Verdict: Small and unappealing

IPO Snapshot:

Karda Constructions is entering the primary market on Friday 16^th March 2018 to sell up to 43 lakh equity shares of Rs. 10 each, 53% via fresh issue and 47% via an offer for sale (OFS) by the promoter, both in the price band of Rs. 175 to Rs. 180 per share. Representing 34.96% of the post issue paid-up share capital, total issue size is Rs. 77 crore at the upper end of the price band, of which, OFS portion is Rs. 36 crore. Issue is closing on Wednesday 21^st March and listing is likely on 2^nd April.

Company Overview:

Nashik based Karda Constructions is a small-sized real estate company, focused on affordable residential housing in Nashik (Maharashtra), having completed 17 residential and commercial projects, aggregating 10 lakh sq. ft, till date. Company has 11 ongoing residential and commercial projects aggregating 15.3 lakh sq ft carpet area and 3 planned residential projects of 2 lakh sq ft. It has land reserves of 4 lakh sq ft of estimated developable land area in and around Nashik. Thus, besides having small scale of operations, company’s presence is restricted to a single geography in Maharashtra.

Financial Performance:

Due to the low base, company’s revenues growth appears high at 26% CAGR for the past 4 years, from Rs. 42 crore in FY13 to Rs. 105 crore in FY17, with likewise 31% CAGR for PAT, from Rs. 2.7 crore in FY13 to Rs. 8 crore in FY17. On current equity of Rs.10 crore, adjusted for 1:9 bonus given in July 2017, FY17 EPS stood at Rs. 8.03. There is huge interest outgo, of Rs. 18 crore in FY17, on net profit of Rs. 8 crore.

Just before the IPO, company’s financials have shown marked improvement, with operating profit inching to 39% (from 28% in FY17) and net margin nearly doubling to 13.7% from 7.6% in FY17 and 6.3% in FY16. H1FY18 revenue stood at Rs. 40 crore, with PAT of Rs. 5.5 crore, translating into an EPS of Rs. 6.65. As of 30-9-17, company’s net worth stood at Rs. 36 crore (BVPS of Rs. 36 crore), with a highly leveraged balance sheet, as total debt of Rs. 133 crore (Rs. 69 crore long term, balance Rs 64 crore short term). Excluding cash on hand of Rs. 3 crore, net debt to equity ratio is extremely high at 3.6:1. Even post IPO, this will remain high at 1.3:1.

Objects of Issue and Shareholding Pattern:

Of the Rs 41 crore proposed to be raised via fresh issue, proceeds of Rs. 30 crore will be used to trim overdraft and term loans and balance for general corporate purposes. Promoter family owning 100% stake the company will hold 65.04% post issue.

Valuation:

At Rs.180 per share, company’s market cap is at Rs. 221 crore, and EV at Rs. 321 crore. This discounts historic FY17 earnings by PE multiple of 22x, which is quite aggressive, as affordable housing player Arihant Superstructures, operating in Mumbai and Jodhpur, is currently trading at historic PE of 15x, with market cap of Rs. 500 crore. Besides its presence spread across two geographies, Arihant has bigger past performance to show, having delivered 70 million sq. ft. space, and currently having 15 projects with 130 lakh sq.ft. under development. Bangalore’s leading residential and commercial developer Brigade Enterprises, undertaking projects in multiple cities such as Bangalore, Chennai, Hyderabad, Mysore, Kochi, Ahmedabad, with annual topline of Rs. 2,000 crore, is trading at historic PE multiple of 20x and lower debt equity ratio of 0.75:1. Thus, fundamentally sounder companies are available cheaper, making Karda’s IPO pricing unattractive.

Moreover, in the ‘Comparison with Industry peers’ table under Basis of Issue price, the Red Herring Prospectus states CMP (current market price) as closing prices of respective stocks as on 15^th Sep 2017. How can 6 month old price be treated as the current market price? Obviously the company, along with the merchant banker, is trying to fool prospective investors, as 2 of the 3 peers are presently ruling at significant discount to their respective prices as of 15-9-17. Arihant Superstructures is currently ruling 33% lower, at Rs.120 against price of Rs.180 as of 15-9-17, while other peer mentioned in the prospectus, BSE listed Prerna Infrabuild, ruling at Rs. 17 per share now, is 50% lower than price of Rs. 38 as of 15-9-17. Such lacuna is gross negligence and can not be considered oversight from the issuer’s end. Lastly, in the peer table, company is being compared to Kolte Patil, a Rs. 2,000 crore market-cap company (i.e. 10x of Karda), having delivered 12 million sq ft. saleable area in Pune, Mumbai and Bangalore across residential, commercial and IT parks space, operating in the mid-level and luxury level. Such comparisons are not apple-to-apple and hence meaningless.

This also raises concerns on corporate governance standards to be employed by the company, given its small scale of operations and heavy dilution in the ensuing IPO. Real estate companies are always looked at suspiciously when it comes to corporate governance. This morning’s revelation of Rs. 1,200 crore fraud by HDIL’s subsidiary is the case in point. Besides, the merchant banker does not have much credible past performance with respect to main board listings. Thus the IPO is not very convincing.

Conclusion:

Company is a regional player with small scale of operations and highly leveraged balance sheet. What land area it has delivered in its life time so far, is typically the average size of a single project for bigger listed players such as Oberoi Realty / Godrej Properties / Sobha / Prestige. Moreover, small real estate stocks are not in flavour currently, coupled with primary markets being flooded with a host of bigger and fundamentally better stocks, which may have a negative bearing on this issue.

Due to unattractive pricing and above mentioned negatives, the issue can be given a miss.

Disclosure: No interest.