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FEB. 11, 2007
 Cover Story
 BT Special
 Back of the Book

Taxing Times
The phase-out of central sales tax is yet another move towards ushering in the national goods and services tax (GST). The compensation to the states, in lieu of CST phase-out, will include revenue proceeds from 33 services currently being taxed by the Centre as well as 44 new services of an intra-state nature that will be traded by the states. However, VAT is the way forward, though much needs to be done to iron out the anomalies in the current VAT regime.

India, Ahoy!
Indian investments overseas are growing and how. For instance, total Indian investment in Latin America and the Caribbean has topped $3 billion (Rs 13,500 crore) so far. The latest investment is by ONGC Videsh, which acquired an oilfield in Colombia for $425 million (Rs 1,912.5 crore). Earlier, ONGC bought an offshore oilfield in Brazil for $410 million (Rs 1,845 crore).
More Net Specials
Business Today,  January 28, 2007
Second Time Lucky?
DLF's revised bid for an IPO is high on ambition.
DLF supremo K.P. Singh: Premium play
Earlier in January, when DLF filed a revised draft prospectus with the Securities & Exchange Board of India (SEBI) for its proposed initial public offer (IPO) of over Rs 10,000 crore, it wasn't accompanied by too much of hype-at least not as much as was generated when the real estate developer first unveiled its ipo plans last summer. In June it had filed a draft prospectus for an issue of over Rs 13,600 crore. The company, however, had to withdraw the issue following litigation with minority shareholders, who are a legacy from its earlier listed avatar.

The hype may have been missing, there may be a few changes in the prospectus (see Now And Then), but the ambitious targets are still intact. Though company officials and bankers are tight-lipped about the expected valuation, the buzz in the market is that the company is targeting a valuation of $23-25 billion (Rs 1.035 lakh-1.125 lakh crore) post a 10 per cent dilution. DLF's current asking price seems to be a 15-20 per cent premium over the net asset value (NAV) of around Rs 450 per share-Rs 517-540. An obscure SEBI circular dated May 28, 2004 probably holds the key to the DLF issue price. The circular was an attempt on the part of the regulator to discourage private companies from going for a stock split just before a public offer. It allows companies with shares of face value below Rs 10 to go for a public offer only if the share price is to be higher than Rs 500. That pretty much sets the floor for the DLF issue since in early 2006 when the stock markets were scorching their way up, the real estate major had split its Rs 10 face value share into five shares of face value of Rs 2 each. This circular reduces DLF's flexibility to price below Rs 500 unless it wants to restructure its share capital once again! So, the question now remains-how much over Rs 500 is the DLF share going to be priced?

In the updated filing, DLF has more than doubled its disclosed land bank. However, unlike in the past, it has fought shy of getting a third party valuation done for the increased land bank. "We are leaving it to the investors to value the additional land bank," say company officials. DLF's valuation is more than two times that of its listed rival Unitech's Rs 39,000-40,000 crore, which would appear surprising considering both have a land bank of roughly the same size. Unitech has 10,332 acres as compared to DLF's 10,255 acres. And at least 35-40 per cent of the land is in similarly valued locations, say industry watchers. DLF, however, is apparently seeking a premium based on the fact that 51 per cent of its land bank is in Gurgaon where the-per-acre realisation is higher than in most other regions. DLF believes the premium is deserved due to the location of its sites within cities also.

DLF is also counting on monetising its pool of developed properties. For instance, it has existing buildings aggregating approximately 2.8 million sq. ft in the National Capital Region (NCR), developed plots of approximately 7.2 million sq. feet as well as 23 super luxury and luxury hotel sites, a golf course, clubs, and other assets in DLF Power. The company has also factored in its execution capabilities, reinforced with a string of alliances, in its valuation. However, what DLF underscores as its strengths are undermined by analysts as concerns. A high concentration of land reserves in Kolkata (23 per cent of total) and Gurgaon leaves it vulnerable to any downturn in these markets. Added to this are the issues related to supply absorption especially in Gurgaon, and execution risks with targets which have not been attempted before in the company's and indeed the industry's history. So, institutional investors are keenly looking at the company's NAV assumptions.

The SEZ Show Won't Stop
More clarity on land acquisition norms may be the right step.

Indiabulls' Banga: No looking back
Rehabilitation before acquisition-that's the clear line from the government on special economic zones (SEZs), or other large projects that involve large-scale land purchases. A three-month deadline has been fixed to put together a rehab policy, but how much of a roadblock is this for prospective SEZ developers? Consider Indiabulls, which recently hived off its real estate arm into a separate company, whose valuation will be determined largely by the multi-product SEZ project it has in the pipeline in Maharashtra. Indiabulls has already begun the land acquisition process, and company officials feel that, barring an increase in the cost of land acquisition, the project won't be derailed. Land cost is not expected to increase beyond 15-20 per cent of the total project cost. "This is not going to be a show-stopper," avers Gagan Banga, Director, Indiabulls. He adds that, in fact, the clarity on land acquisition norms is likely to help reduce the litigation related delays that are almost always an integral part of the real estate business. Adds Vasudeo Joshi, Head (Institutional Equity Research), Man Financial-Sify Securities: "If India has to sustain its growth at 8 per cent, then we need $300 billion (Rs 13.5 lakh crore) worth of public and private investment annually. So the rehabilitation policy has to come into fruition and the SEZ process has to go forward."

Middle Game Gambits
Will Vodafone operate in India with the Hutch brand?

Last fortnight, even as three of the four bidders in the race completed the due diligence of Hutchison-Essar's assets-Vodafone, Reliance Communications and Essar; the fourth, the Hindujas would have completed the process by the time this magazine hits the stands-clarity regarding the eventual winner wasn't too forthcoming. All the four in the fray would appear to have a chance, although at one time a Vodafone-Essar partnership looked most likely (with Vodafone buying Hutchison's 67 per cent stake and the Ruias of Essar staying as 33 per cent shareholders). But the Ruias have made it clear that they're as interested a buyer as anybody else (although they don't rule out the other two options of selling out, or staying put with 33 per cent, either).

What appears to have derailed a Vodafone-Essar equation is the branding issue-if Vodafone seeks to replace the Hutch brand with its own (a logical thing to do from the UK company's viewpoint), the Ruias won't take too kindly to that as they would once again have to pitch in the high-investment exercise of brand-building.

Clearly, the Ruias want to make it evident that as 33 per cent partners they would have a say on various fronts-not just brand-building but, in future, with regard to decision-making involving entry into new businesses, M&As, restructuring or capital raising. Such veto rights might make many a prospective partner wary, and might well open the door for other bidders like Reliance and the Hindujas. They may also be the reason why talk of a couple of the bidders attempting to pick up a stake in the Hong Kong company itself gained ground, rather than buying a stake in the Indian operator. On the other hand, bringing such issues into the open might well be negotiation strategies by the players. The cloak and dagger contest continues.

Turnaround Solutions
IFCI is back in the black, but what's its game plan?

After spending five years in the red, the country's oldest development financial institution (DFI), IFCI, is back with a bang. Not only has it shown a profit for the first half of 2006-07, last fortnight, it also received a Rs 780-crore bonanza from the sale of its stake in the National Stock Exchange. And there may be more good news in store. Credit rating agency ICRA, in which IFCI has a 21 per cent holding, is slated to hit the capital market some time this year. IFCI has already informed the bourses of its intention to offload its stake in ICRA. IFCI also owns 19 per cent in the listed Travel Finance Corporation of India (TFCI); that holding is valued at some Rs 25 crore at current prices. Although there are no concrete proposals to sell equity in other smaller companies, IFCI says in the normal course of business it keeps on disinvesting, in small quantities, its holding in listed companies through stock exchanges.

What's most heartening for IFCI, however, is the turnaround. "Concerted efforts on the recovery front and restructuring of liabilities have helped in the turnaround of the institution," says Sanjoy Chowdhury, Chief General Manager at IFCI. Over the longer term, though, the problem for IFCI is that it still dabbles in project finance and project advisory, where the scope of returns is limited. Which is why contemporaries like ICICI Bank and IDBI have today become full-fledged banks, with a sharp focus on retail banking. However, a former IFCI director feels IFCI can hold its own as a DFI. "There is a void created in the DFI space in India. Globally we have established DFIs like 3i in the UK, KFW in Germany and Japan Development Bank (JDB) in Japan," he maintains. Yet, to ensure IFCI's survival, a long-term game plan needs to be chalked out. "The options on the table are a merger with a stronger institution or a strategic partner," says a top official of IFCI.