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Thursday, June 08, 2006

Morgan Stanley - India Retail

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DLF valuation shoots up 1,000 times in 3 years

In what could be a case of the fastest wealth creation in the history of the Indian stock markets, DLF Universal's valuation has gone up 1,000 times over the past three years.

The company's market capitalisation stood at a little over Rs 100 crore in September 2003 when it was listed on the Delhi Stock Exchange; it has now been valued at a whopping Rs 100,000 crore.

Based on the open-offer price of Rs 320 quoted to public shareholders when the company decided to de-list its shares from the Delhi Stock Exchange in fiscal 2002-03, the company, with an equity capital of 35 lakh shares, was valued at Rs 112 crore.

DLF is planning to raise over Rs 10,000 crore through an IPO this month or the next by offloading a 10 per cent stake. This has put a valuation of Rs 100,000 crore on the company.

Incidentally, the promoters had acquired nearly 10 per cent stake from minority shareholders for a mere Rs 44 crore.

The company's promoters, the Singh family, had increased their stake from 89.45 per cent to 99.4 per cent at a cost of less than Rs 45 crore, most of it after the open offer.

When contacted, a DLF spokesman said the change in the valuation of the company was essentially due to the sharp rise in real estate prices and the growth prospects of the company. "We undertook for the first time ever an exhaustive valuation of the land bank earlier this year," he added.

The current high valuation of DLF is driven by its large land bank. The company's properties, aggregating around 228 million sq ft in 64 locations across India, have been valued at between Rs 77,200 crore and Rs 85,300 crore (after deducting the notional developer profit of 20 per cent) by Cushman and Wakefield.

Another international property consultant, JonesLang LaSalle, has also valued the company's properties at Rs 85,300 crore.

The financial performance of the company, however, has not kept pace with the mind-boggling rate at which its valuation has multiplied. The company's stand-alone total income and profit after tax grew at a compounded annual growth rate of 58 per cent and 17 per cent, respectively.

The company's consolidated numbers grew by 30 per cent and 26 per cent, respectively, between 2002-03 and 2005-06. For 2005-06, DLF's consolidated total income stood at Rs 1,259 crore and the net profit at Rs 199 crore.

Listed on the Delhi Stock Exchange till September 2003, DLF was de-listed due to non-compliance with the listing norms.

Till February 1997, the promoters held 89.45 per cent stake in the company. But by January 2002, they had hiked their stake "inadvertently" by 1.54 per cent, violating the Sebi take-over regulations. The company then volunteered to pay a penalty of Rs 5 lakh and made an open offer to minority shareholders.

DLF Universal made its first and second open offer at a price of Rs 320 per share in June and September 2002, hiking its stake further by 5.27 per cent, taking the count to 96.26 per cent.

Further, the company gave a final exit option to the remaining 3.57 per cent of the stakeholders in March 2003 at the same offer price and the promoters managed to increase their stake further.

By the end of fiscal 2004-05, the promoters had increased their stake in the company to 97.46 per cent by persuading minority investors to tender their shares in the open-offer.

The 8.01 per cent increase in the promoter's stake would have come to them at a cost of Rs 8.97 crore, going by the open-offer price.

The promoters further hiked their stake to 99.5 per cent following a rights issue of optionally convertible debentures earlier this year for a consideration of Rs 35 crore.

These debentures, issued at Rs 100 each in the month of February 2006, were converted into 10 equity shares at Rs 10 for every one debenture in March 2006.

In April this year, the company announced a bonus issue of 7 shares for 1 share and subsequently split the face value of the shares from Rs 10 to Rs 2.

Thus every share held before the debenture issue, which got the benefit of the rights offer, is now equivalent to 440 shares.

In other words, one share of DLF Universal held before the debenture issue will be worth Rs 2,42,000, based on the expected IPO price of Rs 550. The shares were bought back at Rs 320 from the minority shareholders in the past three years.

Mid-cap, small stocks hit downward circuit

The stock market breached the `Manic Monday' (May 22, 2006) lows as stocks continued their downward plunge on panic-like sales by retail and high net worth investors on Wednesday.

Dealers also attributed the bearish trend to redemptions by mutual funds, continued slump in global indices and outflows by FIIs.

Mid-cap and small stocks had the steepest fall with as many as 885 stocks on BSE hitting the downward circuit on Wednesday.

Frontline index BSE-30 Sensex closed at 9,756.76, down 200.56 or 2.01 per cent from Tuesday. This is 70.15 points down from the lows of 9,826.91 points recorded on May 22 when the index dived by over 1,100 points during intra-day on that day.

This is the worst closing for Sensex after February 3, 2006. With today's fall, the Sensex has wiped off 2,855.62 points or 22.64 per cent from the peak of 12,612.38 on May 10. NSE's S&P CNX Nifty Index on Wednesday fell by 76.85 points or 2.62 per cent to 2,860.45.

Since the market's peak, the investors have lost over Rs 6.81-lakh crore.

All the indices closed in the red with BSE Small Cap Index losing by about seven per cent while the BSE Mid-Cap Index fell by 6.25 per cent. Among sectoral indices, BSE Consumer Durables Index had the steepest fall, losing by 7.48 per cent, followed by BSE Metal Index (6.53 per cent) and BSE Capital Goods Index (4.80 per cent).

"Retail investors have been most badly affected as the fall has been relentless in small and mid-cap stocks. The investors are in a dilemma whether to continue holding the stocks or to book whatever profits that remain," said Mr Deepak Jasani, Head of Retail Research of HDFC Securities.

Market breadth was also distinctively negative at 2,240 declines versus just 181 advances on the BSE. Only two stocks — Bharti Tele and HDFC — survived the fall on the 30 Sensex stocks.

Net selling by foreign funds were marginal at Rs 70 crore on Wednesday, but dealers said mutual funds, which were net buyers in May, have turned big sellers due to redemptions. On the first two trading sessions of this week, mutual funds were net sellers for Rs 675.13 crore, while FIIs were also net sellers at Rs 655.80 crore in the same period.

The biggest loser on Sensex was L&T (down 6.59 per cent or Rs 140.35 to Rs 1,988.30) despite a liberal one for one bonus announcement, followed by Ranbaxy (5.97 per cent or Rs 23.20 to Rs 365.25). Heavyweight ONGC slipped below the Rs 1,000-mark and closed at Rs 993.30 while Reliance Industries fell below Rs 900-mark to close at Rs 891.65.