Ambitions Worthy of a Boom
By ANAND GIRIDHARADAS, The New York Times, July 4th, 2006
MUMBAI, India, June 29 — Kushal Pal Singh is a wildly successful entrepreneur with a family business and an outsized dream to become India's landlord.
Mr. Singh wants to build Wal-Mart superstores for a mushrooming consumer class. He wants to build skyscrapers that generate their own electricity for outsourcing giants like International Business Machines. And he wants to build apartment complexes with swimming pools for the aspirational young employees of call centers and software parks.
But Mr. Singh, the chairman of DLF Universal, India's largest builder, has more gumption than cash. And so his bankers have been fanning out worldwide to sell an initial public offering of DLF at the eye-popping price of $3.3 billion in exchange for one-eighth of its stock — about a $26 billion valuation that would make it worth more than General Motors or Mittal Steel, the largest private-sector company in India.
As global investors pull back from the risks and rewards of emerging markets, the DLF sale offers a reminder of why investors first flock to these markets and why they often get burned.
On one hand, stocks like DLF promise what no advanced economy can offer: seemingly limitless growth in an industry where much still remains to be built. But as one investor after another is seduced by a growth story, bidding prices higher, people begin buying stock without regard to what a company can deliver. If a bubble pops, investors suffer.
During the bull run, DLF's pitch was something like: "We brought outsourcing to India by giving multinationals world-class, fully connected back offices. Imagine what we could do for all of India." No less an authority than John F. Welch Jr., the former General Electric chief, says DLF helped spur G.E.'s decision in 1997 to outsource to India.
"K.P. Singh opened my eyes to India and all its possibilities," Mr. Welch said recently via e-mail.
But in recent weeks, as an Indian bull market has turned bearish, the sales pitch has been falling on deaf ears, and the valuation implied by the price institutional investors say they now are willing to pay for DLF has fallen to a range of $13 billion to $16 billion, according to a number of investors and analysts who did not want to be identified because negotiations were still taking place with DLF's bankers. The stock sale is planned for this month, but analysts say it could be delayed by regulatory hurdles and market conditions.
"Markets are not ready for this kind of valuation," said Pankaj Razdan, managing director of Prudential ICICI, which manages $7 billion in mutual funds. "In the economy, nothing has changed. But we have to deal with the fact that the market sentiments have changed."
However, analysts noted that foreign investors are likely to pay a premium for DLF, because those who want to invest in Indian real estate have few listed companies in which to do so. DLF has dispatched bankers to New York, London and beyond to visit Fidelity Investments, Nomura Group, Lehman Brothers and others.
Their lead bankers are Kotak Mahindra, an Indian bank, and DSP Merrill Lynch, the local arm of the global bank. Other bankers include Citigroup, UBS and JM Morgan Stanley, another localized arm of a global bank.
So far, Fidelity and Nomura have shown serious interest in a multimillion-dollar investment, according to a banker who is trying to sell the offering, but who insisted on not being identified because negotiations are still continuing. Both institutions declined to comment officially. Even at the lower valuations, Mr. Singh, who will retain control over the remaining equity, would enter the stratosphere of the global rich.
"It is a matter of time that we will start acquiring companies worldwide to become the world leader," Mr. Singh said by telephone from London. "It is a matter of who is more hungry for global ambition. At this moment, I think Indians are more hungry. I know I am hungry."
DLF's price tag is all the more remarkable for how little money the company actually makes, despite being India's largest developer. At the $25.7 billion valuation and with a $44 million profit last year, investors are being asked to pay $584 for every $1 in current profit — a price that makes Google's stock appear cheap. Investors value Google at $76 for every $1 in profit.
But in a developing country like India, where there is so little modern construction to begin with, there always appears to be so much left to build. India's cities lack 12 million homes, according to Cushman & Wakefield, a consultancy. The firm forecasts demand for 400 townships constructed from scratch, housing 200 million people, by 2011.
The outsourcing industry, which at current rates is doubling in size every few years, needs office towers that insulate it from India's infrastructural shortcomings, like electricity cuts and faulty sewage systems.
DLF has positioned itself as a landlord to India's growth industries. When I.B.M. announced recently that it would triple its investment in India over the next three years, to $6 billion, DLF had reason to celebrate as I.B.M.'s main supplier of offices in India. It also sells space to Microsoft, PepsiCo, Nestlé and other multinationals. Other companies are contending with DLF for the title of India's building champion, including Ansal Group, Hiranandani Developers, Unitech, Lokhandwala Group and Raheja Group. But even those who maintain that DLF is overvalued acknowledge that market leadership is the company's to lose.
From its founding in 1946, the company has risen by using grit, political connections and betting correctly on the trends that would transform how Indians work and live.
The company's first wager was that India was on the verge of a profound socioeconomic shift and that homes would be bought on credit rather than cash, at the beginning of a career rather than at the end.
The wager was prompted by the partition of the subcontinent in 1947, when Delhi thronged with refugees who had good earning prospects but had lost everything. Mr. Singh's father-in-law rented land from rural farmers, leased it to the refugees for a slightly higher price, and pocketed the difference. In this way, DLF built 21 neighborhoods in Delhi with minimal seed capital.
Over the years, the success of selling homes on credit caught on among other firms, and today a growing mortgage industry — expanding at more than 25 percent a year — is a primary driver of the housing boom rippling across India. From 1961 to 2001, the proportion of urban homeowners has risen to 72 percent from 46 percent, government figures show.
DLF has also displayed a knack for solving India's most intractable challenges — whether wrangling a license from the bureaucracy or generating its own electricity when the government supply failed.
As DLF developed the satellite city of Gurgaon, a sea of farms just south of Delhi, it converted the handicap of India's highly fragmented landholdings into a competitive advantage. In the 1980's, Mr. Singh spent half his time in the villages, attending weddings, sharing meals in villagers' huts, becoming "like their older brother," he said. His methods won him vast quantities of land for as little as $400 an acre, or $160 a hectare, at present exchange rates. In Gurgaon today, that land sells for up to $4 million an acre.
DLF's prospects altered most decisively with the technology boom of the 1990's, and its cascading effect on Indian work and living.
Global companies like General Electric found that they could do back-office work in India — if provided modern buildings. The new workers in such companies began to demand homes as comfortable as their offices. As Western values seeped into India, more couples stopped living with their parents and began to build homes on their own.
And with incomes rising, Indians began to spend their added money at food courts and shopping malls. In 2002, one billion Indians had three malls to choose from; by 2008, they will have an estimated 250.
All these forces combined to unleash a surge of demand for the fixtures of American suburbia that DLF specialized in building: shopping malls, apartment complexes and corporate campuses. DLF caters to all rungs of an aspirational society. It sells $1 million condominiums overlooking an Arnold Palmer-designed golf course. To workers in the back offices of global corporations, it rents $180-a-month apartments with a pool, a park, 24-hour security, electricity backup and trash collection.
"What always occurred to me," Mr. Singh said, "was that this housing business has to be a sunrise business in a growing, democratic country like India." |
