Shriram Properties

Asset light realtor

One of leading realty player focused on affordable and mid-market residential housing projects in South India under Development Management/JD/JV business model

Shriram Properties, a part of Chennai based Shriram Group, is one of the leading residential real estate development companies in South India, primarily focused on the mid-market and affordable housing categories. It is also present in the mid-market premium and luxury housing categories as well as commercial and office space categories in its core markets.

The company 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.  According to the JLL Report, the company is among top six players in terms of new launches of residential projects in its core markets.

The company commenced operations in Bengaluru in the year 2000 and have since expanded its presence to other cities in South India, i.e., Chennai, Coimbatore and Visakhapatnam. In addition, it also have presence in Kolkata in East India, where the company is developing a large mixed-use project.

Since inception, the company have been focused on the mid-market and affordable housing categories as its target segment within the residential housing market. The mid-market and affordable housing categories have accounted for significant share of overall market absorption in India in recent years. According to the JLL Report, mid-market and affordable housing categories accounted for 75%, 72% and 74% of overall residential unit absorption during calendar years 2018, 2019 and 2020, respectively.

The company, as of September 30, 2021, have completed 29 Projects (representing 16.76 million square feet of Saleable Area) and of this about 24 completed projects (accounting 90.56% of saleable area) are in the cities of Bengaluru and Chennai.  Further, as of September 30, 2021, about 83.69% of its total Saleable Area for Completed Projects were in the mid-market category (51.44%) and affordable housing category (32.25%), and the remainder in the commercial and office space and luxury housing categories. Additionally, plotted developments accounted for 33.41% and 34.67% of sales volumes during the six months ended September 30, 2021 and the Financial Year 2021, respectively.

Ongoing Projects, Projects under Development and Forthcoming Projects as of Sep 30, 2021 numbers 35 projects aggregating to estimated saleable area of 46.72 million square feet. Of these 35 projects about 26 are ongoing projects (56.28% of saleable area), five are under development projects (17.71% of saleable area) and four are forthcoming projects (26.01% of saleable area).

Residential projects accounts for about 93.79% of the total estimated Saleable Area in Ongoing/under development/forthcoming projects as of September 30, 2021.     Further, across these projects, the midmarket category (35.67% of estimated saleable area) and affordable housing category (35.80% of estimated saleable area) totalling about 71.48% of total estimated Saleable Area as of September 30, 2021. Of the total estimated saleable area as of Sep 30, 2021, about 67.15% is in the two markets of Bengaluru and Chennai.   

Moreover out of 35 ongoing/under development/forthcoming projects as of September 30, 2021 about 32 projects [24 Ongoing Projects, four Projects under Development and four Forthcoming Projects] representing 77.91% of estimated Saleable Area are located in South India. Within South India, as of September 30, 2021, 63.72%, 22.46%, 12.24% and 1.58% of total estimated Saleable Area for its Ongoing Projects, Projects under Development and Forthcoming Projects, is located in Bengaluru, Chennai, Vishakhapatnam and Coimbatore. Outside of South India the company have projects in Kolkata. As of September 30, 2021, approximately 22.09% of estimated Saleable Area is located in Kolkata, West Bengal.

The company is transitioning from a real estate development model to a combination of real estate development and real estate services, by expanding its focus on development management (“DM”) business model.  DM business is primarily a service model, under which the company enter into DM agreements with other developers and landowners and provide turn-key approach to development involving product design, project development, branding, sales and marketing, CRM efforts and thereby handling collection, construction, overall completion and handover to customers, all under the control of Shriram brand and company.

As the DM agreements entered by the company typically entitle it to receive fees ranging between 8% to 16% of the total project revenues, based on the nature of the activities agreed with the counterparty, as well as certain incentives upon project revenues crossing specified thresholds. The fee range is higher in case all of the costs relating to selling, marketing and administration are to be borne by the company. In certain development management agreements, the company may also be entitled to a proportion of project revenues earned up to specific thresholds.

DM fees stood at 20.81% and 22.77% of the revenue in H1FY22 and FY21 respectively up from 8.81% and 13.78% in FY19 and FY20 respectively. 

Of the total 35 ongoing/under development/forthcoming projects as of September 30, 2021, the   development management (DM) portfolio comprise fourteen projects [11 Ongoing Projects, one Project under Development and two Forthcoming Projects] representing 14.92 million square feet [Ongoing Projects 6.42 msft or 13.74% total saleable area, under Development 0.86 msft or 1.83% total saleable area and Forthcoming Projects 7.64 msft or 16.35% total saleable area) as of September 30, 2021. The company so far have completed one project under DM business model, representing 2.03 million square feet of Saleable Area.

The company in Dec 2018 has ventured into plotted development, which offers quick turnaround time and faster returns, under the brand extension “Shriram Earth”. So far the company have launched nine plotted development projects of which seven are under DM model,   one project under the joint development arrangement and one project under the owned development category. The total area launched in these projects is around 2.84 million square feet, out of which it have sold 2.54 million square feet (approximately 89.53% of Saleable Area) as of September 30, 2021.  

The company as of Sep 30, 2021, have Land Reserves of approximately 270.47 acres (including 73 acres for which entered into an agreement for sales dated June 13, 2014 but sale deed is pending to be executed) in Kolkata, with a development potential of approximately 21.45 million square feet of estimated Saleable Area. The land reserve is fully paid and is in addition to the ongoing/underdevelopment/forthcoming projects and other than this it do not own any land reserve.  The projects in Kolkata are owned and are being developed entirely by the company.

The Issue, Objects of the Issue

The Offer comprises of the Fresh Issue (of aggregating to Rs 250 crore) and the Offer for Sale (of aggregating to Rs 350 crore).

The proceeds from offer for sale will go to Investor selling shareholders and other selling shareholders. But of the fresh issue proceeds the company propose to repay/pre-payment  in full or part of certain borrowing availed by the company or subsidiaries to the tune of Rs 200 crore and balance is for general corporate purposes.

Of the offer for sale of Rs 350 crore, about Rs 90.955 crore is by Omega TC, Rs 8.344 crore by TCFSL, Rs 92.206 crore by TPG Asia, Rs 133.495 crore by WSI/WSQI and Rs 25 crore by other selling shareholders. 

Of the post offer expanded equity (on upper price band) OMEGA TC will hold 9.75%, TCFSL 0.89%, TPG Asia about 9.88%, WSI/WSQI about 14.30% and other selling shareholder together about 6.44%.  

Strength

The company is part of the Shriram Group, which is a prominent business group with four decades of operating history in India and a well-recognized brand in the retail financial services sector and several other industries. The relationship helps the company to capitalize/benefit from the trust and confidence that homebuyers, lenders, financial investors, landowners, development partners, contractors and other stakeholders place in the Shriram brand and its operational history. Moreover since May 2006, the company received foreign investment from reputed private equity investors and is benefiting from the strategic inputs and support of reputed global and domestic financial investors.  

One of top player in Bengaluru and Chennai residential real estate market especially in affordable and mid market realty segment and these cities are among two key residential housing markets in India, contributing to approximately 29.3% of the launches in India between the calendar year 2012 and the third quarter of calendar year 2021, and 28.7% of the sold inventory in India between calendar year 2019 and the third quarter of the calendar year 2021.

The business model of the company is asset light with focus on Development Management or joint development agreements with landowners/developers or joint ventures, which requires lower upfront capital expenditure compared to direct acquisition of real estate or land parcels.  Increased focus on DM business will enable it to lower the project development related risks such as delay in acquisition of land and generate increased return from capital deployed.  

The asset light business model will help the company to build Scale, consolidate Position and enhance it Execution Capabilities to Capitalize on Industry Opportunity especially for affordable and midmarket residential housing.

Considering strong latent demand for housing in the country, the Government of India has introduced several incentives to promote the construction and development of affordable housing. A portion of affordable housing portfolio of the company qualifies for tax benefits such as 100% deduction of tax on profit and lower GST on affordable housing under the Government’s affordable housing initiative. The current the low interest cost is also facilitating demand for house purchase.

Demonstrated Capabilities in Project Identification and Strong Execution Track Record. The company have realized pre-sales (sales done during construction of a project in terms of saleable area) volumes of 1.56 msft (or 1260 units), 3 msft (or 2525 units), 3.25 msft (or 2873 units), 3.56 msft (or 3469 units) in H1FY22, FY21, FY20 and FY19 respectively. Steady pre sales volume despite challenging times reflects the ability of the company to push sales and the demand in its focus affordable and mid-market segments. Moreover it allowed the company to benefit from deposit and instalment payments from its customers, which it are able to use as working capital and thereby allowing it to maintain healthy levels of working capital and to reduce its debt servicing costs.

Zero unsold stock in completed projects.

Borrowings of the company as of September 30, 2021, was Rs 695.096 crore, translating into a debt equity ratio of 0.68 on expanded equity and in comparison that of Sobha, Puravankara, Prestige and Godrej Properties stood at 1.16, 1.23, 0.84 and 0.57 respectively.

Weakness

Of the 26 ongoing projects about six are involved in a total of 15 land dispute litigation proceedings, as of September 30, 2021. 

A significant portion of the revenues of the company are derived from a few projects. The top one/five project by revenue accounts for 16.75%/70.86%, 33.79%/75.94%, 39.34%/83.98% and 34.05%/87.35% of its total income respectively for H1FY22, FY21, FY20 and FY19. Any adverse developments affecting such projects could have an adverse effect on business, results of operations and financial condition of the company.

Have not acquired the entirety of the land required to develop certain of its Forthcoming Projects at Chandapura and Kannur which in aggregate represent 7.64 million square feet or 16.35% of total estimated Saleable Area, as of September 30, 2021. Further, the company have not yet received change in land use orders for the entire project land for its projects such as Chandapura, Sambhavi and Kannur.

Bengal Shriram, the subsidiary of the company has been impleaded in a writ petition in the High Court of Calcutta in connection with the obtainment of environmental permissions prior to the commencement of construction. The matter is currently pending before the High Court.

The Indian real estate sector is heavily regulated by central, state and local governmental authorities and change in laws and rules will impact the performance of the company.

The company as of September 30, 2021, has insurance coverage for 61.04% of its total assets and thus any physical damage may not be fully compensated by insurance.

The company's financials have been weaker where revenues of the company are declining largely while the company turned loss-making since FY20. Some of Group Companies such as Shriram Coimbatore, Shriprop Aerospace, Twentyfirst Century and Shriprop Hitech have incurred losses in the preceding three financial years, based on their last audited financial statements available.

Contingent liabilities on a consolidated basis of the company stood at Rs 37.8 crore and financial guarantee at Rs 936.2 crore as of September 30, 2021. Ratio of total liabilities plus contingent liabilities to net worth was 3.34, 2.95, 2.79 and 2.46 as end of September 30, 2021, March 31, 2021, 2020 and 2019 respectively.

K.G. Krishnamurthy, one of Independent Directors in the BoD of the company is also a member on the board of companies such as Ajmera Realty & Infra India, Vascon Engineers, Purvankara and Indiabulls Real Estate which are engaged in a line of business similar to that of the company.

Kolkata (22.09% of  estimated Saleable Area of ongoing/underdevelopment/forthcoming) is a new market for the company and its ability to get all approvals and timely construction and handover of it has to be seen.

Valuation

Consolidated revenue for the fiscal ended March 2021 was down 25% to Rs 431.50 crore dragged largely by lower revenue from constructed properties and lower other operating income as the fee income was up by strong 31% to 114.15 crore.  The revenue from constructed properties was down by 33% to Rs 286.80 crore primarily due to decrease in the number of sale deed registrations to 551 residential units against 1022 units in FY20 due to limited availability of Government Offices during pandemic period. Other operating income was down by 48% to Rs 30.55 crore hit by 100% fall in transfer of development rights to nil from Rs 53.37 crore but that was partly offset by 658% jump in income from co-development rights to Rs 17.97 crore and RS 8.64 crore jump from nil in the income from relinquishment of development rights.   But with OPM expand by 660 bps to 11.9%, the operating profit was up 68% to Rs 51.24 crore. Other income was higher by 17% to Rs 69.81 crore and largely comprise of unwinding of discount of trade receivables and interest income from inter corporate loans and FDs. Its wholly-owned subsidiary Global Entropolis (Vizag), a wholly owned subsidiary of the company  had proportionately assigned its development right over 2.3 million square feet, out of 5.1 million square feet, at the land parcel for the Panorama Hills projects, in favour of a third party for a deferred consideration of  Rs 280 crore during the financial year 2016. This consideration is being settled over a period of five years, and is being recorded in the books as income from unwinding of discount of trade receivables. After accounting for higher other income and higher interest and depreciation, the PBT was a loss of Rs 10.83 crore compared to a loss of Rs 39.17 crore in the corresponding previous period. The share of profit from associate was a loss of Rs 33.20 crore (down from a loss of Rs 40.94 crore) mainly on account of losses from joint ventures i.e. Park63 and Sunshine, as the recognition of revenue had not commenced in accordance with Ind AS 115. And thus the PBT after SoPA but before EO Exp was a loss of Rs 44.03 crore against a loss of RS 80.11 crore in the corresponding previous period. The EO exp was lower by 24% to RS 1.17 crore and thus the PBT after EO was a loss of Rs 45.20 crore against a loss of Rs 81.66 crore. Eventually the net profit after MI was a loss of RS 68.29 crore against a loss of Rs 86.11 crore.

For the half year ended Sep 2021, the company reported a revenue of Rs 118.18 crore and the operating profit stood at 0.10 crore with OPM stand at 0.1%. Eventually the net   loss was Rs 68.28 crore.

At upper price band of Rs 118, the P/BV works out to 2 times and it is against 3.2 times for Sobha, 1.5 times for Puravankara, 2.6 times for Prestige Estates and 6.6 times of Godrej Properties.

Saleable area of the company in ongoing projects is 26.3 msft for the company compared to 28.8 msft for Sobha and 19.62 msft for Puravankara as of Sep 30, 2021.

At the upper price band the company’s market capitalisation works out to Rs 2001.3 crore, which around 4.6 times of its FY21 revenue. On the other hand Sobha, Puravankara and Prestige Estate are quoting at revenue multiples of 3.8 times, 3.3 times and 2.4 times of their FY21 revenue.