DLF raises $2.25 billion from India's largest IPO

The offer attracts $7.4 billion worth of demand as investors back India's growth story, but retail orders fall slightly short of target.
Real estate developer DLF Limited has raised Rs91.88 billion ($2.25 billion) from IndiaÆs largest initial public offering after receiving strong demand from international investors in particular.

The 60% institutional tranche was 5.13 times covered, with about 90% of the order amount coming from international accounts. In total, the deal attracted approximately $7.4 billion worth of orders and was 3.47 times subscribed.

Orders from retail investors didnÆt quite fill the 30% of the offering set aside for them, but given the large size, the subscription ratio of 0.96 times meant that they did submit close to $650 million worth of orders. About 590,000 retail investors submitted an application, which suggests there are plenty of people with confidence in the company.

According to a DLF press release, the offering was 2.75 times covered at the top of the Rs500 to Rs550 price range, but the company still decided to fix the price at Rs525, which reduced the offering size by about $140 million from the maximum $2.39 billion that it was seeking. The company said the mid-point pricing was ôa gesture of (its) appreciation to the tremendous response and keeping in mind the long-term relationship with investors.ö

Investors who met with the company during the 10-day global roadshow said they were impressed by the management and its track record. They also liked the companyÆs well-diversified strategy and according to sources there is a belief that DLF, which is already the largest real estate developer in India, does have the capacity to become one of the leading players in the world in its field over the next five years or so.

The company will have a market capitalisation of $21.9 billion at the time of listing.

While DLF did come at a premium to the other listed Indian developers, observers argue that this was warranted because of the much greater scale of its operations. As such, DLF is expected to set a new benchmark for the sector.

ôA lot of investors bought this as a concept stock rather than getting into the nitty gritty valuations,ö notes one observer. ôWith the Indian economy growing at 7%-9% per year, investors realise that the developers have to benefit and DLF is the frontrunner in almost every part of the sector.ö

One source says the final price of Rs225 per share values DLF at a discount of about 4% to a consensus post-money net asset value of about $19.5 billion to $20 billion. It also puts it at 12 times its estimated 2008 profit, although this was viewed as a less relevant valuation metric by institutional investors.

In the fiscal year to March 2007, DLF posted a ten-fold increase in net profit to Rs19.41 billion ($475 million) from Rs1.92 billion in fiscal 2006 on the back of a 225% rise in revenues to Rs40.34 billion.

DLF sold 175 million shares, or 10.26% off its fully-diluted post-issue capital, with 1 million set aside for company employees. Of the remaining 174 million shares, 60% went to institutional investors, 30% to retail investors and 10% to non-institutional investors, including high net-worth individuals. The latter portion was about 1.08 times covered.

Kotak Mahindra and Merrill Lynch were joint global coordinators and bookrunners. Lehman Brothers was a senior bookrunning lead manager, while Citi, Deutsche Bank, ICICI Securities and UBS were joint bookrunners.

The institutional offering attracted more than 150 investors, with the demand split fairly evenly between the different geographical regions. Asia accounted for 35% (10% from India and 25% from the rest of region), Europe for 33% and the US for 32%, sources say.

Sources say 60% of the orders came from long-only funds and about half of the hedge fund demand was also from the type of funds that tend to have a slightly longer investment horizon of three to four years.

ôThe international response to the offering validates the Indian domestic growth story as one of the leading global investment themes of this decade,ö Damian Chunilal, head of Pacific Rim investment banking at Merrill Lynch, commented in a written statement.

DLF is the leading Indian real estate developer with regard to residential, commercial and retail properties. Recently it has also become involved in related businesses such as the development of special economic zones and hotels, as well as actual construction. Analysts say this will make it a really interesting play for the next five to 10 years.

As of the end of April, DLF had residential projects with a saleable area of about 7 million sqf and commercial and retail projects with a lettable or saleable area of 27 million sqf and 10 million sqf respectively under construction.

Its land reserves amounted to 10,255 acres with an aggregate estimated developable area of 574 million sqf, including 4 million sqf of completed developments and 44 million sqf under construction. In addition, the company has entered into arrangements for the
acquisition of land or development rights covering approximately 554 acres of land.

Prior to this issue, the largest Indian IPO was that of oil and gas explorer Cairn India, which raised Rs86.16 billion ($1.93 billion) in December last year.

Meanwhile, the record for the largest follow-on issue by an Indian company is also set to be broken this month as ICICI Bank kicked off the roadshow for its combined domestic and ADR offering last Friday. The lender is seeking to raise $4.28 billion (or $4.92 billion including greenshoes), split 50-50 between the two portions.

The domestic portion is being offered at a price between Rs885 and Rs950 per share, which ranges from a discount of 3% to a premium of 4.1% versus the closing price of Rs912.9 in Mumbai on June 13, which is used as a reference. Retail investors will be able to by the shares at a Rs50 discount. Enam Financials, Goldman Sachs, JM Financials and Merrill Lynch are bookrunners for this part of the deal, with ICICI Securities, JPMorgan and CLSA as co-bookrunners.

The ADR portion, which is led by joint bookrunners Goldman Sachs, Merrill Lynch and JPMorgan, wonÆt be offered with a fixed price range, but rather will be priced in relation to the existing ADRs. The later closed at $46.50 on June 13, which marked a 4.6% premium to the Mumbai listed shares adjusted for the exchange rate and the fact that one ADR equals two common shares.

The domestic and ADR offerings will both close on Friday (June 22).

IndiaÆs largest follow-on so far, according to Dealogic data, was Oil & Natural Gas CorpÆs (ONGC) $2.36 billion offering in March 2004.
¬ Haymarket Media Limited. All rights reserved.
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