Indian developer seeks $137 million from IPO

The institutional tranche of Omaxe's IPO is 4.5 times subscribed after the first two days of bookbuilding.
Indian real estate developer Omaxe Limited has attracted healthy demand for its initial public offering during the first two days of bookbuilding, leaving the institutional tranche 4.5 times subscribed and the whole deal 3.1 times covered as of yesterday.

The company aims to raise up to Rs5.5 billion ($137 million) from the offering, which comprises roughly 17.8 million new shares, or 10.3% of its enlarged capital. If the 9.8% greenshoe is fully exercised, the deal size could increase to $150 million. The shares are offered at a price ranging from Rs265 to Rs310 apiece.

Omaxe started its business in 1989 as a construction and contracting company, and diversified into real estate development in 2001, with a focus on residential and commercial properties. Its projects are located in 30 cities over nine states in India and range from integrated townships and group housing to hotels and biotechnology parks in special economic zones.

ôThe company has got a long history of construction experience, which most developers donÆt have,ö says an observer close to the deal. ôWhile there has been a shortage of constructors in the real estate sector in India, this company has in-house expertise as it started as a construction company and it has been in the sector for the last 17 years.ö

In the listing prospectus the company argues that one of its key strengths is that it has an in-house ôproject research and land identificationö team, which ensures it is capable of identifying suitable tracts of land for its projects. It also sets up joint ventures with various partners, which provide the developer with expertise of use to drive the business.

The developer has access to extensive land reserves, which will cover its development projects in the next three to four years, according to a source.

By the end of its latest fiscal year in March 2007, the developer had access to land reserves of roughly 3,255 acres, according to the prospectus. Of the total, around 3,096 acres are currently under development or in various stages of approval for development, representing 150 million square feet of saleable area. These developments include 52 residential and commercial projects of which 21 are group housing projects, 16 are integrated townships and 14 are shopping malls and commercial complexes. It is also undertaking the development of one hotel.

As of March 31, 2007, the company had completed eight residential projects, consisting
of seven group housing and one integrated township project and two commercial projects, including retail and office space, covering approximately 5.13 million square feet of built-up/developed area.

Apart from development projects in more mature tier-1 cities such as New Delhi and Mumbai, the company also focuses on projects in tier-2 and tier-3 cities which involve lower costs and higher returns. This strategy has given the company an early mover advantage in those locations.

The industry is competitive and highly fragmented, however, given the low entry barriers. Lower fixed capital and technical expertise requirements in the housing and real estate sector, compared with the industrial and infrastructure construction sector, result in a large number of new entrants and existing players. Larger competitors such as DLF, Ansal Properties & Infrastructure and Unitech may take advantage of efficiencies created by size, according to the preliminary prospectus.

The price range values Omaxe at 16 to 18.7 times its fiscal 2007 earnings. The valuations of Indian property developers vary widely, however and among its closest comparables India-listed Ansal Housing and Ansal Properties trade at fiscal 2007 price-to-earnings multiples of 13.2 and 35.9 respectively, according to Omaxe prospectus. Other India-listed developers trade at much higher P/E ratio. For instance, Unitech trades at a fiscal 2007 P/E of 59.4 times, while Mahindra Gesco is quoted at 172.7 times.

OmaxeÆs total income grew from Rs1.46 billion (roughly $36 million) in fiscal 2003, to Rs14.4 billion in fiscal 2007, equal to a compound annual growth rate of 77.3%. Its net profit surged at a CAGR of 171% in the same period, from Rs47.67 million to Rs2.57 billion.

Of the net issue (which excludes the 296,520 shares set aside for company employees), 60% will go to the institutional tranche, while 30% will be earmarked for the retail investors and 10% will be offered to non-institutions, including high net-worth individuals. DSP Merrill Lynch, Citi and UBS are the joint bookrunners.

The order books will remain open until Friday (July 20) with the final price set to be determined over the weekend.

The proceeds will be used for the acquisition of land for new projects and the settlement of land-related outstanding balances, the repayment of loans, development and construction, as well as general working capital.

Investment bankers have been busy working on Indian company offerings recently, with a string of large Indian equity deals that have all been extremely well received by international investors. Genpact, an Indian business process outsourcing firm, started the roadshow for its IPO on the New York Stock Exchange on Tuesday, aiming to raise up to $635.3 million.
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