Keystone Realtors IPO Review: Will Its Asset-Light Business Model Lead to Sustainable Growth?

Keystone Realtors Limited (KRL) IPO opens for subscription on 14th November. The company is looking to raise up to Rs 635.00 crore through the public issue. Here are the details: 

Keystone Realtors Limited IPO Details

• Keystone Realtors IPO Date: 14 November - 16 November 2022
• Keystone Realtors IPO Price band: Rs 514 - Rs 541
• Keystone Realtors IPO Issue Size: Rs 635 crore (Fresh Issue of Equity shares aggregating up to Rs 565 crore and remaining OFS)
• Reservation: QIB 50%, Retail - 35%, NII 15%
• Minimum Investment: Rs 14,607
• Bid lot: 27 shares, and in multiples of 27 shares

Keystone Realtors Limited IPO: Objects of the Issue

The net proceeds of the fresh issue will be used for below purposes:

• Repayment/ prepayment, in full or part, of certain borrowings availed by the company and/or certain of its subsidiaries.
• Funding acquisition of future real estate projects and general corporate purposes.

Keystone Realtors Limited IPO: About Keystone Realtors

• The company has over two decades of experience in the real estate industry. They are one of the prominent real estate developers in the country. 
• Keystone Realtors is engaged in the business of real estate construction and development and other related activities.
• They have completed 32 projects and have 12 ongoing projects as of 30 June 2022. Also, they have 21 forthcoming projects.
• KRL has a comprehensive range of projects under the affordable, aspirational, mid and mass, premium, and super premium categories - all under the Rustomjee brand.
• The company has adopted an integrated real estate development model for every stage of the property development life cycle.
• They have developed over 280 buildings and homes for over 14,000 families as of 30 June 2022.

Keystone Realtors Limited IPO: Industry Outlook

• The real estate sector in India has witnessed several changes in market conditions because of demonetization, the NBFC liquidity crisis of 2018, and the implementation of RERA and GST.
• Despite the spiraling COVID-19 pressure across the country, the Indian residential sector made a significant comeback in 2021 with absorption rebounding to 171% as compared to 2020.
• New launches have jumped by 185% from 127,959 units in 2020 to 236,693 units in 2021.
• Hyderabad witnessed the highest yearly increase in the available inventory by 171%, whereas MMR, NCR, and Bengaluru witnessed a yearly decline in the available inventory by 10%, 5%, and 4%, respectively (2017 to 2021).

Keystone Realtors Limited IPO: Listed Peers

(Return on Networth is got by dividing the net income of the company by the net worth of the company. The higher the RoNW, the better the profitability of the company)

(Source: Keystone Realtors DRHP)

KRL has many listed peers - Macrotech Developers Limited, Godrej Properties Limited, Oberoi Realty Limited, and Sunteck Realty Limited. Below is the comparison of KRL with its listed peers:

• In terms of revenue (FY22), Keystone Realtors is only above Sunteck Realty. Other listed peers are much bigger players compared to KRL in terms of revenue.
• The gross margin percent for KRL is the lowest among listed peers. The average Gross Margin percent for listed peers is around 42%, while KRL has a Gross Margin of only 22.11% (FY22).
• All the listed peers have Debt to Equity ratio of less than 1, while KRL has a D/E ratio of 1.38 for FY22.
• Earning Per Share (EPS) of KRL is higher than Godrej Properties and Sunteck Realty and lower than the other two listed peers.
• Return of Net Worth (RoNW) is highest for Keystone Realtors - 14.97%, the next best on the list is Macrotech Developers with RoNW of 10.30%.

Keystone Realtors Limited IPO: Financials

(In Rs Millions)
(Source: Keystone Realtors DRHP)

• The company reported revenue of Rs 1211.5 crore, Rs 848.7 crore, and Rs 1269.4 crore for FY20, FY21, and FY22, respectively. There has been no significant growth in revenue in this period.
• EBITDA reported by the company for FY20, FY21, and FY22 was Rs 193.43 crore, Rs 149.45 crore, and Rs 210.74 crore, respectively. The EBITDA margin for the same period was 15.97%, 17.61%, and 16.60%, respectively.
• The net income for FY20, FY21, and FY22 was Rs 14.5 crore, Rs 231.8 crore, and Rs 135.8 crore, respectively.
• The Debt to Equity ratio has come down from 7.70 in FY20 to 1.38 in FY22.
• For the last three financial years, the average EPS and RoNW were 15.7 and 19.63%, respectively.

Keystone Realtors Limited IPO: Unique Selling Propositions

Established customer-centric brand in the MMR: They are one of the prominent real estate developers in the micro markets that they are present in - Juhu, Bandra East, Khar, Bhandup, Virar, and Thane. They can garner premium pricing in the MMR micro-markets where their projects are located. 

Well-diversified portfolio and strong pipeline: They have a diversified suite of projects across a wide range of price points, and a presence in several micro markets. The diversified portfolio has allowed them to hedge their revenue pipelines and shield against business fluctuations across categories. 

Asset-light and scalable model: KRL focuses on entering into joint development agreements and re-development agreements with landowners or developers, or societies, which requires lower upfront capital expenditure compared to the direct acquisition of land parcels.

Technology-focused operations: The company will leverage technology as an enabler in various aspects of operations, including project planning and execution, and customer relationship management. 

Keystone Realtors Limited IPO: Growth Potential

Leverage the ‘Rustomjee’ brand and grow asset-light operations: The company intends to leverage its strength and experience in redevelopment, focus on such opportunities in Mumbai’s city center locations and major suburbs, and continue to expand business by following a disciplined approach with an asset-light model.

Improve operational efficiency with technological innovation: They plan to continue to enhance its capability to deliver more projects, reduce development time and cost, and achieve economies of scale.

Increase focus on key growth areas: KRL plans to increase its focus on several key growth areas, such as the Western Suburbs and Navi Mumbai, by focusing on increased demand for real estate arising from upcoming transportation infrastructure projects and the relaxation of Coastal Regulation Zone norms that allow for the development of more sea-facing properties.

Focus on sustainability: They assess the environmental impact of their projects and have adopted a comprehensive approach to sustainable development from an early design phase through the construction period. 

Keystone Realtors Limited IPO: Risks

Most projects only in Mumbai Metropolitan Region: KRL's real estate development activities are principally focused within the MMR, which may be subject to market conditions and regulatory developments that are different from other real estate markets within India.

Unable to complete existing projects: Company's ability to complete its projects within the expected completion dates or at all is subject to many risks and unforeseen events, including, without limitation, clear title to the relevant plot of land, collaboration with third parties, etc. If they are unable to complete projects on time, it will impact the brand and the company's financials.

Development of residential projects: They focus on the development of residential projects across various categories within the MMR, and the success of these projects is dependent on the company's ability to anticipate and address consumer preferences in the various market segments.

Keystone Realtors IPO: Detailed Review and Recommendation

Revenue from operations: Keystone Realtors revenues have increased by just 2.36% over FY20-22. Its listed peers have either shown similar growth or less growth over the same time period. However, except for Sunteck Realty, the company is small (in revenue terms) compared to its listed competitors.

Gross Margins: For the year 2022, Keystone Realtors had a gross margin of 22.11% which is less than the average gross margin of 42% among its listed peers.

Earnings: For the period between 2020-22, Keystone Realtors showed a growth of 4.38% in earnings which is modest compared to its listed peers.

Debt-to-equity ratio: The firm’s debt-to-equity ratio has shown great improvement over the years. What was around 7.7 in the year 2020, was reduced to 1.38 in 2022. The company attempted to pay off a significant portion of its debt in 2021. (As can be observed from the financials table above.) Also, keep in mind that the company finances most of its working capital requirements through debt. Hence, in case there is an issue of high inventory or pre-sales cancellations, the working capital requirements can increase which would add further pressure on the earnings.

Cash Flows: Real estate business is not a cash-oriented business like those in the consumer goods sector, the cash conversion cycle is one of the longest in the real estate industry. However, it is important to maintain a positive cash flow to meet the interest payment obligations. Except for 2022 (when it was negative), Keystone Realtors had a much higher net cash from operations compared to its listed peers. 

Robust in-house capabilities: The company has ensured that almost all of its important functions are executed in-house, having less dependency on any external agencies. All of the functions, including, land acquisition, regulatory compliance,  designing, and even to some extent sales and marketing is done in-house.

Supply and absorption rate in the Mumbai Metropolitan Region: The supply and absorption rate is an important parameter in the real estate market. It essentially shows how quickly houses are bought and sold compared to the number of vacant homes available. In the Mumbai Metropolitan Region, this ratio has been high over the years. Hence, the prices of homes in Mumbai is generally high. This is a positive for Keystone Realtors as it could show up in the profit margins.

Stronghold in various regions in the Mumbai region: In terms of supply (in money terms), Keystone Realtors has a good hold in various regions in the Mumbai metropolitan area. It is ranked 2nd in Juhu and Khar regions whereas it is ranked 3rd and 4th in Bandra and Bhandup regions.

Dependence on the real estate market in the Mumbai region: An important issue concerning Keystone Realtors is the overdependence on the Mumbai Metropolitan Region. Per a report by ANAROCK, the total supply in area terms has slightly declined in the Mumbai Metropolitan Region. This translates to a hike in land acquisition costs for the company as the land area for development in Mumbai decreases. Also, most of the factors that affect the economic and market conditions are outside the scope of the company’s control.

Leverage its “Rustomjee” Brand: The company looks to leverage the brand value that it has established over the years by focusing more on an asset-light business model. An asset-light business model aims at churning out high revenues with relatively less capital deployment. (Think of Uber. It doesn’t actually own any of its cars, but generates revenues with fairly less capital deployed). Similarly, Keystone Realtors also looks to leverage its brand value by taking up several redevelopment projects in the coming years. There are several dilapidated societies in Mumbai that require redevelopment, and Keystone Realtors looks to capitalize on it.

Recommendation: External analysts opine that since the growth prospects look good given the various projects in hand, investors can invest in the company with a medium to long-term perspective.

How to invest in Keystone Realtors' IPO?

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