In this article
- IPO offer details
- How will the company use funds?
- Offer break-up
- IPO Strengths
- Key Risks
- Valuation and Outlook
Chennai-based Shriram Properties, incorporated in 2000, is one of the leading residential real estate developers in South India focused on the mid-market and affordable housing categories. They are among the top five residential real estate companies in South India. The company is a part of the Shriram Group, which is a prominent business group with four decades of operating history in India and a well-recognized brand in the retail financial services sector.
As of September 30, 2021, they have 29 completed projects, representing 16.76 million square feet of Saleable Area, out of which 24 are completed projects in the cities of Bengaluru and Chennai accounted for 90.56% of the saleable area. Further, 83.69% of the total saleable area for completed projects was in the mid-market category and affordable housing category. In addition, they have a total portfolio of 35 projects ongoing, aggregating to 46.72 million square feet of estimated saleable area.
IPO offers details
- IPO open from: Dec 8th – Dec 10th 2021
- Face value: ₹10
- Price Band: ₹113-118
- Market Lot: 125 shares
- Listing on: BSE and NSE
- Fresh Equity Issue: up to ₹250 cr
- Offer for sale: up to ₹350 cr
- Total issue: up to ₹600 cr
- Promoters: M. Murali, Shriram properties Holding Private Limited, Shriram Group Executives Welfare Trust
- Book running lead managers: Axis Capital Limited, ICICI Securities Limited, Nomura Financial Advisory And Securities (India) Pvt Ltd
How will the company use funds?
Here is what Shriram Properties is going to do with the ₹600 crores it is raising through the IPO:
Offer for Sale (OFS) ₹350 Crores: So basically, ₹350 crores from the total ₹600 crores will directly go into the bank account of existing shareholders, who will be selling the shares to the investors bidding for the IPO. The company will not benefit a penny from this 350 crores.
Fresh issue of ₹250 Crores: Now the remaining amount will come to the company’s bank account and will be used as follows::
- Repayment and/or pre-payment, in full or part, of certain borrowings availed by the company and its subsidiaries, Shriprop Structures, Global Entropolis and Bengal Shriram; and
- General corporate purposes, subject to applicable laws.
The offer is broken up into the following investor classes:
- Strong backing: Shriram group is funded by marquee global and domestic financial institutions across several of its businesses, which enforces trust in the company and its management.
- One of the leading residential real estate developer: They are one of the leading residential real estate development companies in South India, primarily focused on the mid-market and affordable housing categories. They are among the five largest residential real estate companies in South India, ranked number three player in the South Indian market, according to a JLL report.
- Strong execution track record: The company has a proven track record in project identification and execution.
- Scalable business: The company has a scalable and asset-light business model.
- Experienced and professional management: A professional and experienced management team, led by Chairman and MD, Mr. M. Murali. Company’s senior managers have extensive experience in the real estate industry and geographic regions they cover, which enables them to appropriately lead and provide guidance.
- Geographically concentrated: Company’s real estate development activities are geographically concentrated in key cities in South India. Bangalore accounts for fifty percent of its market. Any risks from economic, regulatory and other changes as well as natural disasters in South India may have an adverse effect on their business.
- Covid-19: The pandemic has impacted the business and its continuance and its impact going forward is unknown and impossible to predict.
- Delayed in project: Some ongoing projects and forthcoming projects may be delayed or may not be completed by their expected completion dates due to land acquisition, regulatory approvals and permit and weather condition etc. Such delays may adversely affect its reputation and business.
- Dependency on financing: Real-estate development is a capital-intensive business and the company is dependent on the availability of real-estate financing.
- Competitieve market: The company operates in the highly regulated eal estate sector that faces stiff competition from the organised and unorganised players. Though it has a high brand value due to the Shriram Group, it does not have any USP to differentiate itself from its peers.
In the last financial year ended March 31, 2021, Shriram Properties reported a loss of ₹45 crores before taxes. In fact, the company reported negative cash flows from operations in FY2019. For FY21, the company generated a return on equity (ROE) of -4.0% and a return on capital employed of 7.3%.
|(₹ in crores)||6M Ended 30-Sep-21||Year Ended 31-Mar-21||Year Ended 31-Mar-20||Year Ended 31-Mar-19|
|Profit After Tax||-60.0||-68.2||-86.4||48.8|
Valuation and Outlook
Shriram Properties is one of the top five residential real estate companies in south India and is well-positioned to benefit from RERA. The company’s asset-light business model with efficient utilization of capital will result in lower debt.
The company has been posting net losses after tax for the last two years and in H1FY22. On the upper end of the price band, the issue is priced at a 35.8x EV/EBITDA based on FY21 financials, which is significantly higher than its listed peers.
Also, the company’s geographical concentration in South India increases its risk profile.
Too technical? Well, long story short – the IPO is expensive and there are cheaper options available in the real-estate sector in the listed space. Although, the pandemic has established the importance of owning a home, and the affordable and mid-segment market is driving the overall industry recovery. Keeping that in mind, Shriram Properties could benefit from this in the medium-short term. But when you have other listed players available at a reasonable valuation in this segment, it makes sense to explore them.
Given how the IPO market has been rewarding investors with listing gains (more or less), you may want to jump on the IPO bandwagon to make a quick buck through listing gain. In that case, risk-takers may bid for the IPO and may (or may not) make a profit.
As a value investor, we don’t think it’s a great investment looking at the overall valuation and the company’s concentration in South India. It’s just another company trying to cash in on the IPO boom.