Dated: 19.07.2007 Omaxe (OL) is a real-estate development and construction company promoted and founded by Rohtas Goel. Commencing operation as a construction and contracting company, it has completed 120 construction projects. Now, its focus is fully on development of residential and commercial real-estate projects ranging from integrated townships, group housing and retail and other commercial properties, hotels, information technology and bio-tech parks to special economic zones.
After entering the real-estate business in 2001, OL has completed eight residential projects consisting of seven group-housing and one integrated township projects, and two commercial projects including retail and office space, covering an aggregate built-up/ developed area of approximately 5.13 million sq. ft.
End March 2007, OL had 52 residential and commercial projects, consisting of 21 group-housing projects, 16 integrated townships, 14 shopping malls and commercial complexes and one hotel, either under development or under various stages of approvals for development. Of these 52 projects, 38 are under development and 14 in various stages of approvals for development. The company expects to commence development of these 14 projects in the current year ending March 2008 (FY 2008). The 16 integrated townships are essentially ‘mixed-use’ areas consisting of residential and commercial projects and are expected to include 10 group-housing projects, 16 commercial developments, one biotech park and one information technology park. It is also developing projects in the hospitality sector. Its hotels at Amritsar, Greater Noida and Patiala are part of commercial malls under construction. OL has applied for change of land use for its hotel project in Faridabad.Most of OL’s residential developable space is in non-NCR locations of northern India. Just 19% of the space from the current group-housing projects that can be developed is either under development or in various stages of approval in the national capital region (NCR). All the township projects are in Tier II and III cities/ towns in north India. However, the share of NCR region in the total commercial space that can be developed is 49%. On November 21, 2006, OL entered into a joint venture with Azorim International Holdings, a part of a leading Israeli real-estate development group. The joint venture is for the construction and development of Omaxe Forest, an ultra-luxury group-housing development in Faridabad. Under the terms of the agreement, of the total area of approximately 36.22 acres, the company will transfer approximately 20.58 acres representing approximately 1.8 million sq. ft. of saleable area to the joint venture entity in which Omaxe and Azorim International will hold an equal stake of 50%. End July 2007, OL expects an outstanding of Rs 88.97 crore against land purchased. Part of the proceeds will be used for payment of that outstanding along with funding of about Rs 236.03 crore for future land acquisitions. Apart from land acquisition and project development cost, the company is also expected to retire in FY 2008 Rs 200-crore high-cost debts raised from financial institutions.
Strengths:
1) Access to land reserve of approximately 3,255 acres end March 2007. Total land reserve includes about 571 acres belonging to joint ventures and collaborations in which OL has an economic interest of approximately 74% calculated on a weighted average basis. It owns 31% of the land reserve directly or through its subsidiaries and has sole development rights on 46% of the land bank. About 6% of the land has been allotted by the government and its agencies on a long-term lease of about 90/99 years. 2) Of the total land reserves, around 3096 acres (including approximately 451 acres belonging to joint ventures and collaborations) relate to projects that are currently under development or in various stages of approval for development, representing approximately 150 million sq. ft. of saleable area. Of the 150-million sq ft saleable area, about 66.6 million sq ft will be for group housing and 77.3 million sq ft developed into township and 4.89 million sq ft reserved for commercial purpose. 3) One of the first developers to conceptualise and develop theme malls in north India. OL conceptualised wedding mall: the one-stop shop for wedding arrangements. Given the strong supply glut in the retail space in the NCR region, this ability to differentiate its property will hold good in attracting tenants and retaining them. 4*)Adoption of percentage completion method means revenue recognition starts only if the actual cost already incurred on the date of financial statement is at least 30% of the total project cost as estimated by the management. In FY 2008, OL is likely to recognise revenue for more projects out of the current 38 projects as against 23 projects in the previous year.
Weaknesses :
1) Ventured into realty business only in 2001 and has completed just eight projects since then. Was only a construction contractor since 1989. Despite longer track record as a construction contractor, OL decided not to take up any more construction contracts since March 2006 as the margin in the realty business is higher. As a company with limited track record in this business, it is more prone to cyclical ups and downs of the business. 2) The strong rise in real-estate prices and rising interest rates are likely to impact the affordability of housing. Real-estate prices are already showing signs of softening in certain locations. 3) Effective tax rate stood at 20.18% in FY 2007 largely on account of benefits availed under Section 80-IB of the Income-Tax Act, 1961. For projects approved on or before March 2007 and completed within four years, OL is eligible for this benefit, subject to conditions. New projects approved after this date will not be eligible for this benefit. Hence, the company’s tax incidence is set to increase. 4) Operating cash flows in recent fiscals are negative. Operating cash flow for FY 2007 is negative Rs 713.13 crore. The comparative figure is Rs 131.06 crore in FY 2006. Strong negative operating cash flow is primarily on account of a sharp rise in projects in progress. This was Rs 839.75 crore end March 2007 compared with Rs 544.30 crore end March 2006. The inventory, too, has increased to Rs 192.08 crore end March 2007, from Rs 111.52 crore end March 2006. 5) Ol does not own the ‘Omaxe’ brand. It is owned by its Chairman and Managing Director. Rohtas Goel. Under a license agreement dated October 1, 2005, the company had to pay a lumpsum amount of Rs 1.2 crore and a royalty fee at the rate of 2% of its annual real-estate turnover. Accordingly it paid Rs 13.2 crore on this account in FY 2006. But from FY 2007, Goel has exercising his rights of renunciation, and has agreed to receive fixed payment of Rs 10 lakh per annum as royalty. Further, the license agreement expires end March 2008.
Valuation :
Total income posted a CAGR of 77.34% to Rs 1439.67 crore in FY 2007 to Rs 145.56 crore in FY 2003. CAGR in profit after tax and minority interest was 171.04% to Rs 257.26 crore in FY 2007, from Rs 4.77 crore in FY 2003. At the offer price band of Rs 265-310, Omaxe’s PE works out to 17.8 – 20.8 x FY2007 EPS of Rs 14.9 (consolidated) on post issue equity of Rs 1727.5 million. On a relative comparison, Omaxe trades at a lower PE & M.Cap/Sales basis.Using NAV method, we arrive at a Net Asset Value of Rs 487 per share which is 57% above the upper band of the price range of Rs 265- Rs 310.We feel, company’s strong brand image, focus on Tier2 & Tier 3 cities and lower valuations compared to peers to be major positives. We recommend a subscribe to the issue.
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