Growing Vertically and Horizontally - Nitesh Estates

Nitesh Estates (NEL), a real estate player with a focus in IT hub of India (Bengaluru), is tapping the primary market to raise Rs 405 crore with in a price band of Rs 54-56. The company will offer 7.24 crore shares on the lower price band and 7.08 crore shares on the higher price band. As regards the objects of the issue, Rs 21 crore for acquiring joint development right, Rs 304 crore for funding the development expenses of its ongoing and future projects, Rs 35.69 crore towards loan repayment and the rest for the issue expenses and other corporate purposes.

With the kind of poor response recent new issues have received in the primary market, retail investors may feel uncertain about whether to go for the issue or not. We are of the opinion that, investors can go for the issue as we expect some listing gain in the counter. There compelling factors include asset-light model strategy of the company, where it is focusing on joint development rather than investing huge sum of capital in acquiring a land bank. In addition, unlike other real estate companies with higher debt shadowing the balance sheet, NEL has miniscule debt levels. Currently the debt is around 190 crore and will be reduced to around Rs 113 crore, lowering the debt/equity ratio to much lower levels as compared to other players. Also, its portfolio consists of residential segment with a good demand. Further, the real estate company is valued on net present value method and its NPV stands at around Rs 68. Further, the allotment of 10.49 lakh shares to Brand Equity Treaties at Rs 143 in February 2010 provides comfort to the investors. Hence we expect the stock to witness some listing gains.

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NEL is into real estate development and has delivered 0.55 million sq ft till date. As stated earlier, the company is mainly into joint development of property where the owner of the land get share in the profit. At current level the company has got 3.64 million sq ft of saleable area, which will be completed by September 2013. Out of this, 2.66 million sq ft are into residential projects, 0.88 million sq ft into commercial and 0.10 million sq ft into a hospitality project along with a leading international hotel chain Ritz Carlton. In addition, the company has joint development right for 132.62 acre land. The company has not yet estimated any saleable area in the same, but residential projects form around 85 per cent of its forthcoming projects. Management has mentioned that the talks for these projects are in advance stages and can be commenced in the next fiscal.

On the financial front, NEL being a real estate player witnessed some roller-coaster ride in the past three fiscals. While the topline witnessed up-move, the bottomline got impacted in the poor economic scenario. Some respite was seen in FY09 but in 9MFY10 the topline stood at Rs 6.67 crore and it posted a loss of Rs 1.23 crore. This mainly happened on account of higher tax provisions and losses occurred in its subsidiary which is developing Ritz Carlton hotels. But the financials are expected to get better once the project moves towards completion. Further, its NPV is more important and it is higher than the offer price. Hence we recommend the high risk investors to go for the issue.