Arkade Developers IPO analysis

Arkade Developers IPO will open for subscription on September 16, 2024 and close on September 19, 2024. We break down the residential property developer's strengths, weaknesses, and growth prospects to help investors make an informed decision.

Arkade Developers IPO in a nutshell

• Quality : Its three-year average ROE and ROCE were nearly 39 and 32 per cent, respectively, during FY22-24.
  
• Growth : Its revenue and net profit grew 67 and 56 per cent per annum, respectively, during FY22-24.
  
• Valuation : Post the IPO, the stock will be valued at a P/E and P/B ratio of around 19 and 3 times, respectively.
  
• Overview: Arkade Developers is expected to benefit from the growing housing demand in the economy. The real estate sector overall is benefiting from the government's increased focus on infrastructure development. This is expected to increase prices in the sector and support the company's growth. However, some risks for the company include the cyclicality of the industry and stiff competition from other organised players.

About Arkade Developers

Incorporated in 1986, Arkade is a real estate developer specialising in residential development and redevelopment projects primarily in the Mumbai Metropolitan Region. Redevelopment projects accounted for one-third of its FY24 revenue. Over the past two decades, the company has completed 28 projects covering more than 4.5 million square feet, serving nearly 4,000 customers. The company's typical project completion timeline is around three years. Currently, it is developing six projects, with about 4 million square feet of land under construction.

Strengths of Arkade Developers

• Timely execution: Arkade Developers has successfully developed 28 projects without ever facing any delays. The company has a consistent record of completing projects within an average three-year timeframe.
  
• Diversification via redevelopment: The company has recognised the increasing demand for redevelopment in the Mumbai Metropolitan Region and has steadily increased its focus on this segment. The vertical's share in company revenue has risen from zero to 33 per cent during FY22-24. According to the municipal corporation of Greater Mumbai, there are over 19,500 buildings constructed before September 1969, now requiring redevelopment, creating a significant opportunity for the company.

Weaknesses of Arkade Developers

• Concentration in one region : The company's operations are heavily focused in the Mumbai Metropolitan Region. While it is a lucrative market, over-reliance on a single geographical region exposes the company to risks from regional economic downturns or regulatory changes.
  
• Redevelopment snags: Redevelopment projects often involve lengthy approval processes and complex negotiations with existing property owners. Any delays or disputes could hinder project completion and affect the company's revenues​.

Risk report

Company and business

• Are earnings before tax of Arkade Developers more than Rs 50 crore in the last 12 months?
  Yes. The company reported a profit before tax of Rs 165 crore in FY24.
  
• Will Arkade Developers be able to scale up its business?
  Yes. The growing real estate market, especially the housing segment, will sustain demand for the company's offerings.
  
• Does Arkade Developers have recognisable brands with client stickiness?
  No. The company operates in the real estate sector, which is mostly brand agnostic.
  
• Does the company have a credible moat?
  No. It operates in a very competitive industry with many organised players.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. After the IPO, the promoters' stake will be nearly 71 per cent.
  
• Do the top three managers have more than 15 years of combined leadership at Arkade Developers?
  Yes. Amit Mangilal Jain, the chairman and managing director, has been with the company since 1995.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is Arkade Developers free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  Yes. Its three-year average ROE and ROCE were nearly 39 and 32 per cent. In FY24, its ROE and ROCE were around 47 per cent and 45 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  No. Of the last three years, the company reported positive cash flow only in FY24.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company's debt-to-equity ratio was 0.2 in FY24.
  
• Is Arkade Developers free from reliance on huge working capital for day-to-day affairs?
  No. Arkade Developers operates in a working capital-intensive business. Its average inventory days were above 500 during FY22-24.
  
• Can the company run its business without relying on external funding in the next three years?
  Yes. Proceeds from the IPO should help the company run its operations without relying on external funds ahead.
  
• Is Arkade Developers free from meaningful contingent liabilities?
  No. Its contingent liabilities as a percentage of total equity was around 18 per cent as of FY24.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. After listing, the stock will offer an operating earnings yield of around 7 per cent on its enterprise value.
  
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. Post-IPO, the stock will be valued at a P/E ratio of 19 times compared to its peers' median P/E of 67 times.
  
• Is the stock's price-to-book value less than its peers' average level?
  Yes. Post-IPO, the stock will be valued at a P/B ratio of 3 times compared to its peers' average P/B of 6 times.

Disclaimer: This is not a stock recommendation. Investors should do their due diligence before investing.

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