The Hindu Business Line : Akruti Nirman: Avoid

While the focus on slum rehabilitation projects is promising, fluctuating revenues, risks in land procurement and policy uncertainties make this offer unattractive.

GETTING POSSESSION of tenements can be a long-drawn process, involving legal issues.

Investors can refrain from subscribing to the initial public offer of real-estate player Akruti Nirman. The risks stemming from some of the company's current business segments outweigh the prospects arising from the real-estate boom in the country. With the stage just getting set for unlisted real-estate players to make an entry into the capital market, we believe there could be better opportunities for investors.

In the Rs 475-540 price band, the offer is priced at 45-51 times the company's consolidated FY-06 earnings on the existing equity base. We believe that the complex structuring of transactions and the uncertainties and risks driven by slum clearance policies in Maharashtra call for a valuation discount for Akruti Nirman. The offer price band, however, is at a premium to peers.

Profile

Akruti Nirman is a Mumbai-based real-estate developer of commercial and residential properties and recently forayed into retail real-estate. The company is primarily into real-estate development, under the Slum Rehabilitation Scheme (SRS) initiated by the Maharashtra government. The offer proceeds of Rs 320-360 crore (in the given price band) are to be used for land acquisition and getting development rights as also for development and construction costs of projects.

Business risk

Though Akruti's focus on slum rehabilitation projects in Mumbai holds much potential in the city and States such as Rajasthan and Karnataka which are coming up with similar schemes, they are also fraught with risks and uncertainties. As compensation for constructing new residential buildings for former slum dwellers, the Maharashtra Government grants the company either the right to develop a portion of the slum-cleared land for its own purpose, or offers transferable development rights (TDRs) which will permit the company to develop land elsewhere in Mumbai or sell such rights.

The positive of this model is that the company may get land in prime areas, which can be used to develop commercial or residential property or sell the same. On the flip side, before starting the SRS, the company must evacuate the dwellers after obtaining their consent. This can delay the process of construction and, as a result, receipt of land as compensation (which is the revenue stream). This is visible from the fluctuating revenues over the last five years.

Further, if these schemes are changed, the company will have to buy more land from third parties possibly at higher rates to continue as a realty developer. At present only 30 per cent of the total land area available is acquired or leased, the rest belonging to SR authorities.

Further, any change in land use regulations can render TDRs less valuable and affect revenues in future. In 2006, the sale of TDRs accounted for 17 per cent of Akruti's revenues.

Potential in commercial segment

About 33 per cent of sales for the eight months ended November 2006 came from commercial projects. The company's joint ventures with such leading players as DLF are likely to improve visibility and provide qualification for similar projects.

Akruti has securitised its future rental income in respect of most of its commercial properties with banks.

Consequently, the company would receive a lumpsum payment from the banks on its let-out properties and the banks would receive the rental amounts directly for a term of 11 years.

While this means income upfront, Akruti may lose out on any significant appreciation in rentals during the said period. The effect of this may be felt if the company adopts more lease models.

Land procurement

The company plans to use Rs 114 crore of the IPO proceeds to procure land. This transaction, however, involves acquisition of a company, which will not be controlled by Akruti directly. Such a complex transaction structure does not inspire confidence in this offer.

The company also buys TDRs for its own development projects. One such agreement for a consideration of Rs 113 crore involves acquisition of TDRs now under dispute.

The above transactions are likely to delay the plans of the company, which already has project cycles of three-five years.

The offer is open from January 15 to 19. JP Morgan and Enam are the lead managers.