DLF IPO: Should you subscribe?

The much-awaited DLF IPO has finally hit the stands. Founded in 1946, the company is the largest real-estate developer in India and its IPO is poised to be the largest issue to hit the primary markets raising Rs 9,625 crore.With a track record of successfully developing 220 million square feet of real estate projects, DLF is an established brand name with premium positioning in lucrative NCR market.Even though there are no concerns about quality of the management or the company's executing capabilities, questions are being raised on the valuations front. The proceeds of the IPO would be used for acquiring new lands and retiring the long-term debt.First Global, a Mumbai based brokerage house, maintains that the IPO is overpriced based on the Net Present Value (NPV) of the company's business. According to them, at the price band of Rs 500-550, the stock is at a premium of 21-33 per cent where the NPV of DLF's business works out to Rs 413 per share.

What makes it attractive?According to reports, the company should benefit from economies of scale as it has a land bank of around 10,225 acres translating into a developable land area of about 573.8 million square feet.DLF also enjoys major competitive advantage as well as buffer against the land price inflation due to the relatively low acquisition cost of land.Apart from the real estate development, DLF is ramping up business by entering into new growth areas like hospitality, multiplex, insurance and healthcare that are expected to make substantial value addition.Since most of the land reserves is located in and around prominent cities across the country, it augurs well for DLF when rest of the real estate majors are finding it hard to get hold of qualitative lands.The management team of the company is well poised to take the company forward with most of them having over 20 years of experience in the real estate sector at a time of talent crunch in the industry.High valuation?Even though 41 per cent of the IPO was subscribed in the first hour of opening on Monday, questions are raised about valuations and financial performance of the company.Out of the Rs 4,034 crore sales in FY07, sales of about Rs 2,401 crore has been done to the DLF Assets Pvt Limited (DAL) representing a jump in 59.5 per cent of total sales and 59.6 per cent surge in profit before tax.Ironically DAL, a promoter group company has not paid has not paid Rs 2,350 crore as on 31 March and the amount was classified in the balance sheet as Rs 740 crore under debtors and Rs 1,610 core as loans and advances. According to RHP as on May 25, 2007, DLF has received Rs 1,500 crore from DAL.Out of the total debt of Rs 9,932.8 crore, 75 per cent is on a floating rate making the company susceptible to the risks of raising interest rate scenario.With the rising interest rates, retail loans have been growing at a snails pace resulting in reduced off-take of residential properties from the builders. Adding to these worries, regulators are taking regressive steps fueling the concerns of bubble formation in the realty sector.The recent steps taken by the regulators like curbs on external commercial borrowings by the real estate companies, raising the risk on property loans would have dampening effect on the growth prospects of the company in real estate space.If the doomsayers have their way, the current valuation of residential / commercial property might see re-rating, resulting in the reduced enterprise valuation amidst cool-off in property prices in some pockets of the country.Strong momentumHowever, with the kind of growth momentum we are seeing in the economy there is still enough headroom for company to tap growing need for the residential and commercial property space.International private equity funds are chasing the Indian realty growth story and are investing in Indian real estate companies. This renewed interest from overseas would help the realty companies to deliver decent returns in the times to come."The IPO looks attractive at the lower price band of Rs 500, but one has to stay invested for the longer term," said Amitabh Chakraborty, President (Equity), Religare Securities.At the offer price band of Rs 500-550, DLF’s PE works out to 43.9–48.2 times FY2007 EPS. According to Emkay PCG Research, even though this is a considerably high PE, all the other prominent real estate players are trading at higher price to earning multiples.It makes sense to invest in the issue from the long-term perspective as the long-term story of the country is intact. Even though there are concerns about valuations on whether the issue is over-priced or formation of bubble in the realty sector, the company is poised to benefit from the robustness in the Indian economy
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