About the company:
Shriram Properties Limited IPO
Amidst the ongoing ripe IPO season, investors have been presented with yet another opportunity. Shriram Properties Limited is coming out with an IPO which has an issue size of Rs. 600 crores, a combination of fresh issue of Rs. 250 crores and an offer for sale worth Rs. 350 crores.
Issue Details
Ø Dates: December 8, 2021 to December 10, 2021
Ø Price Band: Rs. 113 to Rs. 118 per share
Ø Minimum Lot: 125 shares
Ø Minimum Application Amount: Rs. 14,750
Objects of the Issue
Proceeds from fresh issue are expected to be utilized towards:
Repayment/Pre-payment of certain borrowings availed by the company and its subsidiaries to the tune of Rs. 200 crores
General corporate purposes
Company Overview
Shriram Properties Limited, a part of the Shriram Group, is one of the leading residential real estate development companies in South India with presence across Bengaluru, Chennai and Hyderabad in the south and Kolkata in the east. The developer has focus on the mid-market and affordable housing categories. Bengaluru and Chennai, accounting for nearly 91% of the total saleable area of 16.76 million sq. ft. (msf), are the company’s key markets.
As of September 30, 2021, the company has a portfolio of 29 completed projects, 26 ongoing projects, 5 projects under development and 4 forthcoming projects. Additionally, the company has land reserves of about 197.47 acres in Kolkata with a development potential of 21.45 msf estimated saleable area.
The company is currently transitioning from a pure real estate development model to a mix of real estate development and real estate services-based business model. The company has shifted its focus towards growing the Development Management (DM) business, wherein they provide a combination of services to other developers and land owners such as timely and quality planning, development, construction, branding, marketing and sales, collections and client management in exchange for 10%-16% of their total project revenue. This asset light strategy could result in efficient utilization of capital resulting in lower debt and regular fee income, translating to higher ROCE.
Financial Snapshot
(in Rs. Crore) | FY19 | FY20 | FY21 | 3 - year CAGR |
Revenue | 650 | 572 | 432 | (18.5%) |
EBITDA | 80 | 90 | 121 | 23.0% |
EBITDA Margin (%) | 11.0% | 14.3% | 24.2% | - |
PAT | (5) | (9) | (7) | - |
PAT Margin (%) | (0.8%) | (1.6%) | (1.6%) | - |
EPS | 3.39 | (5.80) | (4.60) | - |
Net Asset Value | 66.01 | 60.94 | 56.43 | (7.5%) |
Net Worth | 980 | 905 | 838 | (7.5%) |
ROE | (0.5%) | (1.0%) | (0.8%) | - |
Debt | 846 | 737 | 727 | (7.3%) |
D/E | 0.86x | 0.81x | 0.87x | - |
While revenue declined by 18.5% CAGR, EBITDA improved by 23% CAGR which reflects the shift to the asset light strategy. However, the company has been unable to generate net profits over the last 3 years. This strategy has also led to a reduction in net asset value. Further, the D/E ratio could also see some improvement with the utilization of IPO proceeds for repayment of borrowings.
Strengths:
Leadership in core markets: Shriram Properties is among the top 6 players in terms of new launches of residential projects in their core market of Bengaluru between the calendar year 2012 to the 3rd quarter of 2021, and the 4th largest player in Chennai between the calendar year 2014 and the 3rd quarter of 2021.
Backed by marquee investors: The company has benefited from the strategic inputs and support of marquee global and domestic financial investors, including entities affiliated with TPG, Tata Opportunities Fund, Walton Street Capital and Starwood who collectively own about 58% of equity.
Scalable asset light business model: With 76% of completed projects being either JVs, JDAs or DM, the company operates on an asset light business model since inception. Increased focus towards its DM business, which is both asset light as well as scalable will result in efficient capital utilization, lower debt and regular fee income at a comparatively lower risk.
Well poised to benefit from regulatory and industry developments: The implementation of the Real Estate (Regulation & Development) Act, 2016, (RERA), resulted in increased compliance requirements, industry consolidation and increased market share for larger players. Shriram Properties is well positioned to benefit from this.
Risks:
Geographical Concentration: Business activities are concentrated in key cities in South India such as Bengaluru, Chennai, Vishakhapatnam and Coimbatore. 78% of ongoing projects, projects under development and forthcoming projects are located in South India.
Dependence on independent contractors: The company avails services of independent contractors to execute projects and any failure on their part to perform their obligations could adversely impact the intended time frame, costs, reputation, result of operations and cash flows.
Legal uncertainties with regard to title and development rights: Uncertainty about title and development rights may hamper the ability to develop and market projects developed on such lands. 6 out of 26 of ongoing projects are involved in 15 land dispute litigation proceedings.
Project Concentration: The top 5 projects contributed 76%, 84% and 87% to the total income, respectively in FY21, FY20 and FY19. About 34% of the total income was derived from the top project. Any adverse development impacting the completion or sales at these projects could hurt the financial condition of the firm.
Highly competitive industry: The real estate development industry in India, while fragmented, is highly competitive.
Peer Comparison
Among the few organized entities in this sector, company’s chief competitors in South India are large developers such as Prestige Estates Project Ltd, Brigade Enterprises, Sobha Developers, etc.
Company | P/S | P/B | D/E | PAT Margin |
Shriram Properties | 4.63 | 1.96 | 0.87 | (1.6%) |
Industry Average | 16.31 | 3.63 | 0.82 | 3.3% |
Sobha | 3.10 | 3.25 | 1.16 | 2.9% |
Prestige Estates | 2.56 | 2.61 | 0.84 | 5.8% |
Brigade Enterprises | 4.38 | 4.05 | 1.86 | (3.2%) |
Godrej Properties | 66.5 | 6.51 | 0.57 | (29.0%) |
Oberoi Realty | 11.5 | 3.15 | 0.22 | 35.9% |
Sunteck Realty | 9.82 | 2.26 | 0.24 | 7.5% |
Samco’s Stance:
Compared to its peers, the valuation of Shriram Properties Ltd. seems moderate. The company’s healthy track record, strong parentage and its medium term to long term prospects seem promising. However, the revenues have been on a downward trajectory and the developer has posted losses over the last few years. Additionally, higher contribution from a few top projects leaves the revenues vulnerable. Further, after the offer for sale, the shareholding of the promoters will fall below 30%. The Omicron scenario also adds to the short-term uncertainty. Thus, due to the above reasons and the availability of other better opportunities in the primary market, we would advise investors to “AVOID” this IPO for now from listing gains perspective. However, considering the promising long-term prospects aided by the industry tailwinds, investors can keep this company on their radar and can consider investing for long-term at a better price post listing.
(Source: RHP)
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