Omaxe prices IPO at top of range

The Indian real estate developer takes advantage of the market rally to raise $137 million.
Indian real estate developer Omaxe Limited has raised Rs5.5 billion ($137 million) from its domestic initial public offering after solid demand prompted it to fix the price at the top of the range.

According to a source close to the deal, more than 460,000 orders were submitted during the four-day bookbuilding, which coincided with IndiaÆs benchmark Sensex index hitting a series of new highs. The demand came from global investors, hedge funds, banks, financial institutions and retail investors and the total deal ended up 68.3 times subscribed.

The institutional tranche, which accounted for 60% of the net issue (excluding the 296,520 shares set aside for company employees) was 95.3 times subscribed and the 10% non-institutional tranche was 81.2 times covered. The response to the 30% retail portion was less overwhelming, leaving it 13.9 times subscribed.

ôStocks have done well and the business is attractive too,ö the source says, commenting on the strong demand.

Demand for homes and commercial space is underpinned by the rapid growth in the Indian economy, which is expected to expand at a 9% pace in the fiscal year to March 2008, according to the latest forecast by the prime ministerÆs economic advisory council.

Like other markets in the region, the Indian stock market experienced a substantial correction earlier this year with the Sensex index shedding more than 2,200 points from mid-February to a closing low of 12,415 points on March 5. The index has been climbing steadily since mid-April, however, as companies have reported strong earnings and foreign investors have poured money back into the market to the extent that net inflows year-to-date already exceed last yearÆs total. The index has set a dozen closing highs this month, including FridayÆs finish at 15,565 points.

Omaxe priced its offering at Rs310 per share after marketing it within a range of Rs265 to Rs310. The final price values the company at 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 OmaxeÆs prospectus.

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.

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 and two commercial projects, 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. However, the industry is competitive and highly fragmented, thanks to low entry barriers.

OmaxeÆs total income grew from Rs1.46 billion ($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.

The company sold approximately 17.8 million new shares, or 10.3% of its enlarged share capital. If the 9.8% greenshoe is fully exercised, the deal size could increase to $150 million. DSP Merrill Lynch, Citi and UBS were the joint bookrunners.

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.
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