New Delhi: Unnerved by a volatile equity market, Emaar MGF Land Ltd, which was planning India’s second largest real estate share offering, has lowered the price band of the shares a week after it said it was confident of keeping its price band when it kicked off a nationwide road show.
The offer opens on Friday and Emaar MGF has slashed the price band to Rs540-630 a share, an 11.4% decline from its earlier price of Rs610-690, at the lower end of the band. Emaar, which had planned to raise up to Rs7,080 crore from an initial public offering (IPO)—the second highest in the sector after the July effort of DLF Ltd, that raised more than Rs9,000 crore—will now rake in Rs6,457.5 crore at the top end of its new price range.
Some analysts are still not convinced Emaar MGF’s lower offer will fly. A leading domestic brokerage house, Asit C Mehta Investment Intermediates Ltd, has asked investors to “avoid” the issue.
“The company’s valuation is very high. And there is nothing to justify it,” Manoj Jain, construction analyst with Asit C Mehta, said. “Emaar MGF as a company has not completed a single project.”
Emaar’s price-earnings multiple, a measure of its future earnings potential, hovers at 256.44 times compared with 74.99 for larger rival DLF and 48.72 for Unitech Ltd, which is currently India’s second largest listed developer.
“Even at the reduced price band, I would still say ‘avo-id’...as the price-earnings multiple at the revised upper price band of Rs630 a share will still be 200 times,” Jain said.
Just a week back, Shravan Gupta, managing director of Emaar MGF, had said he was confident of keeping the date and price of the IPO unless the Sensex crashed to 13,000 or 14,000 points. On Thursday, the Sensex closed at 17,648.71, down 13% from the start of the year.
In the last one week, the Indian stock market, along with other indices worldwide, has been plunged into turmoil by the fallout of the subprime crisis in the US. Fears of more bad news and that financial institutions will cash out gains in the stock markets to make up for the losses, have led to excess volatility. The Sensex has closed 7.7% lower and 6% higher on some days in the last 10 trading sessions.
Still, some analysts are optimistic. “The IPO should do fine,” an analyst with a domestic brokerage firm, who did not want to be named, said. “I think the IPO may not be oversubscribed, but it will be subscribed mostly by institutional investors,” he said.
Emaar MGF is a joint venture between Dubai’s largest developer Emaar Properties PJSC and New Delhi-based developer MGF Developments Ltd. The firm is selling 102.57 million shares, or 10.4% of the promoters’ stake, to the public. “The company has decided to reduce its price band given the turbulent market conditions,” a banker to the issue, who isn’t authorized to speak to the media, said.
Emaar Properties had its target price cut by EFG-Hermes Holding SAE on flat earnings growth in 2008 and delayed mall and hotel projects earlier this week. Egypt’s largest investment bank also cautioned that while the Indian IPO “will go ahead, we do not expect pricing at the top of the range’’.
Emaar MGF is the second Indian firm to cut the price of an IPO. Mumbai-based Wockhardt Hospitals Ltd on Wednesday said it is reducing its offer price band by 16%. Last year, Bangalore-based realty firm Puravankara Projects Ltd was forced by the poor response to its share sale to revise the price band downwards and extend the closing date of its IPO.
Analysts at brokerages and investment bankers say this is a sign Indian firms will stop aggressive pricing of IPOs. The grey market prices of IPOs, which normally reflect the price expectations and even helps price discovery, have been going down. Reliance Power Ltd’s IPO, the largest ever in India at Rs11,700 crore, which saw a huge interest from investors, is now priced at a discount of Rs150 in the grey market from its offer price of Rs450. Another recent issuer, Future Capital Ltd, whose IPO was subscribed 132 times, is now priced at a discount of Rs360 in the grey market from its offer price of Rs765.
“The aggressive valuations of primary market issues is coming down. The current issues may get subscribed, but they will never match the euphoria witnessed earlier this month for IPOs,” said Amar Ambani, head of research, India Infoline Ltd.
Nesil Staney and Bloomberg contributed to this story.