Keynote Capitals- Subscribe DLF with medium term view

Keynote Capitals has a “subscribe with medium term” view on the DLF Ltd. initial offer. The offer opens for subscription Monday and closes Thursday.

The IPO of 175 million equity shares of Rs 2 each, in the price band of Rs 500-550 per share, is expected to garner of Rs 937.7 billion.

In its recommendation, Keynote Capitals states that DLF is the largest real estate development company in the country in terms of area of completed residential and commercial developments, with a land bank of 10,255 acres.

They believe DLF will continue to have a strong order book in the foreseeable future, given the sheer size of its huge land bank and the company’s interests in developing SEZs, multiplex theaters and hotels.

The proceeds of the IPO will be used in acquiring new land and funding existing projects.

On the flip side, the scenario of hardening interest rates is the main concern from the industry point of view. Around 50% of its projects are to be completed only beyond 2009-10.

DLF is expected to continue to generate negative cash flows during the next three years. Also, the presence of 58 subsidiary companies makes it a complex corporate structure. That being the case, the IPO can be subscribed to with a medium term view, Keynote Capitals said.

Compared with Unitech, its closest competitor in terms of land bank, DLF’s IPO is priced at 1.1 times price to net present value, which is at a small discount to Unitech which trades at 1.2 times, though the quality of Unitech's bank is not as good as that of DLF's.

The high EV/square feet in case of DLF reflects its better quality land reserves and its high leverage.