Name of the Company: Spice Telecom
Sector/Industry: Mobile Service Provider
Issue Size: 11.3 crore shares (Of Rs. 10/- Each Share)
Issue Price: Rs 42 - 46
Issue Opens: Monday, June 25, 2007
Issue Closes: Wednesday, June 27, 2007
Promoters: B.K.Modi and Telekom Malaysia (TM)
Company Website: www.spiceindia.com
Book Running Lead Manager: UBS Securities India and ENAM Financial Consultants Private Limited.
Registrar: Karvy Computershare Private Limited.
Draft Red Herring Prospectus: www.sebi.gov.in/dp/spicecom.pdf
About the Company: Incorporated in 1997, Spice Communications Limited (or Spice Telecom) is a cellular services provider in the states of Punjab and Karnataka in India. At present Spice Telecom has customer base of 0.3 crores.
Objectives of the issue:
Fees for NLD (National Long Distance) and ILD (International Long Distance) licenses (64 crores).
To purchase network equipment (178 crores).
Repayment of debt.
Strengths:
Strong Foreign Investor in TM: TM is a leading telecommunications company based in Malaysia, with a strong presence in the Asia-Pacific region, including strategic investments in Sri Lanka, Bangladesh, Indonesia, Cambodia, Singapore and Pakistan. TM’s experience and track record in expanding its business throughout the region will be helpful in the implementation of pan-India expansion strategy and that relationship with TM may also give access to additional technical and marketing expertise and economies of scale.
Value Added Services: Voice revenues are highly commoditized and it is crystal clear that voice tariffs are going to get cheaper day by day. Hence mobile service providers need to look for different revenue streams. Value added services (VAS) provide this opportunity. Convergence of technologies will open up lot of VAS opportunity. Already in Western countries, VAS accounts for 50% of the revenues. Spice is doing good at VAS. Cellebrum.com Private Limited, an affiliate company, creates value-added services for Spice, to help them stay ahead of competitors. Additionally TM, will also help Spice to develop innovative value-added services designed to appeal specifically to different market segments
Potential pan India presence: Currently Spice operates in two circles only. Spice
has applied for licenses to provide cellular services in an additional 20 circles throughout India. Spice has also applied to obtain NLD and ILD licenses.
Weakness:
Management: According to me, Modi management is not dynamic. Spice has not capitalized on the early mover advantage.
Size: At present, Spice is too small. Getting pan India licenses involves lot of regulatory hurdles and as such there is huge artificial shortage (India Army has occupied loads of bandwidth which it does not use) of spectrum in India.
Financial Information:
In the three years ended June 30, 2004, 2005 and 2006, total income was Rs. 554.4 crores, Rs. 643.0 crores and Rs. 680 crores, respectively, and earnings before income, tax, depreciation and amortization (“EBITDA”) was Rs. 168 crores, Rs. 202 crores and Rs. 164 crores, respectively. For the quarter ended September 30, 2006 total income was Rs. 184.33 crores and EBITDA was Rs. 42.2 crores.
Spice is loss making company. Spice Telecom’s accumulated losses are the tune of Rs 642.54 crore as on June 30, 2006. Also, it further continued to post negative net worth of Rs 684.35 crore as on December 31, 2006. This is the reason it has been denied listing at NSE. Making losses for few years is common among telecom companies because of long gestation period. Idea was also loss making company and has turned to black in this year.
Valuation:
Since Spice is loss making company, traditional method of ‘P/E’ does not work. As an alternative I have compared Spice with Airtel (which commands highest valuation), in terms of ratio of market capitalization to number of subscribers.
For Airtel, the ratio of market capitalization (1, 50,000 crores) to number of subscribers (4 crores) is 37500. Similarly for Spice, the ratio of market capitalization (3750 crores )
to number of subscribers (0.3 crores) is 12500. Other players like Idea and Hutch have the ratio 21500 and 30000 respectively. These figures gave an impression that Spice is damn cheap, but hang on and read the fine print.
We are comparing Spice with integrated telecom and national level players. Apart from mobile services, Airtel provides landlines, fixed wireless and bandwidth and the major point is Airtel, Idea and Hutch are all profit making companies. Hence we need to discount all these factors in Spice’s valuation.
Even if we value Spice at 50% discount to Airtel, then we still have approx 50% listing gains on the table. My call for Spice is ‘Apply’
Spice has done pre-IPO placement of 2.5 crore shares @ Rs 45 to Lehman Brothers and other investors.
One example how big money makes bigger money. In March 2006, Telekom Malaysia had picked 49 % stake in Spice for 1000 crores and today the same stake is 2000 crores on conservative. Seriously big money.
BEML and HDIL are the latest entrants on the IPO bandwagon…Watch out for reviews on this page..
Inputs From:
Spice DRHP
Thursday, June 21, 2007
Wednesday, June 20, 2007
ICICI FPO Review
Name of the Company: ICICI Bank
Sector/Industry: Banking, Finance and Insurance
Issue Size: Equity Share of Aggregating Rs. 8750 Crores (Of Rs. 10/- Each Share)
Issue Price: Rs 885 - 950
Issue Opens: Tuesday, June 19, 2007
Issue Closes: Friday, June 22, 2007
Professional CEO: Mr. K.V Kamath
Company Website: www.icicibank.com
Book Running Lead Manager: Goldman Sachs, DSP Merrill Lynch, Enam Financial, JM Morgan Stanley Pvt. Limited
Registrar: Karvy Computershare Private Ltd
About the Company: Incorporated in 1994, ICICI Bank is part of the ICICI group. ICICI Bank is India's largest private sector commercial bank. ICICI Bank together with its subsidiaries, offer products and services in the areas of commercial banking to retail and corporate customers (both domestic and international), treasury, investment banking and other products like insurance and asset management.
Objectives of the Issue:
To meet the capital requirements arising out of growth in assets, primarily its loan and investment portfolio and compliance with regulatory requirements.
Strengths:
End-To-End Service Provider: ICICI provides complete financial services like bank services, loans, insurance, asset management, private equity and in each segment it has considerable size. It is fair to call ICICI as a ‘Complete Bank’.
Aggressive Performance: Even though ICICI was a late entrant, today its market capitalization is approx 85000 crores. SBI, which has 150 years of history, has market capitalization of 73000 crores and HDFC which was also incorporated in 1994 has market capitalization of 45000 crores.
Management: ICICI is led by K.V Kamath, a man who holds lot of clout in the corporate world. He was the man who played an important role in settling the Ambani feud. To assist Kamath, ICICI has troika of powerful women led by Chanda Kochar, Kalpana Morparia and Lalita Gupte.
Technological Advanced Bank: ICICI has laid state of art technological platform to serve its customers. It is aggressively pushing virtual banking and internet banking. These concepts will help ICICI to tap rural markets as well as people at the bottom of the pyramid. ICICI also has reduced dependency on physical branches and people because lot of its subscribers use internet banking facilities. Fewer branches and more subscribers, positively impact the bottom-line.
Weakness:
If there is severe downturn in global economy (on the scale of 9/11), then ICICI will end up with loads of bad loans in its portfolio.
Financial Summary:
For the year 2006 -07, ICICI bank achieved topline of 22,994 crores and bottomline of 3110 crores.
Valuation:
The pre-issue EPS is Rs 34.84 and the P/E ratio is 27.26. The valuations are comparable with other private sector banks such as HDFC (P/E = 30.5) and UTI (P/E = 26) but ICICI is better than these banks because it has powerful subsidiaries like ICICI Prudential Life Insurance, ICICI Lombard General Insurance and ICIC Prudential AMC in its portfolio. The price band of 885 – 950 seems to be reasonable. Retail investors are also eligible for Rs 50 discount (icing on the cake)
Go ahead and apply, but take care of these points:
a) Probably we will get firm allotment because the issue size is too large and already signs of liquidity crunch are visible. Hence invest according to our own sweet budget without having to worry about allotment. Lot of other good issues are also in pipeline.
b) This is a FPO (Follow on Public Offer) and not an IPO (Initial Public Offer), hence don’t expect any fireworks during listing. Subscribe to this offer as a pure long term investment call.
c) Go for payment option 2 (fully paid option) to avoid headache of partial payment mode.
Few other interesting points about ICICI and banking sector in India:
Value Unlocking: ICICI bank has set up a new subsidiary company called ICICI Holdings. The bank will transfer to the new entity its investments in ICICI Prudential Life Insurance Company, ICICI Lombard General Insurance Company, Prudential ICICI Asset Management Company and Prudential ICICI Trust Ltd. ICICI has put on block a stake of 5.9% in ICICI Holdings for mind boggling 2650 crores and FII are desperate to get as much share as possible from this pie. So ICICI Holdings, which will be the owner of loss making insurance and AMC business, is worth 44,600 crores. Remove this amount from ICICI’s market capitalization and valuation wise it looks damn cheap.
Come 2009( In 2009, banks have to be Basel –II compliant as well as Indian banking sector will be opened for foreign players) and may be even before that, an unprecedented game of mergers and acquisitions will unfold. You can expect ICICI to come out as leader in this game and grow inorganically.
One more interesting point before I end this comprehensive review. China’s largest bank, Industrial Commercial Bank of China has market capitalization of USD 200 billion. No bank in India is even one tenth of ICBC. Hence a fierce M & A game is inevitable.
Do visit this page on June 25 to get to know about Spice Telecom IPO…..
Inputs:
www.icicibank.com
http://www.chittorgarh.com/newportal/IPO_detail.asp?a=93
Sector/Industry: Banking, Finance and Insurance
Issue Size: Equity Share of Aggregating Rs. 8750 Crores (Of Rs. 10/- Each Share)
Issue Price: Rs 885 - 950
Issue Opens: Tuesday, June 19, 2007
Issue Closes: Friday, June 22, 2007
Professional CEO: Mr. K.V Kamath
Company Website: www.icicibank.com
Book Running Lead Manager: Goldman Sachs, DSP Merrill Lynch, Enam Financial, JM Morgan Stanley Pvt. Limited
Registrar: Karvy Computershare Private Ltd
About the Company: Incorporated in 1994, ICICI Bank is part of the ICICI group. ICICI Bank is India's largest private sector commercial bank. ICICI Bank together with its subsidiaries, offer products and services in the areas of commercial banking to retail and corporate customers (both domestic and international), treasury, investment banking and other products like insurance and asset management.
Objectives of the Issue:
To meet the capital requirements arising out of growth in assets, primarily its loan and investment portfolio and compliance with regulatory requirements.
Strengths:
End-To-End Service Provider: ICICI provides complete financial services like bank services, loans, insurance, asset management, private equity and in each segment it has considerable size. It is fair to call ICICI as a ‘Complete Bank’.
Aggressive Performance: Even though ICICI was a late entrant, today its market capitalization is approx 85000 crores. SBI, which has 150 years of history, has market capitalization of 73000 crores and HDFC which was also incorporated in 1994 has market capitalization of 45000 crores.
Management: ICICI is led by K.V Kamath, a man who holds lot of clout in the corporate world. He was the man who played an important role in settling the Ambani feud. To assist Kamath, ICICI has troika of powerful women led by Chanda Kochar, Kalpana Morparia and Lalita Gupte.
Technological Advanced Bank: ICICI has laid state of art technological platform to serve its customers. It is aggressively pushing virtual banking and internet banking. These concepts will help ICICI to tap rural markets as well as people at the bottom of the pyramid. ICICI also has reduced dependency on physical branches and people because lot of its subscribers use internet banking facilities. Fewer branches and more subscribers, positively impact the bottom-line.
Weakness:
If there is severe downturn in global economy (on the scale of 9/11), then ICICI will end up with loads of bad loans in its portfolio.
Financial Summary:
For the year 2006 -07, ICICI bank achieved topline of 22,994 crores and bottomline of 3110 crores.
Valuation:
The pre-issue EPS is Rs 34.84 and the P/E ratio is 27.26. The valuations are comparable with other private sector banks such as HDFC (P/E = 30.5) and UTI (P/E = 26) but ICICI is better than these banks because it has powerful subsidiaries like ICICI Prudential Life Insurance, ICICI Lombard General Insurance and ICIC Prudential AMC in its portfolio. The price band of 885 – 950 seems to be reasonable. Retail investors are also eligible for Rs 50 discount (icing on the cake)
Go ahead and apply, but take care of these points:
a) Probably we will get firm allotment because the issue size is too large and already signs of liquidity crunch are visible. Hence invest according to our own sweet budget without having to worry about allotment. Lot of other good issues are also in pipeline.
b) This is a FPO (Follow on Public Offer) and not an IPO (Initial Public Offer), hence don’t expect any fireworks during listing. Subscribe to this offer as a pure long term investment call.
c) Go for payment option 2 (fully paid option) to avoid headache of partial payment mode.
Few other interesting points about ICICI and banking sector in India:
Value Unlocking: ICICI bank has set up a new subsidiary company called ICICI Holdings. The bank will transfer to the new entity its investments in ICICI Prudential Life Insurance Company, ICICI Lombard General Insurance Company, Prudential ICICI Asset Management Company and Prudential ICICI Trust Ltd. ICICI has put on block a stake of 5.9% in ICICI Holdings for mind boggling 2650 crores and FII are desperate to get as much share as possible from this pie. So ICICI Holdings, which will be the owner of loss making insurance and AMC business, is worth 44,600 crores. Remove this amount from ICICI’s market capitalization and valuation wise it looks damn cheap.
Come 2009( In 2009, banks have to be Basel –II compliant as well as Indian banking sector will be opened for foreign players) and may be even before that, an unprecedented game of mergers and acquisitions will unfold. You can expect ICICI to come out as leader in this game and grow inorganically.
One more interesting point before I end this comprehensive review. China’s largest bank, Industrial Commercial Bank of China has market capitalization of USD 200 billion. No bank in India is even one tenth of ICBC. Hence a fierce M & A game is inevitable.
Do visit this page on June 25 to get to know about Spice Telecom IPO…..
Inputs:
www.icicibank.com
http://www.chittorgarh.com/newportal/IPO_detail.asp?a=93
Sunday, June 10, 2007
Vishal Retail
Vishal Retail
Name of the Company: Vishal Retail
Sector/Industry: Organised Retail
Issue Size: Equity Share of Aggregating Rs. 110.00 Crores (Of Rs. 10/- Each Share)
Issue Price: Rs 230 - 270
Issue Opens: Monday, June 11, 2007
Issue Closes: Wednesday, June 13, 2007
Promoter(s): Mr Ram Chandra Agarwal
Company Website: www.vishalmegamart.net
Book Running Lead Manager: Enam Financial Consultants
Registrar: Intime Spectrum Registry Ltd
Draft Red Herring Prospectus: www.sebi.gov.in/dp/vishalret.pdf
About the Company: Incorporated in 1986, Vishal Retail Limited is among the leading retail houses in India based in Delhi. Vishal Retail has around 46 outlets in 39 cities in India.
Vishal stores offer affordable family fashion at prices to suit every pocket. Vishal Retail also has apparel manufacturing plant at Gurgaon. It has seven distribution centers and a fleet of trucks for transportation.
Objectives of the Issue:
• To meet the expenses of establishing new retail stores.
The objective of this issue is crystal clear and will lot of value to shareholder’s money.
Strengths:
• Early Mover Advantage – Vishal is a player in organized retail since 2001. It is not one of the players who have joined the retail bandwagon recently.
• Retail Space: Vishal already has 11 lakh square feets of retail space under its control spread over 46 outlets. It has also finalized another 5 lakh square feets which will be operational in 2007 and 2008. Reliance and Bharti may talk a lot about thousands of crores of investment but in Vishal we already have a organized retail player of decent size.
• Expansion in Tier II and Tier III cities: I like Vishal’s expansion strategy which is contrarian in nature. Well known names like Pantaloon and Reliance are looking for retail space in Tier I cities but Vishal is concentrating on Tier II and Tier III cities. I think this strategy makes sense because of cheap real estate, less or completely no competition and high profit margins in Tier II and Tier III cities. I am quite sure that consumerism and purchasing power is good in cities like Mangalore, Mysore, Nasik, Ambala, Vijawada, Vadodara, Surat etc where Vishal is expanding.
• Private Labels: Vishal derives substantial revenues( about 20% from private apparel labels) which provide better profit margins and less dependency on others.
• High Profile Investors: Vishal has investors like Bennet Coleman & Co Ltd ,BCCL(11.21 % stake on pre issue equity capital), HDFC Limited (1.09 % stake on pre issue equity capital), Munjal’s of Hero group ( 1 % on pre issue equity capital) and Burman’s of Dabur group (0.4 % on pre issue equity capital). I made my investment decision as own as I saw such reputed names among investors. Vishal can be rest assured about favourable media coverage through BCCL (owner of Times of India and Economic Times).
Weakness:
I just can’t think of any weakness in this business model. This business model will go bust only, if there is severe catastrophe in India.
Financial Summary:
Vishal earned revenue of Rs 600 crores and recorded profits of Rs 25 crores in FY-07. For an organized retailer PAT margins of 4% is very good.
Valuation:
This issue is very reasonably priced. On post issue equity capital of 22.5 crores (approximately), the EPS works out to be 11.11. This gives a PE of around 24 times at higher band where as other peers like Pantaloon (55x) Provogue (46x) Trent (43x) Shoppers Stop (80x) are quoting at quite high PE.
The price band of Rs 230 -270 is very cheap for a company whose sales and PAT have grown at a compounded annual rate of 89.83% and 302.89%, respectively, during the period of FY04 and FY 07*.
Go ahead and apply in full strength. This is a multi bagger for sure.
Inputs From:
DRHP
http://www.chittorgarh.com/newportal/ipo_detail.asp?a=90
ET Finance dated Friday 8 June 2007.
Name of the Company: Vishal Retail
Sector/Industry: Organised Retail
Issue Size: Equity Share of Aggregating Rs. 110.00 Crores (Of Rs. 10/- Each Share)
Issue Price: Rs 230 - 270
Issue Opens: Monday, June 11, 2007
Issue Closes: Wednesday, June 13, 2007
Promoter(s): Mr Ram Chandra Agarwal
Company Website: www.vishalmegamart.net
Book Running Lead Manager: Enam Financial Consultants
Registrar: Intime Spectrum Registry Ltd
Draft Red Herring Prospectus: www.sebi.gov.in/dp/vishalret.pdf
About the Company: Incorporated in 1986, Vishal Retail Limited is among the leading retail houses in India based in Delhi. Vishal Retail has around 46 outlets in 39 cities in India.
Vishal stores offer affordable family fashion at prices to suit every pocket. Vishal Retail also has apparel manufacturing plant at Gurgaon. It has seven distribution centers and a fleet of trucks for transportation.
Objectives of the Issue:
• To meet the expenses of establishing new retail stores.
The objective of this issue is crystal clear and will lot of value to shareholder’s money.
Strengths:
• Early Mover Advantage – Vishal is a player in organized retail since 2001. It is not one of the players who have joined the retail bandwagon recently.
• Retail Space: Vishal already has 11 lakh square feets of retail space under its control spread over 46 outlets. It has also finalized another 5 lakh square feets which will be operational in 2007 and 2008. Reliance and Bharti may talk a lot about thousands of crores of investment but in Vishal we already have a organized retail player of decent size.
• Expansion in Tier II and Tier III cities: I like Vishal’s expansion strategy which is contrarian in nature. Well known names like Pantaloon and Reliance are looking for retail space in Tier I cities but Vishal is concentrating on Tier II and Tier III cities. I think this strategy makes sense because of cheap real estate, less or completely no competition and high profit margins in Tier II and Tier III cities. I am quite sure that consumerism and purchasing power is good in cities like Mangalore, Mysore, Nasik, Ambala, Vijawada, Vadodara, Surat etc where Vishal is expanding.
• Private Labels: Vishal derives substantial revenues( about 20% from private apparel labels) which provide better profit margins and less dependency on others.
• High Profile Investors: Vishal has investors like Bennet Coleman & Co Ltd ,BCCL(11.21 % stake on pre issue equity capital), HDFC Limited (1.09 % stake on pre issue equity capital), Munjal’s of Hero group ( 1 % on pre issue equity capital) and Burman’s of Dabur group (0.4 % on pre issue equity capital). I made my investment decision as own as I saw such reputed names among investors. Vishal can be rest assured about favourable media coverage through BCCL (owner of Times of India and Economic Times).
Weakness:
I just can’t think of any weakness in this business model. This business model will go bust only, if there is severe catastrophe in India.
Financial Summary:
Vishal earned revenue of Rs 600 crores and recorded profits of Rs 25 crores in FY-07. For an organized retailer PAT margins of 4% is very good.
Valuation:
This issue is very reasonably priced. On post issue equity capital of 22.5 crores (approximately), the EPS works out to be 11.11. This gives a PE of around 24 times at higher band where as other peers like Pantaloon (55x) Provogue (46x) Trent (43x) Shoppers Stop (80x) are quoting at quite high PE.
The price band of Rs 230 -270 is very cheap for a company whose sales and PAT have grown at a compounded annual rate of 89.83% and 302.89%, respectively, during the period of FY04 and FY 07*.
Go ahead and apply in full strength. This is a multi bagger for sure.
Inputs From:
DRHP
http://www.chittorgarh.com/newportal/ipo_detail.asp?a=90
ET Finance dated Friday 8 June 2007.
DLF Limited
DLF Limited
Name of the Company: DLF Limited
Sector/Industry: Real Estate
Issue Size: 175,000,000 equity shares of Rs. 2 each. The issue would constitute 10.26% of the post issue paid up equity capital
Issue Price: Rs 500 - 550
Issue Opens: Monday, June 11, 2007
Issue Closes: Thursday, June 14, 2007
Promoter(s): K P Singh (Will he be the richest Indian, watch out Premji)
Company Website: www.dlf.in
Book Running Lead Manager: Citigroup, Deutsche Equities India, ICICI Securities, Lehman Brothers and UBS Securities.
Registrar: Karvy Computershare Private Ltd
Draft Red Herring Prospectus: www.sebi.gov.in/dp/dlfred.pdf
About the Company: Incorporated in 1946, DLF Limited is a real estate development company based in India. DLF is the largest Indian company in terms of the area of completed residential and commercial developments. DLF’s main area of operation is Delhi and surrounding areas.
DLF is in almost each and every area of real estate development including identification and acquisition of land, planning, execution, marketing and maintenance of the projects.
DLF's major line of business includes:
Residential business - DLF builds and sells a wide range of properties including houses, duplexes and apartments of varying sizes, with a focus on the higher end of the market.
Commercial business - DLF builds and sells or lease commercial office space, with a focus on properties attractive to large multinational tenants.
Retail business - DLF develop and manages leases based shopping malls, which in many cases include multiplex cinemas.
DLF is now focusing on more infrastructure, SEZs(special economic zones) and hotel projects.
Objectives of the Issue:
Finance expenditure for acquisition of land and development rights.
Finance the construction and development costs for some of our existing projects.
Repay certain loans of the Company.
Strengths:
Superior Land Bank – According to the prospectus DLF has land bank of 10,255 acres and is likely to last 10 years. This land bank is mostly concentrated around NCR region. The pace of infrastructure development around NCR region is high because of its proximity to national capital, common wealth games in 2010, up gradation of airport. Hence this land bank fetches good premium (but certainly not what K P Singh is asking for)
Size: In real estate business, size matters a lot. Right now, DLF is the largest real estate player of India.
DLF will get Rs 8750 – 9600 crores from this issue. This money will definitely reduce its interest burden and provide lot of flexibility in acquiring more land banks and may be other companies too.
Management Bandwidth and Track Record
Weakness:
Credibility of the land bank claimed: DLF does not own all of its 10,255-acre land bank. While it has title to 11.3 per cent of the bank, a good 35 per cent is still under `agreement to purchase' and for the rest of the land bank it has just ‘development rights’.
Hardening Interest Rates: Real estate valuation is very intricately linked with interest rates. When interest rates are low, people borrow money and buy real estate. With more buyers coming in, real estate prices start increasing to an extent of ‘asset bubble’ being created. In order to cool down the prices, central bankers increase interest rates. This whole process is a vicious circle and unfortunately we are in the latter half of this circle. The simple logic to make money is, buy low and sell high. So now it is the time to sell and not to buy.
Real Estate Bear Cycle: It has had a secular bull run from past 3 – 4 years. Anything that goes up has to come down. We have already seen drop in real estate prices in past 6 months across the country.
Financial Summary:
DLF posted strong numbers in FY07 when compared FY06. It registered revenues of Rs 4,034 crores in FY07 against Rs 1,246 crores in FY06. Net profit increased more than 10 times to Rs 1,941.3 crores
There is a huge debate over the net profit of 1941 crores. Is it artificial or real?
DLF earned an income of Rs 2210 crores and profit before tax of Rs 1570 crores from the sale of certain commercial properties to DLF Assets Pvt. Ltd., a company wholly owned by the promoters. I am not sure whether making profits through this kind of asset sale is sustainable in future.
Valuation:
This issue is very steeply priced. At the upper end of the issue price, the stock will discount its FY07 EPS of Rs 12.80 47.7x and 43.4x at the lower end. This kind of valuations are justified for Google and Apple but not for a brick and mortar company.
Let me get into K P Singh’s shoes and assume that PAT of 1941 crores is real and DLF has land bank of 10255 acres. Lets play with some numbers. If we assume a price of Rs 1500 (it should be fair price for a land bank which consist of prime as well as non prime land) per square feet, an acre of land costs Rs 6.6 crores (an acre of land consists 4400 square feet). According to this calculation, DLF should get valuation of 67683 crores. But K P Singh is asking for 87500 – 96000 crores which is exorbitantly high.
Please avoid this issue. Risk Reward Ratio is highly inclined towards risk. Don’t apply.
It would be interested to see whether this issue would get fully subscribed considering the fact that it is very huge issue as well as highly priced issue. Battery of investment bankers are working overnight to make retail investors poor and they are even resorting to certain unethical behaviour like providing Rs 500 per application to the broker. Don’t be surprised, if your broker calls you to tell that this is the best issue of the year.
Name of the Company: DLF Limited
Sector/Industry: Real Estate
Issue Size: 175,000,000 equity shares of Rs. 2 each. The issue would constitute 10.26% of the post issue paid up equity capital
Issue Price: Rs 500 - 550
Issue Opens: Monday, June 11, 2007
Issue Closes: Thursday, June 14, 2007
Promoter(s): K P Singh (Will he be the richest Indian, watch out Premji)
Company Website: www.dlf.in
Book Running Lead Manager: Citigroup, Deutsche Equities India, ICICI Securities, Lehman Brothers and UBS Securities.
Registrar: Karvy Computershare Private Ltd
Draft Red Herring Prospectus: www.sebi.gov.in/dp/dlfred.pdf
About the Company: Incorporated in 1946, DLF Limited is a real estate development company based in India. DLF is the largest Indian company in terms of the area of completed residential and commercial developments. DLF’s main area of operation is Delhi and surrounding areas.
DLF is in almost each and every area of real estate development including identification and acquisition of land, planning, execution, marketing and maintenance of the projects.
DLF's major line of business includes:
Residential business - DLF builds and sells a wide range of properties including houses, duplexes and apartments of varying sizes, with a focus on the higher end of the market.
Commercial business - DLF builds and sells or lease commercial office space, with a focus on properties attractive to large multinational tenants.
Retail business - DLF develop and manages leases based shopping malls, which in many cases include multiplex cinemas.
DLF is now focusing on more infrastructure, SEZs(special economic zones) and hotel projects.
Objectives of the Issue:
Finance expenditure for acquisition of land and development rights.
Finance the construction and development costs for some of our existing projects.
Repay certain loans of the Company.
Strengths:
Superior Land Bank – According to the prospectus DLF has land bank of 10,255 acres and is likely to last 10 years. This land bank is mostly concentrated around NCR region. The pace of infrastructure development around NCR region is high because of its proximity to national capital, common wealth games in 2010, up gradation of airport. Hence this land bank fetches good premium (but certainly not what K P Singh is asking for)
Size: In real estate business, size matters a lot. Right now, DLF is the largest real estate player of India.
DLF will get Rs 8750 – 9600 crores from this issue. This money will definitely reduce its interest burden and provide lot of flexibility in acquiring more land banks and may be other companies too.
Management Bandwidth and Track Record
Weakness:
Credibility of the land bank claimed: DLF does not own all of its 10,255-acre land bank. While it has title to 11.3 per cent of the bank, a good 35 per cent is still under `agreement to purchase' and for the rest of the land bank it has just ‘development rights’.
Hardening Interest Rates: Real estate valuation is very intricately linked with interest rates. When interest rates are low, people borrow money and buy real estate. With more buyers coming in, real estate prices start increasing to an extent of ‘asset bubble’ being created. In order to cool down the prices, central bankers increase interest rates. This whole process is a vicious circle and unfortunately we are in the latter half of this circle. The simple logic to make money is, buy low and sell high. So now it is the time to sell and not to buy.
Real Estate Bear Cycle: It has had a secular bull run from past 3 – 4 years. Anything that goes up has to come down. We have already seen drop in real estate prices in past 6 months across the country.
Financial Summary:
DLF posted strong numbers in FY07 when compared FY06. It registered revenues of Rs 4,034 crores in FY07 against Rs 1,246 crores in FY06. Net profit increased more than 10 times to Rs 1,941.3 crores
There is a huge debate over the net profit of 1941 crores. Is it artificial or real?
DLF earned an income of Rs 2210 crores and profit before tax of Rs 1570 crores from the sale of certain commercial properties to DLF Assets Pvt. Ltd., a company wholly owned by the promoters. I am not sure whether making profits through this kind of asset sale is sustainable in future.
Valuation:
This issue is very steeply priced. At the upper end of the issue price, the stock will discount its FY07 EPS of Rs 12.80 47.7x and 43.4x at the lower end. This kind of valuations are justified for Google and Apple but not for a brick and mortar company.
Let me get into K P Singh’s shoes and assume that PAT of 1941 crores is real and DLF has land bank of 10255 acres. Lets play with some numbers. If we assume a price of Rs 1500 (it should be fair price for a land bank which consist of prime as well as non prime land) per square feet, an acre of land costs Rs 6.6 crores (an acre of land consists 4400 square feet). According to this calculation, DLF should get valuation of 67683 crores. But K P Singh is asking for 87500 – 96000 crores which is exorbitantly high.
Please avoid this issue. Risk Reward Ratio is highly inclined towards risk. Don’t apply.
It would be interested to see whether this issue would get fully subscribed considering the fact that it is very huge issue as well as highly priced issue. Battery of investment bankers are working overnight to make retail investors poor and they are even resorting to certain unethical behaviour like providing Rs 500 per application to the broker. Don’t be surprised, if your broker calls you to tell that this is the best issue of the year.
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