Arkade Developers coming with an IPO to raise Rs 434 crore

Arkade Developers

• Arkade Developers is coming out with a 100% book building; initial public offering (IPO) of 3,38,91,422 shares of Rs 10 each in a price band Rs 121-128 per equity share.
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on September 16, 2024 and will close on September 19, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 12.10 times of its face value on the lower side and 12.80 times on the higher side.
• Book running lead manager to the issue is Unistone Capital.
• Compliance Officer for the issue is Sheetal Haresh Solani.

Profile of the company

Arkade Developers is a real estate development Company concentrating on the development of premium aspirational lifestyle residential premises in Mumbai, Maharashtra, India’s commercial capital. The company’s business can broadly be classified into two categories: (i) development / construction of residential premises on land acquired by the company (New Projects) and (ii) redevelopment of existing premises (Redevelopment Projects). As on June 30, 2024, the company has developed 2.20 million square feet of residential property (including through partnership entities in which it holds the majority stake). It is engaged in the development of new projects and redevelopment of existing premises, and between 2017 and Q1 2024, it has launched 1,220 residential units and sold 1,045 residential units in different markets in MMR, Maharashtra. 

In particular, it has established a successful track record of completing its projects on time, and from CY 2003 to March 2024, it has successfully completed redevelopment of 10 projects in the western suburbs of Mumbai and 1 project in south-central Mumbai (through a partnership firm in which it holds the majority stake) with a combined constructed area of around 1,000,000 square feet. This track record has established it as one of the major player of redevelopment in the Mumbai western suburbs. The company’s operations are strategically located in Mumbai, one of the biggest and most expensive real estate markets in India. Since CY 2021 to Q1 2024, MMR, Maharashtra has contributed the highest annual sales share of residential units across the top 7 cities in India, ranging from 29% to 33%. 

The company has developed a strong brand proposition and successful track record including by leveraging its lineage - Amit Mangilal Jain, its Promoter, is a second-generation real estate entrepreneur whose family has been involved in real estate development since 1986. It owes its strong brand recognition in MMR, Maharashtra and its track-record to its customer-centric approach, and its business model which lays emphasis on developing high-end and premium budget aesthetically designed, sustainable residential premises with life-style amenities and facilities in the high-density areas in MMR, Maharashtra. It also has a consistent track-record of meeting its project delivery timelines which is a critical aspect of its brand. 

Proceed is being used for:

• Funding a part of the costs to be incurred in the development of its Ongoing Projects (viz. Arkade Nest, Prachi CHSL and C-Unit) (Funding Development Expenses)
• Funding acquisition of yet-to-be identified land for real estate projects and general corporate purposes

Industry overview

The housing demand in India has always been high as homeownership is an emotional decision and this asset assures safety and financial stability along with a social standing. The rapid urbanisation the country has undergone during the past few decades has also risen the housing demand. The housing demand has also transitioned, predominantly in the urban landscape, from investors and speculators to end users. The reforms in the last decade, such as RERA, GST, IBC, and Demonetisation have been instrumental in altering the growth course of the housing market across the country. Post the reforms, the supply-demand trend across the major markets has altered significantly. Supply exceeding sales, which was a more pronounced phenomenon in the pre-reforms regime led to high unsold inventory. This has changed to sales leading the supply in the past few years, which indicates a healthy market condition and is mostly driven by end users.

The Indian real estate sector faced challenges of adapting to various reforms and changes brought about by demonetization, RERA, GST & IBC. These measures initially posed difficulties for the sector in aligning with the new regulations. However, they ultimately proved beneficial by strengthening the industry and promoting transparency, accountability, and financial discipline over the past few years. The structural changes introduced by RERA and GST played a crucial role in enhancing the maturity and credibility of the sector and gaining trust of various stakeholders. Despite the hurdles, the real estate sector had been on a growth trajectory, showing promising signs of emerging stronger than before. Unfortunately, the COVID-19 pandemic disrupted this growth momentum, stalling progress temporarily. Nevertheless, the sector demonstrated resilience and managed to rebound in 2022 and the top cities surpassed the previous peak levels seen in 2014. This bounce back indicates the industry's ability to recover and adapt, showcasing its potential for future growth and stability.

The number of new launches has witnessed a remarkable surge over the past few years, despite facing various headwinds, reflecting robust growth in the industry. In 2020, due to COVID-19 pandemic, only 127,959 new units were added across the top seven cities of India. However, in 2021, the new launches increased by an impressive 185% to reach 236,693 units. This surge brought the number of launches in line with the records of 2019, indicating a recovery and an upward trajectory for the sector. The positive trend continued into 2023 as well, with a substantial improvement as the total number of new launches reached an impressive 4,45,770 units and witnessed record-breaking housing sales of approximately 4,76,520 units. These statistics depict a thriving market characterized by a significant increase in new launches, showcasing the sector’s vitality and potential for future growth.

Pros and strengths

Strategic location of projects in micro-markets of MMR, Maharashtra: The company’s operations are strategically located in Mumbai, one of the biggest and most expensive real estate markets in India. Since CY 2021 to Q1 2024, MMR, Maharashtra has contributed the highest annual sales share of residential units across the top 7 cities in India, ranging from 29% to 33%. On average, the sales in MMR, Maharashtra accounted for 31% of the total residential unit absorption during this time frame. Further, the residential market in MMR, Maharashtra stands out as the most expensive, amongst the top 7 cities in India with a capital value of Rs 14,600 per Sq. ft as of Q1 2024. Further, locations in Mumbai and surrounding areas provide one of the best healthcare in the country, best education opportunity, retail, recreational infrastructure. These aspects increase the quality of life & contribute to housing demand.

Leading player and amongst top 10 developers in terms of supply in select micro-markets: It is an established developer of new and redevelopments projects in MMR, Maharashtra which is India’s commercial capital and also one of the highest density cities in the country. Additionally, Mumbai is the biggest and most expensive real estate market in India. During the time frame from CY 2021 to CY 2023, the capital values of MMR, Maharashtra grew by around 26%. Further, as of Q1 2024, the average basic selling price of residential properties in MMR market stands at Rs 14,600/Sq. ft - an uptick by 13% as compared to 2023. It has grown over the years through a diversified approach to development of residential property and its core strengths comprise (i) development / construction of residential premises on land acquired by the company and (ii) redevelopment of existing premises. The Western Suburbs of Mumbai are well-connected to other parts of the city through an extensive network of local trains, buses, and major roadways.

Strong in-house resources: The company has adopted an integrated business model with in-house resources to carry on a project from its initiation to completion. The company’s in-house resources include its legal team, business development, purchase and contracts, and sales and marketing team. The company’s legal team undertakes the due diligence of the proposed properties to be acquired for development projects and negotiates agreements which the company enters for re-development projects. Due diligence of properties helps it in avoiding unnecessary disputes which may be associated with any parcel of land and consequently helps it in delivering dispute free premises to its buyers. The company’s business development team scouts for land in premium geographies within micro-markets with good development potential and focus on acquiring such lands at competitive prices.

Timely completion of projects: The housing demand in India has always been high as homeownership is an emotional decision and this asset assures safety and financial stability along with a social standing. Given the emotional aspect of home ownership in India, the ability to complete construction of projects within the timelines that have been declared prior to the initiation of the project becomes one of the essential elements of a real estate development project in India. In the last 2 decades, the company has completed 28 projects (including 11 projects on a stand-alone basis (including 2 projects executed through partnership firms in which it holds the majority stake), 8 projects executed by its promoter through his proprietorship, M/s Arkade Creations, and 9 projects through joint development arrangements with other third parties) aggregating more than 4.5 million square feet of development and have catered to more than 4,000 customers.

Risks and concerns

Limited and expensive land for development within the MMR, Maharashtra: The company’s operations are focussed on the MMR, Maharashtra. The availability of land for development within the MMR, Maharashtra is limited and expensive and subject to intense competition. Increased competition may lead to shortage of land parcels that can be used for development or re-development of its projects. In addition, the use and development of land may also be restricted by applicable laws. For instance, a land parcel deemed as an agricultural land may not be available for use and development for residential purposes, without approval from relevant authorities. All these factors may contribute to shortage of land parcels in the regions in which it operates or intends to operate. Shortage of land coupled with intense competition may also increase the cost of acquisition of land parcels which may make its projects not financially viable for it. Further, the company is subject to municipal planning and land use regulations in effect in the MMR, which limit the maximum square footage of completed buildings it may construct on plots to specified amounts, calculated based on a ratio of the combined gross floor area of all floors, except areas specifically exempted, to the total area of each plot of land (the floor space index, (FSI)).

Relies on third party contractors for construct its projects: The company avails the services of independent contractors to execute its projects which are based on work orders. None of its contractors who it has engaged in the last 3 years are related to its Promoter, members forming part of Promoter Group, Subsidiaries, Key Managerial Personnel or members of Senior Management of the Company, or its Associates. While there have been no instances in the past, if a contractor fails to perform its obligations satisfactorily or within the prescribed time periods with regard to a project, or terminates its arrangement with it, the company may be unable to develop the project within the intended timeframe and within the anticipated budget. If such instances arise, it may be required to incur additional cost or time to develop the property to meet the stringent quality standards that it expects in its projects, which could result in reduced profits or, in some cases, significant penalties and losses, which it may not be able to recover from the relevant independent contractor.

Geographical constrain: The company is a Mumbai based real estate developer with operations and projects spread across the MMR region. During Fiscal 2024, Fiscal 2023 and Fiscal 2022, its entire revenue from operations was generated from its operations in the MMR region. Currently, it does not have any plans of expanding its operations beyond the MMR region. Accordingly, its revenues in the foreseeable future and its results of operation for such periods will be entirely dependent on the real estate market in the MMR region. Further, all the micro or macroeconomic factors affecting Mumbai could have a significant impact on business, results of operation and financial condition.

Stiff competition: The company operates in a competitive industry with a number of other entities that offer competing units in projects in the Mumbai Metropolitan Region (MMR) and surrounding regions. It competes with international, national and regional developers for land, sale of units in projects, manpower resources and skilled personnel. Moreover, as it seeks to diversify into new geographies in MMR, it faces the risk that some of its competitors have a Pan-India presence while its other competitors having a strong presence in certain regional markets. Some of its competitors may have certain advantages, including greater financial, technical and, or, marketing resources, which could enhance their ability to finance acquisitions, fund growth, and, or, operate in different geographies including micro geographies. It cannot assure that it can continue to effectively compete with such competitors in the future, and failure to compete effectively may have an adverse effect on its business, financial condition, and results of operations. 

Outlook

Arkade Developers is a real estate development company focused on developing high-end, sophisticated lifestyle residential developments in Mumbai, Maharashtra. The company is involved in the development of new projects and the redevelopment of existing buildings. Between 2017 and Q1 2024, the company launched 1,220 residential units and sold 1,045 residential units in various markets in MMR, Maharashtra. As of June 30, 2024, the company has developed 2.20 million square feet of residential properties. On the concern side, the company’s entire business is concentrated within the MMR region. Any event or circumstance that adversely affects the real estate market in the MMR region will have an adverse effect on its business, results of operation and its financial condition. Moreover, the company operates in a competitive industry. Any inability to compete effectively may lead to a lower market share or reduced operating margins.

The company is coming out with a maiden IPO of 3,38,91,422 equity shares of Rs 10 each. The issue has been offered in a price band of Rs 121-128 per equity share. The aggregate size of the offer is around Rs 410.09 crore to Rs 433.81 crore based on lower and upper price band respectively. On performance front, the company’s revenue from operations increased by 188.32% from Rs 2,201.52 million in Fiscal 2023 to Rs 6,347.36 million in Fiscal 2024 primarily due to an increase in the number of residential units sold from 130 in Fiscal 2023 to 253 in Fiscal 2024. Moreover, the company’s profit for the year increased by 141.91% from Rs 507.66 million in Fiscal 2023 to Rs 1,228.08 million in Fiscal 2024.

The housing demand in India has always been high as homeownership is an emotional decision and this asset assures safety and financial stability along with a social standing. Over the period there has been a gradual rise in buyers’ inclination towards choosing real estate as an investment avenue. Further, developers who demonstrate the capability to complete projects as per the schedule and with minimal execution risk are now preferred, even if their properties are relatively higher priced. In the coming years, financially robust and well-organized players are expected to dominate the market, securing most of the market share. The company expects that its integrity and value proposition, the timeliness of its project delivery, and its brand recognition will enable it to move up the real estate value chain and benefit from the opportunities that are available.