India's biggest ever IPO opens today, that too from a sector with which investors have had a love- hate relationship in the recent past.
DLF is important not only because it is India's biggest real estate company but also because it will be the benchmark for setting valuations in this sector. Nothing in this sector comes cheap, neither will DLF.
The key question for the investor is whether DLF can demonstrate the kind of growth that will justify such valuations.
There is a lot going for DLF. It has 10,000 acres of quality land and even if property prices were to soften somewhat, this will generate enough cash flows over the next many years to sustain at least IPO valuations. The net asset value, depending on who is counting, is around the Rs 500 mark.
Given that Unitech trades at around 1.2 times NAV, and recent large Asian realty listings like Country Garden trade around that multiple, a Rs 600 kind of price on listing is entirely possible.
That leaves some upside even from the upper band of Rs 550; if DLF were to leave a bit on the table below the upper band, even better for IPO allotees.
Qualified institutional bidder subscription should not be an issue, there should be many takers for India's premier real estate play.
At the retail level, though, people will wonder whether there is a substantial upside after listing given its premium valuations.
My guess is that post-listing gains will not be spectacular but over a period of time this stock may deliver steady returns. It makes sense to regard DLF as a quality, long-term sector exposure rather than a play for listing day pop.
DLF's strategy of straddling the entire real estate opportunity through joint ventures is one with enormous potential. Its hotel venture with Hilton, construction alliance with Laing O' Rourke and forays into multiplexes and insurance will unlock value in future.
As will all new land acquisitions. The fundamentals appear solid. The risks are external. If the market were to go into a tailspin for some global turbulence, IPO investors may see an uncomfortable post-listing ride.
More so, if the Reserve Bank of India were to tighten the monetary screws. That may lead to a selloff in realty stocks and DLF will get hit as well. Finally, there is a lot of scepticism about how this sector, still quite nascent, should be valued.
If, over the next few years, cash flows do not measure up to expectations, the sector may be de-rated. DLF will be a blue chip, whether the IPO is the best entry point or one could find the stock cheaper after listing depends on the market environment. One just wishes good things would come a bit cheaper though.
(The writer is Executive Editor, CNBC-TV 18)