With 184 per cent revenue growth and 142 per cent profit jump, is this company’s IPO a good investment?

In FY24, the company reported an outstanding Return on Equity (RoE) of 46 per cent and a Return on Capital Employed (RoCE) of 47 per cent.

About the Issue:  

Arkade Developers Ltd is preparing to launch its Initial Public Offering (IPO) for equity shares. See the issue details below.

Objects of the Issue  

Considering that the offer is exclusively a fresh issue, it is important to note that the company will directly profit from the offer proceeds. The company plans to allocate the net proceeds raised from the fresh issue for the following purposes:

1. Funding a part of the costs to be incurred in the development of the ongoing projects (Arkade Nest, Prachi CHSL, and C-Unit)

2. Funding acquisition of yet-to-be-identified land for real estate projects

3. General corporate purposes.

Promoter holding  

Mr Amit Mangilal Jain is the promoter of the company. The promoter and promoter group currently hold a pre-issue shareholding stake of 85.58 per cent in the company.

Company profile  

The company is a real estate developer focused on creating premium, aspirational lifestyle residential properties in Mumbai, Maharashtra—India’s commercial hub. It has a strong presence in the western suburbs of the MMR region, and since 2017, it has ranked among the top 10 developers in terms of supply in key micro-markets such as Borivali West, Goregaon East, and Santacruz West.

The company’s business is broadly divided into two categories: (i) development and construction of residential projects on acquired land (New Projects), and (ii) redevelopment of existing structures (Redevelopment Projects).

Over the past two decades, the company has completed 28 projects, including 11 on a stand-alone basis, 8 executed by its promoter through his proprietorship, M/s Arkade Creations, and 9 through joint development agreements with third parties. These projects have contributed to over 4.5 million square feet of development, serving more than 4,000 customers.

The company’s ongoing portfolio includes notable gated communities such as Arkade Nest, Arkade Aspire, Arkade Prime, and Arkade Aura.

Financials 

The company reported a lacklustre financial performance in FY23, with stagnant bottom-line growth compared to FY22, largely due to weaker revenue growth and a significant increase in employee benefit expenses. However, the company made a strong recovery in FY24, delivering an impressive 184 per cent revenue growth and a 142 per cent surge in net profit compared to FY23. In FY24, the company reported an outstanding Return on Equity (RoE) of 46 per cent and a Return on Capital Employed (RoCE) of 47 per cent.

Valuation and outlook  

The issue is priced with a P/BV ratio of 6.02 times, calculated using its Net Asset Value (NAV) of Rs 21.28 as of March 31, 2024. At the upper price cap, it is priced at a P/BV ratio of 3.15 times, considering its post-IPO NAV.

When we calculate the PE ratio for the company by considering the FY24 earnings relative to the fully diluted paid-up equity capital, the resulting PE ratio stands at 16. Considering both valuation and returns, the company has significantly outperformed its listed peers.

The real estate development industry is poised for significant growth, driven by government initiatives like ‘Housing for All and urbanization efforts. With increased focus on affordable housing, rising disposable incomes, and expanding infrastructure, the demand for residential and commercial spaces is surging. These factors, coupled with government initiatives and higher purchasing power, position the sector for a robust and optimistic future.

Given the company's plan to fully utilize the net proceeds from its IPO for growth, along with its proven financial track record and strong project pipeline, we recommend investors consider subscribing to the issue with a long-term investment outlook.