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CRISIL has assigned a CRISIL IPO grade of ‘3/5’ (pronounced "three on five") to the proposed IPO of Raheja Universal Ltd (RUL). This grade indicates that the fundamentals of the IPO are average relative to the other listed equity securities in India.

However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The grade is not a recommendation to buy, sell or hold the graded instrument, its future market price or suitability for a particular investor.

The assigned grade reflects RUL’s strong position in the real estate business in Mumbai. RUL and its promoter group companies have developed close to 4.9 mn square feet of real estate across 40 projects largely in the Mumbai Metropolitan Region (MMR). The company has been able to establish a strong brand thanks to high quality construction and execution track record. And, due to its strong brand name, RUL has been able to command premium prices over its competitors in most of the locations. Further, the company has a land bank of close to 1,202 acres across eight cities in India. Of this, 577 acres is in MMR and the remaining in the cities of Pune, Chennai, Hyderabad, Panchkula, Goa, Mangalore and Nagpur - either owned by the company or held through joint ventures or joint development agreements.

The grade takes into account a strong second line of management and independent directors who are experienced in legal and taxation fields. To avoid any conflict of interest, the promoters have signed a non compete agreement with the company. The agreement states that subject to the exceptions mentioned herein, the promoters shall not undertake the development of any land or construction of building(s) thereon under the brand name “Raheja Universal” or any other brand.

The grade is constrained by the inherent cyclicality in the real estate business, significant exposure to high
gestation and capital-intensive commercial projects, and entry into new markets outside MMR where the company has limited experience. RUL has significant exposure to large commercial real estate projects, including the Raheja International Corporate City (RICC) in Jui Nagar, Navi Mumbai, which will require significant funds thereby reducing the company’s financial flexibility. Also, the company has limited experience in executing large commercial real estate projects.

Historically, the company has had high leverage which has resulted in lower margins. Further, the company’s aggressive land acquisition strategy has led to losses during the downturn. The company’s consolidated revenues amounted to Rs 3.6 bn during the first half of FY10; the operating margin was 25.5% and net margin was negative 3.3%. The total consolidated debt as on September 30, 2009 was Rs 8.9 bn in comparison to the total net worth of Rs 3.3 bn.

Concluded.

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