Mumbai: Indian real estate companies are looking to raise around Rs12,000 crore in equity in the coming months. Investors should closely look at the ability of these companies to repay debts and the credibility of their management before subscribing to these share sales, cautions Bhaskar Chakraborty, research analyst at India’s largest listed brokerage India Infoline Ltd. Edited excerpts:
Graphic: Ahmed Raza Khan / Mint
What is driving the rush behind initial public offers (IPOs) by realty companies?
India’s nominal GDP (gross domestic product) is expected to increase at 14% compounded annual growth rate, doubling in around seven years. Personal disposable income in the country is also likely to double over the next six to seven years. This is likely to increase demand for real estate manifold over the next decade. Developers who want to grab the opportunity (need to) access the capital markets for funds. This is a capital-intensive sector with all commercial or hospitality projects requiring significant upfront capital commitments before starting to earn cash flows. Developers who have plans for these segments are looking to the public markets to fund their expansion plans.
How do you see the real estate market fundamentals? Do they justify this kind of fund-raising?
Given the size of the opportunity and the fact that organized debt is not easily available to privately held developers, I can see why many of them want to raise public funds. The listing process improves transparency and corporate governance in the sector.
However, developers who have taken aggressive bets on large tracts of land far away from centres of economic activity will find it difficult to generate returns for the funds that they are seeking from the market. Hence, I feel you have to separate the chalk from the cheese while looking to invest in these developers.
Do you think investors will have appetite for these many real estate company share sales, given that there was a bout of qualified institutional placements (QIPs) last year?
Investor appetite for companies that have well-located land banks with clear visibility on monetization and return generation continues to remain strong. One other aspect that is crucial for investors is the reputation of the promoter group, the independence of the board of directors and good corporate governance. Companies that can package good corporate governance with monetizable land banks will find investors.
What options do realty companies have for fund-raising if these efforts fail?
If public markets do not work out for some of the companies, they will pursue the private equity route. Many investors are comfortable investing in individual projects than at the entity level. We could see more such transactions if valuation expectations of the seller (promoter) and buyer (private equity fund) converge. Those that fail to raise private equity will have to rely on debt.
Will getting debt be easy, considering that many real estate firms have high levels of indebtedness?
Since credit offtake has been slower, developers with reasonably located projects should be able to get construction financing from banks at reasonable interest rates.
What should investors watch out for when they consider applying for these new share sales?
Investors will be looking at each company’s ability to generate cash returns on capital invested over the medium term. Other key metrics are the leverage ratio (levels of indebtedness) and the interest coverage ratio (how easily a company can pay its debts) that quantifies solvency risks. Lastly, investors will be looking at a credible board of directors and high levels of corporate governance.