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DLF IPO Details

The big fat DLF IPO is now over. Subscription details:

  • Institutional buyers oversubscribed 5.12 times – they bid for 53.54 cr. shares of a total requirement of 10.44 cr. shares. Considering they have to put only 10% of the bid amount down, even at Rs. 550 per share, this is an IPO collection of 2,944 cr. of course once alloted the institutions must pay the rest of the amount bid.
  • Out of the institutions, FIIs bid for 48.55 cr shares. Banks and domestic financial institutions bid for only 3.5 cr. shares.
  • Mutual funds bid for only 3.52 cr. shares, despite only having to put up 10% of the money upfront. This means they only put up Rs. 175 cr. for one of India’s largest IPOs – and equity mutual funds have a base of at least Rs. 100,000 cr. That is alarmingly low as a percentage, when you consider that DLF will be one of the largest cap companies.
  • HNIs including corporates bid for 1.9 cr shares of an allowable 1.7 cr. That means that part of the issue is subscribed 1.1 times.
  • The retail part of the IPO has seen 5.09 cr. shares bid for, of a total available 5.22 cr. shares. That’s a 97% subscription – quite surprising to me! Most bids came in at cut-off.
  • Of the 10 lakh shares allocated for employees, 78% has been subscribed.

What this means is that issue as a whole is fully subscribed, and in all likelihood, both HNIs and retail are going to see full allotment since there is undersubscription in those areas.

Institutions will get partial allotment of their bids, with most going to FIIs.

Now, the FII demand signifies that this stock will most likely get picked up at listing; and retail demand is robust enough for people to pick the stock up as well – Like me, many retail and HNI investors have started to avoid IPOs because of the regular massive oversubscription and locking of money. Also the cost of IPO funding is a deterrent.

I did not cover this IPO during its time because I wasn’t interested in it. But looking at media reports, everyone and their uncle was negative on the IPO. But say what you will, you cannot ignore DLF. They are bigger than the other listed real estate players combined together. Sure, their management has been labelled wonky, and the Singhs have been called all sorts of names. The IPO itself has been postponed a number of times for different reasons, including market tanking, minority shareholder issues, and such.

But the resounding FII response and the massive retail subscription prompts me to think – is it going to be a big listing? My answer is: No. Firstly, in all probability, many (retail) people applied to make minor listing gains because they were sure to get allocation. But that very fact will ensure they don’t have a big listing.

Second, the real estate market, as we know, is largely “black” – at least in Delhi where DLF is king. Now this “black” money routinely flows out of India through the hawala route, and comes back through FIIs as “participatory notes” – something SEBI and the finance ministry know but cannot curb without allowing a huge crash to happen. The black money of Indian bigwigs has perhaps flowed back into the DLF issue, and some of it could even be the black money in the real estate market.

Third, the stock is way to big to be operated. This share, which will likely have futures and options on it as well, will not be able to be manipulated that easily. Many companies rig up with operators to attempt to keep up their stock price – even big companies like Reliance have also supposedly done this at some point – and the Singhs of DLF have the unsavoury reputation for doing such things. Yet, I believe they will not be able to move it up – all they may do is to keep it from going down too much.

The market cap of this company at Rs. 550 will be about 93000 cr. That’ll make it one of the largest companies in India – about seventh or eighth in terms of market cap. This will mean that the stock will soon get added to both the Nifty and the Sensex.

Given all this I don’t believe there will be a huge listing gain, but I don’t think there is much downside either. Perhaps the share will list between 400 and 600 and hang around there until Q1 results of DLF are out.

Why am I not interested in this share?

  • Real estate is going to get downgraded. Even in Gurgaon and Dwarka, supply is high and demand is stagnating with extremely high interest rates and lack of investor interest.
  • No ECBs and land purchase issues will have problems in the near term. This is an extremely capital intensive business; I’m not sure how much of a difference the IPO money is going to make – but it surely won’t help more than 10-20% margin increases on the business.
  • Their “other income” is 1400 cr. which is about 70% of their net profit (1941 cr). I don’t like that. Turns out it has come from “disposal of fixed assets and long term investments” – this is a one time thing.
  • Their hotel and commercial business is well planned for the commonwealth games in 2010. But that is a one time event and after that there will be a severe dip in demand…everyone seems to think that the Commonwealth games will do it great, but remember the Asian games in 1982? I lived in Delhi post 1982 – for years, the accomodation created for the games was empty and desolate; my father’s bank bought houses at throwaway prices to provide accomodation to their managers.
  • If you remove the one-time other income, the earnings are about 500 cr. which means the company is getting a P/E of 190. I’m not happy to pay such ridiculous valuations in the age of high interest rates, low borrowing capabilities and oversupply.
  • Land valuations are something I do not understand. How they can value land they do not own is beyond me.

If you’re invested, I don’t think you should worry – there are good reasons why this stock will not do too badly. But there are a number of better opportunities out there, in the heavyweights – like L&T and BHEL, which, while not being real estate plays, are fundamentally better poised than a DLF.

Overall, the IPO is an eye-opener in terms of the amount of money in the Indian market. Let’s see how it performs. And lets see how ICICI’s mega issue turns out.

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