KR Choksey - Parsvnanth Developers

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Parsvnath Developers phenomenal debut

Parsvnath Developers was trading at Rs 550.10 on BSE in early trade, an 83.3% premium over the IPO price of Rs 300.

The scrip hit a low of Rs 481.50 and a high of Rs 579. As many as 40,400 shares changed hands in the counter on BSE.

NSE has also admitted the scrip for derivatives trading, at a market lot of 700 shares.

The company’s paid-up equity capital is Rs 181.60 crore, the face value per share being Rs 10.

The company had priced its IPO at the higher end of the Rs 250 - Rs 300 price band. The IPO had strong investors response. It was subscribed over 60 times, FIIs making a beeline for the public offer.

Parsvnath Developers derives most of its revenue from residential and integrated township projects in Harayana and Uttar Pradesh (UP). The company plans to diversify its revenue in terms of locations as well as projects.

Parsvnath Developers has acquired land/ development rights to develop 20 integrated townships, 27 commercial complexes including shopping malls, multiplexes, office space and a complete metro station and 25 residential projects. The company intends to construct 14 hotels and four information technology parks on commercial land acquired by it.

The track record of Parsvnath Developers includes 17 projects comprising nine housing projects and eight commercial complexes. The company had floated the IPO early this month, to finance 11 of the 90 projects on hand.

As of 15 October 2006, Parsvanth Developers directly owned or held development rights for an estimated 108.64 million square feet of sale worthy area.

In last five fiscals, Parsvnath Developers’s revenue has grown at a CAGR of 121% and net profit at a CAGR of 139%. On the flip side, Parsvanath Developers had a negative operating cash flow in the last two financial years. In the quarter ended June 2006, too, the operating cash flow was negative.

The company has obtained in principle approvals from the government for nine SEZs. As per provisions of sec 80-IAB of the Income-Tax Act, 1961, the company is eligible for 100% deduction of profit derived from developing an SEZ notified on or after 1 April 2005 under the Special Economic Zones Act, 2005, for 10 consecutive assessment years.

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Parsvnath Developers Oversubcription Details

Overall - 61.84 times

QIB - 81.45 times

NII+HNI - 100.4 times

Retail - 10.93 times

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Parsvnath Developers IPO Analysis

Parsvnath Developers currently derives most of its revenue from residential and integrated township projects in Harayana and Uttar Pradesh (UP). However, the company, promoted by Pradeep Kumar Jain, has taken steps to diversify its revenue in terms of locations as well as projects.

Presently Parsvnath Developers has acquired land/ development rights to develop 20 integrated townships, 27 commercial complexes including shopping malls, multiplexes, office space and a complete metro station and 25 residential projects. The company intends to construct 14 hotels and four information technology parks on commercial land acquired by it or on which it has development rights. It has obtained in principle approvals from the government of India for the development of 9 SEZ projects.

The track record of Parsvnath Developers includes 17 projects comprising nine housing projects and eight commercial complexes. To finance 11 of the 90 projects in hand, the company is coming out with public issue

Strengths

* The growth of the Indian economy and its middle class has resulted in increased demand for housing units. Further, it has also resulted in increased consumerism, which in turn has created higher demand for shopping malls and multiplexes. Thus, the growth of the Indian economy has been acting as the growth driver for the real-estate sector in India. As per industry estimates, Rs 5500-crore of mall development is expected to take place in India over the next five years. The IT/ITES sector will make real estate investments of Rs 2500 crore by FY 2008, while the housing sector will require investment of $ 33 billion to $ 44 billion per year. As one of the leading players with presence across most verticals, Parsvnath Developers is likely to benefit from the growth of the real-estate sector in India.

* Though subjected to a penalty clause under the construction agreements entered into with its customers for any delay in the completion of the project, Parsvanth Developers has not paid even a single rupee as penalty.

* As of 15 October 2006, Parsvanth Developers directly owned or held development rights for an estimated 108.64 million square feet of saleable area.

* Parsvanth Developers is planning to develop SEZ in various parts of the country. As per the provisions of sec 80-IAB of the Income-Tax Act, 1961, the company is eligible for 100% deduction of profit derived from developing an SEZ notified on or after 1 April 2005 under the Special Economic Zones Act, 2005, for 10 consecutive assessment years.

Weaknesses

* Parsvanth Developers’s financial performance is vulnerable to fluctuations in the market value of land and constructed inventories as a result of changing economic and market conditions due to lag between the acquisition of land / development rights and construction and development of the project. Also, prices of steel and cement, which comprise a major portion of the construction cost, are expected to rise in the coming couple of years, which may adversely affect margin.

* Hardening of the interest rate and/or withdrawal of tax incentives available for housing loans (recommendations of various committees/panels) may dampen the growth of demand for housing units, which could adversely affect the growth of Parsvanth Developers.

* Parsvanth Developers had negative operating cash flow in the last two financial years. In the quarter ended June 2006, too, the operating cash flow was negative.

* There is a civil suit pending against Parsvanth Developers for the use of the trading name, Parsvnath Developers. If the judgement is adverse, the company will not be able to use or advertise the name, Parsvnath Developers, for its business. The plaintiff, who is also engaged in the construction business, has staked claimed to the name, Parshwanath. As brand name plays an important role in the real-estate industry, the business of a company, deprived of the use of the brand name by which it is known, could be adversely affected.

Valuation

In last five financial years, Parsvnath Developers’s revenue has grown at a CAGR of 121% and net profit at a CAGR of 139%. EPS on FY 2006 earning (assuming green-shoe option is exercised in full) works out to Rs 5.8. At the offer price band of Rs 250-Rs 300, the PE range will be 43.2 to 51.8, respectively. The company’s current profile compares well with Ansals and D S Kulkarni Developers, which command a PE of around 20-30. However, its future projects and plans are to get into the league of Unitech and Mahindra Gesco, which command a stratospheric PE of over 100. The financial performances and stock prices of real-estate stocks are highly volatile and currently their PEs are very high and, hence, highly vulnerable to fluctuations depending on the overall economic as well as stock market trends.

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Parsvnath Developers: Invest at cut-off

A sound track record of profitability, geographical and business diversification, and strong demand scenario in the real-estate sector lend optimism to the earnings growth of Parsvnath Developers. An established player in residential projects, Parsvnath recently entered the integrated township segment and is ramping up activity in the malls and commercial space segment. The company is entering new business segments, such as hotels and special economic zones (SEZs), across the country. Uncertainties involved in entering new business segments do add to the risk profile of the company.

Investors willing to take the risk that come with an early entry in this fast emerging space may invest in Parsvnath with a three-four year perspective. With improved industry practices, the interest evinced by private equity funds and the clearance given for real-estate mutual funds, the stage is set for big unlisted players in the sector to make an entry.

At the price band of Rs 250-300 the price earnings multiple (P/E) will be 16-20 times the likely earnings for FY-08 (subject to projects being completed on schedule) on a diluted basis. The valuation is expected to become more attractive by 2009-10 as a number of the current projects are likely to be completed and sold/occupied by then.

At the offer price, the P/E multiple based on FY-06 earnings is at a discount to peers such as Unitech and Mahindra Gesco Developers but at a premium to smaller players such as Ansal Properties and Infrastructure, and D. S. Kulkarni Developers. The premium appears justified given the diversified business model and size.

Object of the issue

Parsvnath develops residential buildings, commercial complexes, including malls and multiplexes, and integrated townships. The company also plans to develop hotels, SEZs and information technology parks. It is seeking to raise Rs 830-1000 crore through this initial public offer and planning to use the funds towards development and construction of some of the projects on hand.

Healthy project mix

Parsvnath has completed 17 projects and acquired land or development rights for 72 projects spanning segments such as residential buildings, townships and commercial properties. The company has already deployed some funds in most of these projects, revenues from which are likely to start flowing from FY-08. The company has also got in-principle approval for the development of nine SEZs.

Further, the company is involved in ventures with the Delhi Metro Rail Corporation (DMRC) for the development of properties around railway stations and depots. The lease from DMRC for varying periods, of 12-30 years, allows Parsvnath to let out the premises for retail shops, offices and exhibitions. Of the 11 projects, two are complete and fully let-out. The initial earnings from this segments point to a high-margin business, providing regular revenue flows. This also differentiates the company's business model from its peers.

Parsvnath's FY-06 revenues came equally from residential projects and integrated townships. Going forward, we expect increasing activity of the company in the commercial space and lease with DMRC to contribute to revenues.

Early mover to non-metro cities

Parsvnath appear to have a planned strategy of entering early the smaller cities. Eighty eight per cent of the revenue for the quarter-ended June 2006 was derived from non-metro cities. This is reflected in its completed projects being spread over Greater Noida, Ghaziabad, Noida and Gurgaon among others. The current projects are also located in cities such as Chandigarh, Mysore, Pune and Indore.

In their search for more office space and their bid to save costs, a number of IT companies have been shifting work to Tier III cities. With a well-diversified geographical presence and relatively low-cost land in non-metro cities, Parsvnath appears well placed to capitalise on this expansion in office-space demand and consequent residential space requirement. Further, very few players in the listed category, except for Unitech, have projects with a pan-India presence. This gives Parsvanth the advantage of early brand recognition.

Strong financials

Parsvnath's revenue and profits have grown at a scorching 131 per cent and 141 per cent annually over the past five years, largely due to increased activity since 2003. The projects on hand are likely to keep the momentum going although the growth over the next one year may be subdued due to work-in-progress. The company's return on equity (ROE) at 53 per cent is superior to similar-size peers. This may, however, see a dent in the near term as a result of increased equity through the offer and lack of commensurate near-term earnings accretion. The ROE is, however, likely to remain at par with the listed peers. Although it operates in a working capital-intensive industry, the company's ability to comfortably cover interest costs lends confidence on its leveraging capability.

Risks

While Parsvnath's presence in non-metro cities is an advantage, the ability of Tier III cities to offer increased scalability in terms of physical infrastructure, intellectual capital and quality real- estate will determine the company's success in these cities. On this account, Parsvnath will remain a risky option to companies with presence only in Tier I cities.

Parsvnath's venture into SEZs may require dealing with a lot of policy related issues. The SEZ policy is evolving still. There have nevertheless been concerns raised on the revenue loss to the Government through tax exemptions and other concessions.

Further, SEZs have long gestation periods, with possible negative cash flows in the first couple of years. The funding process for these projects and the lag in earnings are risks that an investor should watch out for. Revenues from SEZs, hotels and forthcoming townships in Bangalore and Hyderabad have not been considered in our estimation.

The mounting number of projects adds to the risk of company's ability to execute them. The ramp-up in the asset base over the last couple of years, however, indicates that the company has been equipping itself to face the mounting number of projects.

Offer details: The offer is open from November 6 to 10. Enam, Financial, JM Morgan Stanley and DSP Merrill Lynch are book-running lead managers. At the lower end of the price band the market capitalisation on listing will be Rs 4600 crore.

Parsvnath Developers Ltd. IPO

Background:

• Parsvnath Developers Ltd. (PDL) was incorporated in July 1990. Its core business is real estate development. PDL has operations in 41 cities of 14 states in India. As of October 15, 2006 it directly owned or held development rights for an estimated 108.64 million square feet of saleable area of land.
• Presently PDL have acquired land or development rights in connection with the development of 20 integrated townships, 27 commercial complexes including shopping malls, multiplexes, office space and a complete metro station and 25 residential projects. Also, the company intends to construct 14 hotels and 4 information technology parks. In addition, it has completed 17 projects including 9 housing projects and 8 commercial complexes. Further, PDL has obtained in principle approvals from GoI for the development of 9 SEZ projects.
• PDL’s scale of operation has expanded and total revenue has increased from Rs.27.3 crore in fiscal 2002 to Rs.6,53.77 crore in fiscal 2006, at a CAGR of 121.23%. During the same period, profit after tax has increased from Rs.3.3 crore to Rs.106.9 crore, at a CAGR of 138.67%.
• Post issue promoter’s shareholding would reduce from 100% to 81.7%, if Green shoe option is exercised, else it would be 80.33%

Object of the issue:

• To meet cost of development and construction of projects.
• General corporate purposes and expenses of issue.

Strength:

• For the first quarter ending June 30, 2006 and fiscal 2006, 88.09% and 99.65% of revenue came from projects undertaken in non-Metro cities within India. PDL intends to continue to be a real estate developer with a pan-India presence. This strategy is also instrumental in providing it the early mover advantage in these cities and towns.
• PDL has a strong order book of Rs.1,428.5 crore. Around 65% of the projects are scheduled to be completed by FY2008.
• PDL derives tax benefits as per the provisions of Section-80 IC. The company can claim exemption on payment of income tax on residential projects approved before March 31, 2007.
• The company has strong financial record with income increasing @ 113% in FY2006 (Rs.653.76 crore) over FY2005 (Rs.306.85 crore). Net profits have also been increasing consistently. The same surged 62.93% in FY2006 (Rs.107 crore) over FY2005 (Rs.65.67 crore).
• The tenth five-year plan estimated a shortage of 22.4 million dwelling units. Thus, in the coming 15-20 years, 80-90 million housing units will have to be constructed with a majority catering to the low-income group. The investment required for constructing these and related infrastructure in these period would, be of the order of USD 666 billion to USD 888 billion at roughly USD 33 billion to USD 44 billion per year. This gives immense growth potential to PDL.

Weakness:

• PDL has negative cash flows from operations for FY2006 and first quarter ending June 30, 2006 of Rs.102.27 crore and Rs.48.28 crore respectively.
• PDL is highly dependent on timely supply of the requisite raw materials. The construction cost is range of 70% of total income. Prices of key raw material like cement are firming up which can have an adverse effect on company’s profit margins.
• The company is exposed to risk of fluctuation in market prices of land and constructed inventory. Real estate boom in the country has seen a surge in prices. Any correction in it would hamper the revenues of the company.
• Real Estate industry is highly fragmented and competitive. PDL faces competition from the unorganized sector of local constructors, who cater to the local demands at reduced costs.

Valuation:

• Total income increased from Rs.149.76 crore in the three month period ended June 30, 2005 to Rs.249.02 crore in the three month period ended June 30, 2006, which represents an increase of 66.27%.
• Net profit increased from Rs.16.12 crore in Q1 FY2006, to Rs.36.55 crore in the Q1 FY2007, which represents an increase of 126.75%. Net margins for the same period increased from 10.76% to 14.67% respectively.
• Post issue EPS is Rs.8.05 if the Green Shoe option is not exercised, else it would be 7.91. Post issue P/E will be in the range of 31-38 for a price band of Rs.250/- to Rs.300/-. Industry average P/E is 40.6.
• Net worth for FY2006 is Rs.201.15 crore.

Parsvnath Developers: Sharekhan IPO Flash dated November 03, 2006

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