Mumbai: After large real-estate developers like Sobha and Parsvnath tapped the capital markets to raise funds for expansion, high real-estate prices and fancy discounting have now led to a new crop of construction firms tapping the capital markets for funds.
In the first four months of this year, around Rs2,200 crore is expected to be raised by reconstuction companies.
These firms specialize in taking over dilapidated dwellings and slums, replacing them with high-rise housing for the middle and upper middle class, while rehabilitating slum dwellers. So far one such company, Akruti Nirman, raised Rs350 crore in February, by diluting about 10% of its paid-up equity capital via an initial public offering (IPO).
Rakesh Wadhawan-owned Housing Development and Infrastructure Ltd will soon tap the capital markets with an IPO of more than Rs1,800 crore. The company claims to have built the largest number of flats under Maharashtra’s slum rehabilitation area (SRA) scheme in Mumbai. Orbit Corporation Ltd, which is coming out with its IPO, expects to raise Rs150 crore. Investment bankers say Akruti Nirman and Orbit get majority of their revenues from these projects.
Reconstruction companies have to give free housing to slum dwellers in exchange for their land. The firms make up the cost of the construction from sale of property developed on the balance land left after housing slum dwellers in apartments. Most of the redevelopment work undertaken by these companies is under the auspices of schemes sanctioned by state governments.
These projects are prone to controversies as they require 70% of the slum dwellers to consent to the redevelopment plan. But in cities such as Mumbai—home to Asia’s largest slum—many such shacks occupy prime real estate and have the potential to generate high profits if developed for commercial purposes.
Investors in these companies would do well to remember that reconstruction firms often have a higher business risk than conventional developers such as Sobha.
This risk is well visible in the case of Akruti Nirman, which issued stock at Rs730 per share and is now quoted on the Bombay Stock Exchange at Rs396, down 45.75% from its IPO price. Analysts estimate the company derives almost 80-85% of its revenues from SRA projects.
“These stocks trade at a 40-50% discount to their intrinsic value because of the potential risk,” adds an investment banking official working on one such public issue.
“The construction business is less riskier and more profitable than reconstruction business,” says Joygopal Sanyal, vice-president (strategic development initiatives) of real-estate consultancy firm Trammell Crow Meghraj.
Besides variation in time taken for approvals, the reconstruction business is prone to litigation, and in the recent past, the business is facing some issues about transparency, Sanyal adds.
To diversify their business risks, many reconstruction companies are planning to utilize the IPO proceeds to undertake some conventional construction activities too. For instance, Orbit has agreed to buy Gujarat Ambuja’s two acre Kalina property for Rs330 crore.