DLF Ltd's initial public issue (IPO), the largest-ever by an Indian company, has given a new lease of life to all realty stocks. Given the credit squeeze and rising home loan interest rates, realty stocks had taken a severe beating earlier this year.
But in the last month, since DLF
received clearance for its IPO from the Securities and Exchange Board of India (SEBI) a number of such stocks have soared. Unitech's for instance has appreciated by as much as 34 per cent.
DLF's proposed initial public offer (IPO) has forced fund managers to revisit realty. A leading fund manager who preferred anonymity said there may even be a re-rating of the sector depending upon the secondary market price.
DLF is mopping up between Rs. 8750 crore and Rs. 9625 crore at the proposed price band of Rs. 500 – Rs. 550 per share, resulting in a market capitalisation of Rs. Rs 93,500 crore at the upper end of the price band.
In fact, after the DLF IPO, the combined market capitalisation of all realty companies will be close to Rs. 200,000 crore. The floating market cap will be between Rs. 20,000 to Rs. 25,000 crore.
Investment banking sources noted that other realty companies are closely watching how the DLF IPO fares, being keen to jump into the fray as well. Omaxe Ltd, for instance, has lined up a public issue which hopes to mop up Rs. 1000 crore. More than 10 realty companies had begun planning to come out with IPOs earlier this year, but postponed their plans as realty stocks were hammered in the market.
Some of them have now taken up those plans again, but will enter with a more realistic price than they had set their eyes on earlier. “At that time they were thinking of entering the market at a 20 per cent premium to the value of their land bank. Now their price target would be 20 per cent below the worth of their land bank,” said a leading investment banker.
DLF itself, for instance, in its previous prospectus, had valued its land bank at $19.2 billion and was looking to price its issue to reach a market capitalisation of around $25 billion. Its new prospectus claims its land bank has doubled since then - but no valuation is mentioned.
At the same time, its debt has also doubled to Rs. 9450 crore, which includes Rs. 5,540 crore towards land cost. As per the Macquarie report DLF had capitalised Rs. 110 crore out of the total interest charge of Rs. 280 crore for the financial year 2006-07. The proposed IPO puts the market cap at around $23 billion.
Experts feel given the profit margin, which these realty companies declared for the year ending March 2007 and the trend of foreign funds gravitating towards realty in order to participate in the Indian growth story, the sector may not only see a re-rating, but also a substantial jump in net the inflow of foreign funds.
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