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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.

  • kamla bhatt says:

    >Enjoyed the analysis of the DLF IPO.


    kamla bhatt

  • Rohit Shah says:

    >Hi Deepak. Thank you for this wonderful analysis. From last few weeks, I have been reading a lot on DLF IPO and your thoughts stand out !!!


    Rohit Shah

  • Anonymous says:

    >Wat do you think abt the Vishal Retail, which is about 78 times oversubscribed?

  • hari says:

    >HI Deepak,
    For the first time since 4 months I am with you in your ideas. Meaning I am right for the first time. I have not applied for DLF,I thought for a face value of Rs.2 ,550 is a very costly price to pay.

    Since I was preparing for an exam I could not mail you certain things.Firstly I have made another blunder by not subscribing to Time Technoplasts. But the biggest miss has been Nitin Fireworks.

    Both have given excellent listing gains. Due to me being busy and because of my flippance I missed both. I think you would have made the most out of this.

    Also I thought you would mention a note on Vishal Retail. This IPO is also oversubscribed and is given a five star rating by Money Control. I think it does not have FII participation so It could have a lot of listing gains.

    Anyway thanks for this article. I am sort of addicted to this blog.I finished my exam and the first thing that I am doing after I return is to see this blog.


  • Anonymous says:

    >Dear Deepak,

    Your conclusion may be OK. But the logic is not. Your consipiracy theory of black money etc. is totally irrational.

    Emerging markets all over the world has seen spill over effect of liquidity arising from the change in asset allocation among the investors in Developed economies. This is the root cause of FIIs inflows. Black money may be only a small component. Turkeys too fly when the wind is strong leading to irrational exuberance.

    Real estate in India does have good potential (with pitfalls). Currently valuation may appear stretched.

  • Deepak Shenoy says:

    >Kamla and Rohit: thanks!

    Anon: Haven’t analysed Vishal Retail, though I didn’t subscribe. 78x oversubscription probably says it all – but let me take a look at hte prospectus too.

    Hari: Don’t worry about the face value, it’s irrelevant. Nitin Fire Protection looks good in hindsight but it’s too volatile to make any serious fundamental entries. And thanks for your kind words!

    Anon: I’m not sure this is irrational exuberance, we haven’t yet gone to the May 2006 levels of participation, and that was also not the peak it seems. Of course the Black money theory is something I can’t prove – so you’ll have to take that as an opinion. Do you have links about the asset allocation changes in the developed economies?

    In the short term – 1 to 3 years – I don’t see a huge positive for real estate. For Delhi I don’t see the commonwealth games as a positive either, for reasons I’ve mentioned.

  • Anonymous says:

    >Hi Deepak,
    I dont have accurate data on asset allocation of FIIs investing in Emerging markets. But if you Google it you may find plenty stories of huge amount of capital flowing out of US, Japan etc. into riskier assets (from their Insurance companies, private pension funds, Hedge funds, Mfs, carry trades etc.)

    Although they call themselves as long term investors, We don’t know if their asset allocation model will change if interest rates in developed economies goes up. But it seems that SD for Indian equities will remain high at least in the next 10 years. So one should not go overboard with equity investments in Emerging markets. I know of one retiree who had 2.5 Crores stocks in March 2000 and it got reduced to 45 Lakhs in Sep. 2001.

  • Anonymous says:

    >Having been a prudent investor in emerging markets, I’m pretty convinced about the bouyount growth opportunities these markets offers and as mentioned earlier in the posting I can reiterate it’s not for the weak hearted…It all about getting your asset allocation right and wait for the value to unlock(7-10 years)…..From my own analysis I strongly agree that the Indian realty insdustry is all about irrational exburence…There certainly are more attractive oppurtunities in the infrastructural sector like BHEL and L&T (second Deepak’s opinion)…Any comments and thoughts on the forthcoming ICICI Bank FPO, it’s been fixed in the price range of Rs. 885-950, with a discount offering of Rs.50 for the retail investors?

  • Madhab says:

    >Hey Deepak,
    Thanks for this critical analysis..
    Good to know that you now belong to HNI , but what makes you that… your knowledge or the amount you invest ?

    Hope I phrased the question right..


  • Deepak Shenoy says:

    >Anon: I will read through ICICI’s prospectus and find out what they have and analyse.

    madhab: I’m not necessarily an HNI – High Networth Investor – because my networth is probably less than most readers of this blog! The sentence in the article needs to be rephrased.

  • Anonymous says:

    >Anon: “not for the weak hearted” is ok. But your time frame of 7 to 10 years is rather short. Actual data of BSE index indicated the longest as 13 years. 1992 to 2004 when the index retested. If someone has made good base in the fixed income space for 15 years and has the nerve to see his equity component dip 80% (as happened to Nasdaq and Indian Tech Funds) then he has passed the “stress test” of India and his portfolio can be considered truly resistant to earthquakes. Otherwise, one may sell in panic when the market goes low.

  • Anonymous says:

    >Well, no one has seen what future has in store…so neither do i trust financial analysts nor technical soothsayers…diversification across asset classes and across sectors (tactical global allocation model) is what can provide solace to an investment ascetic….Btw, I’d like to point out asset allocation should always be viewed from the angle of one’s riskable capital and returns expectation not on one’s age….But for a novice there is no better substitute to investing other than a phased, discplined and systematic manner…goal being financial independence with mastery over greed, fear, exuberance, sucess and failure 🙂

  • Anonymous says:

    >Hi Deepak,
    Your DLF analysis is very good. I would like your analysis on NTPC, GAIL, and ONGC if you can spare the time

  • Anonymous says:

    >In the present world of short term outlooks, long term opinions are vital. Hope this blogger will live up to out expectation.