Indian real estate play ready to test investor demand

Parsvnath's $222 million offer will be the first Indian real estate IPO open to foreigners.
Indian real estate company Parsvnath Developers has started marketing an initial public offering worth up to Rs9.97 billion ($222 million) that will be the first real test of investor demand following a two-and-a-half month drought in Indian equity issues.

Following a rule change earlier this year, ParsvnathÆs offer also marks the first time that foreigners will be allowed to buy into an Indian property company during the IPO. This should help to underpin the interest from dedicated property investors û especially since there are few pure real estate plays available in the market.

A successful deal will be important since Parsvnath is expected to be followed by a string of other developers in the next few months. These include DLF Universal, which was initially hoping to raise as much as $3 billion but is expected to trim back the size now that the offer has been delayed several times. Other listing hopefuls include Sobha Developers, which is expected to bring an IPO of about $100 million, and Akruti Nirman, which is targeting around $75 million.

Parsvnath too had originally planned to come to market in May, but was forced to delay the listing due to the sharp correction in global stock markets. With the Indian market now fully recovered and the benchmark Bombay Sensex index having set a new record high last month, investors are expected to be receptive to new issuance again.

With a land bank of 102 million square feet (either directly owned or with secured development rights), Parsvnath is one of the top five Indian real estate developers in terms of size. And with operations in 41 cities and 14 states it is also one of the very few with a pan-Indian focus, according to bankers. Typically, Indian developers operate either on a local or regional basis.

The company, which is controlled by first-generation entrepreneur Pradeep Kumar Jain, is also quite diversified in terms of types of developments. So far it has completed 17 projects, including nine housing developments and eight commercial complexes and has already acquired land or development rights for 19 integrated townships, 26 commercial complexes, including shopping malls, multiplexes, office space and one metro station, as well as 24 residential projects.

In the most recent fiscal year to March 2006, just over three quarters of its operating income came from residential developments, followed by 12.7% from integrated townships and 8.4% from malls and other commercial properties.

To further broaden its income stream and to capitalise on the business opportunities provided by the tourism and information technology sectors, including the fast-growing business process outsourcing (BPO) segment, the company is planning to build 13 hotels and three IT parks. According to a draft listing document, it has also obtained in-principal approvals to develop nine Special Economic Zone (SEZ) projects.

But what really makes Parsvnath stand out, according to a source familiar with the company, is its ôability to spot the growing market for real estate in tier two and tier three cities well ahead of others and to assess the potential of individual locations in these cities.ö This has made it a first mover in many of the cities it is in, the source says.

ôThe ability to aggregate land is also a very important asset in India and that is something that this company has done,ö he adds.

The company, which is being brought to market by joint bookrunners DSP Merrill Lynch, Enam Financial Consultants and JM Morgan Stanley, is offering 33.2 million new shares, or 18.3% of its enlarged share capital. The price range of Rs250 to Rs300 gives a total deal size of Rs8.31 billion to Rs9.97 billion ($185 million to $222 million).

There is a greenshoe option to sell an additional 3.09 million shares (9.3% of the base size) which could boost the total proceeds to $243 million.

Of the pre-shoe deal size, at least 59.6% will be offered to qualified institutional buyers (QIPs), while up to 29.8% will go to retail investors and up to 9.9% to non-institutional buyers such as corporates and high-net-worth individuals.

Unitech, which has a market cap of about $8 billion û roughly eight times that of Parsvnath at the time of listing - is the only other pure developer of size currently trading in the Indian market. As a result, international investors will also be looking at comparables among the regional Chinese developers which are benefiting from many of the same market characteristics as their Indian peers. These characteristics include increasing urbanisation, which is boosting demand for housing in the cities and towns, a rapidly expanding middle class and increasing disposable incomes and wealth.

In addition, the Indian housing market has also been underpinned by easy availability of housing loans at cheap rates and tax incentives. Interest rates are on the rise, however, and the tax deductions for interests on loans for owner-occupied houses are likely to be phased out in the current fiscal year, which may dampen demand growth into the future.

Another potential concern is the fragmented and competitive nature of the Indian real estate market and, given the companyÆs pan-Indian approach, it may well run into specialised local developers in individual markets.

Investors are also likely to question the fact that there are more than 60 companies within the promoter group that are also active within the real estate sector, which suggests a potential conflict of interest with these companies and the possibility that the promoters may favour some of the other companies at the expense of Parsvnath. None of the other companies are listed.

One observer notes, however, that these other companies are primarily used for land acquisitions and arenÆt active as developers in their own right.

The strong demand for housing over the past five years is evident when looking at ParsvnathÆs revenues, which have multiplied from Rs272.95 million in 2002 to Rs6.54 billion ($145 million) in fiscal 2006. In the same period, net profit has expanded at a compound annual growth rate of 138% to Rs1.07 billion ($23.8 million) in the year to March 2006.

In the first quarter of fiscal 2007, its bottom line amounted to Rs365.5 million, or 34% of the total net profit received in the previous fiscal year.

In an interview with FinanceAsia a couple of months ago, Kumar Jain, who is also the chairman, said he expected the companyÆs brand will benefit from being a listed company.

ôWe will be more high profile which will inspire confidence in investors with respect to our larger projects. The funds we raise will make us more comfortable with respect to our debt-to-equity ratio and will also provide long-term funding for us to execute projects such as build, operate, transfer and the SEZs,ö he said.

As of June 30, 2006, the company had outstanding secured and unsecured borrowings of $69 million, compared with its total assets $262 million.

According to the draft listing document, the IPO proceeds will go towards the funding of 11 defined projects at a total cost of Rs10.09 billion ($225 million) divided over fiscal 2007-2010.

The bookbuilding will run from November 6 to 10, with the pricing expected to be finalised on the 11th. The shares are scheduled to start trading in the last week of November.
¬ Haymarket Media Limited. All rights reserved.
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