Showing posts with label overloaded premium. Show all posts
Showing posts with label overloaded premium. Show all posts

Monday, February 15, 2010

IPO ANALYSIS -LODHA DEVELOPERS LIMITED:PREMIUM OVERLOADED - AVOID

The Mumbai Metropolitan Region focused real estate developer is planning to raise around Rs 3000 cr through IPO. The company proposes to issue equity share of Rs 5/ each in the price band of Rs 560 - 600/ share. The issue is likely hit the market in the next two/three weeks. Enam Securities, J P Morgan Stanley, Citi Group Global Markets and Global Trust Capital Finance private limited are the Book Running Lead Managers.

BUSINESS:

Mangal Prabhat Lodha founded the Lodha group in 1980. In the years following its inception the Lodha group concentrated on developing affordable housing in the suburbs of Mumbai and from 2002 onwards, the group diversified into other segments and regions in the Mumbai Metropolitan region. As of June 30, 2009 the Lodha group had developed approximately 9,771,299 square feet of saleable area. The company has received awards and recognition including being selected as one of India’s top ten builders by Construction World. The company is one of the recognized players in the premium segment.

Currently, the company has 38 ongoing projects, of which 35 projects are in the Mumbai Metropolitan Region and one project each in Hyderabad, Pune and Lonavala, giving the company the presence across different segments and price points. These projects account for an estimated saleable area of approximately 29,871,021 square feet. The company also has another 11 projects in pipe line with an estimated saleable area of approximately 36,228,877 square feet. The ongoing and planned projects would give the company near to medium term cash flow visibility. In all the company has land reserves of approximately 139,206,419 square feet, of which approximately 99.67% is in the Mumbai Metropolitan Region.

OBJECTS OF THE ISSUE

The company proposes to utilize the proceeds of the issue towards construction expenses of the ongoing and planned projects, funding certain subsidiaries for prepayment/repayment of their loans and General corporate purposes.

FINANCIALS

The company’s revenue and net profit has shown study increase during the last three years. As on 31-03-09, the total income of the company stood at Rs 950.60cr and net profit of Rs96.22cr. However, the company’s net profit margin has come down from about 25% in 2007 to as low as 10% in 2009. The company had negative cash flow during 08 and 09.

EPS (in Rs.) Face Value (Rs. 5)*


March 31, 2007   


2.24
March 31, 2008   
2.88     


March 31, 2009   
4.34  




Weighted Average 3.51

(*Adjusted for the split of equity shares of face value Rs. 100 to face value of Rs. 5, the issuance of bonus.)
As of March 31, 2009, the NAV is 12.21 per share of face value of Rs.5.


COMPARISON WITH INDUSTRY PEERS: (Fiscal 2009)










EPS
NAV
       P/E
RONW
(%) 





HDIL
24.00
 178.00
6.00
                    
           20.50
DLF
9.10
71.50
  
          25.00
   43.20





Unitech
3.00
30.40
        29.00
29.60





Lodha
4.34
12.21
---
19.93






VALUATION

The premium of Rs 560-600 is not justified on the Face Value of Rs 5/ share. At Rs, the P/E works out to in excess of 100. The industry peers, DLF, HDIL and UNITECH are quoting at an average P/E of less than 30.


RISK FACTORS/ MATTERS OF CONCERN:


1. The average cost of acquisition of shares by the promoters is less than Rs 2.00/share.


2. The Company is heavily dependent on the performance of, and the prevailing conditions affecting, the real estate market in the Mumbai Metropolitan Region.

3. Lodha Developers experienced rapid growth in the recent past and may not be able to sustain the growth or manage it effectively.

4. The Company has granted unsecured loans to certain entities, which are not the subsidiaries or Group Companies.


5. The Company has incurred substantial indebtedness to finance development of ongoing and planned projects. As of March 31, 2009, the outstanding loans were in excess of Rs. 1000.00crores.


6. The company operates in a highly competitive sector, whose fortunes are neither stable nor certain. Family owned and controlled business enterprise. The profitability has shown declining trend.

7. The group (Subsidiary - Shreeniwas Cotton Mills Limited) had defaulted to State Bank of India in respect of loan availed. The matter is pending in DRT court.

8. The rating agency CARE has awarded grade – 3 for the IPO, indicating average fundamentals.

9. The company had negative cash flow in the last three years.


THE CHALLENGES

The company’s operations are presently focused in the Mumbai Metropolitan Region. The supply of land in Mumbai and particularly in south and central Mumbai is limited and acquisition of new land in these and other parts of Mumbai poses substantial challenges and is highly competitive. In addition, due to the limited supply of land, the acquisition of land in Mumbai is costly. The company had acquired land in Mumbai in the past through participation in the auction of mill lands by the National Textile Corporation and in the suburbs of Mumbai through private land acquisitions. There is no assurance that the company will be able to continue to acquire land through such or other means. Due to the increased demand for land in connection with the development of residential, commercial and retail properties, the company may experience increased competition in the attempt to acquire land in the geographical areas in which the company operates and the areas in which they anticipate operating in the future. This increased competition may result in a shortage of suitable land that can be used for development and can increase the price of land.


RECOMMENDATIONS:


Investors may better avoid the IPO of Lodha Developers, considering the high premium sought, uncertain sector they operate and other observations made above. .