IPO Size: Rs. 635 cr 

• Rs. 560 cr fresh issue for

1. Rs. 342 cr debt repayment (Rs. 1,200 cr net debt as of 30.6.22)
2. Balance towards future project purchases and general corporate purposes. When SEBI guidelines cap 35% of gross proceeds for these objects, company and bankers earmarking 37% in the red herring prospectus (RHP) shows their casual approach.

• Rs. 75 cr offer for sale (OFS) by 3 promoters (96.7% to drop to 86.7%)

Price band: Rs. 514-541 per share

• Rs. 170 cr raised in May 22 at Rs. 499.35/share from HDFC and IIFL Funds.  

M cap: Rs. 6,160 cr, implying 10% dilution

IPO Date: Mon 14^th Nov to Wed 16^th Nov 2022, Listing Thu 24^th Nov 2022

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Mumbai Based Real Estate Developer

Company has developed 20 million sq ft, mainly residential projects, under ‘Rustomjee’ brand and has a pipeline of 35 million sq ft (9 mn ongoing, 26 mn upcoming) in Mumbai Metropolitan Region (MMR). Operating in a single geography is the biggest risk for a realty company, while it also has concentrated projects in single cluster - 14 mn sq ft is upcoming in Thane, also with lower realisation per sq feet, which is 50% of future development area, further increasing risk.  

Becoming an Affordable-cum-Mass Housing Player?

Changing product mix reduced company’s average realization to Rs. 12,000 per sq ft in Q1FY23, down 10% YoY, and 30% lower than FY22’s Rs. 17,700 per sq ft. This is also the lowest realization in past 4 years, yet may continue to decline, as 75% of upcoming development is in an affordable and mass categories, where ticket size is much lower, up to Rs. 1 cr and between Rs. 1-3 cr respectively. Future presence in aspirational category (Rs. 3-7 cr ticket size), a dominating segment in Mumbai’s residential demand, is close to negligible for Keystone. Also, HDFC Capital’s fund which invested in the company in May 22, is called ‘Affordable Real Estate Fund 3’ which may not be a mere coincidence!

Poor Credit Rating and Governance

With a current debt equity ratio of as high as 1.1:1, company has not found it prudent to disclose credit rating in the RHP. In Jan 22, term loans were downgraded to BB+ (from BBB- in Oct 20) by rating agency Brickworks, with qualification of ‘issuer not cooperating’. Such non-disclosure highlights poor corporate governance, as also posing a serious solvency risk . Besides, rating of BB+ is ‘below investment grade’ which leads to significantly higher cost of borrowing. Other Mumbai based realtors are better rated – Macrotech A+ (despite 0.8:1 net debt to equity ratio) and Oberoi and Godrej Properties’ AA+, highlighting Keystone’s weak fundamentals.

Post IPO, Keystone’s net debt to equity ratio will reduce to 0.5:1, but this is still unnerving, as rising interest rate proves to be a double whammy for real estate sector, due to higher borrowing cost, combined with reduced sales velocity on home loans becoming expensive.  

Lowest Margin among Peers

For FY21, on revenue of Rs. 850 cr, PBT was at Rs. 289 cr, including Rs. 281 cr one-time gain on conversion of subsidiary to joint venture, indicating poor profitability. FY22 PAT was at Rs. 136 cr, on revenue of Rs. 1,270 cr, which was one of the best years for real estate sectors, given massive stamp duty benefits in MMR region. While FY22 pre-sales of 1.49 mn sq ft jumped from 0.98 mn sq ft YoY, it remains to be seen if the sales momentum can sustain, as Q1FY23 pre-sales were only 0.2 million sq ft, moving closer to pre-covid run-rate.

On the margin front, Keystone’s EBITDA of 15-16% is at half of peers - Macrotech 28-32%, Godrej Properties 33%, Oberoi 50%, and even South based Prestige and Sobha at 30%+. Poor margin profile with eroding product mix paints a very grim outlook for the company.

Stretched Valuation

Keystone’s historic EV/EBITDA multiple of 33x is much higher than both listed Mumbai peers Macrotech and Oberoi, trading below 22x, despite significantly larger size and stronger margin. Keystone’s enterprise value (EV) of Rs. 7,000 cr for a small player with Rs. 2,000 cr annual pre-sales, definitely appears stretched. Also, 8% premium to last transacted price, 6 months ago, appears unjustified when share prices of Oberoi Realty is flat and Godrej Properties down 7% during this period.