Friday, March 5, 2010

Nitesh Estates IPO: Ignore or Invest?

The about to be launched IPO of Bangalore based developer Nitesh Estates may not be coming at a very opportune moment for the company or investors. Though the market is on a roll after the budget, with listed realty companies also participating in the rally, the time doesn’t feel much favourable for yet another realty IPO. Mumbai’s No.2 developer DB Realty had listed at a discount just before the budget, after garnering barely 0.35% times retail subscription during the Issue.

But the question is whether the offer of Nitesh Estate has something special, whether it has a silver lining among the clouds. The youthful vigour of the company as well as its promoter Nitesh Shetty, and the high brand recall in the super luxury segment are definite pluses for the company. Nitesh Estates had used these advantages to become one of the fastest growing realty companies in Bangalore within a short span of less than eight years.

The downsides are also significant with the company registering a difficult phase in FY09 as far as operating profit (7.6%) and margins (3.2%) were concerned. Subsequently, in the first half of FY10, operating profit has even gone negative. But these developments have more to do with Nitesh’s diversification into low-margin middle-income housing, which is expected to do extremely well in the coming quarters.

The developer has also been smart enough to restructure intelligently before the IPO, shedding some unnecessary weight in subsidiary companies, thereby bettering half-yearly margins in FY10.

Sensing the ongoing dull mood among retail investors, Nitesh has also roped in two Directors with international background to make the right moves in institutional subscription. Nitesh Estates already has a private equity participation of 14.4% by an Och-Ziff group firm.

Rating agencies haven’t been very kind to Nitesh’s books, with CRISIL giving only a 2/5 rating citing below average fundamentals for the IPO. But there are signals that the company is right on to some of the best emerging trends in the industry like co-development with land owners that will drastically reduce investment requirements in the coming years. Nitesh has switched to this model in the majority of their new projects. This, together with their newfound focus on affordable housing should make the Nitesh IPO a value buy, provided the pricing is right.

Watch this space, as Seasonal Magazine would bring updates on the Issue.

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