Keystone IPO: Holds value for medium to long-term returns

Keystone Realtors Limited has tapped the capital markets with its fresh issue for Rs 560 crore and an offer for sale of 75 crore shares in a price band of Rs514-541. The issue opened on 14th November, Monday and would close on Wednesday, 16th November. The company uses the popular brand Rustomjee as its iconic name as far as homebuyers are concerned. The name is the first name of the promoter Boman Irani's father.

The company has been in existence for 26 years, has developed over 20 million square feet, 2 mega townships, over 14,000 homes and has a robust pipeline of over 34 million square feet. It has done all of this construction and development in the rich and opportunity-providing MMR region. In terms of looking to expand its geography, there is absolutely no need as the developers of India look to enter this region. Keystone Realtors in the near foreseeable future sees no possibility or need of expanding outside MMR.

The region offers scope for new development, joint development, joint ventures, redevelopment agreements and slum rehabilitation projects. Keystone has done projects in all the above categories and has projects in each of the categories mentioned above. The company has experience in building communities and nurturing spaces that provide their customers a superior lifestyle. They are present across many micro markets in the MMR region. Moreover, they are also present across various price points which make it that much easier to get customers to buy their homes. Mumbai generates 6 per cent of India's GDP and 1/3rd of tax revenues of the country. This is the potential of the MMR region. Further MMR has the highest supply and absorption amongst the seven major Indian markets.

A very key factor for real estate has been the sale of inventories across segments, post covid-19 outbreak in April 2020. Demand increased substantially as people began looking at work from home and also children needing space to attend classes from home. The need for that additional room or what in MMR is popularly known as half a bedroom increased. This helped give a fillip to unsold inventories being liquidated and gave builders a new lease of life as they began new projects.

The company has a large base of channel partners which numbers 1,542 as of 30th June which helps in finding the right fit of home for customers from the Rustomjee portfolio. The brand has a great acceptance amongst homebuyers and the same is borne out by the fact that Pre-sales in terms of homes was 607 in FY20, 823 in FY21 and 1,241 in FY22. The same for the first quarter of 23 was 134.

In terms of ongoing development, the company has 10 projects currently on. Of these, 2 are in the super premium segment, 3 in the aspirational segment, 4 in the mid and mass segment and 1 in the affordable segment. The total saleable area in these 10 ongoing projects is 5.73 million square feet with about 2.34 million sq ft in super premium and 2.37 million sq ft in mid and mass segment.

The company follows the asset light model and typically does not invest in land parcels or what is popularly known as land banks. In redevelopment projects the investment is restricted to about 10 per cent of the realisable sale value in re-location, rents and other expenses before pre-sale begins. The company through experience has also learnt that without all permissions being in place it is not advisable to start relocation of existing families from their homes.

In terms of construction, Rustomjee uses a dual method. For the smaller buildings it uses its own expertise with the help of local contractors. In the case of complex construction of large multi-storied towers, it uses reputed construction companies. This ensures timely deliveries and quality of the standard that the brand Rustomjee is known for.

The company had revenues of Rs1,269.36 crores for the year ended March 22 and a profit after tax of Rs 135.82 crs. The company reported an EPS of Rs 13.96 for the year. The PE band is 36.83-38.76. The NAV for the year ended March 22 is Rs 93.24. The comparison with its peers makes it in line but more expensive than Macrotech developers and Oberoi Realty and cheaper than Godrej Properties and Suntec. The company has an interesting model and should be looked at for investments over the longer horizon.

The issue comes at a very interesting time. Interest rates have risen over the last two quarters making housing loans that much more expensive. Inventories have reduced and home buyers are becoming more demanding than ever before in terms of amenities. Rustomjee or Keystone Realtors have their job cut out in delivering quality construction, time after time. Subscription to the issue is warranted by investors looking for returns in the medium to long term. Those looking for listing gains may stay away from the issue.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)