Oberoi Realty is entering the capital market on with a public issue of 395.62 lakh equity shares of Rs. 10 each, in the price band of Rs. 253 to Rs. 260 per share.

It is very much essential to understand the structuring of the company to assess its true value. The company, as of date had completed 33 projects with total area of 50.18 lakh sq. feet. Presently, it has 13 ongoing projects with total area of 101.23 lakh sq. feet and 11 planned projects with total area of 101.32 lakh sq. feet. Of these 202.55 lakh sq. feet, 19.77 lakh sq. feet are of school and hospital projects, which will be run by Oberoi Foundation, a public charitable Trust, on profit sharing with the company.

Apart from this, about 17.87 lakh sq. feet, of ongoing projects are sold, as on date, for about Rs. 2,300 crores. So net area or land bank with the company can only be taken at 164.91 lakh sq. feet. Of this, 13.34 lakh sq. feet is in Pune while area in Worli is about 21.20 lakh sq.feet. So major presence of the company is in the western suburbs of Mumbai, thus having  low quantity of land bank.

 The company has estimated a net fund requirement of Rs. 741 crores for construction of ongoing projects and Rs. 225 crores for acquisition of land. This is despite company having a cash and bank balance of Rs. 367 crores, as at . If one considers 101 lakh sq. feet of ongoing projects, of which, 17.87 lakh sq. feet is sold, how one can take estimated cost of construction of Rs. 1,003 crores. The company will be having good cash flows of over Rs. 500 crores, from sold area by December, as also, will be receiving good amount on sale of further area under its ongoing projects. So, this net amount of Rs. 741 crores, may not really be required.

Also, due to benefits available under section 80-IB (10) of Income Tax Act, to its various projects, the tax liability of the company was quite low, which was at around 4.70% for FY10 and at 6.60% for FY09. This would increase sharply from FY13, as future projects would not be eligible for the said benefits.

The company is also focusing more on develop and lease model to have a respectable rent earnings from FY11 onwards. The company presently has 9.77 lakh sq. feet of completed office and retail space and 3.82 lakh sq. feet of hospitality project. This is likely to increase to about 75 lakh sq. feet, by FY13. But does this strategy really good and workable for a realty company?

By making significant investments in the completed projects and properties, the company is blocking a large chunk of its funds, which otherwise, would have been available for the core operations of the company. Also, the argument of respectable return by way of rentals, may not hold good from prospective investors point of view, as he/she is subscribing to the issue, based on the current valuations of those properties.

If we compare this company, with other listed peers, than also, it is found to be quite expensive. D B Realty, ruling at 408, is having present market capitalization of close to Rs. 9,900 crores. This company, has over 61 million sq. feet under development, with 4-5 projects of 1 million sq. feet and above in Central Mumbai, as also, having a big presence in Western Suburbs of Mumbai.

As, against this, Oberoi Realty will have a market cap of Rs. 8,500 crores, calculated at the upper price band of Rs. 260 per share. Since the company will be using IPO proceeds for completion of ongoing projects, it will not be correct to deduct any cash balance from this market capitalization, to arrive at its enterprise value.

Even going by the concept of develop and lease model, Century Textiles, looks the cheapest, amongst the listed peers, which has a market cap of less than Rs. 5,000 crores. Century Textiles own 10 million TPA cement plant, paper plant, textile plant and chemical plants. The company will be developing about 50 lakh sq. feet area at Worli, in Central Mumbai, in the next 5 years, and will lease it, which can give it, an annual rent of Rs. 1,500 crores.

So IPO, is just made by the company, without having any need for it, and is seen quite expensive, when compared to the listed peers like D B Realty and HDIL.

Better to avoid it.