DB Realty Limited (DB) is tapping the capital markets with a public issue which has opened on Friday the 29th of January and closes on Tuesday the 2nd of February. The issue is in the price band of Rs 468-486 and intends to raise Rs 1500 crs. The company has already completed raising Rs 260 crs from anchor investors at a price of Rs 468 which is the lower end of the price band.

Business

DB is a company promoted by Mr Vinod Goenka and Mr Shahid Balwa. DB is a real estate development company that is focused on residential, commercial, retail and other projects such as mass housing, cluster redevelopment in and around Mumbai. As of 31st December 2009, the company has 11 ongoing projects, aggregating approximately 19.51 million square feet (msf) of saleable area. DB has 8 forthcoming projects of 19.28 msf and six upcoming projects of 22.24 msf. In all the forthcoming and upcoming projects total 41.5 msf and with the ongoing projects combined have a total of 25 projects with roughly 61 msf.

If one were to look at the break up of this 61 msf, the bulk of 40.6 msf is in residential and 17.9 msf under TDR. Commercial is 2.1 and retail a mere 0.4 msf. If one were to look at this area geographically, 6.3 msf is in Mumbai South and Central, 24.1 msf in Mumbai suburbs and 21.7 msf in Mumbai Metropolitan region or distant suburbs outside the octroi area. The balance 8.9 msf is in Pune.

Very clearly DB is a Mumbai centric company but not necessarily the heart (cream) of Mumbai. The majority of land is in suburbs or distant suburbs where land prices and development prices are substantially lower than the city centre.

DB does not do its own construction and relies on third party contractors such as Man Infraconstruction, Unity Infraprojects and New construction combined besides using renowned architects like Hafeez Contractor, Shah and Dumasia and Mandviwala Qutub and Associates amongst others. DB till date has completed 14.4 msf of projects which are not part of the above mentioned 61 msf.

DB uses the name ‘ORCHID’ in most of their buildings. Some examples are Orchid Turf View, Orchid Hills, Orchid Apartment, Orchid Ozone and Orchid Centre. The name Orchid is a very generic name and is therefore not registered.

The above projects could be in DB or in the subsidiaries of DB. A large portion of the ongoing projects would be completed by calendar year 2012 and the balance by March 2013. The forthcoming projects are expected to start in financial year 2010-2011 and are expected to complete by 2013-2014, while the upcoming projects may take a little longer. Rough estimate would suggest that in the next four years that is 2011-2015 the company should deliver about 40 msf of the 61 msf that we are talking about.

Objects of the Issue

Of the issue purpose for construction, the company has already spent a sum of Rs 343.25 crs till November 2009 and the amount to be raised would be spent over the next four years.

Financials

The financials are on a consolidated basis for the company. Total income for the year ended March 2008 is Rs 6.32 crs, while for the year ended March 2009 is Rs 471.23 crs. The half year ended September 2009 saw the total income increasing to Rs 399.20 crs. The company made a net loss in the year ended March 2008 of Rs 24.76 crs, while the year ended March 2009 saw a profit of Rs 145.79 crs. The half year ended September 2009 saw the profit at Rs 58.28 crs.

Real estate development company’s results cannot be annualised for purposes of comparison and therefore it becomes difficult to compare the results based on half yearly basis. One way of looking at the financials of a development company is land value and amount paid for land. In the case of DB that also is not available. A large portion of the land has been acquired by TDR rights. Historical land was bought by the erstwhile group and all merged into the new entity DB Realty.

If one were to look at the net worth of the company the same is Rs 1411.54 crs prior to the IPO and post IPO the same would become Rs roughly Rs 2900 crs. If one were to assume that the price would be decided at the same level as the anchor investor than the book value per share would be roughly Rs 120. The price to book would then be 3.91.

Comparison

Quite a few real estate and development companies have come to the market in recent times. Investment bankers have tried to sell the valuations at which these companies have been brought using different yardsticks or different logic. The matrix for valuation has kept on changing each time. The net result in almost all has been the same – The poor investor has lost his money, his shirt. Some examples were Shobha Developers, DLF, Parsvnath Developers, Brigade Enterprises and Purvankara Projects.

I believe that the best thing to do is wait for clarity and the same would be available as at the road show the Managing Director of the company Mr Shahid Balwa has assured the analyst community that within 40 days of listing the company would hold a meeting for the community and answer all pending queries. If something like this happens very clearly new standards of transparency would come into a business which is always looked at with suspicion and disbelief.

Conclusion

The huge availability of high priced inventory could be a concern as plenty of apartments for the higher middle class would be available at one time. The sale of such inventory at the right time and right price could be a cause of concern. Secondly the management of DB believes that holding on to inventory is not their policy and they would sell at what the market would pay as they have a huge pipeline of inventory. Large inventory is the biggest risk for the huge delivery of roughly 40 msf in four years that the company is talking about.

Secondly valuations once again leave a lot of doubt in the minds of investors and it is advisable to follow the old adage of what Benjamin Franklin said ‘when in doubt, don’t’. I believe in the given circumstances this should be the best strategy.

SEBI disclaimer: – I do not intend to subscribe to the above issue.