An expensive estate

Bangalore-based Nitesh Estates is planning to raise about Rs 405 crore to part-fund its ambitious expansion plan. The company, set up six years ago, plans to develop projects totaling 8 million square feet over the next three years. The company has so far developed projects with an area of 0.55 million square feet. Of the total issue proceeds, Nitesh Estates intends to use Rs 305 crore to fund existing ventures, while the rest will be used to repay loans (Rs 35 crore) and acquire development rights (Rs 21 crore).

Business model
The company follows a partnership model whereby the property is developed by Nitesh Estates in association with its owners. Analysts say this is attractive for entrepreneurs who have limited capital and allows them to get prime land at less rates. The downside is that margins are typically lower as risks are lower. But, return on equity tends to be higher. The management believes this helps the company save on high land costs, spread risk and free up cash for project development. The company has 11 ongoing and forthcoming projects. A majority of these are in the residential space and in Bangalore.

 

Out of its ongoing projects, 47 per cent are under the under joint venture model, 44 per cent in joint development, while the rest are on lease. The company intends to continue its focus on the partnership model.

Strong demand
The company is banking on growth in demand from mid- and high-income segments in its key markets of Bangalore, Kochi and Chennai on the back of rising disposable incomes and increased urbanisation. The units developed by the company are expected to be priced in the Rs 20-40 lakh range. While the positioning might be right, the company has a limited track record of project execution, which may be major drawback for investors. Moreover, the mid-income housing segment is highly competitive, with a number of Bangalore-based realty companies such as Puravankara, Prestige, Sobha Developers and Brigade vying for a share of the mid-income housing pie.
 

THE BREAK-UP Project pipeline
	Land Area**	Ongoing*	Forthcoming*	Total*
Residential	73.48	1.69	0.97	2.66
Hospitality	2.58	0.1	–	0.1
Office	2.65	0.3	–	0.3
Shopping Mall	5.06	–	0.58	0.58
Total	83.77	2.09	1.55	3.64
* Saleable area in million square feet **Land area in acres, the company has a land bank 132.6 acres Source: Company

 

Inconsistent performer
In Rs crore	FY08*	FY09	9MFY10*
Sales	63.36	87.69	48.4
Operating profit	-2.57	6.67	-6
Net profit	1.26	2.76	-1.32
*Other income for 9MFY10 and FY08 of Rs 18 crore and Rs 5.5 crore respectively

Conclusion
The slowdown in the real estate sector and a high proportion of low margin contractual work has had a negative impact on Nitesh Estates’s financials. The company made losses at the operating level in the first nine months of FY10 as well as in FY08. Operating margins for FY09 were just 7 per cent and may not improve significantly going ahead.

While positives for the company are heavyweight promoter institutions in its various projects such as HDFC Asset Management Company, Citi Property Investors and hedge fund Och-Ziff and the improving demand for real estate, limited track record and stiff valuations (in the pricing band of (Rs 54-Rs 56) are some negatives.