Building IPOs

SMARTSHARE

On Thursday, it was confirmed that DLF Universal had pulled out of its IPO, and withdrawn the Draft Red Herring Prospectus (DRHP) it filed on May 12.

Ostensibly this is to update the financial details of the past four months. The real-estate giant says that it intends to return with an IPO by year-end.

The pullout was not a surprise. The mega-IPO suffered from truly unfortunate timing. The market crashed in the very week of the DRHP filing. In addition, DLF ran into a legal challenge that may make it a test case for the entire delisting/ relisting concept.

DLF delisted in 2003 (incidentally paying a fine for violation of the Takeover Code). Some 1,000-odd minority shareholders refused to sell in 2003. DLF made a 1:1 rights convertible debenture offer in December 2005.

Less than 15 per cent of minority shareholders subscribed to the debenture offer. The debenture conversion was followed by a combination of share splits and a 7:1 bonus. That turned a single debenture into 400 equity shares.

Post the debenture issue, some 99.5 per cent of DLF is owned by the promoters. Some minority shareholders allege that the company failed to inform them about the rights issue.

The unresolved matter has been referred to the Ministry of Company Affairs and it could have cast a cloud on the IPO.

DLF intended to sell a minimum of 202 million shares (face-value Rs 2) at a minimum price of Rs 675, raising at least Rs 13,650 crore. It had a greenshoe option of an additional 17 million shares. It also intended a pre-issue private placement.

The promoter-stake would have dropped to about 87 per cent.

DLF's net profit in 2005-06 rose to Rs 199 crore, up from Rs 83.7 crore in 2004-05. Sales rose to Rs 1259 crore (Rs 630 crore). The DRHP said that US real estate broker, Cushman & Wakefield, had valued 228 million square feet of land owned by the company across 64 locations at somewhere between Rs 96,500 crore and Rs 107,000 crore.

DLF will surely return with an IPO at some future date. It needs the money for land purchases, land development and construction projects, and to repay debt. It has also hinted at entering the hotel segment.

The withdrawal could cause a crisis of confidence in a somewhat shaky IPO market. The GMR issue went through on strong institutional support but retail subscription was weak. Power Finance Corporation has held back on its IPO. Deccan Aviation struggled.

Nevertheless, between April-June 2006, 25 IPOs raised a total of Rs 10,685 crore, compared with Rs 3,895 crore worth of IPO in April-June 2005. So it's not as though the market has completely collapsed.

Another real-estate major, Parsvnath Developers, says that it will launch an IPO by Diwali. Parsvnath may offload 18-20 per cent at a valuation of over Rs 6,000 crore. Omaxe, which is yet another real-estate developer, also says that it intends an IPO before the end of 2006-07.

More than most businesses, real estate valuations are based on investor confidence and wealth effects. Rising interest rates have already caused some loss of momentum. This could be a Texas Hedge. If the IPOs work, the real estate market itself will remain intact. Or else, it will be a faulty increase of exposure.