. Tower business of the company would get listed once the private equity placement deals of the company is through. Mr. Anil Ambani also informed that the private placement of the equity deal is in advanced stages. We believe company is well placed in the telecom sector and could be considered as a long term investment option.
Bajaj Auto continued its weakness. Company reported a net profit of Rs 226 Cr against Rs 266 Cr in the corresponding quarter of the previous year, down by 15%. PAT margins saw a 134 bps yoy decline. Net Revenues were down 4% at Rs 2109 crore from Rs 2202 crore (YoY). Company intends to launch a new model in the month of September. The new bike will provide comforts of 125 cc bike However, The price and economy would be in line with the 100 cc bikes. We believe that could help in bringing the volumes, which would be the key to success. This will help in beating Hero Honda the arch rival of the company in the Two wheeler business. Bajaj was also looking for a big-ticket acquisition in the European motorcycle market. We believe that the margins pressure is unlikely to ease much on the back of cut throat competition. The dependence on the new platform is excessive. This launch is due in September. There is also the demerger which has to take effect. Its not a very clean demerger and it seems more like a family rearrangement of holdings. Do read our note for more details.
Nitin Fire was 3% higher. The company is into manufacturing of Fire protection equipments and Cylinders (Industrial and CNG). Fire protection is growing at 20-25% but it is CNG cylinder where we see exponetial growth. To cater this growth Nitin has put plant in Vishakhapatnam which was suppose to go on strem by July 2nd week. Probably this was the reason for action in stock. EKC is the biggest player here (3rd largest globally) and agressively expanding to become world no. 1. We remain positive on both the company but valuation is what makes it unattractive.
Technically Speaking : Sensex traded between an intra day high of 15,440 and low of 15,272. Declines outnumbered Declines in the ratio of 2:1. Support lies at 15,225 levels. The resistance is at 15,000 levels. Turnover was to the tune of Rs.6,023 cr for the day.
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