IPO Analysis: Keystone Realtors Limited

IPO Rating: Invest for long term

About the issue: 

Keystone Realtors Limited one of the prominent real estate developers is coming out with its initial public offering (IPO) of equity shares with a face value of Rs 10 per equity share. The price band of the issue has been fixed at Rs 514 to Rs 541 per equity share. The issue size is Rs 635 crore at a higher price band.  

The IPO opening date is November 14, 2022, and it will be closing on November 16, 2022. The issue is likely to be listed on the exchange on November 24, 2022. The IPO market lot size is 27 shares and in multiple thereof. A retail-individual investor can apply up to a maximum of 13 lots (351 shares or Rs 189,891 at upper price band). 

Objects of the Issue 

Each of the Selling Shareholders will be entitled to their respective portion of the proceeds of the Offer for Sale. 

The company propose to utilise the Net Proceeds towards funding the following objects: 

1. Repayment/prepayment, in full or part, of certain borrowings availed by the company and/or certain of the subsidiaries. 

2. Funding acquisition of future real estate projects and general corporate purposes. 

Promoter holding  

The Pre issue shareholding is 96.71 per cent, Post the IPO the promoter stake will be 87.92 per cent.  

About the company: 

Keystone Realtors Ltd. (KRL) is a well-known realty developer from Mumbai, carrying out property development under the brand name "RUSTOMJEE". KRL is one of the prominent real estate developers (in terms of absorption in the number of units) in the micro markets it operates. The company commands a market share of 28 per cent in Khar, 23 per cent market in Juhu, 11 per cent in Bandra East, 14 per cent in Virar, 3 per cent in Thane, and 5 per cent in Bhandup in terms of absorption (in units) from 2017 to 2021. As of June 30, 2022, it had 32 Completed Projects, 12 Ongoing Projects, and 21 Forthcoming Projects across the Mumbai Metropolitan Region ("MMR") that includes a comprehensive range of projects under the affordable, mid and mass, aspirational, premium and super premium categories, all under its Rustomjee brand.  

As of June 30, 2022, KRL has developed 20.22 million square feet of high-value and affordable residential buildings, premium gated estates, townships, corporate parks, retail spaces, schools, iconic landmarks and various other real estate projects. Since its inception in 1995, the company has strived to create a brand focused on customer satisfaction, building communities, and nurturing spaces that provide customers with a superior lifestyle. KRL aspires to have customers perceive the 'Rustomjee' brand as a trusted provider of quality offerings and services due to its track record of delivering multiple high-end award-winning buildings, gated communities, and townships. Its experience in the MMR market has helped it develop a firm understanding and acquire the requisite skill sets to create ideal spaces for communities to flourish.  

As part of its business model, the company focuses on entering into joint development agreements, redevelopment agreements with landowners or developers or societies, and slum rehabilitation projects, which require lower upfront capital investment compared to the direct acquisition of land parcels. Its business model allows it to minimize the upfront capital expenditure compared to the direct acquisition of land parcels, which ensures that KRL's capital allocation is balanced and calibrated, allowing it to generate revenue with lower initial investments. It has adopted an integrated real estate development model, with capabilities and in-house resources to execute projects from their initiation to completion.  

As of June 30, 2022, KRL had 1,542 channel partners who present the Rustomjee portfolio to their customers and drive customer traffic to its projects. As of June 30, 2022, it had 602 permanent employees and 36 persons employed as consultants. As of the said date, it has ongoing projects for 9.26 million square feet and 26.37 million square feet of forthcoming ones. Revenues from these projects will be booked as and when received.  

Financial  

On the financial performance front, for the last four fiscals, KRL has (on a consolidated basis) posted total revenue/net profits of Rs 2142.65 crore/Rs 137.74 crore (FY19), Rs 1268.60/Rs 14.49 crore (FY20), Rs 1177.27 crore/Rs 231.82 crore (FY21), and Rs 1302.97 crore/Rs 135.83 crore (FY22). For Q1 of FY23, it earned a net profit of Rs 4.22 crore on a total income of Rs 176.00 crore.  

Valuation and Outlook 

For the last three fiscals, KRL has reposted an average EPS of Rs 17.69 and an average RoNW of 21.26 per cent. The issue is priced at a P/BV of 5.18x based on its NAV of Rs 104.40 as of June 30, 2022, and at a P/BV of 4.13x based on its post-IPO NAV of Rs 131.07 per share (at the upper cap). 

If we annualize the FY23 earnings and attribute it to post-IPO fully diluted paid-up equity capital then the asking price is at a P/E of around 365.54x and based on its FY22 earnings, it is at a P/E of 45.35x. According to management, Q1's performance is not indicative of the annual trends, as most of the business happens in the second half of the year.  

Based on its current financial data, the issue appears fully priced, but considering growth prospects with projects on hand, well-informed cash surplus investors may consider the investment with a medium to long-term perspective. Therefore, we recommend investors to apply for long term in this IPO.