DLF Ltd, the Delhi-based developer controlled by billionaire Kushal Pal Singh, received clearance from stock- market regulator Securities & Exchange Board of India (Sebi) to sell shares in an initial public offering (IPO) that, apart from being one of India’s largest ever, will set benchmarks for the valuation of real-estate companies and assess the appetite of investors for stocks of such firms.
“The DLF IPO may be a benchmark for the sector,” said Alex K. Mathew, chief analyst at Geojit Financial Services Ltd. “After this, the real-estate sector will get re-rated on the basis of the response to this IPO,” he added.
DLF plans to offer 175 million shares, each with a face value of Rs2, to the public through a book-building deal, which effectively means that investors will bid for the shares to arrive at the issue price. Since the company filed its application with Sebi before the regulator enforced a rule on mandatory rating of IPOs, its offering will not be rated.
The company received an approval from Sebi four months after making a second application, and after almost a year-long process characterised by disputes over shareholdings. “We’ve received Sebi approval,” said Shalini Vig Wadhwa, spokesperson for DLF, who refused to provide any other details. Investment bankers associated with the issue, and who did not wish to be named, said the regulator had not asked the company to make any “material changes” to its prospectus, although one of them added that “as in other IPO documents, Sebi has made some comments and we will discuss (these) with the company and take further steps”. Sebi chairman M. Damodaran was not available for comment and Usha Narayan, the executive director of Sebi in charge of IPOs, refused to comment on a company-specific IPO.
The IPO has been cleared at “the worst possible time for real-estate stocks”, according to Dipan Mehta, director, Dipan Mehta Share & Stock Brokers Pvt. Ltd. Even as concerns about a real-estate asset bubble begin to surface, the stocks of real-estate firms have hit a rough patch.
The stock of Ansal Properties and Infrastructure Ltd (APIL) is down 31% from Rs412 on 8 February to Rs283 on 7 May; that of Sobha Developers, down 11% from Rs972 to Rs864; and that of Unitech Ltd, India’s largest listed real-estate firm, down 10.3% from Rs471 to Rs423. The Bombay Stock Exchange’s Sensex has fallen 5% in the same period.
In a 4 May report on the real-estate sector in India, Citigroup Global Markets’ Ashish Jagnani and Aditya Narain put out a “sell” recommendation on Unitech, Parsvanth Developers and APIL.
“India’s real-estate market is in pain: transaction volumes are drying up, higher interest rates and prices have damaged affordability, developers are suffering a regulatory/capital markets squeeze, supply is impending, and the consensus view is almost unanimous that property prices are set to fall. In sum, it’s pretty tough for the country’s property developers,” they said in the report.
Another report released on Monday by DTZ Holdings Plc., a UK-based real-estate broker, said office-space rentals will likely “hit a plateau” in the next six to 12 months across seven of the country’s biggest cities. “The real-estate market is not doing too well,” said Manish Gunwani, an analyst at Brics Securities Ltd. “There is concern about sustaining prices in the north where DLF has the bulk of its properties,” he added.
Such concerns could translate into a lower issue size according to one analyst. DLF had sought to raise $2.5 billion in India’s biggest offer, bankers said last year. That was the company’s first bid to make an IPO, and the dollar was trading at around Rs45 then. Mukesh Agarwal, a manager at HDFC Securities, said that the company might now raise only around Rs8,000 crore.
DLF had Rs6,638 crore of debt on its books as of 30 November 2006, according to the documents it filed with Sebi in January. An earlier issue had to be scrapped in August 2006 after a dispute with minority shareholders. The company made a profit of Rs1,830 crore on revenues of Rs3,324 crore in the eight months ended 30 November, according to the documents. DLF needs money from the issue, said Sujit Jain, a real-estate analyst at Mumbai’s PINC Research. He added that this wouldn’t just be used to finance its growth plans, but to pay off debt and pay for land that it has committed to buy. “The issue will get sold, but they will have to push hard,” said Jain. “Because of the sheer size of the company, selling the issue won’t be a problem,” said another investment banker associated with the IPO. “But pricing will determine the appetite of investors,” he added.
With the Sebi clearance in hand, DLF will have to file documents with the Registrar of Companies listing the price band for the issue, and the opening and closing dates of the issue. The company will likely go on a roadshow to assess demand for the issue and determine pricing before this. However, DLF will have to complete the IPO within 90 days of receiving Sebi’s clearance. Investment bankers managing the issue said it could take three to four weeks for the IPO to hit the market. Merrill Lynch & Co. and Kotak Mahindra Capital Co. will manage the sale with Citigroup Inc., ICICI Securities Ltd, Lehman Brothers Securities Ltd, UBS AG, Deutsche Equities India Pvt. Ltd and SNI Capital Markets Ltd helping.
J. Venkatesan, a fund manager at Sundaram BNP Paribas Mutual Fund, said that one would need to look if the offer price left some money on table for the investors.
Bloomberg’s Subramaniam Sharma contributed to this story.