DLF Real Estate Mega IPO in June 2007
To me, the upcoming IPO of Indian real estate developer DLF Universal Limited is quite interesting on several fronts - its sheer size (Rs 9,600 crore, ~$2.4B), the various controversies, its impact on other real estate stocks, its potential as a short-term ‘peak indicator’ for Indian real estate, its impact on the dollar:rupee exchange rate, etc.
I have compiled below a historical timeline of sorts for the IPO:
- May 2006: Draft Red Herring Prospectus filed with the SEBI, amount to be raised: Rs 13,600 crore.
- July 2006: Indian real estate: boom or bubble?
Concerns about an asset-price bubble have led the Reserve Bank of India to raise the risk weightage on real estate loans extended by banks, and mortgage rates have gone from 7.5% to about 9.5% as a result. That’s still well below the 15% rates that most Indians were used to, but it’s enough to raise questions about whether the speculation of the past year and a half, which has driven land prices up by 30% to 100% and real estate stocks up as much as 2,000%, may be coming to an end
- August 2006: IPO withdrawn
. . . company cited a change in business for withdrawing the IPO prospectus, the financial details in the prospectus needed to be updated due to the lapse of about four months since the filing, expects to get a valuation much higher that what was stated in the previous prospectus.
- December 2006: DLF IPO likely to hit market in February
The group, which has already resolved the issue with its minority shareholders, is now in the process of filing the draft red herring prospectus (DRHP) with Sebi . . . the DRHP will be filed by December 15.
- January 2007: DLF doubles land bank; silent on valuations
The company has disclosed a land bank of 10,255 acres in the draft red herring prospectus filed with the SEBI on Wednesday, which is more than double the 4,265 acres that it held as per the original offer document filed in May 2006.
Interestingly, unlike the last time, the current offer document is silent on the value of the land bank. In the document filed in May, the company had published valuations made by Cushman & Wakefield (Rs 77,000-85,000 crore) and Jones Lang LaSalle (Rs 85,000 crore).
- February 2007: Investing in real estate stocks? Careful!
The current high valuations are largely based on the value of the land bank available with the real estate companies, with the underlying assumption that these will be developed in the near future, leading to a rise in earnings.
P/E ratios highlighted below:
- February 2007: Realty scrips hit 3-month low
Public sector banks’ proposed move to raise prime lending rates and the RBI’s hike in cash reserve ratio (CRR) led to a steep fall in realty and construction shares, many of which fell over 30% from their all-time highs.
DLF fixed the price band for bids in its IPO, aiming to raise up to $2.4 billion in the country’s biggest-ever IPO . . . the company settled for 500-550 rupees a share band, against its earlier expectation for up to 600 rupees.
DLF’s valuation is expected to have dropped to about $23 billion, from an estimated $25-$27 billion in May last year.
- May 2007: Coming clean on the real deal
. . . corporate machinations for and against DLF will remain in full swing during the run up to its IPO . . . The eventual price of trying to ditch 500 odd minority shareholders while restructuring its capital was a whopping Rs 1,300 crore . . . It will be the first important test for the IPO grading process as well as new realty disclosure norms.
The offer, made by the company after last November’s extraordinary general meeting, would have resulted in each investor receiving a minimum of 31,328 shares of Rs 2 each, which at Rs 500 — the lower price band of DLF’s public issue — would be worth over Rs 1.56 crore.
In the grey market for IPOs (”koshtak”) in Ahmedabad, the stock has been trading at a premium of Rs 20-40 on the eventual issue price over the last few days. On Thursday, after the price band was announced, the premium on the issue price remained unchanged in the grey market.
- May 2007: DLF, ICICI floats may put Re in Zone 39
Investment by portfolio investors in the upcoming public offerings will likely exceed $5 billion . . . With IPOs from DLF and ICICI Bank happening next month, which would again pump in excess liquidity, will help rupee touch 39 levels by the end of June.
The incentives provided to sub-brokers have shot up multifold compared to normal IPOs. Commissions for most IPOs range from 10-20 paise per application for smaller floats, and 35-45 paise for bigger ones . . . But, for the DLF issue, sub-brokers with Kotak Securities and others are being offered a whopping Rs 100-225 per form, depending on the volume of applications procured. (see table). Motilal Oswal is offering Rs 150-250 and DSP Merrill Lynch Rs 55 per application for its distributors.
- June 11-14 2007: IPO open for subscription
Will I apply? For now, I am in “wait and see” mode, but I will post an update during the IPO subscription period.
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May 28th, 2007 at 3:01 pm
Where do I get info on grey narket premium on ongoing and forthcoming IPOs?
May 28th, 2007 at 3:11 pm
Nitin: I have no idea! The Mint article mentions that “The koshtak market has diminished in big cities but remains buoyant in smaller cities that are dominated by retail investors, such as Ahmedabad, Indore and Rajkot.” Perhaps it’s time to visit Gujarat
May 28th, 2007 at 3:16 pm
Thanks Kaushik for taking the trouble to reply…But I know it for a fact that a thriving grey market indeed exists in Mumbai itself. I do have some contacts who brief me in on the grey market premium. However, I had read in the financial press that figures of the grey market premium are also quoted in internet blogs…which is why I left the message…seems like I’ll have to keep visiting these pages to get some dope…
May 28th, 2007 at 3:21 pm
Nitin: Perhaps you could share some of the information you have from other sources. More importantly, how useful have you found the grey market premium to be in forecasting post-IPO performance?
May 28th, 2007 at 5:19 pm
Good question Kaushik. Grey market premium does give a good sense of listing price, except in cases where there are unforeseen events between the close of the IPO and the listing date. However, please note that grey market premiums can only help indicate listing price, not post-listing performance. IPOs like Tech Mahindra and Sobha Developers are cases in point.
May 30th, 2007 at 11:41 am
Kaushik ;
Do you think mkt might go south post DLF IPO ? I have a fear that Rupee-$ issue might bring further distribution among export oriented stocks as you have indicated rupee hitting 39. Already many are below 200 DMA !
krishna
May 30th, 2007 at 2:16 pm
Shreekrishna: It seems to me that the rupee may not strengthen as much anymore; of course, even at current levels, exporters and IT companies will pay a price. Whether we’ll see a crash? My random guess: No, most likely a consolidation or worst case, a 10% drop.
As for DLF, it seems that the largest impact will be on smaller companies with IPO plans: http://www.dnaindia.com/report.asp?NewsID=1099478