DLF's record-breaking IPO sells in two days

India's leading developer seeks up to $2.4 billion as the country's equity issuance calendar fills up.
After two days of bookbuilding, DLF LimitedÆs initial public offering is already covered and institutional investors have ordered more than twice the amount of shares available to them. And given that most investors in Indian IPOs typically wait to submit their orders until the last day û as they have to put down 10% of the order amount upfront û the record-breaking deal looks set to be a success.

Sources familiar with the deal also cite an encouraging response from international investors who have met with the DLF management during the 10-day global roadshow which preceded the bookbuilding. The interest, they say, stems not only from the fact that the company is the largest real estate developer in India today, but from a belief that it has the capacity to become one of the leading players in the world in its field over the next five years or so.

The opportunities for equity investors to participate in the anticipated growth of the Indian real estate sector have also been quite limited so far, as the handful of property companies that are listed are all quite small. With a market capitalisation of at least $21 billion at the time of listing, DLF thus stands out as a tempting alternative û assuming one buys the Indian growth story.

At an indicated size of Rs87.5 billion to Rs96.25 billion ($2.2 billion to $2.4 billion) the offering will be the largest ever IPO by an Indian issuer, ahead of oil and gas explorer Cairn IndiaÆs Rs86.16 billion ($1.93 billion) initial share offer in December last year. If the early orders are any indication, the amount of price sensitivity will also be limited, which suggests the deal could easily price towards the top end of the range.

DLF is offering 175 million shares, or 10.26% off its fully-diluted post-issue capital, at a price between Rs500 to Rs550 apiece. Of the total, 59.7% will be sold to institutional investors and as of yesterday this portion of the deal was already 2.08 times covered, with more than 91% of the order amount coming from international investors. People familiar with the deal say the management held more than 80 one-on-one meetings during the roadshow in addition to the group lunches.

About 29.8% of the deal has been earmarked for retail investors, while the remaining 10.5% will go to non-institutional investors and company employees. The bookbuilding will close on Thursday (June 14) and the final price will be set within the next couple of days.

Kotak Mahindra and Merrill Lynch are joint global coordinators and bookrunners. In true Indian fashion, however, there are also several other bookrunners namely Citi, Deutsche Bank, ICICI Securities, UBS and Lehman Brothers (who has been given the additional title of senior bookrunning lead manager).

The price range values the company at a discount of 8.5% to a consensus post-money net asset value of about $19.5 billion to $20 billion at the bottom of the price range, according to one source. The top of the range would translate into a small premium of about 0.5%, he says.

On a price-to-earnings basis the price range translates into 11.5 to 12.5 times its estimated 2008 profit, although this is 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.

During its 60-year history, DLF has been responsible for the development of approximately 224 million square feet of real estate developments, primarily in the New Delhi region. This includes the Gurgaon district in the neighbouring state of Haryana where DLF started to acquire land at low cost in 1957 after the state assumed control of property developments in New Delhi. The company is widely credited with being the main architect behind the growth of this area and for being one of the first developers to anticipate the need for townships on the outskirts of fast-growing cities.

Guragaon is now the home of DLFÆs landmark project, DLF City, which is an integrated township spread over 3,000 acres that includes residential, commercial and retail properties as well as schools, hospitals, hotels, shopping malls and even a golf and country club. It also incorporates the companyÆs leading commercial development, Cybercity, which is expected to have a developed area of about 20 million sqf when completed.

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 to acquire land or development rights covering approximately 554 acres of land. According to DLFÆs listing document, the development plans for these 554 acres are still at a preliminary stage.

While such numbers give a sense of the vast scale of DLFÆs business, one observer says it is the companyÆs ability to ôcease the opportunities in related industries such as (the development of) special economic zones, hotels and constructionö that makes it a really interesting play for the next five to 10 years.

DLF has entered into a 50-50 joint venture with Laing OÆRourke, a leading UK construction firm with experience of major high-profile construction project around the world, which will be involved in the construction of the companyÆs real estate projects. But it will also explore opportunities within the construction of infrastructure projects such as roads, bridges, tunnels, pipelines, harbours, runways and power projects.

Even though the tie-up with Laing OÆRourke happened only last year, the venture has already begun work on 11 projects. Similarly, DLF has also formed a joint venture with the Hilton group to set up a chain of hotels and serviced apartments in India. According to the listing document, the companyÆs intention is to enter into JVs with other leading hotel operators as well to develop hotels in the budget, business, four star, five star and deluxe segments.

The observer notes that the JV currently has more than 20 hotel sites under construction and assuming its plans are carried out, DLF could become the largest hotel developer in India within three to five years.

Given the companyÆs aggressive expansion plans, which also include the acquisition of land in 60 cities across India for further retail developments, one of the key concerns for investors pondering whether to invest or not has to be the execution risk.

There are also some concerns related to the likely softening of real estate prices from current levels. In the longer term though, few people are prepared to argue that growth in the property sector is coming to a halt.

ôThere is a shortage of residential units in India that will continue to drive the sector and the same is true with regard to commercial properties,ö says the observer. ôAnyone who has been to India knows that the quality of commercial properties are not that great and with more multinational companies and investment banks setting up shop here, the demand will continue to increase.ö

The DLF issue, which was delayed for about 12 months due to difficult market conditions and a legal challenge by minority shareholders, comes to market on the back of very thin equity issuance by Indian corporates in the first five months of the year û especially by major corporations.

However, the secondary market has now recovered almost all the losses made in February and the issuance calendar is building quickly. Metals and mining company Sterlite is already on the road marketing of its first ADR issue that could raise about $1.65 billion based on the current market price and business process outsourcing company Genpact is gearing up for a US IPO of about $600 million.

In the financial sector ICICI Bank has filed for a combined domestic and ADR follow-on that could raise as much as $5 billion, making it the largest Indian follow-on ever, and HDFC Bank is seeking up to $1 billion from an ADR sale. Other potential near-term deals include property developer Omaxe, which is planning an IPO in the domestic market.
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