Lower valuations of Omaxe to be major positives: Emkay

Omaxe, a real estate player, is open for subscription with a public issue of 1.78 crore equity shares of Rs 10 each with an additional green shoe option of upto 17.50 lakh equity shares in the band of Rs 265 to Rs 310 per share on July 17. The issue will close for subscription on July 20, 2007.

Emkay PCR report on Omaxe IPO

Company Overview

Omaxe is a real estate development & construction company with projects ranging from integrated townships, group housing and retail & commercial buildings. As of March’07, the company has completed eight residential projects (consisting of seven group housing & one integrated township) and two commercial projects (consisting retail & office space) covering approximately 5.13 million sq.ft of developed area.

The company has operations in 30 cities & 9 states in India. As on 31st March07, the company is working on 52 residential & commercial projects (38 under development & 14 under various stages of approvals). As on March 31, 2007 the company has a debt of Rs 12636.5 million of which debt amounting to Rs 4000 million relates to deferred payment for land.

Positives

• Of the total land reserves of 3255 acres (150 million sq.ft of saleable area) around 3096 acres relate to projects that are currently under development. Of the 150 million sq.ft saleable area, about 66.6 million sq.ft is for group housing & 77.3 million sq.ft is to be developed into township & 4.89 million sq.ft is reserved for commercial purpose.
• The company has been historically carrying out Sales model for all its residential & commercial projects with high rates of presales. The company wants to introduce lease rental model but the proportion would be quite less.
• 63% of the total project land (3096 acres) of Omaxe is in the Tier 2& Tier 3 cities. With growing economy Tier 2 & Tier 3 cities are expected to see exponential growth.
• One of the first developers to conceptualise & develop theme malls eg. Wedding Malls (one stop shop for wedding arrangements). This kind of differentiation could prove good for the company.

Concerns

• Significant fall in real estate prices would impact the profitability of the company.
• Adverse changes in interest rates, tax benefits on housing finance, and other tax breaks provided to developers might dampen the demand for residential properties and have a negative impact on the profitability of developers.
• The company has ventured into real estate business lately in 2001 (starting as a construction & contractor company in 1989) thereby having a limited experience in the reality business.

Recommendation

At the offer price band of Rs 265-310, Omaxe’s PE works out to 17.8 – 20.8 x FY2007 EPS of Rs  14.9 (consolidated) on post issue equity of Rs 1727.5 million. On a relative comparison, Omaxe trades at a lower PE & M.Cap/Sales basis

NAV Valuation

We value Omaxe using NAV method. We discount the cash flows from the projects in hand on the present land bank at 15% for a period of 5 years. We arrive at a Net Asset Value of Rs 487 per share which is 57% above the upper band of the price range of Rs 265- Rs 310.

We feel, company’s strong brand image, focus on Tier2 & Tier 3 cities and lower valuations compared to peers to be major positives. We recommend a subscribe to the issue.