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    Default CRISIL assigns 2/5 grade to Nitesh Estates IPO

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    [DOWN]MUMBAI: CRISIL has assigned IPO Grade "2/5" to the proposed initial public offer of Nitesh Estates Ltd, which indicates that the fundamentals of
    the IPO are below average relative to other listed securities.

    Nitesh Estates is a Bengaluru-based real estate development company and conducts business under the joint development model. Since 2004, NEL has developed three housing projects in the high-end luxury market, totalling 0.55 mn sq ft of saleable area. The promoters, Nitesh Shetty and Pushpalatha V Shetty, and their group company hold 84.1 per cent in NE. AMIF I (a PE fund of Och-Ziff Capital Management Group) holds 14.4 per cent stake.

    NEL recently ventured into the midĖincome housing segment. In the residential segment, the company has four ongoing projects, having total saleable area of 3.0 mn sq ft (NELís share is 49%), five forthcoming projects of 2.3 mn sq ft (NELís share is 71%) and five planned projects of 6.5 mn sq ft (NELís share is 65%). On the commercial and retail fronts, the company has four planned projects of a total developable area of 3.0 mn sq ft (NELís share is 65%). These projects (except one residential project) are being developed on the joint development model.

    Out of the Rs 4.5 billion that NEL plans to raise via the IPO, Rs 905 million is expected to fund the acquisition of joint development rights of two residential and one retail project, Rs 884 million would be used to fund the construction of a residential project, Rs 460 million will be invested in equity of Nitesh Residency for construction of the ĎRitz Carltoní hotel, Rs 1,357 million will be used to repay debt and the balance will be utilised for general corporate use.

    CRISIL IPO grade 2/5reflects the companyís entry into the highly competitive mid-income housing segment, and development of retail, commercial and hospitality projects, in which the company has a limited track record. These plans also present significant funding and execution risk. In the past, the managementís strategies have not been very successful, with NEL registering very low margins. The company also defaulted on its debt and interest payments in 2008-09, which was subsequently restructured/repaid. In addition, the second-rung management is fairly new and highly dependent on the promoter.

    The grading, however, gets its support from the groupís strong brand name in the high-end luxury housing segment and the presence of experienced independent directors on the board of the company. The promoters have a number of group companies, some of which are in the same line of business. However, the company plans to execute a non-compete agreement to avoid any issues of conflict of interest.

    NELís operating (OPBDIT) and net margin in FY09 were low at 7.6 per cent and 3.2 per cent, respectively, due to low-margin contractual income and high corporate expenses compared to its revenue. In the first half of 2009-10, operating margin was negative 19.1 per cent and net margin was positive at 11.7 per cent, due to a one-time gain of Rs 174 million from sale of investments in subsidiary company, Nitesh Housing Developers.



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