IPO Valuation Raises Serious Concern amidst Realtors and Bankers

Tension is simmering between property development companies, which are planning to raise funds through public offerings, and the merchant bankers to the share offerings. There is a growing realisation among cash-starved realty companies that they may not be able to sell shares to the public at the valuations that were initially proposed by merchant bankers at the time of their appointment, according to senior bank officials. Some real estate companies have already trimmed their fund-raising targets in the initial public offerings by as much as half of the earlier targets. A South-based developer, which planned to raise over Rs 550 crore through an initial public offering initially, is believed to have cut it down by around 30%.

A Maharashtra-based realty company, which wanted to be valued at close to Rs 20,000 crore during its IPO, is mulling a significant cut in the valuation target for the public issue, according to a person familiar with the development. A few more are expected to follow suit, he said. Company officials and investment bankers to the issues were not available to officially comment on the matter. “Many realty companies were earlier assured of valuations in their public issues that were comparable to what an IPO commanded in 2007… As they started meeting more investors in roadshows, companies started realising such expectations cannot be met,” said a top official at a foreign investment bank.

“This has caused some friction between companies and merchant bankers,” he said. Realty firms including Emaar MGF, Lodha Developers, Sahara Prime, Lodha Developers, Nitesh Estates, Oberoi Realty, Kumar Urban, Prestige Estates, Vatika, Neptune Developers and BPTP plan to raise close to Rs 19,000-20,000 crore through IPOs, bankers said. So far in 2010, two realty firms — Godrej Properties and DB Realty — have been listed. Their issues were over-subscribed, but with the market turning volatile, companies have been reluctant to float their IPOs on concern their issues may not sail through.

Institutional investors, in their meetings with companies, have conveyed their discomfort about their business prospects, as property prices have risen without any major pick-up in demand, said a fund manager with a private mutual fund. One disgruntled developer, which was exploring the option to change its merchant bankers to its issue, decided against it, as companies have to file fresh papers with the Securities and Exchange Board of India (Sebi) if they appoint new issue managers. “Most of the developers are in need of money and a refiling will only delay their fund raising plans further,” said a top official with a domestic investment bank.

However, a banker to one of the above issues denied tension between them and realty companies over valuations. “When we were appointed in 2009, the market was roaring and valuations were based on the sentiment then. Now, investors are a lot more cautious about their choice of paper and accordingly, companies have to trim their valuation expectations,” he added.