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IVR Prime futures settle at discount on debut

NSE F&O turnover surges

The Nifty August 2007 futures settled at 4,144.95, a discount of 33.65 point as compared to spot closing of 4,178.60.

The NSE F&O turnover surged to Rs 46,447.41 crore as compared to Rs 28,493.98 crore on Tuesday, 14 August 2007.

Prior to this, the NSE F&O turnover declined for the fourth straight day on 14 August 2007 to Rs 28,493.98 crore. It was Rs 31,627.64 crore on 13 August 2007, Rs 55,930.24 crore on 10 August 2007 and Rs 48,868.82 crore on 9 August 2007 respectively.

Reliance Industries August 2007 futures settled at a premium, at 1738.55, compared to the spot closing of Rs 1733.95. It was the top traded counter with turnover of Rs 1246.27 crore.

IVR Prime Urban Developers August 2007 futures settled at 416.90, a premium as compared to spot closing of Rs 414 on its debut. 7625 contracts were traded on the underlying, which has lot size of 400 shares.

GMR Infrastructures August 2007 futures settled at a premium, at 762.15, compared to the spot closing of Rs 760.30.

SBI August 2007 futures settled at a premium, at 1524.95, compared to the spot closing of Rs 1519.

Reliance Capital August 2007 futures settled at slight premium, at 1018, compared to the spot closing of Rs 1012

In the cash market, the S&P CNX Nifty lost 191.60 points or 4.38% at 4,178.60.

Listing - IVR Prime Urban Developers Limited

IVR Prime Urban Developers Limited will list on August 16 2007

Expected to list at a DISCOUNT

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IVR Prime Urban Developers

IVR Prime Urban Developers (IVR) is a subsidiary of IVRCL Infrastructure (IVRCL). The company began its operations in 2001 and has developed residential apartments and villas as part of the Gachibowli Village Project, aggregating 1.95 million square feet (sq ft). Parent company IVRCL has constructed 15.4 million sq ft of residential and commercial projects. IVRCL holds 80% stake in IVR Prime and its holding will come down to 62.35% after the IPO.

Strengths

• On 21 June 2007, the land reserves measured approximately 2,478.85 acres, representing 75.45 million sq ft of saleable area in Hyderabad, Visakhapatnam, Chennai, Bangalore, Pune and Nodia. Of these reserves, 54.57% of land is in and around Chennai. The company plans to develop this land bank over the next five years.

• As the focus is on construction of small houses, gestation period of about six-eight months is quite low.

• Currently developing about 0.87 million sq-ft retail mall with multiplex cinema. This would include apparel store, restaurant outlets and entrainment centres as well as an IT park consisting of around 0.7 million sq-ft office tower above the retail mall. Plans include development of a business hotel of approximately 0.5 million sq ft.

• Acquired land bank at an average cost of Rs 65 lakh- Rs 75 lakh per acre.

Weaknesses

• As the focus is on mass housing, the demand for the company’s houses are likely to be more vulnerable to increase in EMI on housing loans on account of rise in interest rates and real-state prices. Also, non-extension Section 80-IB (10) benefit beyond 31 March 2007 will indirectly result in hike in prices of mass housing, impacting its demand.

• End March 2007, advances from customers amounted to Rs 16.09 crore compared with Rs 18.48 crore (including advances from contract clients), down by 13%. Advances represent just 11% of revenue in year ending March 2007 (FY 2007). The company’s inventories have also declined 39% to just Rs 59.41 crore. Lower inventories and advances reduce the near-term visibility of revenues.

• Of the total land reserves (saleable area), 27.71% is under memoranda of understanding (MoU).

Valuation

On 23 January 2007, Cushman & Wakefield had valued projects using net present value of the projects in the range of Rs 4998.4 crore and Rs 5524.6 crore after deducting the developer’s margin, the net present value of the land reserves was between Rs 2889.8 crore and Rs 3194 crore. The per share value after deducting the developer’s margin works out to Rs 450-Rs 498 per share. However, land reserves (saleable area) have increased 32% after the valuation report.

Consolidated FY 2007 EPS on post-issue equity works out to Rs 3.3. At the offer price band of Rs 510 - 600, the P/E range is 155-182.4, respectively. Comparable listed player according to size Ansal Properties is currently trading at 24.7 times its consolidated recurring FY 2007 earning. Nearest location-wise comparable company Sobha Developers is trading at 41.6 times its FY 2007 earning.

Given that it will take five years to develop the entire land bank and low near-term visibility of revenue due to low inventory and advance received, P/E is likely to come down to decent levels only in the long run

IVR Prime Urban Developers: Avoid

Investors can avoid the initial public offer of IVR Prime Urban Developers for now, given the steep asking price and the company’s limited track record as a developer.
Though the company’ proposed projects may translate into higher earnings over a period, most of them are at a nascent stage, making for low earnings visibility.
The price band of the IPO is Rs 510-600. The company’s earnings per share for 2006-07 stood at Rs 4.1 (on the pre-IPO equity base). Also, certain transactions suggest a conflict of interest with the parent. However, the backing of the parent company — IVRCL Infrastructures & Projects — may help IVR Prime prove its execution capabilities over the next few years. Investors can wait for a significant ramp-up in earnings over the next few years for a better clarity on the investment decision.
We believe there are other real-estate companies with a proven track record and better earnings visibility, available at better valuations.
IVR Prime is an 80 per cent subsidiary of IVRCL Infrastructures, an integrated construction company. Post-IPO, the parent’s holding will reduce to about 62 per cent. IVR Prime has developed about two million sq ft, in a single project (predominantly residentials) at Gachibowli (games) village in Hyderabad. The company plans to raise Rs 720-850 crore through this offer.
The proceeds would be used to complete projects, repay loans and make payments for development rights — the last two to be made to the parent company. About Rs 362 crore, or over 40 per cent of the offer proceeds, would, therefore, go to the parent company.Land bank profile
Unlike some recent IPOs, the profile of IVR Prime’s land bank does not provide much comfort. The company has 2,478 acres, of which only 14 per cent is owned by the company or its subsidiaries; on a good 58 per cent the company has sole development rights. Of this, two-fifth of the acreage is rights from third-parties (other than parent company or subsidiaries).
Further, about 21 per cent of the land is still in the “agreement to acquire” stage. Only 5.5 per cent of the land is being developed jointly.
Although only a part of the land is directly owned by the company, it would be more confidence-inspiring if substantial payments had been made for the rest of the land. However, about 70 per cent of the payment on land is still outstanding, with a bulk of it pertaining to instalments to be paid for the Noida parcel.
The above land mix and the payment schedule show that most of the planned development is at a preliminary stage and face execution risks in terms of delays/stalling. The offer document states that the company expects the projects to be completed by 2012.Concentration
IVR Prime’s urban land reserves are skewed in favour of Chennai that accounts for about 70 per cent of the total developable area, consisting predominantly of residential projects.
While the Chennai market is witnessing a boom on the back of increased demand from IT companies, the prices, especially in the suburbs where the company holds land (Sriperumbudur and Minjur), have already witnessed a significant run-up. There is, therefore, a risk of a correction in property prices.
Further, the company has reported that, on average, it has realised about Rs 3,300 per sq ft from the sale of flats in 2006-07.
This has largely come from the sale of its apartments in Gachibowli, which have the locational advantage of being near the IT corridor in Cyberabad. Further, the company is a new entrant (with hardly any joint ventures) in locations such as Bangalore, Pune or Noida, and may have to promote its brand mainly through competitive pricing. IVR Prime now plans to develop about 75 million sq ft of area, consisting primarily of residential projects and a few commercial and retail projects. This is 37.5 times the two million sq ft project, executed so far over a four/five-year period.
Added to this, the company has not executed projects in any other locality save Hyderabad.
The lack of strong track record as a developer and entry into regions where the company does not have much brand recognition increases the risk profile.Strong parent but…
IVR Prime has a strong parent in IVRCL Infrastructures. A sound infrastructure player, the latter, is also likely to be the contractor for projects developed by IVR Prime Urban. This provides comfort to the project execution skills. However, while the resource pool of the parent is strong, it needs to be noted that IVRCL Infrastructures is itself sitting on a robust order-book that may absorb resources in terms of assets and skill-sets.
IVR Prime Urban has managed to contain its debt level as a result of support it received from its parent (unsecured loans of Rs 203 crore). Given that IVRCL Infrastructure is itself in a working capital-intensive industry, its subsidiary may not be able to receive continuous fund support for the massive scale of development that is being planned. This may necessitate borrowing and increase the debt levels.Revenue scenario
IVR Prime’s revenue for 2006-07 was Rs 148 crore, with net profits at Rs 21 crore. While operating profit margins surged to 25 per cent compared to a mere 10 per cent, as a result of higher realisations, we do not expect significant margin expansion, given that much of the residential projects are aimed at the middle-income group, where the scope for improving margins comes only through lower land costs. However, this segment may help increase volumes, and, thus, maintain margins.
The parent company, which was allotted plots in Noida, has given the development rights to IVR Prime. Two of the four lease plots are, however under revenue-sharing agreements with the parent company.
This apart, some of the above Noida lands are subject to yearly lease rentals (that are enhanced by 50 per cent each year) that will be paid to the parent. These indicate that not all the revenue arising in Noida will accrue to the company.
The IPO is open from July 23 to 26. Enam Financial and Kotak Mahindra Capital are the book-running lead managers. At the offer price band, the company’s market cap would be Rs 3,300-3,850 crore.