Nitesh Estates IPO
- Nitesh Estates is coming with a 100% book Building, Initial Public Offer (IPO) in a price band of Rs 54 – Rs 56 per equity share to raise about Rs 405 crore in aggregate. It has an option of additionally raising 10% through Greenshoe Option.
- At least 50% of issue will be allocated on proportionate basis to Qualified Institutional Buyers (QIB). The company may allocate up to 30% of the QIB portion to anchor investors. Further 5% of the QIB Portion less Anchor Investor Portion shall be available for allocation to mutual fund. Upto 15% would be available for non-institutional bidders and remaining 35% for the retail investors.
- The issue will open for subscription on April 23, 2010 and will close on April 27, 2010.
- The shares offered through the IPO are proposed to be listed on the NSE and BSE both.
- Book running lead managers to the issue are ICICI Securities, Enam Securities, Kotak Mahindra Capital Company and JM Financial Consultants.
- Company Secretary and Compliance Officer for the issue is M. Ganapathi Joshy.
Profile of Nitesh Estates:
Nitesh Estates was originally incorporated on February 20, 2004. It is in the business of real estate development and is primarily engaged in the development of residential projects in Bengaluru. Its residential projects include multi-unit apartment buildings targeted at high-income and middle-income customers.
The company is in the process of diversifying into the development of shopping-malls and is expanding its geographic reach to Chennai and Goa. It is also developing an office project in Kochi. Further, it is currently developing its first hospitality project which is the first ‘Ritz-Carlton’ brand hotel in India, on Residency Road in the central business district of Bengaluru.
The company undertakes most of its projects through the joint-development model as compared to acquiring a freehold or leasehold interest in the land, which reduces the upfront cost of land acquisition and the total project financing costs. This allows it to deploy its capital towards development expenses and the expansion of its operations.
Nitesh Estates IPO Grading :
CRISIL has assigned an IPO Grade 2, indicating below average fundamentals, to the initial public issue of the company.
Proceed is being used to:-
- Acquire joint development rights of the Company;
- Fund the existing Subsidiaries and the Associate company, for repayment/prepayment of loans, redemption of debentures, finance Ongoing Projects and finance the acquisition of joint development rights;
- Repay certain loans of the Company; and
- Fund the expenditure for general corporate purposes
Industry Overview-
The real estate sector in India comprises the development of residential housing, commercial buildings, hotels, restaurants, cinemas, retail outlets and the purchase and sale of land and development rights. The real estate and construction sectors play an important role in the overall development of India’s core infrastructure. This sector in India has evolved over the years, accompanied by various regulatory reforms.
In the past, factors such as the absence of a centralized title registry providing title guarantee, lack of uniformity in local laws affecting real estate and their application, the unavailability of bank financing, high interest rates and transfer taxes and the lack of transparency in transaction values led to inefficiencies in the sector. However, in recent years, the real estate sector in India has exhibited a trend towards greater efficiency and transparency due to the various laws and regulations that have been implemented to govern the sector.
This trend of greater efficiency and transparency has led to the development of more reliable indicators of value and has triggered investment in the real estate sector by domestic and international financial institutions.
The growth in the Indian economy has stimulated the demand for land and developed real estate. Although weakened by the global financial crisis, demand for residential, commercial and retail real estate has been increasing throughout India in recent years, accompanied by increased demand for hotel accommodation and improved infrastructure.
Pros and strengths:
Development of Projects through the Joint-Development Model- The Company undertakes most of the projects through the joint-development model as compared to acquiring a freehold or leasehold interest in the land as this reduces the land acquisition and the total project financing costs.
This financial leverage is deployed in the capital towards development expenses, therefore reducing the need for project financing and enabling the company to undertake further expansion of the operations. This joint development model also mitigates the risk of land banks losing their value or locational advantages because of external factors.
An established brand name and reputation for quality- The company is having an established brand name and reputation for quality in the real estate market in Bengaluru since its inception in 2004. It has a separate in-house quality assurance team that undertakes regular inspection of its projects to ensure adherence to the quality standards. It also engages international architectural, structural and other consulting firms with established track record for some of its projects. It continues to develop its in-house competencies for every stage in the property development life cycle, commencing from property development inception to execution and culminating in property delivery that gives it an extra edge over its competitors.
Strong Execution Capabilities- The company is having an experienced team that has capabilities in various aspects of project execution, established relationships with corporate and financial institutions and knowledge of the localities in which it develops its projects, It has also developed a detailed process for project development, implementation and monitoring. The company is trying to strengthen its execution capabilities by engaging a reputed accounting firm and financial advisor.
Focus on Residential Projects – The Company has developed the in-house expertise to deliver quality residential projects in a timely manner. Since incorporation it has developed three residential projects in Bengaluru, with 0.55 million sq. ft. of Saleable Area and Developable Area. In terms of Saleable Area, residential projects constitute 73.1% of the current portfolio of the Ongoing Projects and Forthcoming Projects. Due to India’s favorable demographics, in the recent past, the residential segment demand within India has outpaced supply. Further, industry reports suggest that there is a shortage of housing in the middle-income segment. The company is now suitably placed to capitalize this opportunity with the portfolio of residential projects and their strategic focus on middle-income housing.
Nitesh Estates IPO Risks and concerns:
Limited operation history:- The company is incorporated in the year 2004 and has limited operating history as compared to the other real estate players in the markets in which it operates. As of March 20, 2010, the company has completed three residential properties, and currently has five residential projects, one hospitality project and one office project under development. Also, the company did not derive any income from property development for the nine months ended December 31, 2009 and the financial years 2009 and 2008. So it makes difficult to estimate the financial position and growth strategy of the company. Though, the company has experienced significant growth since its inception and a failure to sustain its growth may have an adverse effect on the business, financial condition and results of operations.
Dependence on the performance of real estate market in Southern India- Though the company has expanded its operations to Chennai, Kochi, Goa and Hyderabad, but its projects portfolio has been and continues to be concentrated in Bengaluru. Company’s business is heavily dependent on the performance of the real estate market in southern India, particularly Bengaluru. As of March 20, 2010, its seven Ongoing Projects and four Forthcoming Projects comprised a combined Saleable Area of 3.64 million sq. ft., out of which 2.65 million sq.ft. or 72.8% was located in Bengaluru. In the event of a regional slowdown in construction activity in Bengaluru or factors such as a slowdown in the IT/ITES sectors, or any developments that make projects in Bengaluru less economically beneficial then it will affect the results of operations and cash flows of the company.
Company having minuscule land of its own – The Company has 4.05 acres of land registered in their name which constitutes less than 2.0% of the total land comprising the ongoing projects, forthcoming projects and land parcels available for a future development. Since the company primarily undertakes development of the real estate through the joint-development model and majority of its ongoing and forthcoming projects being in that category it inherits the completion risk in executors contracts as the rising land prices may encourage the counterparties to violate such arrangements, resulting in the possibility of expensive disputes of uncertain outcome, which may adversely affect the business, financial condition and results of operations.
Doubt of success in markets outside Bengaluru- The Company has recently commenced or is in the process of commencing real estate development in various cities outside Bengaluru such as Kochi, Chennai, Goa and Hyderabad. The company is yet to complete any real estate project outside of Bengaluru and has limited experience in conducting business outside Bengaluru. Expanding into new markets, the company’s business will be exposed to various additional challenges, including seeking governmental approvals from agencies with which it has no previous or limited working relationship, identifying and collaborating with local business partners, contractors and suppliers with whom it may have no previous or limited working relationship, identifying and obtaining development rights over suitable properties, successfully gauging market conditions in local real estate markets. All these factors collectively or individually will restrict the growth of the company in new markets.
Nitesh Estates IPO Outlook:-
Nitesh is in the business of real estate development and is primarily engaged in the development of residential projects in Bengaluru. Its residential projects include multi-unit apartment buildings targeted at high-income and middle-income customers. The company follows a joint development model that helps reduce the land acquisition and the total project financing costs while it carries a strong brand name helping it to sustain the growth. The company possesses a strong execution capability and its focus on residential projects is likely to yield benefit due to the continuous demand.
On the concern side the company is having limited operating history in the new and evolving markets that may put it in a vulnerable position against its competitors. The other major drawback with the company’s operations is high dependence on Bengaluru Markets, which may put the company in vulnerable condition in case of a downturn, the company has its heavy dependence on Joint development model which might be helpful as far as the finances are concerned but posses serious risk from default of other party.
The scrips are being offered in a price band of Rs 54-56 which is even less than half what company has got in the pre IPO placement and the company aims to raise Rs 405 crore from the offer, and has a greenshoe option to raise another 10%. The net worth of the company as on December 31, 2009 stood at 69.41 crore and 55.4 crore as on March 31, 2009. Basic EPS of the company was 0.43 so the PE at lower price band is 125.58 and at the upper price band 130.23, slightly lower to the Industry highest of 152.9. The company is first from the realty sector to enter the market after some stabilization, the price of the issue has been made competitive keeping in view the present market condition and the faith of some of the recent IPOs, so the pricing is not an issue for the subscription but there are other factors that may pose serious concern like its localization to the market of Bengaluru and just 2% of own land. Our view will be neutral for the issue and can be opted only if the risk appetite is extremely strong.
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