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Insight

If there is one good reason to invest in DLF Universal, which is planning an initial public offering (IPO) some time next month, it’s the value of its land reserves under various stages of development.

After all, as the saying goes, one should always buy land since they ain’t making any more of it no more.

According to the draft red herring prospectus filed by the company with Sebi, the net value of properties (approximately 228 million sq ft across 64 locations) being developed is between Rs 77,200 crore and Rs 85,300 crore, as estimated by property consultants Cushman & Wakefield.

Since the bulk of the money to be raised by the IPO will also go to buying more land - Rs 6,500 crore out of a potential Rs 13,600 crore issue - investors will essentially be buying into land reserves and development capabilities.

That, in fact, also constitutes one solid reason why you shouldn’t be investing in DLF. Land deals on this scale almost always involve significant cash-based transactions and deals that operate close to the edge of the law.

This, in turn, means that it would be a hopeless task trying to figure out how the company is performing from its apparent balance-sheet.

One look at the nearly 500-page draft prospectus tells you why. With 68 direct subsidiaries and several hundred related-party transactions, even sharp chartered accountants may take days to figure out how the money is coming into or going out of the company’s books.

Of the 50-plus risk factors mentioned, at least 10-15 are not of the routine type. For example, not only did the company have seriously negative cash flows in recent years, but its promoters were in violation of Sebi’s takeover guidelines and the stock exchange listing agreement.

Reason: they “inadvertently” breached the minimum public shareholdings norm. The promoters were apparently keen to take the company private by mopping up shares from the market.

After accepting a fine as penalty, Sebi asked the promoters to make open offers to the remaining shareholders and the company was finally delisted on March 13, 2003, by the Delhi Stock Exchange.

The company had delisted from the Bombay Stock Exchange, where it is now seeking to relist along with the National Stock Exchange, as far back as in 1982 because it found the listing fees too high.

Why would a company that took itself private just three years back want to return with a humongous issue suddenly? The high share valuations of  real estate companies is one obvious answer.

Most real estate companies now quote at sky-high price-earnings (P/E) multiples (Mahindra Gesco has a multiple of 305, and Unitech quotes at 300 times earnings following its recent bonus-cum-split announcement). Most others have P/Es in the range of 40-50.

DLF, which is more than twice as big as Unitech (2005-06 sales of Rs 1,259 crore Vs Unitech’s 509 crore), is obviously expecting to clean up with a higher P/E.

While no official figures are available on the size of the issue, the prospectus mentions total funding requirements of Rs 13,600 crore for land acquisition, property development and prepayment of loans.

Since the company has proposed to issue 219 million shares, including the greenshoe option of 17million shares, we are looking at a Rs 2 share being priced around Rs 621 at least. At the weighted average earnings per share (EPS) of Rs 9.09 for the last three years, we get a P/E of 68. Not cheap by any yardstick.

This, of course, is not the same as saying that DLF will not make money for investors. Given the post-issue price stabilisation arrangements and general buoyancy in the asset markets, real estate companies could well offer big returns - as many companies have done recently.

But there’s another side to this picture. Any pricking of the asset bubble can have devastating effects, too.

The sheer impossibility of trying to figure out DLF’s profits and losses from the real estate business should deter retail investors from dabbling in this sector.

Barring the promoters and a few close business partners, few people can hope to fathom the real workings of DLF Universal. Unless the idea is to sell on listing.

Contributed by R Jagannathan