Month: June 2007

DLF India – Building India by looting Small Retail Indian Investors IPO is now open for subscription. We at Dalal Street Business, after a careful review put an AVOID Recommendation for DLF IPO.

Kindly Read the Indian Real Estate Stocks and Sector Research reports here.

Sure DLF is a big company backed by few Congressmen in the corridors of New Delhi. However, the issue pricing is expensive. Fair Value of its Land Bank is between Rs 375 to Rs 425.

Financials of DLF:
The company has reported fairly flat topline between 2002 and 2005 at around Rs 550 crore. For the year ending March-31st 2006, the company reported a 100% rise in topline to Rs 1,242 crore and for the following year it reported Rs 4,034 crore. Out of this Rs 4,034 crore, the company has other income component of Rs 1,416 crore which is the value of property sold to promoters group company – A Shady Deal.

DLF reported a net profit of Rs 1,941 crore for year ended March,2007.

The debt-equity ratio as on March 31, 2007 was 2.5:1. It paid interest of Rs.789.6 cr in FY07 on loans of Rs.9,932 cr (incl floating interest loans of Rs.7,489 cr). Any extended slowdown in the real estate industry will hit DLF badly due to its debt servicing obligations. This combined with the fact that DLF had large negative operating cash flows in FY06 and FY07 (Rs.949 and Rs.5831 cr respectively) could impair its capacity to raise large debts on a continuing basis.

IPO Offer:
Fully Diluted Equity after IPO: 170.48 crore shares of Rs 2.0 each
IPO Offer: Price band of Rs 500 to Rs 550 amounting to Rs 8,750 to Rs 9,625 crore

Why should You Avoid the Issue ?

• DLF is mainly banking for the IPO to sail through on the value of its Land Bank. Cash Flow has been negative as indicated above. Approximately 60% of its DLF’s reserves comprise land for which DLF have not yet obtained a certificate for change of land use.
• More than 50% of the land reserves is concentrated in NCR, mainly in and around Gurgaon and another 23% is in Kolkata (incl Dankuni project). With very little jobs being created in those Areas, DLF is under increasing threat from oversupply.
• Shady Deals: DLF has 112 related parties including subsidiaries and associates and substantial inter-company transactions.
• In anticipation of DLF issue, another comparable stock Unitech made an all time high of Rs 601 on May-29th where it saw substantial delivery based SELLING and the stock currently trades at Rs 490 levels.

Grey Market: It is very unfortunate that a Grey Market which is completely illegal exists for IPOs in India. We advise caution to all our Retail Investors not to go by rumors and get trapped, really especialyl for DLF IPO.

Post-Listing Strategy:
At Rs 550 the issue is really really expensive and you can avoid this. Long Term investors can pick the stock around Rs 425 levels.

Investors willing to take exposure in the booming Retail Sector in India, can subscribe at “Cut-Off” to the IPO of Vishal Megamart.

Vishal Retail focuses on value retailing in tier-II and tier-III cities. 43 of its 50 stores are located in these cities. Sure their is enough potential for retailing in these cities as well. Through backward integration, in-house design and manufacture of
apparels, the Company substantially controls cost of production and pass on the cost benefits to customers.

Financials:
Over the past 3 years, the company has reported a top line growth of 100% YoY. For they ear ended March-31st 2007, the company had total income of Rs 771 crore and a Net Profit of Rs 24.9 crore. ICICI in its research report expects the Vishal Retail to report a Net Profit of Rs 45.6 crore for year ending March-2008.

IPO Offer:
Offer: Rs 110 crore worth of shares in the price band of Rs 230 to Rs 270.
Fully Diluted Equity Post-IPO: 22.4 crore
Expected EPS assuming Vishal Retail reports a net profit of Rs 45 crore = Rs 20.4

So in the current IPO the shares are offered at a forward P/E of mere 13.5 compared to 30+ for other retailers. Blindly subscribe to the issue. Retail Individual Investors category of the issue is just Rs 33 crore, so allotment will be LOTTERY for even Rs 1.0 lakh application.

Post-Listing Strategy:
The company has no immediate threat and is a good investment bet in the medium term. Vishal Retail will benefit from low real estate prices and staff costs in tier II and tier III cities. However, on strong listing, you are requested to book profits.