IPO Ananysis- Omaxe

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Walk in, but don’t settle down
Sandeep Singh
Posted online: Monday , July 16, 2007 at 1416 IST
Updated: Wednesday, June 29, 2005 at 1257 hours IST -->

About 15 years ago, Rohtas Goel was a contractor, giving shape to the lines of architects and builders in the NCR. Today, he owns Omaxe, one of the developers making the lines that are changing the face of housing in the NCR and its skyline, a prime example of which is its NRI City in Greater Noida.

Much of Omaxe’s increase in size, profitability and stature has happened in the last five years. Its income has grown almost 10-fold during this period, from Rs 145 crore in 2002-03 to Rs 1,431 crore in 2006-07, net profit from Rs 5 crore to Rs 257 crore. It’s built on its reputation, proof being the higher prices it is able to charge buyers, but in terms of quality of construction, management vision, and company practices, it is still spoken of a notch or two below DLF and Unitech. Even as the company is tipped to ride the wave of construction activity sweeping the country, these qualitative issues shade what otherwise looks like a promising growth story.
Big buildAgainst a constructed area of 5.1 million sq ft sold so far, Omaxe plans to deliver 150 million sq ft — 30 times more — in the next five years from its current land bank of 3,255 acres. That doesn’t necessarily translate into a corresponding growth in revenues, as the geographical and construction profile of then and now is quite different.
So far, it’s made most of its money by selling high-rise apartments in the NCR region, mostly in prime suburban locations. Going forward, its NCR share will reduce and that of tier-II and tier-III cities will increase, which is likely to reduce the average per sq ft realisation. The company gives only a state-wise break-up of its land bank, which currently reads as: Haryana (32.7 per cent), Punjab (30.3 per cent), Rajasthan (20.5 per cent) and UP (15.4 per cent).
Construction work is underway or plans are being firmed up for about 95 per cent of this land bank, covering 52 projects — 21 in group housing, 16 townships, 14 commercial buildings and one hotel. Work is at various stages in 38 projects, 14 will start this fiscal. These projects will be completed through 2011-12.
Omaxe has estimated the cost of these 52 projects at Rs 16,789 crore. In 2006-07, the company’s net margin was 18 per cent. If these projects are completed, on a 15 per cent margin, the company is looking at a net profit of Rs 2,518 crore — 10 times the 2006-07 number — over the next five years. At a 10 per cent net margin, it works out to Rs 1,678 crore. Only if the real estate market goes into a tizzy will these numbers be missed.
Imposing as it is, the current work-in-progress also poses the challenge: what next? Unlike DLF, for instance, Omaxe’s current round of projects will exhaust its land bank. For future growth, it will have to bid for new parcels, at market prices, which means lower margins than now.
Transparency issuesOmaxe’s growth prospects are bright, but it faces issues of professionalism and transparency. It’s a promoter-driven company. For instance, Rohtas Goel, who owns 87.6 per cent of the company, draws an annual salary of Rs 3.6 crore (excluding perks), plus up to 2 per cent of the net profit as commission. The other two co-promoters are drawing Rs 2.1 crore and Rs 1.2 crore, plus perks. By comparison, 28 of the 39 key managerial employees listed in the prospectus drew an annual salary of less than Rs 15 lakh. These included its head of HR (Rs 4 lakh) and top legal man (Rs 7 lakh)!
Similarly, in its issue prospectus doesn’t give its land bank split in the states or the per sq ft prices realised from its projects. Its auditor has remarked that the company’s internal audit system needs to be strengthened. Says chief financial officer Arvind Parakh: “We’ve had phenomenal growth in the last two years. It takes some time to fine-tune the system, and we are in the process of doing that.” In times of heady growth, such issues tend to get overlooked, but it’s these intangibles that build credibility and the business in the long run.
Such inadequacies are partly the reason why Omaxe is one of the ‘cheaper’ real estate IPOs. Omaxe plans to raise Rs 471-551 crore, to fund projects and to retire debt. At a price of Rs 265-310, the PE on 2006-07 earnings works out to 18-21. It’s cheaper than its peers, but with reason — it is less profitable and less efficient (See table: Peer comparison). At the issue price, Omaxe is valued at Rs 4,624-5,409 crore. Market players say the value of its land bank is twice that amount. If that’s true, smart listing gains should follow. On a longer time scale, though, the management needs to instil better corporate governance practices to win investor faith.