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  • JULY 26, 2010

Unique IPOs: But will they attract investors?

Recently JayPee Infratech, a company with a very unique business model hit the primary market. The business model was deemed to be unique as the company offered both infrastructure and real estate play in a single company. However, the response to the IPO was lukewarm.

Now what could be the reason for this? It wasn't as if the company management was not very well known. Valuations were not expensive either.

However, we believe what did in the company was that it jumped on the IPO bandwagon pretty soon. Although it was confident of completing the Taj Expressway before schedule (prior to the launch of IPO), the real estate story which it tried to sell was never a realistic possibility in the near future. Hence, the investors were a bit awry. In short, markets factored in the longevity discount for the real estate story.

After JayPee Infratech, we have another one such unique story in the pipeline ready to hit the markets. Hindustan Construction Company (HCC) plans to come out with an IPO of its subsidiary, Lavasa. It plans to raise Rs 20 bn from the IPO which is slated to hit the markets by 2010-end. The company has already appointed lead managers for this issue.

Lavasa: An overview

Lavasa is HCC's visionary mega township project near Pune spread over 20,000 acres. HCC owns about 65% stake in Lavasa and has plans to develop the entire township in 4-5 phases. HCC has already launched phase 1 and received a strong response for it. The company has plans to develop about 160 m sqft of area in Lavasa. 75% of the area will be for residential use while the balance 25% will be for commercial and hospitality purposes.

Market gurus believe that the planned IPO of Lavasa could see some value unlocking for the investors. However, it should be remembered that Lavasa is no less than 10-12 years project. An idea which will take approximately a decade to fructify is subject to execution risk and deserves a longevity discount by the markets.

Here we present a snapshot of Lavasa's valuation based on certain facts and assumptions.

ParticularsCommentsAmt (Rs bn)
Valuation of Lavasa (As of now)As per management120
Funding details  
-Debt -70%Assumption (typical mix)84
-Equity -30%Assumption (typical mix)36
HCC's stake in Lavasa@65% 23
Outstanding shares (m) 292
Per share value of Lavasa (In Rs) 80
HCC CMP (In Rs) 133
Embedded value of Lavasa in HCC's price 60%

Now does a story that has just been launched and will take about a decade to fully blossom out deserve to command an embedded value of 60% in a listed entity. And we still listen to market gurus saying that the IPO has huge value unlocking potential for investors.

Further, it is to be noted that right now, HCC's stake in Lavasa is valued at book value. But once the IPO sails through, it will be valued at market price. And this could further boost HCC's valuations.

When applying to an IPO, the retail investor should not get carried away by the unique story which the promoter is trying to sell. After all promoters have the right to maximize their profits. It is up to you as an investor to carry out a reasonable valuation exercise before committing your funds.

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