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.