The merchant bankers, inspite of many IPOs getting tepid response for the issues, particularly from the retail investors (due to unreasonable premium) and IPOs quoting discount to the issue price after listing, have not learnt any lessons. Out of the twelve recently listed IPOs, eight are quoting below the offer price. How do retail investors get confidence to invest in new issues?
OFFER DETAILS:
The Bengaluru based real estate company is planning to raise around Rs 405cr through initial public offer of equity shares of Rs 10/- each.
ICICI Securities Limited, Enam Securities Private Limited and Kotak Mahindra Capital Company limited are the BRLM s. The issue opens on 22-04-10 and closes on 27-04-10.
BUSINESS:
The Company is in the business of real estate development and is primarily engaged in the development of residential projects in Bengaluru. Nitesh is also developing a residential and an office project in Kochi
The Company since its incorporation in 2004 has completed three residential projects totaling 0.55 million sq. ft. of Saleable Area. Nitesh undertakes most of the 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 the company to deploy the more funds towards development of the projects.
OBJECTS OF THE ISSUE:
a) To acquire joint development rights,
b) Funding Subsidiaries and the Associate Company, for repayment/prepayment of loans, redemption of debentures.
c) Repayment of loans
d) General corporate purposes.
The fund requirement and deployment of the Net Proceeds of the Issue is based on internal management appraisal and estimates.
FINANCIALS: (Rs in millions)
Sep 09 | 09 | 08 | 07 | |
Total income | 458.47 | 868.89 | 688.73 | 240.15 |
Net profit | 60.80 | 27.60 | 9.86 | 28.73 |
EPS | -- | 0.43 | 0.17 | 0.77 |
RONW | -- | 5.30 | 0.90 | 7.40 |
RISK FACTORS AND CHALLENGES
The joint development model pursed by the company will have negative impact on the bottom line, since the brand equity and reputation of the company is not strong enough to attract potential joint development partners on favorable terms.
The company’s ability to successfully compete in new segments across different geographies is yet to be demonstrated. The company has a limited operational history.
As per CRISIL estimate, the annual additions in units are expected to grow from 70 million units in 2008 to reach 81 million units in 2014. Estimated annual additions in units in rural areas are to grow from 174 million units in 2008 from 198 million units in 2014.
Nitesh’s business is heavily dependent on the performance of the real estate market in Bengaluru. Regional slow down or slow down in IT/ITES sectors will have adverse effect on the performamence on the company.
Nitesh had defaulted in loan repayment to the banks and financial institutions. The auditors were unable to comment on related party transactions. The company is heavily indebted and interest out go will put pressure on margins. Nitesh had negative cash flow in the last three years. A major portion of the proceeds of the issue - Rs 136cr is earmarked for repayment of loans.
The Company was irregular in the deposit of income tax, fringe benefits tax and service taxes. The company had inconsistent margin in the last three years.
Out of current and on going projects, only 4% of the land is registered in the name of the company.
VALUATION:
CRISIL IPO grade 2/5reflects the company’s entry into the highly competitive mid-income housing segment, and development of retail, commercial and hospitality projects, in which the company has a limited track record. These plans also present significant funding and execution risk. In the past, the management’s strategies have not been very successful, with NEL registering very low margins. The company also defaulted on its debt and interest payments in 2008-09, which was subsequently restructured/repaid.
Comparison with the peers
Name of the company | F V | EPS | PE | RONW | NAV |
Ansal properties | 5 | 4.6 | 18.7 | 4.8 | 98.5 |
Brigade | 10 | 7.2 | 25.7 | 8.6 | 88.6 |
Purvankara Projects | 5 | 6.2 | 27.0 | 30.6 | 61.4 |
Sobha Developers | 10 | 11.1 | 32.9 | 10.3 | 169.7 |
Nitesh Estates | 10 | 0.41 | -- | 5.3 | 8.15 |
RECOMMENDATIONS
For a company whose EPS in paise the price band of Rs 54-56 is on the high side.
AVOID SUBSCRIPTION.
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