The institutional portion of India's biggest IPO, a $2.4 billion public offering by property developer DLF Ltd, was fully subscribed within an hour of opening on Monday, the company said, as investors shrugged off fears of an overheating real estate market.
Bankers said that they had received bids for about 40 per cent of the 175 million shares on offer in the first 45 minutes. The retail portion is yet to get any significant applications, which bankers expect only towards the close of subscription on Thursday.
A buoyant Indian economy has boosted demand for office space, shopping malls and houses, but a sharp rise in prices and higher interest rates have pushed buyers to the sidelines.
DLF, which built much of the outsourcing hub of Gurgaon on the outskirts of Delhi, merits a premium given its track record and earnings potential with land holdings of more than 10,000 acres (4,000 hectares), analysts said.
"DLF is the best way to get exposure to Indian real estate, given its size, quality and credentials," broker Edelweiss Securities said in a client note before the IPO opened.
"We consider the company a default play on Indian real estate as well as a growth story going forward."
The offering of 175 million shares at an indicated price band of 500-550 rupees ($12.20-$13.40) each had received bids for the full portion of 104.4 million shares, the company said.
"DLF IPO-QIB (qualified institutional buyers) portion fully subscribed," the DLF statement said.
Before the IPO opened, the order book for the issue was fully covered, a source close to the deal said. Bids still have to be submitted formally once the offer opens, and in India institutional investors have the option to withdraw bids before the issue closes.
If the sale is priced at the upper end of the indicative range, DLF would be valued at around $23 billion, ahead of State Bank of India and ICICI Bank and rival Unitech Ltd, which is worth around $11 billion.
Analysts said they expected the aggressively marketed offering of 10.27 per cent of DLF's enlarged capital to sail through, but concerns remained about the valuation and the prospects for profitability.
"While demand outlook over the longer term remains intact, primarily driven by the IT sector, mortgage rates have moved up nearly 200 basis points and impacted investor-led demand for real estate projects," said CLSA in a report before the IPO opened.
"The slowing pace of sales may impact prices going forward, which remains the key threat for the sector," it said, adding DLF was attractive at the lower end of the indicated price range.
The IPO was shelved in May last year after the stock market dropped sharply and amid disputes with minority shareholders.At the time, New Delhi-based DLF hoped to raise over $3 billion.
Analysts have estimated DLF's indicated price band shows a 9-20 per cent premium on its "net present value", or NPV, based on its land holdings and prospective earnings.
"A majority of the global real estate stocks in Hong Kong and Singapore trade at a 10-30 per cent discount to NPV," said First Global Securities before the IPO, adding that each DLF share was worth Rs 413 on an NPV basis.
However, DLF's smaller rival Unitech commands a 28 per cent premium on NPV, while Mahindra Gesco Developers Ltd trades at a 40 per cent discount and Ansal Properties at a discount of about 35 per cent, analysts said.
DLF, which plans to spend nearly 70 billion rupees to buy and develop property, has offered brokers 200-500 rupees for every application from their clients, against a normal practice of 0.2-0.4 per cent commission on allotment, brokers said.
"We've not heard of this sort of incentive in the primary market," said MAA Annamalai, director at Akshaya & Co which has been selling IPOs for nearly two decades.
The IPO is lead managed by Kotak Mahindra and DSP Merrill Lynch. Other managers are UBS, Citigroup, Lehman Brothers, Deutsche Bank, ICICI Securities, and SBI Capital Markets.