Subscribe to Parsvnath Developers IPO: ASK RJ

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Risks & concerns

Execution - key risk

PDL has completed and delivered about 3.5 million sq ft till date. The company has ambitious plans to scale up its development rapidly and expects to complete and deliver 108.6 million sq ft over the next five years. Given its slow initial start, we foresee the management of these projects as a challenging task.

Real Estate Cycle

PDL is exposed to an asset cycle risk, as any fall in the prices may directly affect the revenues and the profitability. A spurt in the demand for these projects due to perception of a further rise in prices, may lead to adequate cash flows and vice versa.

Escalation in input prices may affect margins

The company's operating margins may be affected mainly due to surge in the key input prices of cement, steel, labour and due the escalation in land prices.

Township dependence

This segment forms about 71% of its estimated total 108.6 million sq ft of saleable area to be developed over the next 45 years. The company's revenues have been primarily concentrated from North India and accounts for about 50-55% of the developable area of 108.6 million sq ft.

40 group companies for land acquisition purpose

The quantum of land bank and the cost of acquiring the land bank is key to performance and profitability in the real estate development space. The company is dependent on about 40 group companies owned by promoters for its land bank. The management claims that it has a set formula to transfer the land to PDL, which generally works out at lower than current market price.

Financials and valuation

PDL has a unique business model with three different revenue streams - developments rights to land, construction business and the annuity/rentals. The company has reported a healthy 121% revenue CAGR, 149% EBITDA CAGR and 139% earnings CAGR over FY02-06 period. At the upper end of the offer price of Rs 300, PDL trades at 37x FY07E (Rs 8.1 annualized 1QFY07 earnings). However, we believe that market value of land (for the estimated saleable area of 109 million sqft) would form significant part of issue price and hence protecting investment from downward risk arising out of executions.

Given its head start we expect PDL to be a sizeable real estate developer over the next five years. At the upper end of the offer price of Rs 300, PDL trades at 37x FY07E (Rs 8.1 annualized 1QFY07 earnings). However, we believe that market value of land (for the estimated saleable area of 109 million sqft) would form significant part of issue price and hence protecting investment from downward risk arising out of executions. We are positive about PDL's diversified real estate portfolio; strong PAN India presence and management ability and thus recommend investors to subscribe to the issue.