IPO: Signature Global

Signature Global, a leading real estate development company, has come out with its IPO (initial public offering). Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality : The company had negative net worth in FY21 and FY22. Moreover, it has reported losses in each of the last three years.
  
• Growth : Its topline grew by 335.1 per cent per annum over FY21-23 due to increasing revenue from sales of real estate properties.
  
• Valuation : The stock will be priced at a P/B of 8.3 times as compared to its peers' average P/B of 3.9 times. P/E cannot be calculated as the company reported negative earnings in FY23.
  
• Overview : As the company specialises in the affordable housing segment, an increase in demand for these properties can significantly boost the revenue of the company. Further, the company mostly deals in projects in the Delhi NCR region, so there is an opportunity to expand to various other markets as well. However, high debt levels, and high competition combined with the cyclical nature of the industry remain a threat.

About Signature Global

Signature Global is the largest real estate development company in Delhi NCR in affordable and lower-mid segment residential projects (below Rs 80 lakh price category). According to a report by Anarock (a real estate consultant), it has a market share of 19 per cent as of FY23. It is also involved in the development and acquisition of various commercial projects such as society shops, malls as well as shop-cum-office spaces.

Strengths of Signature Global

• Largest player in affordable and mid-segment housing in Delhi NCR with a market share of 19 per cent.
  
• Company has been able to scale up rapidly in the past five years. Its total product portfolio of saleable area has grown from 9.06 million square feet in FY18 to 44.6 million square feet in FY23, growing at a CAGR of 42.5 per cent.

Weaknesses of Signature Global

• Highly capital-intensive business with a high dependency on financing for projects.
  
• High dependency on the performance of real estate markets of Delhi NCR , as 90 per cent of the revenue is generated from this vicinity. Any downturn in these markets could significantly impact the topline of the company.
  
• Company has not been able to generate profits for the past three years . Further, the company has an exorbitantly high debt-to-equity ratio of 36.1 times as of FY23.

Risk report

Company and business

• Are Signature Global's earnings before tax more than Rs 50 crore in the last 12 months?
  No. The company's profit before tax for FY23 was Rs -57 crore.
• Will Signature Global be able to scale up its business?
  Yes. The company has a strong brand presence in Delhi NCR with a good track record of timely completion of projects. They can use this to their advantage while expanding to various other market regions in the country.
• Does Signature Global have recognisable brands with client stickiness?
  Yes. The company is a well-recognised brand in the Delhi NCR region.
• Does the company have a credible moat?
  No. It faces stiff competition from various listed entities.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Post-IPO, promoters' stake will be 69.6 per cent.
• Do the top three managers have more than 15 years of combined leadership at Signature Global?
  Yes. The combined leadership of the top three managers is 16 years.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is Signature Global 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?
  No. As the company reported a negative net worth in FY21 and FY22, its ROE cannot be calculated. The three-year average and FY23 ROCE are -1.4 and 3.8 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  No. The company reported negative cash flow from operations in FY23.
• Is the company's net debt-to-equity ratio less than one?
  No. The company's net debt-to-equity ratio is 22.1 times as of FY23.
• Is Signature Global free from reliance on huge working capital for day-to-day affairs?
  No. The company's business affairs are working capital intensive. They rely on short-term loans to fund these requirements.
• Can the company run its business without relying on external funding in the next three years?
  No. Operations of the company are highly capital intensive. Further, the company has high levels of debt as well as negative earnings.
• Is Signature Global free from meaningful contingent liabilities?
  No. Contingent liabilities as a percentage of equity stood at 43 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock will offer a 0.3 per cent operating earnings yield on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  Not applicable. The company reported a loss in FY23.
• Is the stock's price-to-book value less than its peers' average level?
  No. The company will trade at a price-to-book ratio of 8.3 times compared to peers' average of 3.9 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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