Shriram Properties to Hit the Bourses on 8 December. Here's What You Should Know Before Applying

South-based real estate company Shriram Properties is set to launch its initial public offering (IPO) on 8 December 2021, with the plan to raise Rs 6 bn. The offer will close on 10 December.

This would be the second public issue to open next week, after RateGain Travel Technologies.

Also, this will be the second public listing of a property firm after Macrotech Developers Rs 25 bn IPO in April.

The realty firm has set price band of Rs 113 - Rs 118 a share, valuing the company at Rs 17.5 bn at the top end of the band.

Shriram Properties, a part of the Shriram Group, is among the top five residential real estate companies in South India in terms of number of units launched between the calendar years 2012 and the third quarter of 2021 across Tier 1 cities of South India including Bengaluru, Chennai and Hyderabad.

Axis Capital, ICICI Securities, and Nomura Financial Advisory and Securities (India) are the book running lead managers to the issue.

Shriram Properties IPO Details

Issue Type	Book Built Issue IPO
Face Value	Rs 10 per equity share
IPO Price	Rs 113 to Rs 118 per equity share
Market Lot	1 lot - 125 shares
Issue Size	Rs 6 bn
Fresh Issue	Rs 2.5 bn
Offer for Sale	Rs 3.5 bn
Basis of Allotment Date	Wednesday, December 15, 2021
IPO Listing Date	Monday, December 20, 2021

Data Source: Company's Red Herring Prospectus (RHP)

The offer for sale (OFS) comprises shares worth up to Rs 909.5 m by Omega TC Sabre Holdings, up to Rs 83.4 m by Tata Capital Financial Services, up to Rs 922.1 m by TPG Asia SF V Limited, up to Rs 1.3 bn by Wsi/Wsqi V (XXXII) Mauritius Investors Limited.

Currently, Omega TC Sabre Holdings holds 16.33% stake in the company, TPG Asia SFV Limited holds 16.56% stake, WSI/WSQI V (XXXII) Mauritius Investors holds 23.97% stake.

Category-wise reserved portion

• 10% is the maximum subscription amount reserved for retail investors.
• 15% is reserved for non-Institutional bidders.
• 75% is reserved for qualified Institutional Buyers (QIBs), which includes 60% for anchor investors and 1/3rd of the anchor investor portion for domestic mutual funds.

Objects of Shriram Properties IPO

Funds from the issue will be used for repayment or prepayment, in full or part, of certain borrowings made by Shriram Properties and their subsidiaries, Shriprop Structures, Global Entropolis, and Bengal Shriram.

Also it will be used for general corporate purposes, but not more than 25% of the gross proceeds of the fresh issue.

These purposes include working capital requirements, investment in subsidiaries and joint ventures, strengthening of marketing capabilities, and strategic initiatives.

A brief insight of the company

Incorporated in 2000, Shriram Properties is a part of the Shriram Group and is one of the leading residential real estate development companies in South India.

The company primarily focuses on the mid-market and affordable housing segments. The company is also present in the mid-market premium and luxury housing categories as well as commercial and office space categories.

The company has operations in South India, including Chennai, Coimbatore, and Visakhapatnam.

They also have a foothold in Kolkata, East India, where we are working on a huge mixed-use development. Bengaluru and Chennai are two of their most important marketplaces.

These cities are one of India's two most important residential housing markets, accounting for roughly 29.7% of India's new home launches during 2012 and 2020 and 28.6% of the country's sold inventory during 2018 and 2020.

Realty developer's current portfolio

As of 31 December 2020, they have a whole portfolio of 35 projects including ongoing projects, projects under development, and forthcoming projects with a total projected marketable size of 46.7 million square feet.

During the same period, their inventory comprises of 21 ongoing projects, 9 under development projects and 5 upcoming projects, accounting for 52.1%, 20.9%, and 27.8% of total projected saleable area, accordingly.

Furthermore, the mid-market and economical residential categories together accounting for 70.7% of their total projected saleable area (mid-market and inexpensive housing accounting for 34.9% and 35.8%, correspondingly) among these projects.

Quick look at the company financials

On the financials front, it posted a loss of Rs 681.7 m in the financial year ended March 2021 against loss of Rs 863.9 m in previous year.

Revenue from operations declined to Rs 4.3 bn from Rs 5.7 bn during the same period.

In the six-month period ended on 30 September 2021, it also posted a loss of Rs 600.3 m on revenue of Rs 1.2 bn.

(Rs m)	FY19	FY20	FY21
Total revenue	7,237.8	6,318.4	5,013.1
Growth (%)		-12.7%	-20.7%
Expenses	7,542.2	6,710.2	5,121.4
Net Profit\Loss	487.9	-863.9	-681.8

Data Source: Company's RHP

In the year 2020, the company witnessed a decline in sales due to Covid pandemic which resulted in total shutdown in construction activity during the nation-wide lockdown.

However, the developer, who focuses on affordable and mid-income housing projects, mainly in southern India, saw sales recover to pre-covid levels in the December 2021 quarter.

For more details, check out Shriram Properties' Red Herring Prospectus.

Peers of Shriram Properties

In their offered documents, Shriram Properties have shown Sobha, Prestige Estates Projects, Brigade Enterprises, Godrej Properties, Oberoi Realty, Sunteck Realty and Macrotech Developers as their peers.

Company (Rs bn)	Total Income	Net Profit\Loss	Return on Net Worth (%)
Sobha	21.9	0.6	2.60%
Prestige Estates Projects	75.0	15.8	21.80%
Brigade Enterprises	20.1	-0.1	-2%
Godrej Properties	13.3	-0.7	-2.30%
Oberoi Realty	20.9	7.4	-7.9%
Sunteck Realty	6.1	0.4	1.5%
Macrotech Developers	57.7	0.5	1%
Shriram Properties	5	-0.7	-

Data Source: Company's RHP and Equitymaster

Competitive advantage

• The firm is a subsidiary of the Shriram Group and is backed by TPG, Tata Opportunities Fund, Walton Street Capital, and Starwood Capital.
• They are one of the top five residential real estate development businesses in South India, focusing on mid-market and low-cost homes.
• They've built strategic partnerships with both domestic and foreign financial investors.
• Demonstrated project assessment skills and an established track record of performance.
• Their scalable and asset-light business model is supported by the company's improving financials.
• They also have an experienced and professional management team.

Some risk factors

• The company's business and profitability are significantly dependent on the performance of the real estate market in India, and particularly in the South. Fluctuations in the market may affect the business's revenues and earnings.
• 77.9% of the estimated saleable area of their ongoing, under development and forthcoming projects, are located in South India. This exposes them to risks from economic, regulatory, and other changes as well as natural disasters in this part of India.
• There are pending legal proceedings that involve the company, subsidiaries, directors, group companies, and promoters. Such procedures could drain the financial resources of the company.
• The company may have to make advance payments to the owners of the land when they enter into joint development agreements, which may not be recoverable.
• Around 22.1% of their saleable area is located in Kolkata. Their future business, financial condition and result of operations are all dependent on the performance of the real estate market in Kolkata.
• The impact of Covid-19 on their business and operations in the coming is unknown and impossible to predict.
• Substantial rises in the cost of labour and essential building products, as well as shortfalls or disruptions in availability, might influence our anticipated construction costs and schedules, leading in cost overruns and reducing their earnings.

India's residential sector

India's growth fuelled by increase in service industries, increasing urbanization, improved per capita earnings, decreasing household size and various macro factors have led to growth of residential unit needs. Organized RE growth in large cities and towns has led to quality supply in the sector addressing the needs of all economic strata. Annually the supply across the 7 major cities has been over 1.3 lakh units.

The residential sector is slowly recovering - 2018 witnessed a rise in residential market activity with over 1.6 lakh new launches as well as 1.4 lakh sales (approximately 70% increase from 2017).

However, there was again a drop in supply in year 2019 due to the liquidity issues as lending had slowed down.

While the sector was slowly witnessing improvement, year 2020 has again witnessed a decline due to pandemic which resulted in total shutdown in construction activity during the nation-wide lockdown.

While the 6-month moratorium on term loans has provided a temporary breather to homebuyers and developers, stressed non-banking financial company (NBFCs) and risk averseness of banks has exacerbated the liquidity crunch for the sector.

The silver lining is the work from home that has made people look for comfortable homes, larger homes for want of more space for the online office, school activities.

The reduced home loan rates is further making it attractive for end users to invest in the housing.

IPO market is booming in India. Will the trend continue?

Following the recent market correction, market participants should keep an eye on the Indian and global markets as new corona variant has hit global bourses very badly.

This could affect the primary market as well.

However, given the abundant liquidity and the market regulator easing listing procedures, the IPO craze is understandable.

Data suggests that companies raised funds to the tune of US$4.6 bn from IPOs last year. The market believes this amount will be easily surpassed in 2021.

As companies line up to raise funds from the market amid high valuations, investors need to consider many factors before investing their money in an IPO.

If you are investing in an IPO, weigh in all the positive and negative factors affecting the company.

Take a close look at the company's financials and valuations. It would give you a clear picture of what's brewing.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more here...