DLF's $2 bn issue gets off the ground

Real estate firm DLF launched India’s largest IPO of over $2 billion on Tuesday amid rising investor wariness over real estate stocks and regulatory fears of a bubble in this large, but loosely-organised sector.

The Gurgaon, Haryana-based DLF will offer 175 million shares to investors at a price band of Rs 500-550 per share. The issue will open for subscription on June 11, one year after the company first made its plans public. At the lower end of the band, the issue will raise Rs 8,750 crore, while at the upper end it will garner Rs 9,625 crore.

The issue is a landmark event for both DLF and the Indian capital markets. At the upper end of the band of Rs 550, DLF will command a valuation of Rs 93,800 crore, making it the eighth largest company by market value after Reliance Communications but before ICICI Bank.

The move also signals the rapid maturing of the stock markets. In the past two years, the stock markets have seen greater liquidity, stronger FII participation and greater investor confidence, enabling companies with strong financials to raise large amounts of money through IPOs. Reliance Petroleum mopped up Rs 8,100 crore in April last year, a record that DLF is hoping to beat.

But there is salt to this strawberry. Interest rates are rising, property prices are falling and regulators have cracked the whip on loose and risky practices by real estate promoters and banks. The government has tightened lending to the sector, while the Securities and Exchange Board of India (Sebi) has warned companies not to indulge in aggressive methods of land valuation.

Real estate stocks have been extremely volatile in the recent months. For instance, Parsvnath Developers, which was listed in late 2006, was trading at Rs 450 plus levels at the beginning of 2007. It fell to a low of Rs 226.75 by early March — the recent weeks have seen it recover to Rs 320.

Unitech, which is the largest listed real estate player right now, was close to Rs 500 at the beginning of the year, a level from which it dropped 35% by early March. The current market price is Rs 600 — coming on back of strong results and a bonus issue.

The DLF management, however, sounded upbeat and confident. “About two-thirds of the money raised from the issue will go for acquisition of land and development rights and for existing projects. We may use the remainder for repayment of debt,” said Rajiv Singh, vice-chairman. He added that the company has been transparent and open in all its dealings and that all economic interests from its various ventures are being captured in DLF Ltd

DLF has total loans of Rs 9,932 crore. The company has not gone in for an IPO grading. “The process is new, and we will go for it as and when it becomes mandatory. We feel it is premature and not required at this point,” he added.

“We have development rights for 574 million square feet of land, which gives us earnings visibility for 10 years,” Mr Singh added. DLF delivered 10.3 million square feet to customers during FY08 — it needs to scale up operations manifold to justify the valuations it is asking for.

DLF recorded total income of Rs 4,034 crore during FY07, more than three times the figure for previous year. Net profit for the year stood at Rs 1,941 crore, almost ten times the value for the year before. However, 54% of the sales and 60% of the profit before tax were due to sale of assets to promoter group companies. DLF says this is a part of their business model, where instead of selling commercial property, they will be leasing it out, which will generate steady cash flow.

In addition to leasing property, the company is also getting into new business segments like hotels, SEZ and insurance. It plans to be present in all segments of the hotel industry — budget, luxury and business. It has recently tied up with Hilton for setting up a chain of business hotels around the country. Another JV for developing a large township has been entered into with Nakheel, a Dubai-based developer.

DLF had originally filed its draft prospectus with the markets regulator in May 2006, The issue size was pegged at Rs 13,600 crore, though there was no official confirmation from the company. However, the stock market went into a correction almost immediately and fell 30% in the next few weeks.

Stocks of other realty companies like Mahindra Gesco and Ansal fell even sharply, by over 50%. This wasn’t the only setback for the company. The announcement of the offering also resulted in a bitter dispute with the minority shareholders of the company. They filed a complaint with Sebi alleging that they did not receive the letter of offer of the debenture that the company issued in December 2005.

Each debenture entitled the holder to ten shares of the company. That issue has been resolved since. Another problem for the company has been the Reserve Bank tightening the liquidity screws, especially for the real estate sector. Sebi has also come down on real estate companies with regard to disclosures relating to valuation and titles of land holdings. Under the new set of rules, real estate companies have to disclose the exact details of ownership of the land-bank to which they claim development rights.

Economic Times!