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Shriram Properties IPO: Should You Invest?

Editor, TRANSFIN.
Dec 9, 2021 8:25 AM 4 min read
Editorial

The ₹600cr ($79.66m) IPO of Bengaluru-based residential realty developer Shriram Properties opened yesterday.

Should you invest in the company before the offer closes on Friday? Read on for details!


Fast Facts

  1. The offer includes fresh equity worth ₹250cr ($33.22m) and an offer for sale (OFS) of equity by promoters and existing shareholders worth ₹350cr ($46.44m).
  2. Bidding is available within the price range of ₹113-118 ($1.5-1.56) with a lot size of 125 shares.
  3. The offer opened today and closes on December 10th. Allotments are expected to be finalised on December 15th and the listing date is likely to be December 20th.
  4. 75% of the issue is reserved for QIBs, 15% for NIIs, and 10% for retail investors.
  5. The current shareholding of promoters stands at 31.98%, which will climb down to 27.98% post-issue.
  6. The company raised c. ₹268cr ($35.62m) from anchor investors ahead of its IPO.
  7. As of yesterday, the issue was subscribed 0.89 times, with the retail portion subscribed 4.85x and the NII portion subscribed 0.04x.
  8. The IPO proceeds are intended to repay or prepay borrowings and for general corporate purposes.
  9. The latest grey market premium (GMP) was ₹16 ($0.2).
  10. Link to DRHP

 

About the Company

Shriram Properties, which is a part of the Shriram Group, was incorporated in 2000. It mainly focuses on mid-market and affordable housing segments and is among the leading residential real estate development companies in South India.

As of September-end this year, Shriram Properties has completed 29 projects - most of them in Bengaluru and Chennai - and has 35 ongoing or forthcoming projects.

 

Macro and Money Matters

In FY21, the company posted a net loss of ₹68.2cr ($9m) against a net loss of ₹86.4cr ($11.48m) in the previous fiscal. Meanwhile, total revenue dipped from ₹631.8cr ($83.97m) to ₹501.5cr ($66.65m) in the same period.



Brokerages are in two minds about the IPO. On one hand, it is listing at an EV/EBITDA multiple of 51.84 while its peers Sobha Ltd. and Oberoi Realty Ltd. are trading at an EV/EBITDA of 15.60 and 33.00 respectively. On the other hand, at the higher price band, Shriram Properties is demanding a P/B multiple of 1.8x, which is at significant discount to the peer average of 4.6x.

 

Sector Overview

The Indian real estate market has faced its share of challenges. It grew at a CAGR of c. 10% between 2008 and 2017 and is expected to be worth $1trn by 2030 and command 13% of the country’s GDP by 2025. Housing is also considered a relatively safe bet, sectorally speaking, in the long term - after all, consumers will always have an appetite to purchase property.

That said, the sector has faltered and stagnated of late. In 2018, defaults and mayhem among shadow lenders sparked a crippling credit crisis that severely hurt property developers. The parallel economic slowdown dragged down the real estate sector, along with the rest of the economy.

Inadvertently, COVID-19 adversely affected Indian real estate. 2020 sales plunged YoY - for housing projects, this number was 75%. But with the pandemic receding and vaccinations picking up pace, near-term trends are expected to be more positive. In 2021, the sector began to get back on its feet. Many measures were implemented to reignite demand, including conventional offers like cash discounts, lower interest rates, GST and stamp duty waivers. And not-so-conventional ones like property exchange schemes. The pandemic also brought about new trends with the rise of proptech and REITs.

The sector still confronts considerable obstacles, such as the availability of labour, raw material supply chains, liquidity, availability of loans, and unfinished or delayed projects. Many of these factors are linked to (1) macroeconomic indicators and (2) the future course of the coronavirus pandemic, which is more uncertain now due to the Omicron variant.

 

Reading the IPO Room: Opportunities and Risks

As a subsidiary of the Shriram Group, Shriram Properties enjoys strong brand recall and a commanding presence in Indian real estate. However, the last time the company posted a net profit was in FY19. A loss-making enterprise, it also has a hefty debt book (total outstanding borrowings of ₹695cr ($92.37m), c. 21% debt-to-asset ratio, albeit the company has a BBB+ rating with stable outlook and debt has steadily gone down from ₹846cr ($112.4m) as at FY2019) and its business is largely concentrated in South India - particularly in Bengaluru and Chennai. It also faces substantial competition from other players in a crowded sector. Real estate is also a capital- and labour-intensive business with a proclivity for delays and lengthy project durations.

At the same time, housing is an evergreen sector. Any demand dips are most likely to be temporary. India also faces an acute shortage of homes - the Ministry of Housing estimates a housing shortage of 18.78 million houses (page 97, DRHP) - and the country’s urban housing shortage has risen 54% to 29 million in 2018 from 18.78 million in 2012, based on the number of physically inadequately housed households.

Clearly, a lot of potential for well-financed and efficient players in the housing market. However, if you’re looking for listing gains from the Shriram Properties IPO, you may be kept waiting as this appears to be a classic restructuring play. Expect any substantial ROI only in the long run. The market’s appetite for IPOs seems to be near-saturation (Paytm infamously plummeted on debut and Star Health barely managed to scrape through SEBI’s 75% subscription requirement).

Besides - while this isn’t exactly like comparing apples to apples - there is some precedent. Another property developer to hit the bourses this year was Macrotech Developers. It listed at a 10% discount - but it is up 209.83% YTD.

FIN.
 

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