plan a long stay with Shriram
a bumper year for IPOs has seen India’s biggest-to-date, Paytm with its Rs 18,300 crore offering, successfully make it across the line. that very investor fervour has also taken South India-centric property developer Shriram Properties’ relatively-minute offering of Rs 600 crore comfortably to the markets (assuming the IPO is fully subscribed). it was an offer that was reduced from Rs 800 crore, thanks to anchor investors picking up Rs 269 crore worth of equity at the upper price band of Rs 118/share just ahead of the IPO.
can it make itself at home in the public markets?
the pandemic may have wreaked havoc on the economy and upended how the world works, but for many aspiring homeowners, it came with a silver lining. for only the second time in a decade, after the minor 1% dip in July-to-September 2017, the average price of buying a house in India fell. this time it was significant, dropping 11.4% for July-to-September 2021, and has continued to register negative growth since. this led to a revival in the housing market, which was declining even before the pandemic struck.
the drop in prices was supplemented by attractive interest rates on loans, waivers on stamp duty, and other stimulus schemes. this led to residential property sales across major cities climbing above pre-pandemic average levels in the third and fourth quarters of FY21, as per RBI data. beyond that, data from Anarock suggests that Q1 FY22 house sales were 93% higher than the corresponding quarter the previous year.
riding this wave, several property related firms have successfully passed the IPO-test in India this year. Brookfield REIT (issue size of Rs 3,800 crore), Macrotech Developers (Rs 2,500 crore), and Aptus Value Housing Finance (Rs 2,780 crore) are some of the biggest on that list.
at a price-to-book ratio of 2.4 and a price-to-sales ratio of 4.6 (as per FY21 financials), the Shriram Properties IPO offers decent value. Macrotech, for example, was trading at a price-to-book ratio of 12.3 as of December 8. however, there’s a limiting factor involved, and it’s the company’s debt-to-equity ratio of 0.9x for H1FY22. this means the company has debt amounting to 90% of its net assets. a high amount of debt carries with it high interest payments and limits a company’s ability to make profits. for FY21, Shriram Properties reported a net loss of Rs 45 crore.
in fact the company hasn’t reported a profit since FY19, but that may be related to its geographical positioning. 24 out of 29 of Shriram’s saleable properties, comprising 91% of the saleable area, are located in Bangalore and Chennai. with the pandemic causing a reverse migration, the real estate business has taken a bigger hit in major cities than elsewhere. as that changes, and people return to metropolitan areas, it’s likely that Shriram will see green again. Bangalore, for one, saw home prices grow 8% for Q1 FY22 (Apr-Jun 2021) over Q1 FY21 (Apr-Jun 2020).
all in all, the high debt it holds puts a ceiling on Shriram’s ability to turn profits in the short term, so it might not become an investor-favourite anytime soon. But in the long run, a solid foundation in major cities and expansion elsewhere is likely to see it sustain and grow.