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 is engaged in the development of new projects (development / construction of residential premises on land acquired by the company) and redevelopment of existing premises.

The company, on standalone basis, has completed 11 projects (including those through partnership entities in which it holds the majority stake) aggregating more than 2.20 million square feet (msft) of residential space as of June 30, 2024. In addition, it has completed 9 projects through joint development arrangements with other third parties of which 0 were redevelopment projects and 9 new projects. Further, the promoter, through his proprietorship firm i.e. Arkade Creations, has developed 8 projects in the last 2 decades. In the last 2 decades it has completed 28 projects (including 11 standalone, 9 joint development and 8 by Arkade Creations) aggregating more than 4.5 msft of development and has catered to more than 4000 customers. Out of the 28 projects completed by it 23 projects were completed before the introduction of RERA and the remaining 5 projects completed by it were after introduction of RERA which were completed by it within the agreed timelines.

As of June 30, 2024, the ongoing projects numbers 6 projects with a developable area of 1.87 million sft & saleable RERA carpet area of 0.66 msft. And the upcoming projects numbers 6 projects with a developable area of 1.82 million sft & saleable RERA carpet area of 0.59 msft. Moreover of 6 ongoing projects 3 are New Projects and 3 are Redevelopment Projects. Similarly of the 6 upcoming projects 1 is new projects and 5 are redevelopment projects. All the ongoing projects are in prime locations in the western and eastern suburbs of Mumbai, Maharashtra, which are at various stages of development.

Historically, the focus of the company has been on the western suburbs of Mumbai Metropolitan Region (MMR) but it has also developed a high-end luxury project located in south Mumbai, Maharashtra. And from 2017, the company is amongst the top 10 developers in terms of supply in the Borivali West, Goregaon East and Santacruz West micro-markets. Further, out of the total supply of 20,294 units (consolidated) in the select micro-markets of Andheri East, Borivali West, Goregaon East and Santacruz West from 2017 to till Q1 2024, the top 10 developers contributed 38% in the total supply and the company contributed 7% share in the top10 developers’ supply. Most of the residential units supplied by the company in these micro markets are in the high-end and premium budget segments. It is one of the major players of redevelopment in the Mumbai western suburbs.

Further, in the recent years, it has sought to broaden its area of focus and have undertaken projects in the eastern suburbs of Mumbaiwhich have experienced substantial expansion and development over a long period of time where it expects to be able to acquire larger land parcels. It has already completed 1 project in the eastern region and launched a new project in Mulund. It has 12% share in the total supply and 11% share in the total absorption of Kanjurmarg East micro-market consolidated from 2017 to Q1 2024.

Generally, it has undertaken projects with 1 acre and upward of land, which allows it to offer aspirational life-style amenities and choices to the customers. The company proposes to undertake projects that are developed over a larger land area so as that it enables it to construct more premium properties with greater amenities as well as higher per unit carpet area etc.

Unsold units as end of Jun 2024 in the ongoing projects numbered 160 residential units out of total 567 residential units available for sale. Moreover, it also has 18 unsold units in completed projects. All the 18 units were from one project, i.e., Arkade Crown and translates into 14.63% of the total units available for sale from that project.

The company has 2 subsidiaries, Arkade Paradigm ( where it has 95% profit/loss sharing ratio) and Arkade Realty ( where it has 70% profit/loss sharing ratio).

The Issue and Object of the Issue

The IPO comprises fresh issue of equity shares, aggregating to Rs 410 crore.

Of the net proceeds from the fresh issue, about Rs 250 crore will be used for funding a part of the costs to be incurred in the development of itsongoing projects, and upcoming projects. The balance amount will be used for funding acquisition of yet-to-be identified land for real estate projects and general corporate purposes.

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Strengths

An established developer in MMR with strong brand recognition (including strong promoter lineage of real estate development since 1986) and a successful track record.

A leading player and among the top 10 developers in terms of supply in the micro-markets of MMR. In the combined micro-markets of Andheri East, Goregaon East, Santacruz West and Borivali West it accounts for 2%, 5% and 3% of the supply of 4 BHK, 3 BHK & 2 BHK units, respectively, and 3%, 5% and 4% of absorption in the period between 2017 upto Q12024.

Strong project pipeline of ongoing and upcoming projects.

Weakness

Focuses only on select few micro markets of MMR, where the availability of land for development is limited and expensive and subject to intense competition.Inability to acquire contiguous land parcels within reasonable timelines or at a price that is acceptable to it will impact the operations.

Moreover, the entire business is concentrated within the MMR region and any event or circumstance that adversely affects the real estate market in the MMR region will have an adverse effect on its business.

Of the upcoming projects it has received letter of intent for 2 redevelopment project as of June 30, 2024 for which it is yet to execute a contract.

Rely on third party contractors to construct its projects. Any delay or failure on the part of such contractors to adhere to their obligations could adversely affect the operations of the company.

Had negative cash flows in the past and it may occur in future too.

The real estate Industry in India is heavily regulated by the central, state and local governments and any change in regulations may adversely affect the business of the company.

Redevelopment projects are subject to certain risks involving existing tenants and applicable Government regulations. Typically, redevelopment projects have long gestation periods. Any delays and cost overruns could adversely affect the operations of the company.

The company has made delayed filings with the RoC and tax authorities and certain forms filed with RoC and certain payment challans in relation to the corporate filings made by the company are not traceable.

Cyclical nature of real estate industry demand.

Valuation

Consolidated re-stated revenue stood higher by 188% to Rs 634.74crore in FY 2024 primarily due to an increase in the number of residential units sold from 130 in Fiscal 2023 to 253 in Fiscal 2024. But with the OPM contracting 100 bps to 26.4%, OP was up by 178% to Rs 167.44crore. Eventually, Pat after MI stood higher by 142% to Rs 122.84 crore.

At the upper price band, the PE works out to 19.4 times of its FY24 EPS, the P/BV works out to 3.2 times and EV/Sales works out to 3.9 times.

In comparison realty players operating in Mumbai market such as Keystone Realtors, Suntek Realty, Mahindra Lifespace, Valor Estates (formerly DB Realty) and Suraj Estates, quotes at a PE of 70.8 times, 118.2 times, 97.9 times, 8.3 times and 50.9 times, respectively of their FY24 EPS. Bigger Mumbai-based realty players such as Macrotech Developers, Oberoi Realty and Godrej Properties quote at PE of 73.6 times, 36.5 times and 122.8 times, respectively.

Keystone Realtors, Suntek Realty, Mahindra Lifespace, Valor Estates (formerly DB Realty), Suraj Estates, Macrotech, Oberoi Realty and Godrej Properties quote at a P/BV of 4.5 times, 2.7 times, 4.5 times, 2.1 times, 6.6 times, 7 times, 4.6 times and 8 times, respectively. Similarly,Keystone Realtors, Suntek Realty, Mahindra Lifespace, Valor Estates (formerly DB Realty), Suraj Estates, Macrotech, Oberoi Realty and Godrej Properties quotes at a EV/Sales of 4.5 times, 15.4 times, 43.7 times, 35 times, 12.3 times, 12.3 times, 14.8 times, and 29.9 times.