Omaxe likely to prove rewarding for investors: First Global

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.

First Global report on Omaxe IPO

Realty companies have been the flavour of the quarter at Dalal Street. With DLF and more recently, HDIL collecting huge amounts of capital, other realty companies are also jumping onto the IPO bandwagon. This time around, it’s the turn of the North India based developer, Omaxe, which is eyeing the capital market for grabbing its own share of pie through the launch of its IPO (19.55 mn shares of face value of Rs 10, assuming that the green shoe option is exercised) at a price band of Rs 265-310 and garnering between Rs 5.2-6.1 billion.

As per calculations, the NPV works out to Rs 342 per share on a conservative basis. At the price band of Rs 265-310, the stock is at a discount of 22.5-9.4% to the NPV. In comparison, Unitech and DLF currently trade at a premium of 0.9% and 47.9% to NPV as per calculations. The DLF IPO price itself was at a premium of 21-33% to its estimated NPV. HDIL, which came out with an IPO early this month at a price band of Rs 430-500 per share is at a (discount)/premium of (12.1%) – 2.2% to its NPV.

Omaxe commenced operations in 1989 as a construction and contracting company and has completed over 120 projects under the leadership of Mr Rohtas Goel, Executive Chairman and Managing Director, with over 2 decades of experience in the construction and real estate business. In 2001, the company diversified into the real estate development business with a focus on residential and commercial properties.

Omaxe has access to extensive land reserves across 30 cities and 9 states in India totalling 3,255 acres, with a saleable area of 149.8 mn sq.ft. (representing 3,096 acres), with 27.9% in Haryana, 18.6% in Uttar Pradesh, 17.3% in Punjab, 15.9% in Rajasthan, and the balance 20.3% in the remaining 5 states covering group housing developments, integrated townships, commercial developments and hotels.

Taking into account the price band of Rs 265-310, Omaxe is available at a FY07 P/E band of 18-21, as against a FY07 P/E of 53.6 for DLF, 35.1 for Unitech, 42.4 for Sobha and 23.9 for Parsvnath.

With the shift in business mix from construction and contracting to real estate development, Omaxe’s profitability has witnessed a significant jump. The EBIDTA margin, which was as low as 6.8-7.2% in FY04 and FY05 respectively, improved to 24.3% in FY07. The shift in business mix is quite visible in the company’s net profit margin as well. The fact that the shift happened at a time when the real estate was booming, has also helped.

Using the net proceeds of its issue, the company is planning to pay off debts of Rs 2 billion, which will reduce its interest cost, thus further improving its profitability. We expect Omaxe to record a significant topline and bottomline growth in thecoming years.

Moreover, the company’s focus on Tier 2 and Tier 3 cities that hold substantial potential provides it with an early mover advantage. Moreover, its emphasis on innovation, established brand image, outsourcing of critical activities to leverage expertise, and a strong marketing network, provides a significant competitive advantage for Omaxe.

The overall picture appears bright for Omaxe and its IPO, which is quite reasonably priced, is likely to prove rewarding for investors.

We recommend ‘Subscribe’ on the Omaxe IPO.