Shriram Properties
Shriram Properties is coming out with a 100% book building; initial public offering (IPO) of 5,31,25,975 shares of Rs 10 each in a price band Rs 113-118 per equity share.
Not less than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
The issue will open for subscription on December 8, 2021 and will close on December 10, 2021.
The shares will be listed on BSE as well as NSE.
The face value of the share is Rs 10 and is priced 11.30 times of its face value on the lower side and 11.80 times on the higher side.
Book running lead manager to the issue are Axis Capital, ICICI Securities and Nomura Financial Advisory and Securities (India).
Compliance Officer for the issue is Duraiswamy Srinivasan.
Profile of the company
The company is one of the leading residential real estate development companies in South India, primarily focused on the mid-market and affordable housing categories. It is among the top five residential real estate companies in South India in terms of number of units launched between the calendar years 2012 and the third quarter of 2021 across Tier 1 cities of South India including Bengaluru, Chennai and Hyderabad. It also present in the mid-market premium and luxury housing categories as well as commercial and office space categories in its core markets.
The company is part of the Shriram Group, which is a prominent business group with four decades of operating history in India and a well-recognized brand in the retail financial services sector and several other industries. Its relationship with the Shriram Group provides it with strong brand recall and that it benefit, and will continue to benefit, from the trust and confidence that homebuyers, lenders, financial investors, landowners, development partners, contractors and other stakeholders place in the Shriram brand and its operational history. The company commenced operations in Bengaluru in the year 2000 and has since expanded its presence to other cities in South India, i.e., Chennai, Coimbatore and Visakhapatnam. In addition, it also has presence in Kolkata in East India, where it is developing a large mixed-use project. Bengaluru and Chennai are two key markets for it.
Proceed is being used for:
Repayment and/ or pre-payment, in full or part, of certain borrowings availed by the company and its Subsidiaries, Shriprop Structures, Global Entropolis and Bengal Shriram.
General corporate purposes, subject to applicable laws.
Industry overview
The residential housing market performed strongly during the quarter ended September 30, 2021, i.e., the third quarter of 2021, with residential unit sales and new launches of residential projects experiencing the strongest results since the outbreak of the COVID-19 pandemic, despite the impact of the second wave during the second quarter of 2021. In particular, greater control over the impact of the pandemic and positive progress of the vaccination program have enabled an early relaxation of the second wave related lockdown initiatives, while learnings gained from similar relaxations during 2020 have assisted property developers to better manage construction and delivery schedules, as well as continue sales activity. India’s growth fuelled by increase in service industries, increasing urbanization, improved per capita earnings, decreasing household size and various macro factors have led to growth of residential unit needs. Organized RE growth in large cities and towns has led to quality supply in the sector addressing the needs of all economic strata. Annually the supply across the 7 major cities has been over 130,000 units.
The residential sector is slowly recovering - 2018 witnessed a rise in residential market activity with over 160,000 new launches as well as 136,000 sales (approximately 70% increase from 2017). However, there was again a drop in supply in year 2019 due to the liquidity issues as lending had slowed down. While the sector was slowly witnessing improvement, year 2020 has again witnessed a decline due to COVID pandemic which resulted in total shutdown in construction activity during the nation-wide lockdown. While the 6-month moratorium on term loans has provided a temporary breather to homebuyers and developers, stressed NBFCs and risk averseness of banks has exacerbated the liquidity crunch for the sector. In terms of residential capital value trends across top 7 cities of India, Mumbai remained at the top of the chart with average capital value upward of Rs 10,000 per sq. ft. The chart below presents capital value trends across top 7 cities of India in the residential market.
Pros and strengths
Backed by marquee investors: The company is part of Shriram Group, which is a prominent business group with four decades of operating history in India and a well-recognized brand in the retail financial services sector and several other industries. The group is funded by marquee global and domestic financial investors across several of its businesses. The Shriram Group’s management philosophy is characterized by empowerment of stakeholders and decentralized decision-making by professional management teams. The company benefits from the trust and confidence that homebuyers, lenders, financial investors, land-owners, development partners, contractors and other stakeholders place in the Shriram Group. Its relationship with the Shriram Group provides it with brand recall and the ability to leverage its reputation among stakeholders in performing its business operations.
Leading residential real estate Development Company in South India: The company is a leading residential real estate development companies in South India, primarily focused on the mid-market and affordable housing categories. The company is among the top five residential real estate companies in South India in terms of number of units launched between the calendar years 2012 and the third quarter of 2021 across Tier 1 cities of South India including Bengaluru, Chennai and Hyderabad. It’s completed projects in the cities of Bengaluru and Chennai accounted for 15.18 million square feet, or 90.56% of its total Saleable Area in Completed Projects, as of September 30, 2021. In addition, Ongoing Projects, Projects under Development and Forthcoming Projects in Bengaluru and Chennai accounted for 31.37 million square feet, or 67.15% of its total estimated Saleable Area in these projects, as of September 30, 2021. Bengaluru and Chennai are two key markets in South India, and India generally, contributing to approximately 29.3% of the residential launches and 28.7% of the sold inventory in India’s seven cities (Bengaluru, Mumbai, Delhi, Chennai, Pune, Hyderabad and Kolkata), from the calendar year 2012 to the third quarter of 2021.
Established strategic relationships: The company has established relationships with domestic as well as international financial investors, from whom it has been able to procure financial investments for its projects. Investors who have invested in its projects include SUN Apollo India Real Estate Fund I LLC, Mitsubishi Corporation, Amplus Capital Advisors Private Limited, ASK Real Estate Special Opportunities Fund, India Realty Excellence Fund II LLP managed by Motilal Oswal Real Estate Investment Advisors II and Kotak Affordable India Fund (a joint investment vehicle focused on investing into affordable housing projects between CDC of UK and Kotak Alternative Investment Managers), and include certain investors who have made multiple investments in its completed and ongoing projects. This approach has enabled the company to raise capital through investments from financial investors in order to fund growth, expand the scale of its projects and reduce debt exposure, while also benefitting from the know-how and strategic inputs of such investors. Other than its strong association with investors, it also has well-established relationships with several lenders, including public and private sector banks and NBFCs, across its projects.
Scalable and asset light business model: The company’s business model relies on the strength of its brand, project execution and management capabilities as well as its well-established relationships with landowners, development partners, financial investors, architects and contractors. Leveraging these capabilities and relationships, The company is transitioning from a real estate development model to a combination of real estate development and real estate services based business model. This transition will help improve margins and profitability as well as return on capital, given low capital-intensive nature of its newer business model. As part of this model, its focus is on DM or joint development agreements with landowners/developers or joint ventures, which requires lower upfront capital expenditure compared to direct acquisition of real estate or land parcels. The company has launched 11 projects under the DM portfolio with a Saleable Area of 6.42 million square feet as of September 30, 2021. Its pre-sales volume from the DM model for the six months ended September 30, 2021 and 2020, Financial Years 2021, 2020 and 2019 were 0.79 million square feet, 0.29 million square feet, 1.05 million square feet, 0.83 million square feet and 0.69 million square feet. Company’s asset light business model will result in efficient utilization of capital resulting in lower debt and regular fee income, allowing it to have higher return on capital employed.
Risks and concerns
Profitability significantly dependent on performance of real estate market in India: The company’s success of its projects depends on the general economic, demographic and political conditions in India, as well as the performance of the real estate market generally in India, and particularly in South India, where majority of its projects are located. In addition, the condition of the real estate sector in India, particularly market prices for developable land and finished units and projects, has a significant impact on its revenues and results of operations. The real estate market may particularly be adversely impacted due to lack of housing finance for potential or existing customers. The real estate market may be affected by various factors outside its control, such as prevailing local and economic conditions, changes in the supply and demand for properties comparable to those it develop, lack of financing for real estate projects, change in demographic trends, employment and income levels, rising interest rates, changes in the applicable governmental regulations, decrease in or restrictions on foreign currency remittances, regional natural disasters, pandemics such as coronavirus disease (COVID-19) performance of key industrial sectors, or the public perception that any of these events may occur. These factors may contribute to fluctuations in real estate prices, rate of sales and the availability of land and can adversely affect the demand for, and pricing of, its Completed Projects (unsold), Ongoing Projects, Projects under Development and Forthcoming Projects, as well as adversely affect the value of its land reserves, and, as a result, may adversely affect its financial condition, results of operations, cash flows.
Company’s business geographically concentrated in South India: The company’s real estate development activities are geographically concentrated in the cities of Bengaluru, Chennai, Vishakhapatnam and Coimbatore, which are located in South India. As of September 30, 2021, 24 Ongoing Projects, four Projects under Development and four Forthcoming Projects, representing 77.91% of estimated Saleable Area for its Ongoing Projects, Projects under Development and Forthcoming Projects, are located in South India. Within South India, as of September 30, 2021, 63.72%, 22.46%, 12.24% and 1.58% of its total estimated Saleable Area for its Ongoing Projects, Projects under Development and Forthcoming Projects, is located in Bengaluru, Chennai, Vishakhapatnam and Coimbatore, respectively. The company cannot assure that the demand for its projects in key cities where it are present, such as Bengaluru, Chennai, Vishakhapatnam, Coimbatore and Kolkata will grow, or will not decrease, in the future. Consequently, it business, results of operations, cash flows and financial condition have been and will continue to be heavily dependent on the performance of the real estate market in South India.
Company and some of its Subsidiaries have unsecured loans: The Company and some of its Subsidiaries have currently availed unsecured loans which may be recalled by the lenders at any time. As of September 30, 2021, the unsecured loans of the company and its subsidiaries (subsidiaries as defined in its Restated Financial Statements) that may be recalled at any time by the lenders aggregated to Rs 76.37 crore, which constituted approximately 10.99% of the total indebtedness of the Company and its subsidiaries. In the event that any lender seeks a repayment of any such loan, the company would need to find alternative sources of financing, which may not be available on commercially reasonable terms, or at all. The company may not have adequate working capital to undertake new projects or complete the Ongoing Projects, and, as a result, any such demand by the lenders may affect its business, cash flows, financial condition and results of operations.
Financing agreements impose certain restrictions on operations: The company’s financing arrangements impose restrictions on the utilization of the loan for certain specified purposes only, such as for the purposes of meeting expenses for development and related activities. The company are required to obtain prior consent from some of its lenders for, among other matters, amending its articles of association, altering its capital structure and shareholding pattern, changing the composition of its management or Board of Directors or its management set-up, undertaking mergers or amalgamations, changing its constitution, making certain categories of investments, declaring dividends, making certain payments (including payment of dividends, redemption of shares, prepayment of indebtedness, payment of interest on unsecured loans and investments), undertaking any scheme of expansion or diversification, effecting any change in the nature or scope of its projects or any change in the financing plan, creation of security interest in secured properties and raising further indebtedness. The company may also be required to comply with financial covenants stipulated by its financing documents.
Outlook
Shriram Properties is a part of the Shriram Group and is one of the leading residential real estate development companies in South India. The company primarily focuses on the mid-market and affordable housing segments. The company is also present in the mid-market premium and luxury housing categories as well as commercial and office space categories. Bengaluru and Chennai are the key markets for the company. The company also has operations in Coimbatore, Visakhapatnam, and Kolkata. It is transitioning from a real estate development model to a combination of real estate development and real estate services based business model, with a shift towards an asset light business strategy. It has established relationships with domestic as well as international financial investors, from whom it has been able to procure financial investments for its projects. On the concern side, the company’s business faces competition from both national and local property developers with respect to factors such as location, facilities and supporting infrastructure, services and pricing. Intensified competition between property developers may result in increased land prices, oversupply of properties, lower real estate prices, and lower sales at its properties, all of which may adversely affect its business. Also, the company’s inability to provide customers with quality construction or its failure to continually anticipate and respond to customer needs may affect its business and prospects and could lead to the loss of significant business to its competitors.
The issue has been offered in a price band of Rs 113-118 per equity share. The aggregate size of the offer is around Rs 600.32 crore to Rs 626.88 crore based on lower and upper price band respectively. On performance front, the company’s total income decreased by 20.66% to Rs 501.31 crore for the financial year 2021 from Rs 631.84 crore for the financial year 2020, due to decrease in revenue from operations and other income. The company’s loss was Rs 68.18 crore for the financial year 2021 compared to loss of Rs 86.43 crore for the financial year 2020. The company intends to continue to strengthen its reputation and track record in the mid-market and affordable housing categories, in order to deliver cost effective housing solutions to its customers. It intends to leverage its existing market position, competitive strengths and understanding of customer preferences to deepen its penetration in mid-market and affordable housing category. It intends to continue to focus on key cities in which it is present, such as Bengaluru and Chennai, where it has established a strong presence and developed in depth local knowledge and relationships.
