The stage is set for the largest ever initial public offering (IPO) in India as DLF Limited, the largest real estate company of the country, is entering the capital market to raise up to $2.39 billion (Rs.9,625 crore). The company will issue 175 million fresh equity shares having face value of $0.05 or 5 cents (Rs.2) each under the IPO that will open on June 11 and close on June 14. It will be a 100% book built issue, comprising 10.27% of the post issue paid up capital, at a price band of $12.4-$13.6 (Rs.500-Rs.550). The issue proceeds would be deployed in meeting construction cost, land acquisition and repayment of debt.

At the upper band of IPO price at $13.6 (Rs.550) per share, the market capitalisation of the company will be at $23.27 billion (Rs.93,700 crore), the seventh highest among the listed Indian companies after Reliance Industries Ltd, one of India’s largest diversified business conglomerates; Oil & Natural Gas Corporation Ltd, the state-owned largest Indian oil refining company Oil and Natural Gas Corporation Ltd (ONGC), Bharti Airtel Ltd, country’s largest GSM mobile service provider; Tata Consultancy Services Ltd, largest IT Services company of India; Infosys Technologies Ltd, country’s second largest IT services provider and Reliance Communications Ltd, largest CDMA mobile service provider.

Merrill Lynch & Co, a global financial management and advisory company and Kotak Mahindra Capital Company Ltd, the investment banking arm of the private sector Kotak Mahindra Bank are the global lead managers of the issue, with Indian arm of Citigroup, an American financial services company; ICICI Securities Ltd, investment banking arm of India’s largest private sector bank ICICI Bank Ltd; UBS AG, a diversified global financial services company, headquartered in Basel and Zürich, Switzerland; Deutsche Equities India, part of the Deutsche Bank Group; SBI Capital Market Ltd, the investment-banking subsidiary of State Bank of India being the other lead managers.

It’s a re-entry of DLF in to the stock market, as it was a listed company until 2003, before it had to exit the exchanges following a violation of a stock-market rule barring promoters from holding more than 90% of the firm.

K.P. Singh: The Promoter Worth $20 billion  

Kush Pal Singh, the promoter of the company, will own about 87.5% stake after the IPO, as the company has reserved 1% of the equity for employee’s stock options and the remaining shares amounting to more than 1% of the post IPO equity capital are held by minority shareholders. Singh was ranked 5th among the wealthiest persons of India as his wealth doubled last year to $10 billion, according to Forbes’ list of India’s 40 Richest that was released in November 2006. And now, his holdings in DLF would be worth about $20 billion based on the $23.27 billion market capitalisation of the company. His wealth has increased many-folds in the recent times as the land prices in Delhi’s satellite town Gurgaon, where DLF built its real-estate empire by developing large tracts, have risen from $16.14 (Rs.650) per sq. ft. to as much as $161.40 (Rs.6,500) per sq. ft. during the last five years.

Net Profit Moves Up 10 Times In One Year

As per the latest financial results submitted to registrar of companies, DLF recorded a turnover of $1 billion (Rs.4,034 crore) in the financial year (FY) 2006-07, with net profit of $482 million (Rs.1,941 crore). In FY 2005-06, the group clocked a turnover of $308 million (Rs.1,242 crore), with net profit of $47.4 million (Rs.191 crore).

DLF is the largest real estate development company in India in terms of residential, commercial and retail area developed, according to a report by AC Nelson, world's leading marketing information company. So far, it has developed more than 220 million square feet of property.

It has extensive land reserves of 10,255 acres in 31 cities of various regions across India. The land reserves comprise a developable area of approximately 574 million square feet, of which 46 million square feet is under construction. Its core business traditionally has been made up of three prime divisions of residential, commercial and retail. To these, DLF has added three more divisions of hotels, infrastructure and Townships, spreading its presence in all verticals of real estate including Special Economic Zones (SEZs).

The Homes business line involves a wide range of products including condominiums, duplexes, row hoses and apartments of varying sizes, with a focus on the higher end of the market. To the 17 million square feet of developed area under homes with 195 million square feet of plotted development, DLF has planned developing another 375 million square feet of projects across the country in the long term.

In the office segment, DLF has nearly 32 million square feet of developed as well as on-going projects. It has plans to develop another 62 million square feet across the country with an aim to achieve 15%-20% of market share in the business & commercial sector.

With a booming retail environment on the horizon, this is a major thrust area for the Group and DLF is actively creating new shopping and entertainment spaces all over the country. There are more than 42 million sq. ft. of retail space developed or under development. These include categories of prime downtown shopping districts, shopping centres and super luxury malls.

Partnerships Pave The Way For New Businesses  

The DLF Group has made significant efforts in pursuing new business opportunities in hotel, infrastructure and special economic zones (SEZs). DLF and Laing O’Rourke, the largest privately owned construction firm in the U.K. are strategic partner in several infrastructure projects. Laing O’Rourke is credited with some landmark projects such as the Dubai International Airport, Millennium Tower and the T-5 Airport Terminal in the U.K.

The company has formed a joint venture (JV) with global hospitality company Hilton Hotels Corp., with 2,645 hotels and 485,000 rooms, to acquire land and build 50 to 75 hotels in India with an investment of $143 million (Rs.6,122 crore). DLF owns 74% stake in the JV, which is expected to benefit from the increasing number of business travellers to India. Tourism in India is expected to grow at 8.8% a year in the next ten years, third fastest after Montenegro and China, according to an estimate by London-based World Travel & Tourism Council.

It has also tied up with United Arab Emirates (UAE)-based Nakheel Properties to develop townships with an investment of more than $10 billion. The company will build two townships through a 50:50 joint venture with Nakheel.

DLF Turned A Distress In To An Opportunity

DLF was founded in 1946 with the original name of Delhi Land & Finance by K.P. Singh’s father-in-law Chaudhary Raghvendra Singh. Since then, it has developed 22 urban colonies, as well as an entire integrated 3,000-acre township called DLF City in Gurgaon, which is close to Delhi’s domestic and international airports. It holds the credit of developing some of the first residential colonies in Delhi including South Extension, Greater Kailash, Kailash Colony and Hauz Khas in South Delhi, and Krishna Nagar in East Delhi that was completed as early as in 1949.

The company, however, had to stop its colony development activities in Delhi following the passage of the Delhi Development Act in 1957, through which the state assumed control of real estate development activities in Delhi. The Act imposed restrictions on private real estate colony development and colony development in the capital city became the monopoly of the Delhi Development Authority (DDA). Due to this restriction, DLF was forced to diversify in to areas such as batteries, cables etc. To help Raghvendra Singh in the tough times, K.P. Singh left a prestigious army posting in the Deccan Horse cavalry regiment and joined the land business in 1961. The duo focused at Gurgaon in the south of Delhi in the adjacent state of Haryana, as it was outside the area controlled by the DDA and the cost of acquiring land was relatively low.

The new beginning, however, wasn’t that easy. They accumulated land holdings in Gurgaon for a period of 15 years, starting with the 40 acres Raghvendra Singh owned. It was a tough task to purchase land from the farmer families with an average landholdings of 4-5 acres jointly owned by a number of relatives. Then, the company had to make huge efforts in getting the farmland reclassified as ‘non-agriculture’ and get the license to develop it.

Also, it wasn’t easy to attract buyers outside the boarders of Delhi. When the company started its first development in Gurgaon, it named the project ‘DLF Qutab Enclave’ after the historical monument in south Delhi, just to give a feel of being a part of south Delhi. This project later evolved in to DLF City, an integrated township spread over 3,000 acres with modern city infrastructure. Interestingly, the average cost of the 3,000 acres accumulated by DLF initially in Gurgaon was $2,000 an acre – just a tiny fraction of the current prices.

But, despite offering space in large sizes and quality construction, there were not many takers due to the distance from the heartland of Delhi and absence of transport facilities and support services such as restaurants etc. The situation changed when General Electric Co, U.S.-based technology and services conglomerate decided to set up its call centre facility in India and opened its pilot back office at DLF Corporate Park in 1997. This was followed by other reputed global brands such as Nestle SA, Switzerland based global packaged food company; PepsiCo Inc, U.S. based global beverage and snack company; British Airways Plc, largest airline of the United Kingdom; American Express, a diversified global financial services company; International Business Machines Corporation, world’s largest IT services company and Telefonaktiebolaget L. M. Ericsson, a leading provider of communications networks. Gurgaon has now transformed in to a huge commercial hub with modern office buildings, apartment complexes and shopping malls from a barren expanse of farmland, thanks to the pivotal role played by DLF.

Undisputed Leadership Makes It An Obvious Choice

Considering the growth opportunities of the real estate sector in India, it is difficult for an investor to stay away from this sector. And, for any investor wanting to keep real estate stocks in the portfolio, DLF would be an obvious choice. Unitech Ltd., the second largest real estate company of India, commands market capitalisation of $11.3 billion (about Rs. 45,000 crore), less than half of the market capitalisation of $23 billion at the upper end of IPO price range. In fact, realty stocks have seen a dream run in the stock market in 2006. Unitech’s market capitalisation has nearly tripled in the past one year.

Land Bank Is Fine, But When Will You Develop It?

On a fundamental note, there are certain questions regarding the location of the land bank and the timeframe of the development. Most of the real estate experts believe that the property prices are set to fall in the coming months, and the situation will be tough for the developers. Analysts are warning about decrease in transaction volumes and excess supply as the rising interest rates and high prices have impacted affordability. The situation, however, might remain for a limited period as people are not anticipating a prolonged recession in the sector.

The DLF IPO is coinciding with another large public issue of ICICI Bank, the largest private bank of India, raising some doubts on whether both the large IPOs can sail through together smoothly. ICICI Bank has planned a $5 billion public issue and a large part of the same would be raised in the domestic market. The concern, however, is not too serious for a stock market having gross market capitalisation of about a trillion dollar. Many believe that the Indian market has enough appetite to absorb these mega issues at the right price. Also, the IPOs have the potential to attract fresh money instead of just prompting a portfolio shifting by the investors. On the pricing front, DLF has in fact taken enough time to reach at an acceptable price for the institutional investors. As we know, half the portion of all the IPOs in India is reserved for qualified institutional buyers (QIBs) requiring a pre-IPO informal marketing even before the announcement of IPO dates and price range. It would be fair to assume the price band of Rs.500 ($12)-Rs.550 ($13.41) incorporates the feedback by the potential key QIB investors and their willingness to pay that price. 

Attractively Priced, Or Risky Affair?

A number of analysts have commented that the IPO price of DLF is attractive compared with the net asset value (NAV) of DLF’s land reserves. Although the company hasn’t put any valuation to its lands reserves in its red herring prospectus as per the rules prescribed by the market regulator Securities and Exchange Board of India (SEBI), Mumbai-based brokerage firm Brics Securities has estimated the NAV of the 10,255 acres land reserves at Rs.320-350 ($7.8-$8.5) per share.

In general, market analysts feel that although the valuation can’t be described as cheap, the DLF IPO has a number of positives and brings a good opportunity to long term investors. However, considering the recent developments of the real estate market in India and the sharp volatility seen in the stocks of this sector in the recent months, the investors applying in the IPO should have a decent risk appetite.