Developers Using Realty IPOs to Repay Debt

December 1, 2009	(Be the first to rate this story!)  Loading ...
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Realty stocks are off their lows and quite a few real estate stocks have outperformed the broader market in the past 12-months, but the sector still seems to be facing financial headwinds. Nothing illustrates this better than the spate of new initial public offerings (IPO) from the sector. Nearly a dozen developers have announced plans to raise a large amount of capital from the primary market and most of them are raising equity to pay off debt rather than use the proceeds to fund growth. While a company has full discretion over the use of IPO proceeds, as long as it makes full disclosures, hitting the market to raise money to settle debt primarily is a sign of the precarious financial health of some of the real estate developers.

For companies which charted out a growth path using borrowed funds during good times, the money being raised through IPOs could be a last-ditch attempt to fix their lop-sided balance sheets. In case of Emaar MGF — the Indo-Dubai JV — a whopping 73% of the funds raised would go towards retiring its debt as well that of its various subsidiaries and redemption of ‘certain’ redeemable preference shares. The company seeks to raise around Rs 3,850 crore, making it one of the largest IPOs in recent times.

Infrastructure developer Ashoka Builcon is also planning to raise Rs 225 crore but has allocated a meagre Rs 14 crore from the proceeds for buying capital equipment. The bulk of the money would go towards meeting working capital requirements and paying loans of subsidiaries. While Emaar MGF has a debt-to-equity ratio of 1.5x, that of Delhi-based Ambience is 2x. Emaar’s cash flow from operations for the year ended March 31, 2009 suddenly turned positive at Rs 174 crore from a negative of Rs 2,378 crore in the year prior to that. However, for Ambience it was a negative Rs 97 crore.

The flood of realty IPOs comes at a time when RBI has tightened norms relating to bank funding for the sector. Though the move is primarily aimed at curbing any build up of asset prices, it may have a significant impact on the operating capabilities of many of the developers. The recent crash in the Dubai market will further add to the troubles. Retail investors would be better off being cautious while considering the IPOs of these companies.

News Published Under:   Real Estate Developers |

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