Home >Markets >Mark To Market >Lodha IPO banks on right pricing, foreign investors to get third time lucky

A stitch in time saves nine. In September 2009, Lodha Developers Ltd had planned an initial public offering (IPO) of shares worth Rs2790 crore. Back then, the company’s gross borrowings stood at slightly less than Rs3000 crore. A successful IPO would have made the company nearly debt free. But even though companies such as Godrej Properties Ltd and DB Realty Ltd were successful with their IPOs in late 2009/early 2010, Lodha wasn’t. A second IPO attempt in 2018 didn’t go through either.

Lodha Developers is now known as Macrotech Developers Ltd, which is hitting the primary markets with an IPO of Rs2500 crore. But about twelve years after the failed attempt in 2009, the company has accumulated a gross debt of Rs18,662 crore. This is without accounting for debt worth 402 million pounds (Rs4086 crore) sitting on the books of its two London projects. The net proceeds from the IPO will not even be enough to reduce its debt by 10%.

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"The IPO fundraising won't move the needle substantially as far as addressing concerns around the company's debt. It would need to do a follow-on fundraising, perhaps through a qualified institutional placement in the medium-term," said Vishal Bhargava, an expert on the real estate industry.

Analysts at Jefferies India Pvt. Ltd pointed out in a note to clients that Macrotech’s net debt to equity ratio of 3.8 times is the highest among its coverage of real estate stocks.

The IPO market has been weak lately, with some recent issues listing at a discount to their issue price. In the case of Macrotech, there is the added pressure of ensuring a successful issue in the third attempt. Because of these factors, analysts say that pricing isn’t steep. The shares are being priced much lower compared to the planned pricing in the 2018 IPO, even though the Nifty Realty index has risen during this time. The 2018 prospectus had mentioned a plan of raising upto Rs750 crore through a pre-IPO placement of upto 9.5 million shares, implying a per share price of Rs790. The current issue is priced at upto Rs486 per share.

Even so, there is hardly any excitement for the issue among domestic mutual funds and non-institutional market participants, who look at trading activity in the grey market before bidding. The grey market suggests a listing at a mere 4-5% premium. Besides, the first wave of the pandemic had severely hit the company’s sales, and the sharp rise in cases in the second wave has impacted investor sentiment. Foreign portfolio investor (FPI) interest, meanwhile, is strong, which could be attributed to the relatively large size of the company and the seemingly attractive pricing of the issue. The anchor book of the issue, where 30% of the issue is sold a day before the issue opens, was fully subscribed. Some marquee institutional investors such as Capital Group, Abu Dhabi Investment Authority and Brookfield Asset Management picked up shares. But note that domestic mutual funds, for whom a third of the anchor book is reserved, more or less stayed away, with bids from only HDFC Mutual Fund. FPIs bought 95% of the shares on offer in the anchor allotment.

Apart from the high debt, credit rating agency Moody’s has pointed out to governance risks arising from the company's concentrated ownership structure and its aggressive financial policies. In March last year, for instance, the company’s London business ceased to reflect in the books of accounts as a subsidiary, and was listed as a joint venture instead after a transaction with another group firm. As a result, the consolidated debt on the books is lower than it would have been if the venture remained a subsidiary, and other income has got a boost.

Investors buying in IPO will hope, most of all, that sales at the company pick up and that the company is able to raise funds through follow-on offerings and reduce debt. Post-IPO, minority shareholding will stand at merely 11.5%; the company has a long way to go before meeting minimum public shareholding norms, giving it ample scope for reducing debt as well.

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