Keystone Realtors IPO review (May apply)

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Review By Dilip Davda on November 10, 2022

•    A well-known Realty company with the "Rustomjee" brand. 
•    It has posted inconsistency in its top and bottom lines for the reported financial periods.
•    Based on its financial data, the issue is fully priced. 
•    It is exploring approx. 35 million square feet of saleable area at various places in and around Mumbai.
•    Well-informed cash surplus investors may park funds for long-term rewards.

ABOUT 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 (Source: Anarock Report). The company commands a market share of 28% in Khar, 23% market in Juhu, 11% in Bandra East, 14% in Virar, 3% in Thane, and 5% in Bhandup in terms of absorption (in units) from 2017 to 2021 (Source: Anarock Report). 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.

Some of its notable projects include Rustomjee Elements, a large gated community in Upper Juhu, Mumbai; Rustomjee Paramount, a signature complex in Khar, Mumbai; Rustomjee Seasons, a 3.82 acres gated community in Bandra Annexe, Mumbai; Rustomjee Crown, a 5.75 acres land parcel for high-end development at Prabhadevi, South Mumbai, consisting of three high-rise towers. KRL's projects include features for entertainment for the family, such as an approximately 150,000 square feet clubhouse at the Virar Global City project, a 6.22 acres podium at its Thane project, an 11.72 acres amusement park at Virar Global City project, Leon's World which is an interactive play space for children and adults at Rustomjee Urbania project. 

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. 

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its need for repayment/prepayment of certain borrowings (Rs. 341.60 cr.), and funding acquisition of future real estate projects and general corporate purposes, KRL is coming out with a maiden combo issue of fresh equity shares worth Rs. 560.00 cr. and an Offer for Sale (OFS) of Rs. 75 cr. thus making an overall IPO size of Rs. 635.00 cr. It has announced a price band of Rs. 514 - Rs. 541 per share of Rs. 10 each. The issue opens for subscription on November 14, 2022, and will close on November 16, 2022. A minimum application is to be made for 27 shares and in multiples thereon, thereafter. At the upper price band, the company will issue approx. 10351206 fresh equity shares and 1386322 equity shares by way of OFS, making an overall approx. 11737528 equity shares issue. The issue constitutes 10.31% of the post-IPO paid-up equity capital of the company. The company has allocated 50% for QIBs, 15% for HNIs, and 35% for Retail investors. Post allotment, shares will be listed on BSE and NSE. 

The joint Book Running Lead Managers (BRLMs) to this issue are Axis Capital Ltd., and Credit Suisse Securities (India) Pvt. Ltd. while Link Intime India Pvt. Ltd. is the registrar of the issue. 

Having issued initial equity shares at par, the company issued/converted further equity shares in the price range of Rs. 499.35 to Rs. 150000 per share between December 2013 and May 2022, including a pre-IPO placement worth Rs. 170 cr. at a price of Rs. 499.35 in May 2022 to a few renowned investors. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 3.35 and Rs. 3.36 per share. 

Post-IPO, KRL's current paid-up equity capital of Rs. 103.53 cr. will stand enhanced to Rs. 113.88 cr. Based on the upper cap of the IPO pricing, the company is looking for a market cap of Rs. 6160.77 cr. 

FINANCIAL PERFORMANCE:
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 cr. / Rs. 137.74 cr. (FY19), Rs. 1268.60 / Rs. 14.49 cr. (FY20), Rs. 1177.27 cr. / Rs. 231.82 cr. (FY21), and Rs. 1302.97 cr. / Rs. 135.83 cr. (FY22). For Q1 of FY23, it earned a net profit of Rs. 4.22 cr. on a total income of Rs. 176.00 cr. 

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

If we annualize 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 365.54 and based on its FY22 earnings, it is at a P/E of 45.35. 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. 

DIVIDEND POLICY:
The company has not declared any dividend for the reported periods of the offer document. It will adopt a prudent dividend policy post-listing, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per offer documents, KRL has shown Macrotech Developers, Godrej Properties, Oberoi Realty, and Sunteck Realty as their listed peers. They are currently quoting at a P/E of around 44.26, 53.68, 64.48, and 467.86 (as of November 10, 2022). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORDS:
The two BRLMs associated with the offer have handled 44 public issues in the past three years, out of which 18 issues closed below the offer price on the listing date. 

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