Arkade Developers IPO review (Apply)

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Review By Dilip Davda on September 13, 2024

•    ADL is engaged in redevelopment and construction of new real estate projects in and around MMR region.
•    After static performance for FY22 and FY23, it posted growth in FY24, indicating likely trends ahead.
•    It has around 3.7 million sq. ft. developable area in its ongoing and upcoming projects.
•    The company is virtually a debt free company as it provides funding to its projects from promoter's share and advances received from ongoing developments.
•    Based on FY24 earnings, the issue appears reasonably priced.
•    Investors may park funds for medium to long term. 

ABOUT COMPANY:
Arkade Developers Ltd. (ADL) is a real estate development Company concentrating on the development of premium aspirational lifestyle residential premises in Mumbai, Maharashtra, India's commercial capital. Its business can broadly be classified into two categories: (i) development / construction of residential premises on land acquired by the Company (New Projects) and (ii) redevelopment of existing premises (Redevelopment Projects). As on June 30, 2024, it has developed 2.20 million square feet of residential property (including through partnership entities in which it holds the majority stake). 

The company is engaged in the development of new projects and redevelopment of existing premises, and between 2017 and Q1 2024, it has launched 1,220 residential units and sold 1,045 residential units in different markets in MMR, Maharashtra. In particular, it has established a successful track record of completing projects on time, and from CY 2003 to March 2024, it has successfully completed redevelopment of 10 projects in the western suburbs of Mumbai and 1 project in south-central Mumbai (through a partnership firm in which it holds the majority stake) with a combined constructed area of 1,000,000 square feet (approx.). 

Its operations are strategically located in Mumbai, one of the biggest and most expensive real estate markets in India. Since CY 2021 to Q1 2024, MMR, Maharashtra has contributed the highest annual sales share of residential units across the top 7 cities in India, ranging from 29% to 33%. On average, the sales in MMR, Maharashtra accounted for 31% of the total residential unit absorption during this time frame. Further, the residential market in MMR, Maharashtra stands out as the most expensive, amongst the top 7 cities in India with a capital value of Rs. 14,600 per sq. ft. as of Q1 2024. (Source: Anarock Report) Within MMR, Maharashtra, its operations are strategically located, and it has significant operations in the western suburbs of MMR, Maharashtra and, from 2017, are amongst the top 10 developers in terms of supply in the Borivali West, Goregaon East and Santacruz West micro-markets. (Source: Anarock Report).

It owes strong brand recognition in MMR, Maharashtra and its track-record to customer-centric approach, and business model which lays emphasis on developing high-end and premium budget aesthetically designed, sustainable residential premises with life-style amenities and facilities in the high-density areas in MMR, Maharashtra. It also has a consistent track-record of meeting project delivery timelines which is a critical aspect of its brand. While its initial projects were stand-alone residential buildings, current portfolio of Ongoing Projects includes gated communities such as Arkade Nest, Arkade Aspire, Arkade Prime and Arkade Aura. In the last 2 decades it has completed 28 projects (including 11 projects on a stand-alone basis (including 2 projects executed through partnership firms in which it holds the majority stake), 8 projects executed by its Promoter through his proprietorship, M/s Arkade Creations, and 9 projects through joint development arrangements with other third parties) aggregating more than 4.5 million square feet of development and have catered to more than approximately 4,000 customers. 

ADL's projects have, generally, been financed primarily through a mix of promoter equity and internal accruals. As on March 31, 2024, its net debt to equity ratio was 0.14. It is primarily operating in Western and Eastern suburbs at present. As of June 30, 2024, out of its 6 projects that are currently under-development 3 are New Projects and 3 are Redevelopment Projects constituting 50.00% each of its under-development projects. As of June 30, 2024, its Upcoming Projects comprise 6 projects in MMR, Maharashtra i.e., 1 New Project, viz., Arkade Rare located in Bhandup, i.e. Copper Rollers Private Limited, and 5 Redevelopment Projects i.e., 1 project Arkade Vistas and Arkade Views located in Goregaon East, 2 projects viz., Municipal Employees Arunachal Co-operative Housing Society and Maheshwar Niwas Co-operative Housing Society located in Santacruz West, 1 project viz., Laxmi Ramana Co-operative Housing Society located in Goregaon West and 1 project Nutan Ayojan Nagar Co-operative Housing Society located in Malad West, respectively. In addition to Upcoming Projects, as of June 30, 2024, it has received letter of intent for 2 redevelopment projects for which the company has yet to execute a contract. Its ongoing and up-coming projects are having total developable area of 3.7 million sq. ft. As of June 30, 2024, it had 201 employees on its payroll and additional 850 contract labourers.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of fresh equity shares issue worth Rs. 410.00 cr. (approx. 32031250 shares at the upper cap). The company has announced a price band of Rs. 121 - Rs. 128 per share of Rs. 10 each. The issue opens for subscription on September 16, 2024, and will close on September 19, 2024. The minimum application to be made is for 110 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The IPO constitutes 17.25% of the post-IPO paid-up equity capital of the company. From the net proceeds of the fresh equity issue, the company will utilize Rs. 250.00 cr. for funding ongoing developments, and the rest for funding acquisition of lands which are yet to be identified, and general corporate purposes.

The company has reserved shares worth Rs. 2.00 cr. for its eligible employees and offering them a discount of Rs. 5.00 per share. From the balance, it has allocated not more than 50% for QIBs, not less than 15% for HNIs and not less than 35% for Retail investors. The company has done a pre-IPO placement of 1626016 shares at a price of Rs. 123 per share worth Rs. 20.00 cr.

The sole Book Running Lead Manager (BRLM) to this issue is Unistone Capital Pvt. Ltd., while Bigshare Services Pvt. Ltd. Is the registrar to the issue. 

Having issued initial equity shares at par, the company issued/converted further equity shares in the price range of Rs. 60 - Rs. 500 between November 2010, and July 2024. It has also issued bonus shares in the ratio of 75 for 1 in July 2023. The average cost of acquisition of shares by the promoters is Rs. 1.28 per share. 

Post IPO, company's current paid-up equity capital of Rs. 153.63 cr. will stand enhanced to Rs. 185.66 cr. Based on the upper cap of IPO pricing, the company is looking for a market cap of Rs. 2376.41 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/met profit of Rs. 237.18 cr. / Rs. 50.84 cr. (FY22), Rs. 224.01 cr. / Rs. 50.77 cr. (FY23), and Rs. 635.71 cr. / Rs. 122.81 cr. (FY24). After static performances for FY22 and FY23, it posted growth in FY24, indicating the likely trends ahead. 

For the last three fiscals, the company has reported an average EPS of Rs. 5.71, and an average RoNW of 39.94%. The issue is priced at a P/BV of 6.02 based on its NAV of Rs. 21.28 as of March 31, 2024, and at a P/BV of 3.15 based on its post-IPO NAV of Rs. 40.58 per share (at the upper cap). 

If we attribute FY24 annualized earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 19.34. The issue relatively appears reasonably priced in comparison to its listed peers.

The company reported PAT margins of 22.21% (FY22), 23.06% (FY23), 19.35% (FY24), and RoCE margins of 46.17%, 24.30%, 47.34% for the referred periods, respectively.

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It has already adopted a dividend policy in August 2023, based on its financial performance and future prospects.

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Keystone Realtors, Godrej Properties, Macrotech Developers, and Suraj Estate as their listed peers. They are trading at a P/E of 99.6, 73.2, 63.5, and 40.0 (as of September 13, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The BRLM associated with this issue has handled 19 issues (9 mainboards and 10 SME), out of which no issue has closed below the offer price on the listing date.

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