Jul

5

The largest ever IPO in India listed today. DLF Limited that has "Building India" as its corporate slogan is a real estate company. An issue for about 2.2 billion USD worth of stocks witnessed total bids for about 7.4 billion USD. The company's website announces with pride, "The company could have priced the issue at the top end of the price band. However the company chose to price the IPO at Rs. 525 per share as a gesture of their appreciation to the tremendous response and keeping in mind the long term relationship with investors."

Now might one dare ask a company that comes into existence in public markets starting its career as one of the top 10 market capitalization companies on the day this market made an all-time high to figure out the rational of this one declaration of pride from any angle? If you are selling shares to new stockholders taking up 10% of your stock at prices less than you could have sold them at then are you being fair to the existing private promoter shareholders? If not, don't we understand business is business and there are no free lunches?

The company notes further on this webpage that subscription came in even measure from every corner of the globe in the institutional portion of the issue and that majority of the applications came in from long ("long" underlined) only funds. Now do we understand that fund managers who know and can short sell stocks did not find it worthwhile to apply for this issue?

Well, today the Indian equities market witnessed close to 10% of the volume in single stock futures segment coming from real estate stocks only. TV channels are proud of this arrival of the real estate stocks. Every commentator is finding more headroom ahead. Doesn't larger volume mean larger struggle for discovery of price? The markets here have discovered a new financial tool as a comforting aid to continue to believe real estate stocks are cheap. At 1.2 times Market Cap./NAV, most public commentators are suggesting there is no unfair pricing yet in these stocks!

My dear genius stock pickers, with real estate being a liquidity nightmare, what does the NAV as a denominator for this comforting ratio suggest other than the fact that the stock market pricing with its liquidity attraction is already 20% higher than the pricing of the illiquid land bank these companies hold? The relevance of P/E Ratios, ROCE, RONW having been left behind long ago, with relatively zero entry barriers in the business a price/book type Market Cap/NAV is suggestive of what? Desperation to justify the price?

Those hedge fund managers having avoided this largest ever IPO in India may have much to find comfort in one fact unique to India. In yesteryears, great companies like Dabur, Thermax, Jet Airways, BPL (a household consumer durables name then, extinct today), etc, all grew to be household names before coming out with an IPO. The other common fact that many other similar companies in India share is that each of these highly popular-named IPOs came at the peaks of their respective valuation cycles. For years a one-way hemorrhage of investment values continued.

If not a common mind playing the chords of price discovery, there certainly has existed a common mindset. The commentators have nevertheless several bullish arguments. Short term interest rates are likely to begin softening and hence real estate is still not looking bad, as if long term investing is to be done with a short term expectation. They will then hasten to tell you DLF is not a leader in any of the property segments it operates in and hence there is room for surprise, as if the franchise factor of a P/E multiple is higher for runners-up.

The large market cap is going to bring DLF into every major equity index, so buying will come in, as if all buying will happen without any matching selling. I asked my teammate who tracks the Indian Realty sector what is his take on the eight percent higher closing of this grand IPO and all he offered, with a chuckle, was "From a song by Roger Waters: What is the shelf life of a sixteen-year-old beauty queen?"


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